Arnold Kling  

Policy in a Fog

Budget Woes... Immigration Reform...

In a wide-ranging essay on the problem of incomplete information, I write,

Perhaps the most important point of all is that government officials operate in a fog. If one looks at all of the imperfections and shortcomings of the market, then there appears to be a nearly infinite set of opportunities for the government to improve on private sector outcomes. However, it is important to remember that the information that government has is often no better than what is available to private individuals.

For the private sector, one of the most important signals that cuts through the fog is the profit and loss statement. If nothing else, a company that makes too many mistakes will find itself out of business. Government programs are insulated from such signals. I believe that as the pace of innovation has increased in our society, the relative inefficiency of government has gone up. Both private-sector operations and government programs become anomalous and obsolete more rapidly. However, government anomalies persist, while in the private sector market discipline serves to weed out failure. The more dynamic the economy, the larger the drag exerted by the government.

For Discussion. What I am suggesting is that government tends to move slowly, particularly when it comes to terminating a process or a project. As the surrounding world moves more quickly, I suggest that this makes government less effective. Are there offsetting considerations?

Comments and Sharing

COMMENTS (8 to date)
Eric Krieg writes:

Well, certain government functions have definable outcomes. I mean, how did the 101st Airborne do in Iraq? Their performace cemeted Rumsfeld's "Faster, leaner, meaner, more agile" philosophy. I don't think that the US military is going to be buying any self propelled 100 ton Howitzers anytime soon.

And on the other hand you have The State Department. Can these fools get anything right? An honest assesment of the State Department would lead to a serious reorganization.

It seems to me that, with government, there just doesn't seem to be the will to force change. But when there IS a will to change (which Rumsfeld has, and Powell does not), the fog can be parted.

On the economic front, can anyone seriously say that the Bush economic policy could have been substantially improved? I don't think that ANY policy changes could have been made to improve employment. We are doing the best we can. Dubya doesn't get enough credit for his economic stewardship.

Ronnie Horesh writes:

Sensible government policies can accelerate inevitable change by mitigating its negative effects. I believe there is a US program that partially compensates some of the losers from trade liberalisation. Unfortunatly adjustment-promoting policies of this type are heavily outweighed by those that entrench opposition to change [such as agricultural support policies].

Donald H. writes:

"this makes government less effective."

["I suppose my real concern is that most of the critics don't have any solutions, that they don't know what to do." -James Surowiecki]

As opposed to what? Unless you proffer an alternative (as you appear to be trolling for :) then your criticism is rather hollow. Do you propose short-circuiting the democratic process? Do you long for a Lee Kuan Yew-type authoritarian technocrat? Or, more fundamentally, do you not think that there are some activities, by no means profitable, which still provide enormous utility? i.e. non-rival, non-excludable, indivisible, natural monopoly public goods and regulation to prevent tragedy of the commons outcomes:

The common fallacy among libertarians is to confuse profits with utility, as if privatising roads, vaccinations and fire brigades (and open source software!) will somehow make their provision more efficient, just because it can then be calculated on profit/loss statement. All that wasteful repetition gone under the holy discipline of the market, as if there weren't such a thing ever as a market failure. It's a shame it seems nowadays that b-schools don't teach econ 101.

That said, I tend to agree with small government republicans about decentralising and devolving power to the state, municipal and even neighborhood level :D Call me a big local-gov't advocate!

As for valid criticisms leveled at Bush's handling of Iraq, I'm sympathetic to arguments about him contributing to 'the fog' as you put it.

Despite the hyperbole and moral equivalence...
["argument 1. Saddam really was evil. And we really did get him. The costs of that deed include not just the dead and the maimed on our side, and the dead and the maimed on theirs, and the couple hundred billions of dollars from buildup through reconstruction. The costs include the Administration's decision to motivate the American people by fear, to perpetrate an official farce (inspections) and to be less truthful about factual matters than one of the most tyrannical governments on earth.

"Yes, it was too much to pay, and to continue to pay." -Jim Henley]

The FT is a bit more diplomatic...
["the way the Iraq threat was misinterpreted through dubious intelligence should say more, not only to the US administration but all governments: that it is in their interest to have in position institutions and processes that do not end up suggesting to the governed that their governors are all liars." -FT editorial]

And it's not just in matters of war btw, ...
["The administration's reaction to the IMF's criticism was to intone the mantra that it plans to halve the federal deficit in five years. Higher economic growth, it says, will raise tax receipts. But as a commitment to long-term fiscal responsibility, this is disingenuousness bordering on dishonesty." -FT editorial, The Economist backs their assertion up: ]

Now that we're there, tho I find it looks like the democrats (excepting Lieberman) have adopted Fareed Zakaria's foreign policy.

He's a super smart guy, but his main objections... 1) lack of postwar planning, 2) insufficient forces, which 3) could be alleviated with int'l help and 4) defray mounting costs in 'blood and treasure', and 5) a more authoritative and visible Iraqi governing council

...appear not to have resulted in failure so far, so none of the criticisms leveled at the administration have been much of a liability to them. If, of course, however the insurgency intensifies, casualties rise significantly and costs spiral then the democratic position suddenly becomes a whole lot more legitimate and the republican position more untentable.

The standard republican response has been to characterize democrats as desiring failure to boost their political fortunes, i.e. unpatriotic. I think it's been largely successful, albeit again only to the extent that the administration appears to be making progress in the 'war against terror' and foreign (and domestic, e.g. no domestic attacks on US soil) policy is seen as successful.

So as long as that's true, republicans are likely to remain largely immune from criticism, as it should be. That's democracy, or like Keynes said, "When the facts change, I change. What, sir, do you do?" If the 'facts' change, America will likely change too, but probably not until then.

That said, my boss had a great insight. Perhaps in part from being from N.Ireland and having a particular insight into such things, he suggested there probably won't ever be more attacks on US soil. If the primary objective of 'islamacists' is to get the US out of the Middle East and Central Asia, then domestic attacks in the US are likely to accomplish the exact opposite.

Moreover, keeping Bush around as a polarising figure actually helps the islamacists' cause on the recruitment front, much as the IRA (in my boss' words) "would never dream of getting rid of Ian Paisley." It's an organisational cohesion thing.

Under this analysis tho, one would expect increasing attacks on the US, its allies and humanitarian agencies operating there (successful in UN, Red Cross/Crescent and S.Korean withdrawals so far) to try and marginalize the Americans, and as Zakaria sez provoke "heavy-handed retaliation" by the Americans, to make them be viewed as a colonial occupying force (infidel oppressors) rather than liberators bringing prosperity, freedom and democracy. From a 'purely objective' foreign policy/political science standpoint then, it'll be interesting to see how Japan's recently committed SDF deployments will fare this year as a litmus test and barometer for how well things are going over there.

Moreover, it'll be quite interesting to see how the 'hand off' goes this summer... during the olympics? What shape it takes I think will be critical. In this regard, I'm leaning toward the three state solution, a loose confederation joined by oil rights, the administration of which to be sure promises to be a nightmare.
["Post-Saddam Iraq is a country without a defining national identity, and over the long term that's a situation potentially more dangerous than the threat currently posed by the insurgents. Cobbled together by the British in the 1920s, Iraq resembles three countries more than one; it was kept together by strongmen rulers even before Saddam. The Kurds in the north, the Sunni Arabs north and west of Baghdad, and the Shiite Arabs of the south and center inhabit vast swaths of territory." -Stanley Reed]
["To be effective, a new post-war Iraqi government must be pluralist, one that includes the three major sub-national groups in Iraq and advances their interests. A decentralized federal political system offers the best means of assuring local autonomy, protection against the return of a tyrannical central government, a fair political settlement in Iraq, and an equitable disbursement of Iraq's oil and tax revenues." -John C. Hulsman, Ph.D. and James Phillips]

Lawrance George Lux writes:

There is actually much to criticize about Bush economic policy. Republicans state there were no measures to stop the Job loss which occurred, a statement which is false. They also say his policy brought the Stock Market back, a patent lie; consider, his Tax Cuts allowed funds for a potential 3000 point rise in the DOW, he is still beneath the Inaugural market values. Bush cannot say he, or the Federal Reserve, slowed Inflation; American Consumers are paying more for Goods and Services, than they ever have before in history. Bush cannot claim a higher Standard of Living for American citizens, his Administration is actually trying to hide data related to this area. He proposes huge increases in Spending for Space, while only a dozen Companies and less than 100,000 Job-Holders will benefit from the program. This is the Bush economic policy in a nutshell. lgl

John Thacker writes:

I apologize, Professor Kling, for the many trolls you seem to collect these days. It's quite obvious, for example, that the alternative to government action is private action.

In any case, it seems that what you're discussing is a variation on the information gathering problem discussed by Hayek, Schumpeter, and others. One possible offsetting consideration, not that I necessarily believe it, is that Moore's Law and the progress of technology means that the cost of information gathering and processing across the entire economy has also decreased at the same time, decreasing certain traditional inefficiences of government (this could include the greater ease of polling the citizenry, for example). Also, government has the power in certain cases to compel information from private citizens, by using coercive powers not available to the private sector, and again the increasing use of technology may mean additional efficiency in this area.

Another possibility is that as the surrounding world moves more quickly, it has also become easier for people to move from location to location throughout the world, and thus to move from government to government. This introduces a level of competition between governments, if the governments care about the loss of citizens (and businesses). A more globally connected economy puts pressure on high tariff goods by allowing smuggling or mere tourism to enjoy the items, and banned information resources can be obtained easily.

Donald H. writes:

"It's quite obvious, for example, that the alternative to government action is private action."

No, it isn't obvious. Why then did Hayek propose and advocate a guaranteed minimum income, or Friedman NIT?*

But I heartily agree with your supposition on information technologies' impact on efficiency, e.g. in procurement and logistics or gov't stats on the economy (a poll as it were), particularly in regard to Coase and organisational program size complexity. Mayhaps _more_ hedonic measurement need be introduced as I would surmise _real_ growth (and hence, the deflator) has heretofore been underestimated.

As well, I wholly agree with your assessment of global labor arbitrage, e.g. migrant worker remittances or Richard Florida's 'plug-and-play communities', the impact of which I believe has been underrated, particularly wrt global capital movement.


'It can be argued that private charity is insufficient because the benefits from it accrue to people other than those who make the gifts - again, a neighborhood effect. I am distressed by the sight of poverty; I am benefited by its alleviation; but I am benefited equally whether I or someone else pays for its alleviation; the benefits of other people's charity therefore partly accrue to me. To put it differently, we might all of us be willing to contribute to the relief of poverty, provided everyone else did. We might not be willing to contribute the same amount without such assurance. In small communities, public pressure can suffice to realize the proviso even with private charity. In the large impersonal communities that are increasingly coming to dominate our society, it is much more difficult for it to do so.

'Suppose one accepts, as I do, this line of reasoning as justifying governmental action to alleviate poverty; to set, as it were, a floor under the standard of life of every person in the community. There remain the questions, how much and how. I see no way of deciding "how much" except in terms of the amount of taxes we - by which I mean the great bulk of us - are willing to impose on ourselves for the purpose. The question, "how," affords more room for speculation...'

Monte writes:

“Are there offsetting considerations?”

None that would outweigh the efficiency losses. Government projects and spending are self-perpetuating and insulated from the mechanism of efficient resource allocation by legislative majority, unlike those in the private sector whose economic values are determined by profit and loss. With few exceptions, the costs of continuing to subsidize financially troubled government sponsored enterprises (GSEs) far exceed their benefits to society. Fannie Mae, Freddie Mac, TVA, and Amtrak represent only a fraction of troubled GSEs that cost taxpayers in excess of $1 trillion dollars annually keep solvent. Additionally, the GAO estimates that some $35 billion a year is improperly paid to recipients of government benefit programs (

This is not to say that government has failed to produce a fair number of successes (a strong military, national education, the space program, social welfare, and foreign policy). And progress on the renewable energy sources and e-government fronts look promising. To date, however, GSEs and government programs, on balance, create risks to the economy by crowding out private sector competition and increasing economic inefficiency.

Monte writes:

Re-posted...apparently some problem w/link in comment above.

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