Arnold Kling  

Government Incentives

PRINT
High-Beta Houses... Manufacturing Crisis?...

Does the absence of a bottom line affect government behavior? Consider this story from the Washington Post about the "busy season" for GTSI, a company that sells technology products to government agencies.


Fall is coming, and for GTSI that means the end of the federal fiscal year is approaching and that civil servants are rushing to spend department funds before they revert to the U.S. Treasury on Oct. 1...

In September, GTSI's distribution warehouse adds 15 or 20 workers to its usual staff of 45 to 50 people to handle accelerated shipments of computers and networking equipment. By next Monday, the company will begin staying open three hours later, until 9 p.m., so that its sales force can field last-minute calls from customers.

By the middle of the month, the company will extend its hours to 11 p.m. and open its doors on weekends as well. On the last day of the month, administrators and executives will join workers in the warehouse to help check orders for defects and load boxes before the midnight deadline.

"We sell as much on the last day of September as we do in the whole month of January," said M. Dendy Young, chief executive of GTSI.

During the rush, the company's largest suppliers, giants such as Cisco Systems Inc., Microsoft Corp. and Sun Microsystems Inc., usually pay for catered lunches and dinners for the 356 salespeople.


For Discussion. Bureaucrats believe that failure to spend money before the end of the fiscal year will lead to cuts in their budgets the following year. What rules might the government adopt that would produce a more rational incentive system for spending money?


Comments and Sharing


CATEGORIES: Cost-benefit Analysis



COMMENTS (20 to date)
Patrick R. Sullivan writes:

It's just the Christmas Rush phenomenom. It's familiar to a variety of industries. The real incentive problem is, as Arnold said, the lack of a bottom line profit incentive. Making bureaucrats compete with each other for work, with the ability of managers to hire and fire at will would be about the only change I can think of that would improve efficiency.

Boonton writes:

Two possible incentives:

1. Let unsused portions of the budget carry over into the next fiscal year.

2. Let there be bonuses for coming in under budget.

Both proposals have the potential for abuse. For example, consider the agency handling the payouts to the 9/11 victims. Their job is to get the money out the door and in the hands of the people Congress directed them to pay. If they come in 'under budget' because they put up all sorts of roadblocks to legitimate victims getting the compensation then we wouldn't want to reward them with a bigger budget next year or a bonus in their paychecks.

I don't think there is one reform that could change the entire situation but certainly some reforms could be instituted in some departments. Hiring & firing at will could help but it is also open to much abuse. Remember managers are not responsible for output in the same way that private sector managers are. I think the dynamics of the system would encourage using 'hire/fire at will' as a source for low level nepotism & kickbacks.

David Thomson writes:

Human beings are innately selfish. We often should not give money to government bureaucrats in the first place. It is inherent that they will waste money that is not theirs. The temptation will normally be too great to resist. Why do so many presumably intelligent people fail to comprehend the obvious? Is it due to something in the water they drink? Were they imbibing hallucinatory drugs during their university years? Oh well, perhaps some kind soul will send them a statue of John Calvin on their next birthday.

But don’t we sometimes need government bureaucrats? Isn’t there a legitimate role for the public sector? The answer to this question is obviously yes. Am I therefore inconsistent and mealy mouthy? Nope, I merely recognize the harsh fact that some government is unavoidably required to sustain a viable social order. Taxes indeed do underpin civilization. We should, however, restrict government spending as much as possible. The government should be our very last option---and not our first!

Boonton writes:

"Human beings are innately selfish. We often should not give money to government bureaucrats in the first place. It is inherent that they will waste money that is not theirs. "

This is a restatement of the classical agency problem. Corporations have it too. The actual owners of a corporation (the stockholders) not only trust the workers (upper management) to correctly spend their money but even set their own pay! Anyone who has had experience with a corporate monopoly knows that waste thrives there as well.

Unfortunately some jobs are just to big to get done without a beauracacy....whether public or private. That doesn't mean that we can't find ways to minimize the waste.

One idea is to have small teams inside an organization bid against each other for major projects. This probably couldn't be applied everywhere but in some organizations it may create a 'market inside a bottle' that is efficient.

David Thomson writes:

“This is a restatement of the classical agency problem. Corporations have it too. The actual owners of a corporation (the stockholders) not only trust the workers (upper management) to correctly spend their money but even set their own pay! Anyone who has had experience with a corporate monopoly knows that waste thrives there as well.”

You are only half right. It is where you are half wrong that concerns us at the present moment. I am well aware that private sector entities occasionally waste money. How can we, for instance, forget the foolishness of the tech bubble? However, the good times eventually come to an end because of limited funds. Private companies cannot indefinitely ignore their frivolous spending because tax payers rarely can be tapped on the shoulder to bail them out. Regrettably, this is often not the case for civil servants---especially those protected by their length of service Their fiefdoms endure for years regardless of being unable to present evidence of success.

The private sector must satisfy the demands of consumers. Government bureaucrats, sadly, are mostly (on a practical basis) obligated only to please specific politicians and the special interests.

Boonton writes:

Are you really so sure about that? Last time I looked I noticed that gov't spending as a % of GDP has remained remarkably constant around the 20% mark for several decades. This despite the fact that we've seen a diverse array of administrations & ideologies....even a major paradign shift with the collapse of liberalism in the 70's and later the end of the Cold War.

Clearly there is a dyanmic of some sort that is holding some type of check on spending by the US gov't.

David Thomson writes:

“Clearly there is a dyanmic of some sort that is holding some type of check on spending by the US gov't. “

Yup, and they are called tax cuts! Politicians can’t spend what we won’t give them. This often means that new spending programs are less likely to be created. The old programs may not exponentially grow---but they are also usually well protected. Why is this? I may abstractly be upset by a hypothetical $30,000,000 program that I deem worthless. In the real world, though, this amount barely directly impacts my pocketbook by even a small fraction of a penny. I must therefore almost certainly act altruistically if I desire to fight this new spending bill. However, those pushing this new legislation are probably being amply rewarded for their efforts.

John Thacker writes:

It is, I believe, currently illegal to come in under budget in federal agencies. (Unless this has been changed.) This law was enacted by Democratic Congresses who (with reason) feared a Republican executive branch simply failing to spend money appropriated by Congress. The example of President Nixon impounding educational spending in 1972 (spending which he argued was unConsitutional) could easily be repeated. It's easy to see how, taken to an extreme, a President could subvert the power of Congress over fiscal policy.

Boonton writes:

"Yup, and they are called tax cuts! Politicians can’t spend what we won’t give them. This often means that new spending programs are less likely to be created. "

Very wishful thinking. After two years of tax cuts we have seen nearly no spending cuts at all. Taxes are not directly tied to spending.

John is right, any blanket reform runs the danger of subverting the Constitution. My example, Congress voted to give the victims of 9/11 money. The person in charge of this should not be coming in under budget. His duty is to disburse all the money allocated for the victims.

Some areas, though, can be made quite efficient. Look at Social Security. Less than 1% of the money goes to actual administrative expenses. Whatever you think of the program, only a tiny portion is going to fund those cutting the checks and issuing Social Security numbers.

David Thomson writes:

“After two years of tax cuts we have seen nearly no spending cuts at all.”

You are conveniently overlooking my point about the prevention of new spending programs. Many politicians of both political parties are now far more hesitant in asking for additional money from Congress. Also, you are focussing too much attention on the federal government. The States have been making immediate major cuts. Why is this? Governors do not possess a way to print more money! It’s as simple as that.

“John is right, any blanket reform runs the danger of subverting the Constitution. My example, Congress voted to give the victims of 9/11 money. The person in charge of this should not be coming in under budget. His duty is to disburse all the money allocated for the victims.”

Please reread your comments. They are a recipe for a financial disaster. I was not previously aware that Congress passed a ridiculous law mandating that the money must be spent. Just try imagining what this might be mean if your own family enacted similar budgetary rules.

The 9/11 tragedy is not at all relevant to this particular discussion. This atypical situation is premised upon the very concept that the recipients get all the money collected. The government is merely acting as a middle man with the responsibility to distribute the available funds. In many respects, financial need is not even a criteria. Our normal budgets are trying to achieve a totally different set of objectives.

Boonton writes:

"You are conveniently overlooking my point about the prevention of new spending programs. Many politicians of both political parties are now far more hesitant in asking for additional money from Congress. "

That's intersting since we now have a totally new department of homeland security, a new farm subsidy program that actually reversed the cuts made in the 90's, & we are inching towards a new entitlement to prescription drugs. Needless to say existing spending programs have also increased dramatically as well.

"Please reread your comments. They are a recipe for a financial disaster. I was not previously aware that Congress passed a ridiculous law mandating that the money must be spent. Just try imagining what this might be mean if your own family enacted similar budgetary rules. "

A government is not a family. Nor is it a business. If Congress decides it wants to provide a spend a set sum on something (such as $1b to victims of 9/11) the job of the Treasury is to spend the money. If Congress allocates money for some ongoing function such as policing, then incentives should be incorporated that reward the department for being under budget. My point is just that the incentives have to be somewhat subtle or else they may end up encouraging the department to save money by not doing its job.

David Thomson writes:

“That's intersting since we now have a totally new department of homeland security, a new farm subsidy program that actually reversed the cuts made in the 90's, & we are inching towards a new entitlement to prescription drugs. Needless to say existing spending programs have also increased dramatically as well.”

Excuse me, but you are not paying attention. I strongly emphasized the state budgets in my previous post---which have indeed been sharply curtailed. The federal government is regrettably a slower process because the U.S. Congress can essentially print more money. Still, at the end of the day even our federal elected officials and civil service protected bureaucrats have less money to spend.

I might also add that politicians employing federal money to bribe voters transcends party affiliation. Both Republicans and Democrats are guilty of this vice.

Matt Young writes:

Simple reform:

Teach academics how to say the following words:

"Cut the god-damned goverment spending"

Bernard Yomtov writes:

Having worked for a company that sold big-ticket software to large corporations, I can assure everyone that exactly the same sort of behavior is found in the private sector. December was always a good month for us, because customers "had to" spend their software budget by year-end or lose it.

I don't think the problem is one of government as much as it is one of large organizations.

Ronnie Horesh writes:

With regard to Mr Yomtov's comment: competitive pressure would surely make last-minute spending something less than a serious concern. The problem with government is that there is no competition, so there are no incentives to be cost-effective. I think this will continue until we move to a system whereby we pay people [not necessarily government] for achieving social outcomes, rather than for performing activities that allegedly lead to these outcomes. We need to move away from financing agencies, activities, programs or projects, and towards one that inextricably links rewards to outcomes. [Social Policy Bonds - see my website http://SocialGoals.com - may be one way to go.]

Bernard Yomtov writes:

"With regard to Mr Yomtov's comment: competitive pressure would surely make last-minute spending something less than a serious concern. "

Is this a statement of theory or of empirical fact?

Isn't it possible that the structure of budgeting in large organizations is such as to induce this sort of behavior? It seems plausible, at least, that there are no perfect ways to manage budgets in such organizations, and that systems that lead to last-minute spending may be the best choice. Competition does not solve all problems perfectly.

David Thomson writes:

“I don't think the problem is one of government as much as it is one of large organizations.”

I was also a technology salesman who saw sales dramatically increase at the very end of the year. The reason was due almost entirely to the IRS tax code compelling the business firms to make these last minute purchases. I would also add that in the vast majority of instances---the equipment and services bought at this time made long term economic sense. The same often cannot be said of the government.

The private sector still must be cautious when spending money. Saving a few dollars on their tax bill is usually not sufficient to act foolish. None of the companies I dealt with acted like drunken sailors with too much money in their pocket! Much though and discussion had been invested before their top executive signed on the bottom line.

Eric Krieg writes:

Do you guys ever read Dilbert? I'm pretty sure that I have read storylines in that comic that revolve around having to spend money before the end of the year so that next year's budget isn't cut.

I suppose to some extent it is a problem in any large organization. However, the profit motive would seem to me to be a feedback mechanism that would curb this phenomenon in the private sector.

Ronnie Horesh writes:

"With regard to Mr Yomtov's comment: competitive pressure would surely make last-minute spending something less than a serious concern. "

"Is this a statement of theory or of empirical fact? Isn't it possible that the structure of budgeting in large organizations is such as to induce this sort of behavior?"

My point is: Sure, last-minute spending will go on in large private-sector organisations, but it is less of a concern because consumers can choose whether to pay if it inflates the costs of whatever these organisations are selling. When the government does it taxpayers have no choice. Regards

Bernard Yomtov writes:

David,

I fail to see how the IRS stimulates late-year sales. Sure, you get a deduction, but you're still better off not spending the money at all if the product is not useful.

Ronnie,

What I'm saying is that this sort of behavior in large organizations may be the result of using the best available management techniques. In other words, a budget system that is not prone to being gamed this way may well be gamed in other, worse, ways.

After all, departmental budgeting is a compromise to begin with. Ideally, all possible expenditures should be evaluated on the basis of their benefits, without regard for artificial constraints. But this would be hopelessly burdensome, so budgets are used instead. we might argue that the cost of this artificiality is less than than the cost of weighing everything on an organization-wide basis.

Should managers be 'allowed" to play games. Well, they have incentives to do so, and monitoring them to prevent it may agian be more costly than just letting it go on.

So it seems entirely possible to me that organiztations where this last-minute spending goes on are in fact being run as efficiently as is possible on a practical level, so competitive pressures won't change things.

Comments for this entry have been closed
Return to top