DRI-265 for week of 2-23-14: False Confession Under Torture: The So-Called Re-Evaluation of the Minimum Wage

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False Confession Under Torture: The So-Called Re-Evaluation of the Minimum Wage

For many years, the public pictured an economist as a vacillator. That image dated back to President Harry Truman’s quoted wish for a “one-armed economist,” unable to hedge every utterance with “on the one hand…on the other hand.”

Surveys of economists belied this perception. The profession has remained predominantly left-wing in political orientation, but its support for the fundamental logic of markets has been strong. Economists have backed free international trade overwhelmingly. They have opposed rent control – which socialist economist Assar Lindbeck deemed the second-best way to destroy a city, ranking behind only bombing. And economists have denounced the minimum wage with only slightly less force.

Now, for the first time, this united front has begun to break up. Recently a gaggle of some 600 economists, including seven Nobel Laureates, has spoken up in favor of a 40% increase in the minimum wage. The minimum wage has always retained public support. But what could possibly account for this seeming about-face by the economics profession?

The CBO Study

This week, the Congressional Budget Office (CBO) released a study that was hailed by both proponents and opponents of the minimum wage. The CBO study tried to estimate the effects of raising the current minimum of $7.25 per hour to $9 and $10.10, respectively. It provided an interval estimate of the job loss resulting from President Obama’s State of the Union suggestion of a $10.10 minimum wage. The interval stretched from roughly zero to one million. It took the midpoint of this interval – 500,000 jobs – as “the” estimate of job loss because… because…well, because 500,000 is halfway between zero and 1,000,000, that’s why. Averages seem to have a mystical attraction to statisticians as well as to the general public.

Economists looking for signs of orthodox economic logic in the CBO study could find them. “Some jobs for low-wage workers would probably be eliminated, the income of most workers who became jobless would fall substantially, and the share of low-wage workers who were employed would probably fall slightly.” The minimum wage is a poorly-targeted means of increasing the incomes of the poor because “many low-income workers are not members of low-income families.” And when an employer chooses which low-wage workers to retain and which to cut loose after a minimum-wage hike, he will likely retain the upper-class employee with good education and social skills and lay off the first-time entrant into the labor force who is poor in income, wealth and human capital. These are traditional sentiments.

On the other hand, the Obama administration’s hired gun at the Council of Economic Advisers (CEA), Chairman Jason Furman, looked inside the glass surrounding the minimum wage and found it half-full. He characterized the CBO’s job-loss conclusion as a “0.3% decrease in employment” that “could be essentially zero.” Furman cited the CBO estimate that 16.5 million workers would receive an increase in income as a result of the minimum-wage increase. Net benefits to those whose incomes currently fall below the so-called poverty line are estimated at $5 billion. The overall effect on real income – what economists would call the general equilibrium result of the change – is estimated to be a $2 billion increase in real income.

The petitioning economists, the CBO and the CEA clearly are all not viewing the minimum wage through the traditional textbook prism. What caused this new outlook?

The “New Learning” and the Old-Time Religion on the Minimum Wage

The impetus to this eye-opening change has ostensibly been new research. Bloomberg Businessweek devoted a lead article to the supposed re-evaluation of the minimum wage. Author Peter Coy declares that “the argument that a wage floor kills jobs has been weakened by careful research over the past 20 years.” Not surprisingly, Coy locates the watershed event as the Card-Krueger comparative study of fast-food restaurants in New Jersey and Pennsylvania in 1994. This study not only made names for its authors, it began the campaign to make the minimum wage respectable in academic economic circles.

“The Card-Krueger study touched off an econometric arms race as labor economists on opposite sides of the argument topped one another with increasingly sophisticated analyses,” Coy relates. “The net result has been to soften the economics profession’s traditional skepticism about minimum wages.” If true, this would be sign of softening brains, not skepticism. The arguments advanced by the re-evaluation of the minimum wage have been around for decades. Peter Coy is saying that, somehow, new studies done in the last 20 years have produced different results than those done for the previous fifty years, and those different results justify a turnabout by the economics profession.

That stance is, quite simply, hooey. Traditional economic opposition to the minimum wage was never based on empirical research. It was based on the economic logic of choice in markets, which argues unequivocally against the minimum wage. Setting a wage above the market-determined wage will create a surplus of low-skilled labor; e.g., unemployment. Thus, any gains accruing to the workers who retain their jobs will come at the expense of workers who lose their jobs. The public supports the minimum wage on the misapprehension that the gains come at the expense of employers. This is true only transitorily, during the period in which some firms go out of business, prices rise and workers are laid off. During this short-run transition period, the gains of still-employed workers come at the expense of business owners and laid-off workers. But once the adjustments occur, the business owners who survive the transition are once again earning a “normal” (competitive) rate of profit, as they were before the minimum wage went up. Now, and indefinitely going forward, the gains of still-employed workers come at the expense of laid-off workers and consumers who pay higher prices for the smaller supply of goods and services produced by low-skilled workers.

The still-employed workers are by no means all “poor,” despite the face that they earn the minimum wage. Some are teenagers in middle- or upper-class households, whose good educations and social skills preserved their jobs after the minimum-wage hike. Some are older workers whose superior discipline and work skills made them irreplaceable. The workers who rate to lose their jobs are the poorest and least able to cope – namely, first-time job holders and those with the fewest cognitive and social skills. The minimum wage transfers income from the poor to the non-poor. What a victory for social justice! That is why even the left-wing economists like Alan Blinder formerly pooh-poohed the minimum wage as a means of helping the poor. (While he was Chairman of the CEA under President Clinton, Blinder was embarrassed when the arguments against the minimum wage in his economics textbook were juxtaposed alongside the administration’s support of a minimum-wage increase.)

This does not complete the roster of the minimum wage’s defects. Government price-setting has mirror-image effects on both above-market prices and below-market prices. By creating a surplus of low-skilled labor, the minimum wage makes it costless for employers to discriminate against a class of workers they find objectionable – black, female, politically or theologically incorrect, etc. Black-market employment of illegal workers – immigrants or off-the-books employees – can now gain a foothold. Business owners are encouraged to substitute machines for workers and have done so throughout the history of the minimum wage. In cases such as elevator operators, this has caused whole categories of workers to vanish. This expanded range of drawbacks somehow never finds its way into popular discussions of the minimum wage, which are invariably confined to the effects on employment and income distribution.

“If there are negative effects on total employment, the most recent studies show, they appear to be small,” according to Bloomberg Businessweek.  The trouble is that the focus of the minimum wage is not properly on total employment. The minimum wage itself applies only to the market for low-skilled labor, comprising roughly 20 million Americans. There are certainly effects on other labor and product markets. But it is difficult enough to estimate the quantitative effect of the minimum wage on the one market directly affected, let alone to gauge the secondary impact on the other markets comprising the remaining 300 million people. The Obama administration, the vocal economists, the Bloomberg Businessweek and the political Left are ostensibly concerned with the poor. Why, then, do they insist on couching employment effects only in total terms?

It is clear that the same reasons why economists have traditionally chosen not to confuse the issue by dragging in total employment are also the reasons why economists now choose precisely to do so. They want to confuse the issue, to disguise the full magnitude of the adverse effects on low-skilled workers by hiding them inside the much smaller percentage effect on total employment. That is what allows CEA Chairman Jason Furman to brag that the “CBO’s central estimate…leads to a 0.3% decrease in employment… [that] could be essentially zero.” 500,000 is not 0.3% of 20 million (that would be 60,000) but rather 0.3% of the larger total work force of around 170 million. 0.3% sounds like such a small number. That’s almost zero, isn’t it? Surely that isn’t such a high price to pay for paying people what they’re worth – or what a bunch of economists think they’re worth, anyway.

But we digress. Just what is it that causes those “apparently small” effects on total employment, anyway? “Higher wages reduce turnover by reducing job satisfaction, so at any given moment there are fewer unfilled openings. Within reasonable ranges of a minimum wage, the churn-reducing effect seems to offset whatever staff reductions occur because of higher labor costs. Also, some businesses manage to pass along the costs to customers without harming sales.”

This is mostly warmed-over sociology, imported by economists for cosmetic purposes. American industry is pockmarked with industries plagued by high turnover, such as trucking. If higher wages were a panacea for this problem, it would have been solved long since. Today, we have a minimum wage. We also have a gigantic mismatch of unfilled jobs and discouraged workers. The shibboleth of businesses “passing along” costs to consumers with impunity was a cherished figment imagined in books by John Kenneth Galbraith in the 1950s and 60s, but neither Galbraith nor today’s economists can explain what hypnotic power businesses exert over consumers to accomplish this feat.

The magic word never mentioned by Peter Coy or the 600 economists or Jason Furman is productivity. Competitive markets enforce a strict link between market wages and productivity – specifically, between the wage and the discounted marginal value product of the marginal worker’s labor. Once that link is severed, the tether to economic logic has been cut and the discussion drifts along in never-never land. The political Left maunders on about the “dignity of human labor” and “a living wage” and “the worth of a human being” – nebulous concepts that have no objective meaning but allow the user to attach their own without fear of being proven wrong.

Bloomberg Businessweek‘s cover features a young baggage handler holding a sign identifying his job and duties, with a caption reading “How Much Is He Worth?” Inside the magazine, a page is taken up with workers posing for pictures showing their jobs and their own estimation of their “worth.” These emotive exercises may or may not sell magazines, but they prove and solve nothing. Asking a low-skilled worker to evaluate their own worth is like asking a cancer victim what caused their disease. Broadcast journalists do it all the time, but if that were really valuable, we would have cured cancer long ago. If a low-skilled worker were an expert on valuing labor, he or she would qualify as an entrepreneur – and would be set up to make some real money.

A Fine-Tuned Minimum Wage

Into the valley of brain death rode the 600 economists who supported a minimum wage of $10.10 per hour. Their ammunition consisted of fine-tuning based on econometrics. Let us hear from Paul Osterman, labor economist of MIT. “To jump from $7.25 to $15 would be a long haul. That would in my view be a shock to the system.” Mr. Osterman, exercising his finely-honed powers of insight denied to the rabble, is able to peer into the econometric mists and discern that $10.10 would be …somehow… just right – barely felt by 320 million people generating $16 trillion in goods and services, but $15 – no, that would shock the system. In other words, that first 40% increase would be hardly a tickle, but the subsequent 38% would be a bridge too far.

In any other context, it would be quite a surprise to the economics profession to discover that the study of econometrics had advanced this far. (The phrase “science of econometrics” was avoided advisedly.) For decades, graduate students in economics were taught a form of logical positivism originally outlined by John Neville Keynes (father of John Maynard Keynes) and developed by Milton Friedman. Economic theory was advanced by developing hypotheses couched in the form of conditional predictions. These were then tested in order to evaluate their worth. The tests ranged from simple observation to more complex tests of statistical inference. Hypotheses meeting the tests were retained; those failing to do so were discarded.

Simple and attractive though that may sound, this philosophy has failed utterly in practice. The tests have failed to convince anybody; it is axiomatic that no economic theory was ever accepted or rejected on the basis of econometric evidence. And the econometric tools themselves have been the subject of increasing skepticism by economists themselves as well as the outside world. One of the ablest and most respected practitioners, Edward Leamer, titled a famous 1983 article, “Let’s Take the Con Out of Econometrics.”

The time period pictured by Peter Coy as an “econometric arms race” employing “increasingly sophisticated” tools and models overlapped with a steadily growing scandal enveloping the practice of econometrics – or, more precisely, statistical practice across both the natural and social sciences. Within economics alone, it concerned the continuing failure of the leading economists and economic journals to correctly enforce the proper interpretation of the term “statistical significance.” This failure has placed the quantitative value of most of the econometric work done in the last 30 years in question.

The general public’s exposure to the term has encouraged it to regard a “statistically significant” variable or event as one that is quantitatively large or important. In fact, that might or might not be true; there is no necessary connection between statistical significance and quantitative importance. The statistician needs to take measures apart from ascertaining statistical significance in order to gauge quantitative importance, such as calculating a loss function. In practice, this has been honored more in the breach than the observance. Two leading economic historians, Deirdre McCloskey and Steven Ziliak, have conducted a two-decade crusade to reform the statistical practice of their fellow scientists. Their story is not unlike that of the legendary Dr. Simmelweis, who sacrificed his career in order to wipe out childbed fever among women by establishing doctors’ failure to wash their hands as the transmitter of the disease.

This scandal could not be more relevant to the current rehabilitation of the minimum wage. The entire basis for that rehabilitation is supposedly the new, improved econometric work done beginning in 1994 – the very time when the misuse and overemphasis of statistical significance was in full swing. The culprits included many of the leading economists in the profession – including Drs. Card and Krueger and their famous 1994 study, which was one of dozens of offending econometric studies identified by McCloskey and Ziliak. And the claim made by today’s minimum-wage proponents is that their superior command of econometrics allows them to gauge the quantitative effects of different minimum-wages so well that they can fine-tune the choice of a minimum wage, picking a minimum wage that will benefit the poor without causing much loss of jobs and real income. But judging the quantitative effect of dependent variables is exactly what econometrics has done badly from the 1980s to the present, owing to its preoccupation with statistical significance. The last thing in the world that the lay public should do is take the quantitative pretensions of these economists on faith.

This doesn’t sound like a profession possessing the tools and professional integrity necessary to fine-tune a minimum wage to maximize social justice – whatever that might mean. In fact, there is no reason to take recent pronouncements by economists on the minimum wage at face value. This is not professional judgment talking. It is political partisanship masquerading as analytical economics.

The Wall Street Journal pointed out that the $2 billion net gain in real income projected by the CBO if the minimum wage were to rise to $10.10 is a minute percentage gain compared to the size of a $16 trillion GDP. (It is slightly over 0.001%.) The notion of risking a job loss of one million for a gain of that size is quixotic. Even more to the point, the belief that economists can predict gains or losses of that tiny magnitude in a general equilibrium context using econometrics is absurd. The CEA and the CBO are allowing themselves to be used for political purposes and, in the process, allowing the discipline of economics to be prostituted.

The increasing politicization of economics is beginning to produce the same effects that subservience to political orthodoxy produced on Russian science under Stalin. The Russian scientist Lysenko became immortal not because of his scientific achievements but because of his willingness to distort science to comport with Communist doctrine. The late, great economist Ronald Coase once characterized the economics profession’s obsession with econometrics as a determination to “torture the data until it confesses.” Those confessions are now taking on the hue of Soviet-style confessions from the 1930s, exacted under torture from political dissidents who wouldn’t previously knuckle under to the regime. Today, politically partisan economists torture recalcitrant data on the minimum wage in order to extract results favorable to their cause.

The CBO and the CEA should have new stationery printed. Its logo should be an image of Lubyanka Prison in old Soviet Russia.

DRI-287 for week of 9-8-13: Stop the Presses! ‘Government Does Not Spend Money Wisely.’

An Access Advertising EconBrief:

Stop the Presses! ‘Government Does Not Spend Money Wisely.’

When somebody tries to persuade you that they are smart by telling you something you already know, you are not impressed. When they insist that they just learned it after spending years wielding their expertise on the subject, you react by considering them stupid rather than smart. Alternatively, you suspect them of dishonesty. And when your informants turn out to have been highly placed officials in the government, you fear for the future of the nation.

That is the position in which Peter Orszag and John Bridgeland place readers of their article, “Can Government Play Moneyball?” which appears in the current issue of The Atlantic magazine. Orszag and Bridgeland have determined that “less than $1 out of every $100 of government spending is backed by even the most basic evidence that the money is being spent wisely.” To a substantial plurality of Americans – perhaps even a thin majority – this is about as surprising as the fact that the sun rose in the east this morning. But it is ostensibly a stunning revelation to the authors, who profess that “we were flabbergasted by how blindly the federal government spends.”

Are the authors anthropologists who just now returned to the United States after spending the last 50 years on an isolated tropical island, studying the native culture? As John Wayne might put it, not hardly. Both men are “former officials in the administrations of Barack Obama (Peter Orszag) and George W. Bush (John Bridgeland).” Both have sterling educational pedigrees (one in economics, one in law) that equip them to understand the logic of markets and the workings of government.

Both inhabit the belly of the Establishment beast. Orszag is a prep-school graduate and cum-laude PhD product of the London School of Economics. He was Director of both the Congressional Budget Office (CBO; 2007-2008) and the President’s Office of Management and Budget (OMB; 2009-2010). Bridgeland graduated from Harvard University and the University Of Virginia School Of Law and held down several positions in the Bush administration, including Assistant to the President, Director of USA Freedom Corps and Director of the White House’s Domestic Policy Council. He also taught a seminar on Presidential decision-making at Harvard’s Kennedy School of Government. Since 9/11, he oversaw over $1 billion worth of spending on domestic and international service programs. He currently heads a public-policy organization (Civic Enterprises) and vice-chairs a non-profit business created to eradicate malaria in less-developed countries. He is also a noted educational activist who drew attention to the “silent epidemic” of high-school dropouts.

Given their backgrounds, we can assume that Orszag and Bridgeland are not fools. In the first paragraph of their article, they state that “the federal government” is “where spending decisions are largely based on good intentions, inertia, hunches, partisan politics, and personal relationships.” How, then, can Mr. Orszag and Mr. Bridgeland possibly claim to be surprised by what they found when they went to Washington? And what inferences should we draw from their attitude?

The Authors Already Knew That the Federal Government Spends Unwisely

From childhood on, the authors’ own experience already ratified the idiocy of federal- government spending long before they set foot in Washington, D.C. They experienced Social Security withholding from their earliest paychecks. Their schooling taught them the rudiments of the Social Security system and its mandatory character. Orszag’s economics training introduced him to Paul Samuelson’s famous article rejoicing in the Ponzi-like, pay-as-you-go funding mechanism, which Samuelson considered a stroke of genius because the U.S. birth rate was then producing ever-larger streams of payers relative to recipients. And both authors have watched the ensuing baby bust drive the system into actuarial insolvency, bringing the day of default ever closer. Orszag and Bridgeland know only too well that Social Security has long been touted as the crown jewel of 20th-century liberalism’s welfare state. LIkewise, both men have observed Medicare and Medicaid approaching a similar fate after previously attaining similarly sacrosanct status. These entitlement programs are de facto examples of government spending even though they are off-budget in the technical accounting sense. After observing these examples, why should Messrs. Orszag and Bridgeland have been shocked by anything else they found?

“In other types of American enterprise, spending decisions are usually quite sophisticated,” the authors observe. They are referring to American business, the vineyard in which both toiled prior to government service and to which they retreated to recover from the shock of their exposure to profligacy and waste. Corporations formulate a capital budget, in which potential investment projects are evaluated by comparing the present value of their costs and benefits. Shareholders calculate the best alternative use of their money in investment of equal risk and compare it with their rate of return, enabling them to judge the wisdom of their investment choice. Sole proprietors gauge the best alternative use of their labor time – perhaps working as an employee – and compare it to the earnings from their business. These are the ways used to gauge the wisdom and effectiveness of spending decisions in the private sector.

We know these methods work well because the United States became the world’s leading economy midway through the 20th century after carving a small foothold on the North American continent in the 17th century. Other countries imitated our methods and enjoyed similar success. Countries rejecting our methods generally failed. Even the few Scandinavian countries that built successful welfare states did it by utilizing relatively free markets, while countries that moved away from free markets by nationalizing industry (such as Great Britain and Argentina) experienced drastic declines in their living standards).

The federal government – and government generally – has no rational method for evaluating its spending decisions. Private businesses spend money in order to create value for consumers. They gauge the success or failure of their spending by the size of their profits. The federal government ostensibly spends money to benefit the same people served by private business. But the federal government does not earn profit, thus cannot gauge its success by its profits. There is no true owner of its assets – when something is “publicly owned,” nobody owns it and nobody has an incentive to maintain it, husband its productive potential and maximize its value. The government does not normally sell its output to private citizens at prices that are free to fluctuate in accordance with the supply and demand for that output; thus, it cannot use price fluctuations to gauge the success of its efforts. Even if politicians wanted to, they have no way to gather the information necessary to tailor government spending to the desires of all their constituents, in the fashion of markets. Since no human being or institution possesses a complete picture of reality, both incentives and institutions must be favorably attuned to allow our subjective perceptions to satisfy individual wants. Free, competitive markets calibrate the key variables to produce this result while government fails utterly. The last thing politicians, bureaucrats and government employees can afford is a thoroughgoing analysis of government programs, their results and the reasons for them.

So politicians clasp hands earnestly to their breasts and swear to spend money for the benefit of “the 99%, not the 1%,” or “Main Street, not Wall Street.” That is, they profess “good intentions.” They pass baseline budgeting rules declaring that spending on federal programs must always rise by a certain percentage every year, no matter what (e.g., “inertia.”) Politicians spend money on electric cars and wind farms and ethanol subsidies because they have “hunches” that these measures are the wave of the future. First-year legislators are told that they must agree to support the spending programs of their incumbent colleagues in order to gain support for their own legislative proposals, thereby establishing “partisan politics” as a potent force behind wasteful spending.

The authors actually provide a specific example to bolster their choice of “personal relationships” as a roadblock to wise spending. In 2003, Bridgeland and officials at OMB judged that the Even Start Family Literacy Program was a waste of money. Why? Because the children and parents who participated in it showed no more gains in literacy than did those in a control group used for comparison. So the program was marked for elimination. “But Even Start was founded in 1989 by Bill Goodling, a well-liked Republican who had been the Chairman of the House Education and the Workforce Committee, and had previously served as a teacher, principal, and school superintendent in Pennsylvania. So Congress continued to fund this ineffective, if well-meaning, program to the tune of more than $1 billion over the life of the Bush administration.”

Orszag and Bridgeland left out a few important spending determinants from their list. For years, “fraud” and “abuse” have figured prominently in task-force reports on federal-government spending. Both men will recall the infamous “bridge to nowhere” of a few years ago. Fraud has risen to mammoth proportions in the Medicare and Social Security programs. Nothing was said about “graft” in the article, but the movie Mr. Smith Goes to Washington was released before both authors were born and it is safe to assume that both have seen it.

All in all, the faux outrage expressed by Orszag and Bridgeland lacks credibility. Their years of service in government allowed them to fill in the blanks of their indictment, but produced no other added value. They knew going in that the federal government was every bit as wasteful as they now portray it. Their disingenuous attitude – I’m shocked – shocked! – to find gambling going on here! – is borrowed from Claude Rains in Casablanca.

This is bad enough. Their proposed solution is worse. Citing “baseball’s transformation into ‘Moneyball’ as a case of private-sector spending sophistication, they aver that “the lessons of moneyball could make our government better.” You heard right. They don’t want to make government spend less. They want to make it spend better.

“Moneyball” in Government? Why Not “Nomoneyball?”

Orszag and Bridgeland maintain that “the moneyball formula in baseball – replacing scouts’ traditional beliefs and biases…with data-intensive studies of what skills actually contribute most to winning – is just as applicable to the battle against out-of-control health-care costs.” Their argument for assembling expert knowledge and applying it via central planning goes back at least as far as the “soviet of experts” advocated by institutional economist Thorstein Veblen in the early 1900s.

The problem is that it isn’t expert knowledge that is lacking as much as the “particular knowledge of time and place” conveyed by the price system and utilized best by the individual patient and doctor. That truth has already dawned on many doctors, patients and policymakers such as John Goodman of the National Center for Policy Analysis. Obamacare already embodies the demand for government-chosen best-practices medicine, but those choices will be made using the criterion of statistical significance. This is a recipe for disaster, since medicine in fields such as oncology has moved rapidly in the direction of individually tailored drugs and therapies rather than the “one-size-fits-all” approach implied by statistical regression. By its very nature, government action must involve coercion when flexibility and feedback are what is most urgently needed.

Thus, by applying the “moneyball” formula to health care, the authors are actually embracing the pretense of effectiveness in spending rather than the genuine article. They should be arguing for a return to the price system instead. “It is indisputable, however, that a move toward payments based on performance would harm some businesses. If most of your profits come from a medical device or procedure that …doesn’t work all that well, you’re likely to resist anyone sorting through what works and what doesn’t, never mind changing payment accordingly. Health-care interests are wise to invest millions of dollars in campaign contributions and lobbying to protect billions of dollars in profits.” The authors have just made the case against involving the government in health care and in favor of allowing free markets to work. Free markets are the best device ever invented for enforcing “pay for performance.” Leaving government out would eliminate campaign contributions and lobbying completely. As we will soon see, the authors’ method would accomplish none of these objectives.

The Moneyball Hook

The selection of “Moneyball” as the authors’ marketing hook reveals their lack of purpose. They try to persuade their readers by connecting emotionally rather than rationally. Moneyball was a tactic used successfully by one baseball team (the Oakland Athletics) during one pennant race. Its name derives from a book, but the authors picked it because of the successfully movie adapted from it.

Selling “free markets” would make perfect logical sense, since this is the same device that disciplines spending for thousands of businesses around the world. It has worked for centuries. But as a marketing concept, it has no sex appeal. No recent movie used it; no top-40 recording gyrated to it; no leading rap group is named for it. And the authors are only trying to sell a concept; they are not really trying to succeed in reducing spending or improving its quality.

How do we know the authors are not really trying? They tell us – not in so many words, but indirectly.

The System is Rigged Against Spending Changes or Reductions

The authors relate the history of so-called attempts to evaluate government-spending programs and jettison the ones that aren’t working. During the Clinton administration, the Government Performance and Results Act directed Congress “to provide for the establishment of strategic planning and performance measurement in the Federal Government.” The use of vague, circumlocutory language is a classic bureaucratic way of avoiding clarity and specificity – in this case, of avoiding commitment to eliminating wasteful spending. Sure enough, no link was established between performance assessments and continued funding by Congress.

The Bush administration, egged on by Bridgeland, established the Program Assessment Rating Tool (PART). This specifically identified programs that were not working as intended and tried to get them improved or discontinued.

Or did it? It seems that the assessment process has five possible outcomes. A program could be declared “effective,” “moderately effective,” “adequate” or “ineffective.” The fifth possibility was “results not demonstrated” due to insufficient data for evaluation. It is clear that four of the five possible outcomes were designed to justify continued funding, while even a rating of “ineffective” would not necessarily lead to termination of a program but would rather call for “improvement.” Not surprisingly, of the 1,000 programs assessed during Bush’s tenure, only 3% were adjudged “ineffective.” And Congress apparently ignored OMB’s recommendations to reform or abolish even that paltry percentage.

The reader might pause to consider that restaurants serving very good food go broke every day; an Internet review of “effective,” “moderately effective” or “adequate” would probably be the kiss of death in that business. And the people doing the rating have only their own inner fidelity to truth and honesty as an incentive to be honest in their evaluations – the institutional incentives for the federal government to discipline its own spending range from slim to none.

Beginning in 1990, the federal government has actually tested 11 large social programs, comprising some $2 billion in aggregate annual spending; using randomized controlled trials of effectiveness. The trials tested the results of spending by comparing the effects to those experienced by a control group who did not receive the benefits of the spending. 10 of the 11 programs showed either no effects on recipients or only a weak positive effect.

In some cases, programs were found to do positive harm. Government funding of so-called “Scared Straight” programs was found to “make kids about 12 percent more likely to commit a crime.” 21st Century Community Learning Centers, an afterschool program designed to improve academic performance of elementary-level students, has failed to affect academic outcomes but has increased the number of school suspensions and other behavioral infractions. Even this verdict of counterproductive was not enough to kill funding for the Learning Centers, which were saved by the intercession of then-gubernatorial candidate Arnold Schwarzenegger of California and are still receiving $1 billion in federal funds today.

Are the Authors As Mad As Hell? Are They Not Going to Take It Any More? Not Even Close


You might suppose that by now Messrs. Orszag and Bridgeland are mad as hell and aren’t going to take this any more. No, unlike Howard Beale, Network‘s “Mad Prophet of the Airwaves,” the authors are mildly irritated and ready to offer constructive alternatives. By golly, a non-profit organization called Results for America “is calling for reserving 1 percent of program spending for evaluation: for every $99 we spend on a program …we would spend $1 making sure the program actually works.” Don’t you just love those calls for action? Don’t you just love those non-profits?

“The more evidence we have, the stronger it is; and the more systematically it is presented, the harder it will be for lawmakers to ignore.” Uh… haven’t you just been telling us that they’ve done just that, for decades? “Still, linking evaluation to program funding will be tough, as both of us have seen in practice, again and again.” Aha. So the upshot of the authors’ ineffectual whining is that we’re supposed to do more of what’s conclusively failed in the past, but expect a different outcome this time. This is the operational definition of insanity – as if we weren’t already being driven insane by the actions of government gone wild.

Grasping at straws, the authors ask hopefully (drum roll, please):”What if we had a Moneyball Index, easily accessible to voters and the media, that rated each member of Congress on their votes to fund programs that have been shown not to work?” At ages 44 (Orszag) and 53 (Bridgeland), respectively, the authors are not too young to recall Sen. William Proxmire of Wisconsin, whose “Golden Fleece” awards were designed to attract media attention to Congressional spending projects that Proxmire felt were wasteful or even counterproductive. Awardees included a science grant to study why people fall in love, a study of Peruvian brothels (which proved particularly popular with its researchers) and a study of the buttock dimensions of airline stewardesses. (Proxmire’s awards were handed out from 1975 to 1987, when the job description of “airline stewardess” was still operative.)

The authors should ponder Proxmire’s fate. After a dozen-year run in which he actually succeeded in killing a few small-scale raids on the public treasury like the above examples, Proxmire’s career ended at age 74 in 1989. He didn’t retire due to age; his well-publicized physical-fitness regime made him perhaps the best-conditioned Senator. Instead, he was “retired” by the government-spending Empire, which struck back at him electorally when he finally lampooned a few too many of their pet projects. It should also be remembered that Proxmire, the scourge of wasteful spending, was a consistent supporter of dairy price-supports.

So much for “public shaming.” There is little point in shaming people who have no shame. Is there a group more institutionally bereft of shame than the U.S. Congress, whose poll approval rating hovers near single digits yet adamantly refuses to reform themselves?

Too Little, Too Late, Too Ineffectual

Figuratively speaking, Orszag and Bridgeland are canvassing the Titanic lifeboats to recruit passengers to go on iceberg watch. If there was ever a time to fussily insist upon substituting wise spending for wasteful spending, it expired nearly a century ago. Today, the Federal Reserve is directly buying new Treasury debt to the tune of a trillion dollars per year. Banks are husbanding $4 trillion or so in excess reserve accounts. The Fed has been desperately pegging short-term interest rates as close to zero as possible for years. It has not been trying to “stimulate the economy,” because it has encouraged banks to hold the reserves rather than loaning them out. (Had they been loaned out, we would have experienced hyperinflation.) Rather, it has been trying to buy time during which the Treasury can pay the lowest possible interest on outstanding debt, so as to keep interest payments from overwhelming the federal budget.

Orszag and Bridgeland should be advancing on the federal budget with a meat ax, intending to decapitate entire cabinet-level departments. They should be screaming at the top of their lungs in press conferences, not daydreaming about cutesy marketing ploys like “Moneyball” in the pages of a left-leaning opinion journal like The Atlantic (circulation: 400,000+). And they should have started their campaigns while still in government, not after bailing out to the private sector. The fact that two former “spending czars” – heads of CBO, OMB and DPA – were too timid to speak out against runaway spending while in government and still didn’t come within shouting distance of the whole truth years after leaving the bureaucracy tells us that there is no hope at all of reforming government from the inside. That is, the real shocker about this article is not even what the authors say; it is what they have refused to say.

What really motivated Orszag and Bridgeland to speak out? After all, they could have simply sat silent. Perhaps they were caught between two alternatives, like Buridan’s Ass. As members in good standing of the Establishment, they couldn’t simply up and admit that the federal government is one big welfare project – not for the purported beneficiaries, the program recipients, but for government employees who pick up paychecks while performing work of little or no true value. Yet neither could they do nothing while watching their country go down the drain. This half-hearted, empty-headed response was all they could muster.