EBF 200
Introduction to Energy and Earth Sciences Economics


Bureaucracies and Power


We spoke in the previous section of public choice theory, which relates to the choosing of politicians. In this section, we will look at how the other, larger part of government functions, from a "positive" point of view. A bureaucracy is an agency the government charges with a specific obligation for which the government is ultimately responsible. The word "bureaucracy" has become negative in modern society, with connotations of red tape, confusing instructions and poor service. However, this is an improvement on the system it replaced. The word "bureau" is French for "desk," and the word "bureaucracy" comes from the government structure that was developed after the French Revolution. Before the Revolution, if a person wanted anything from the government in France, they had to make a personal appeal to the king or one of his regional representatives. The decisions of these people could be completely arbitrary, or would depend on the paying of bribes or kickbacks. After the Revolution, a system of written rules, standards and practices was established, with these rules being managed by supposedly disinterested civil servants, who would decide whether somebody received a government favor based on merit and adherence to a rule or regulation, and not as a personal favor. This was largely seen as a great improvement on the previous system, and systems like this are used in most parts of the world - at least in theory.

Some examples relevant to the United States:

  • The Department of Defense (DoD) is a bureaucracy charged with defending the nation.
  • The Environmental Protection Agency (EPA) is a bureaucracy charged with protecting the environment.
  • The National Forest Service (NFS) is a bureaucracy charged with managing the nation’s forests.

In each of the above examples, the government (either Congress or the President) is assigned (or assumes) the property rights for the said resources and programs, and then chooses to "contract out" the work to an agency working, nominally, for the politicians. This is like hiring a maid to clean your house, or a gardener to mow your lawn, except the government hires large numbers of economists, accountants, engineers, scientists, lawyers, and administrators to perform the management, execution and enforcement of the rules that the politicians put into place. So, for example, the politicians will pass a law like the Clean Air Act, with a bunch of goals and targets for cleaning up the environment, and will then delegate to an agency (in this case, the EPA) the job of making sure that the law is put into effect.

Quite a bit of academic work has been done studying how bureaucracies work. American economist William Niskanen came up with a theory of bureaucracy that can be briefly summarized as follows.

A bureaucracy is a response to a market failure, but is a form of government failure with 3 main elements:

  1. Bureaucracies carry out valuable programs for which society is willing to pay.
  2. The bureaucracy will maximize its own welfare.
    • Bureaucracies are composed of individuals.
    • These individuals act in their own best interests — not society’s.
  3. The bureaucracy knows the true costs of its programs much better than any overseers.

The third point can be summarized in the context of the first two: the bureaucrats know that the public places some value on the services they provide, for example, they want national defense, they want a clean environment. Since the bureaucrats are the people who provide the service, they have the best knowledge about their costs, much like a firm providing a good or service in society knows its costs better than its customer. However, the bureaucrats also have a good understanding of what the public (via their selection of politicians) is willing to pay for the services. So, we have a difference between a cost and a willingness to pay. In a market, this is known as the "total wealth" derived from trade, which can be divided into producer surplus and consumer surplus. A market will establish the equilibrium price, which divides the wealth up between the producers and consumers. In this case, we have a type of market, but the sellers (the bureaucrats) have market power - they are typically a monopoly, and they have information asymmetries working in their favor, and they are striving to maximize the "producer surplus" while minimizing the "consumer surplus." That is, the bureaucrats would like to be "paid" the highest amount possible, which is the total willingness to pay by society.

Furthermore, it is difficult for the government to detect or control for this behavior, as the disparity will always exist by nature of the system.

This theory is a bit extreme, however: bureaucracies do have controls - politicians, who have to be elected. Occasionally, the public grows unhappy with the capture of wealth by bureaucrats and elects politicians who campaign on the promise of reducing the size, power, and cost of the bureaucracy. Unfortunately, politicians often have less power than the bureaucrats, who have often been in their positions for many decades and know how to play the system and public sentiment. Bureaucracies are greedy and do have power, and are generally unwilling to give up that power. What incentives do agencies have to be efficient? Few, because being efficient means more work for less budget — we often hear the phrases “close enough for government work,” and “in government, 10% of the people do 90% of the work.” However, fear of losing the position provides some incentive for efficiency.

In business, many of the processes can be measured, and their "contribution" to the bottom line (profit or loss) can be assessed. How can the output of bureaucracies be measured? In many situations, it is very difficult. If there is no attack from Canada, can we really say the DoD succeeded in defending us? The next question is, how can legislators monitor bureaus? Who is more likely to show up on a bureau’s oversight committee? Congress-people, who often have vested interests in the bureaucracy. Because they are basically the people who perform the day-to-day operational functions of government, the agencies can make life very difficult for politicians if they want to. Thus, the politicians, who want re-election, will often strive to keep the bureaucracy happy because actions of the bureaucracy can make a politician look very bad in the eyes of the public. Only when a politician has strong support to act against bureaucracies will they try hard to crack down on agencies, but this can often backfire on the politicians, when the public sees that something that they value is being taken away. The public is notoriously fickle - they may elect politicians who promise to crack down on public spending, but become very unhappy when that "cracking down" means less service from government agencies.

What do bureaucracies want? Maybe the same thing as everyone else - money. However, government officials generally cannot profit from their actions - we hope - at least not in the same way that private parties can. So what do government officials maximize? Power in various forms (either budgets or power over private authorities). Often, this power manifests itself in large budgets, which means large staffs. A bureaucrat who has 5,000 people is a lot more powerful than one who has 150 people working for him.

An example, let's say we went to the EPA and gave them two choices for regulating pollution:

  1. The EPA decides how much pollution will occur. It then decides who will produce what.
  2. The EPA decides how much pollution will occur. It then sells the right to pollute. A market arises in tradeable permits.

Under (1) EPA has a lot more authority and power, so we might think they would choose this method.

Looking a little deeper into this example: the government basically “hires” the EPA to provide a clean environment. The means for accomplishing this come from a budget for which the EPA asks (since the EPA knows better than Congress how much it will cost – see the inherent flaw?) The EPA asks for as much as it can get without being rejected. This is the point at which we are indifferent between spending one more dollar on cleaning the environment and letting pollution flow freely from factories. Notice that it may only take a clever ad campaign threatening dire consequences to protect the environment to scare the public. Congress accepts the budget request because the EPA knows better how much it costs, and the bureaucrats are better off at society’s expense. The difference between the true costs and the budget are at the disposal of the bureaucrats

The Shortsightedness Effect

We expect that firms will maximize their stream of profits discounted by the interest rate. This means that firms discount the future ("discount" means "count as less valuable"). Investments that pay off in the future are less valued than ones that pay off in the present. What would you prefer, a dollar today, or a dollar tomorrow? What would you require in order to accept payment tomorrow instead of today? This is a complaint that many make about businesses - that they are focused on "short-term" profits, but do not take the long-term benefits of society into consideration when making investment or production decisions. It is a commonly held belief that governments do a better job of considering long-term effects of policies, because government does not have short-term, profit-maximizing objectives. Put in a more technical way, we would expect government to have lower "discount rates" than business - because they will place a higher value on future events, they do not "discount" them as much. So, is this true? How much do politicians discount the future?

Politicians care about getting votes. But we know that voters are rationally ignorant and are going to have a hard time predicting the impact of policy on future events. Thus, we might expect that voters would focus on how well things are going on election day. As a result, politicians have little incentive to engage in policies that will have benefits past the next election day. You see this in states with surpluses from oil revenues (Arkansas, Louisiana, Alberta), where the surpluses are generally spent immediately. Thus, while the private market has positive discount (interest) rates, we might expect government to have even higher rates. A firm, and its shareholders, might focus on short-term profits, but the firm does want to be in existence 5, or 10 or 25 years from now, and thus they are unlikely to perform actions that will hurt the company in the long term. Any firm that does something in the short-term that can be seen to hurt it in the long-term will likely be punished in the stock market. However, in the market for votes, people generally care little about the next election, and focus on the present one.