Renewing America 2: Institutions, Values & Performance
In case you hadn't noticed today is the first real working day of the new year, and depending on how
you count it, of the decade. The last decade began with euphoria to the point of delusion-euphorillusion but quickly came aground against a series of challenges. It ended worse, as if you don't know that. We've managed to avert disaster and step back from the edge of the cliff but have the accumulated detritus of the decade that we must not only clean up but fix and move far beyond. Our last post expressed considerable optimism but accepted the depth and difficulties of the challenges. In our minds the central challenge is in changing our institutions and how they function. But just for starters you might want to review Rick Newman's list of four major problems we need to address. We covered some of that ground in the last post, or at least the readings; they are largely attitudinal but Mr. Newman doesn't propose ways of dealing with them (important as they are).
A while back David Brooks had a pair of opeds that discussed the "The Protocol Society" and "The God That Fails" that begins to. In the first when he talks about protocol he's really talking about the rules that govern our society, what the folks who study it call institutions. They can be formal, for example court systems, government or churches. Or they can be informal, holding the door for someone, norms of behavior and other rules of behavior. But they are the embodied and accumulated learnings from past experience captured in organizations and rules and they govern our lives.
Theory vs. Practice: Policy-making in the Real World
The path from voters wants and needs to new policy to actual implementation is governed by these institutions and it'll pay us to understand how they work vs. how they're supposed in the ideal world of your h.s. civics textbook. In the ideal world wants and needs are supposed to be translated by our represenatives into the best working compromise they can come up with and result in legislation. In turn that is turned over to the Federal agencies to be taken down into more detail and result in a set of detailed regulations to implement.
The Agency then develops a set of staffing requirements, operating procedures and processes and policies that are supposed to result in the effective implementation of the result. This being a very large and complex country what they are administering is the distributed implementation of policy in specific directives at the localized level, the state and local level. This being a Federal system that's supposed to happen in conjunction with the local agencies and governments.
In reality this ideal process is perturbed all along the way. Interest groups work to influence politicians in setting policy and agencies writing regulations, as well as in specific cases. Politicians are subject to other pressures as well, starting with their fundamental strategic goal to get re-elected. Since politics is partisan and the best interests of the party and the politician are not necessarily served by finding the best workable compromises between conflicting policy and regulatory goals they often work to pursue other ends. As we've seen in spades this year.
Interest Groups, Rent-seeking and Capture
Anytime things are decided by administrative fiat the impact of the rules is going to determine the fates of many interested parties. It is NOT therefore surprising that they are willing to go to great lengths to influence the decision-making and implementation processes. They would in fact be remiss in not doing so. The real question is how they influence the process. If they seek to make the new rules accurately reflect realities they understand better than anyone else there may be a net benefit. When they focus on manipulating the rules for their own narrow benefit they are seeking to create rents for themselves. And when the pursuit of rents becomes more important to them than in creating value you have the recipe for serious degradation of performance and the cause of the failure of most societies in history. The Chinese have gone thru this cycle so many times that the peasants habitually store emergency supplies away from the government's reach to protect themselves in the case of collapse.
Rent-seekers, Values and Mechanisms
The Chinese answer historically, as it has been for every other civilization, is to try to recruit, train and employ competent administrators who's major ideal is the best public interest. Sometimes this works but more often, and also eventually, the mandarins start pursuing their own interests. We are very far from that stage, fortunately. On the whole most public servants in the US are there to serve the public interest as their highest ideal. But more and more, despite the best intentions, we're becoming prisoners of rent seeking. The appeal to gentlemanly conduct won't fix it. And some of it is inherent so it must be controlled (which is why you have Inspector Generals and the GAO for example). But the real key is the mechanism for implementation.
The administrative apparatus we use today has it's roots in the late 19thC, as well as longer historical experience. But as society grew enormously in size, connections and complexities the challenge was to find ways to run it. Between 1890-1920 we, collectively and in all the major developed countries, came up with one version or another of the same basic answer: large-scale bureaucracy. Which is not inherently a bad thing, and setting aside the interest-group influences. It's certainly the best answer we've come up with.
But innate in the purely administrative approach to implementation is the notion that you can you write a rule to change things. Which in turns calls for inspection, administration, enforcement, adjustment and adjudication of those rules in the trials and turbulences of the real world. For policy problems we've been wrestling with for centuries the ways and means are pretty well understood. But beginning the 60s we started tackling a whole host of new problems for which the administrative approach was very ill-suited. What we desperately require is another strategic approach entirely. One that relies less on rules and more on administered incentives that cause the various interested parties to want to pursue the policy rather than distort the rules in their favor. The whole backlash against social engineering was a backlash against the failures of administrative bureaucracy.
Yet there were pockets where a more de-centralized system was developed and very successfully implemented. Atul Gawande in his recent article points to the agricultural extension programs of the US Ag. Dept. where agents who had access to a huge inventory of knowledge and skills and special capabilities could share all that with the local farmers who knew local conditions better. But who could not afford to learn all that there was to learn. A similar experimental approach to de-centralized organization and collaborative implementation based on incentive alignment is what we need for all the major social and domestic challenges we're facing. Whether it's Energy, Infrastructure, Education or Healthcare. In fact such an approach is explicitly built into the current proposed Healthcare legislation and is being adopted and adapted by the Education and Energy Depts.
Expectations, Realities and Choices
To some extent we're all trapped in the system as it is and must face the challenge of changing it to suit our new needs and problems. Fortuantely we have some examples to point toward. Unfortuantely we don't have a large pool of knowledge, skills, resources or techniques and will have to come up with them. In the 60s though, having won WW2 thru a command-n-control approach we tried to apply the same approach to problems that would last longer, were more complicated and would lead to the capture of the bureaucracies by their own accumulating rules and proceedures. This time around we know better we just don't have the perfect answer.
The recent underwear bomber case and how everyone reacted to it is a perfect illustration though. Read the cartoons for a minute - is that a fair judgement? How would you design and build a worldwide intelligence service that knew everything all the time, stopped all attempts no matter how many and how clever they were? Or got - since this is a game where opponents get smarter over time.Bearing in mind that the NSA sees approximately 500K intercepted messages/day! And, oh btw, with all due respect for politically correct due processes and individual rights as well.
If we expect absolute perfection from our institutions they'll never satisfy those goals. We can expect reasonable effectiveness, satisfactory efficiency, experimentation and learning. If we let them. But if instead we insist that the measure of policy is to serve our own narrow needs and to do so perfectly we create a vicious feedback loop where partisan politics and special interests will pile exception and exemption on top of one another.At the end of the day our institutions will eventually perform like we ask them to. What's your choice?
So, at the end of the day, what do we conclud here?
1) Policy-making needs to be more about value-creation than rent-seeking which calls for process changes in congress on the one hand AND changes in voter expectations. Don't hold your breath but do read How America Can Rise Again.
2) The really big change we need is to change the way the administrative apparatus works - the current search for the guilty in the under-bomber case is simply going to cause well-meaning civil servants to look for more air cover. It's time and far past to move beyond reinventing government and actually do it.
3) The second big change is to look for new implementation mechanisms, though we have a somewhat better idea how to proceed here.
All three changes call for public support - that's you in case you didn't get it! 
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Meanwhile we'll leave you with this quote from James Fallows:
"I started out this process uncertain; I ended up convinced. America the society is in fine shape! America the polity most certainly is not. Over the past half century, both parties have helped cause this predicament—Democrats by unintentionally giving governmental efforts a bad name in the 1960s and ’70s, Republicans by deliberately doing so from the Reagan era onward. At the moment, Republicans are objectively the more nihilistic, equating public anger with the sentiment that “their” America has been taken away and defining both political and substantive success as stopping the administration’s plans. As a partisan tactic, this could make sense; for the country, it’s one more sign of dysfunction, and of the near-impossibility of addressing problems that require truly public efforts to solve."
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A Look Back in Pictures
- A Decade in Cartoons
- The 10 Big American Ideas of the Decade
- Failed Predictions of the Decade (Atlantic)
- Top 10 everything TIME charts the highs and lows of the past year in 50 lists.
Consequences, Challenges & Inheritances
4 Problems That Could Sink America If we're lucky, the recession is winding down, and life will start to feel a bit more comfortable before long. But that doesn't mean things will go back to the way they used to be. The global recession that began in America's housing market has shaken the world's economic order and possibly knocked the United States down a notch or two. The spendthrift American consumer is out of money. American wages are flat. Despite some hopeful signs, the U.S. economy could muddle along for years. American innovation has solved daunting problems before and could again. But it would be a mistake to assume that American prosperity will continue on some preordained upward course. Nations rise and fall, often realizing what happened only in retrospect. Here are four problems that are undermining our future prosperity: We don't like to work. Sure, now that jobs are scarce, everybody's willing to put in a few extra hours to stay ahead of the ax. But look around: We still expect easy money, hope to retire early, and embrace the oversimplistic message of bestsellers like The One Minute Millionaire and The 4-Hour Workweek. Unfortunately, the rest of the world isn't sending as much money our way as it used to, which makes it harder to do less with more. White-collar jobs are now migrating overseas just like blue-collar ones. Kids in Asia spend the summer studying math and science while American mall rats are texting each other about Britney and Miley. "We need a different mind-set," says Guillen. "People need to invest more in their own future. Instead of buying stuff at the mall, spend the money on evening classes. Learn a language or skills you don't have." We're uninformed. The healthcare smackdown—sorry, "debate"—is Exhibits A, B, and C. The soaring cost of healthcare is a problem that affects most Americans. It's shrinking paychecks, squeezing small businesses, bankrupting families and swelling the national debt. Yet outraged Americans seem most concerned about fictions like death panels and government-enforced euthanasia, while clinging to the myth that our current system of selective availability and perverse incentives somehow represents capitalist ideals. But let's take a break from that burdensome issue to examine the likelihood that President Obama was born in a foreign country and hoodwinked America into believing he was eligible to run for president. People who lack the sense to question Big Lies always end up in deep trouble. Being well informed takes work, even with the Internet. In a democracy, that's simply a civic burden. If we're too foolish or lazy to educate ourselves on healthcare, global warming, financial reform, and other complicated issues, then we're signing ourselves over to special interests who see nothing wrong with plundering our national—and personal—wealth.
Aughts were a lost decade for U.S. economy, jobs For most of the past 70 years, the U.S. economy has grown at a steady clip, generating perpetually higher incomes and wealth for American households. But since 2000, the story is starkly different. The past decade was the worst for the U.S. economy in modern times, a sharp reversal from a long period of prosperity that is leading economists and policymakers to fundamentally rethink the underpinnings of the nation's growth. It was, according to a wide range of data, a lost decade for American workers. The decade began in a moment of triumphalism -- there was a current of thought among economists in 1999 that recessions were a thing of the past. By the end, there were two, bookends to a debt-driven expansion that was neither robust nor sustainable. There has been zero net job creation since December 1999. No previous decade going back to the 1940s had job growth of less than 20 percent. Economic output rose at its slowest rate of any decade since the 1930s as well. Middle-income households made less in 2008, when adjusted for inflation, than they did in 1999 -- and the number is sure to have declined further during a difficult 2009. The Aughts were the first decade of falling median incomes since figures were first compiled in the 1960s.
The Big Zero Maybe we knew, at some unconscious, instinctive level, that it would be an era best forgotten. Whatever the reason, we got through the first decade of the new millennium without ever agreeing on what to call it. The aughts? The naughties? Whatever. (Yes, I know that strictly speaking the millennium didn’t begin until 2001. Do we really care?) But from an economic point of view, I’d suggest that we call the decade past the Big Zero. It was a decade in which nothing good happened, and none of the optimistic things we were supposed to believe turned out to be true. So there was a whole lot of nothing going on in measures of economic progress or success. Funny how that happened. For as the decade began, there was an overwhelming sense of economic triumphalism in America’s business and political establishments, a belief that we — more than anyone else in the world — knew what we were doing. So here’s what Mr. Summers — and, to be fair, just about everyone in a policy-making position at the time — believed in 1999: America has honest corporate accounting; this lets investors make good decisions, and also forces management to behave responsibly; and the result is a stable, well-functioning financial system. What percentage of all this turned out to be true? Zero. What was truly impressive about the decade past, however, was our unwillingness, as a nation, to learn from our mistakes. Even as the dot-com bubble deflated, credulous bankers and investors began inflating a new bubble in housing. Even after famous, admired companies like Enron and WorldCom were revealed to have been Potemkin corporations with facades built out of creative accounting, analysts and investors believed banks’ claims about their own financial strength and bought into the hype about investments they didn’t understand. Even after triggering a global economic collapse, and having to be rescued at taxpayers’ expense, bankers wasted no time going right back to the culture of giant bonuses and excessive leverage. Then there are the politicians. Even now, it’s hard to get Democrats, President Obama included, to deliver a full-throated critique of the practices that got us into the mess we’re in. And as for the Republicans: now that their policies of tax cuts and deregulation have led us into an economic quagmire, their prescription for recovery is — tax cuts and deregulation. So let’s bid a not at all fond farewell to the Big Zero — the decade in which we achieved nothing and learned nothing. Will the next decade be better? Stay tuned. Oh, and happy New Year.
The Best Is Yet to Come The big idea behind "Sonic Boom" is that globalization—celebrated, reviled and analyzed for at least a decade now—has hardly begun. The world, Mr. Easterbrook believes, is on the verge of a period of pell-mell integration that will dwarf anything before now, and a good thing too: The coming age of global integration, he argues, will produce riches that none of us can imagine and scatter them more widely than ever before. But Mr. Easterbrook is not offering just another account of the shift in economic opportunity from the West to the East. Instead, he wants to show how a rapid reconfiguration of resources is benefiting all sorts of unexpected people and places. Erie may not be booming, but it is doing better than it has for decades, thanks to General Electric's willingness to ignore Wall Street analysts (who said that manufacturing was dead and the future lay in finance) and make a bet on renovating its locomotive plant. Today the plant is an important profit center, and trains are the apple of everybody's eye, including Warren Buffett's, while GE's financial-services division was the source of almost all the company's recent losses. But he is at his most interesting on a subject that he seems slightly reluctant to embrace—the creativity of the manufacturing sector. Manufacturing companies have done a much better job of improving their productivity than sexier service companies. The average car bought today costs 6% less than the average car bought a decade ago and is stuffed full of clever gadgets. America produces more steel today than it did 30 years ago, despite the shuttered plants and slimmed-down work force. Manufacturers have also been much better at responding to the pressures of globalization. Haier, a Chinese domestic-appliance maker that had such a bad record for quality a generation ago that the Chinese used its washing machines to store coal, is now a world-class company with its American headquarters in Camden, S.C. General Electric sells 40% of the locomotives that it makes in Erie to China.
Causes, Dysfunctions and Breakdowns
Opposition Strategy 101 The Democrats have been peddling hard a "Party of No" narrative--I get what seems like an email a day from the Democratic National Committee with some update or twist on this theme--though I have no idea whether this meme about the GOP is resonating or not with the broader public. In any case, I think it is actually wise--as a general rule, and specifically to healthcare--for the GOP to vote against reform. Mind you, this has nothing to do with my opinions about the bill or its significance; I'm speaking here solely about political calculus. To demonstrate my point, consider the opposition party's situation as a simple game with two possibilities for the quality of legislation the majority passes--a generally "popular" bill or a generally "unpopular" one--and two options for how minority party members can vote on those bills, either voting with the majority or against. Presumably, legislators have some notion of how popular the legislation will be, but their information is incomplete. I don't suggest that this game and my hypothetical payouts apply at all times and everywhere. But I do think as a general rule, or at least the default strategy, minority parties should vote unanimously in opposition to majorities. Why? Because if you vote along with them, you get little credit and are used for political cover when things go wrong, making it a break-even/lose situation. And if you vote against you usually pay little to no price if things go well, but stand to reap huge windfalls if things go awry, making that a break-even/win situation. Applying all of this specifically to the healthcare legislation, there really is no reason for any Republican to vote for it. There are a lot of specific reasons why this is so: the GOP coalition is older and whiter and thus will benefit less; conservative voters reflexively oppose expansions of government of any type; etc. But even if the ideological and demographic reasons are held aside, it makes sense to vote "nay."
The Protocol Society In the 19th and 20th centuries we made stuff: corn and steel and trucks. Now, we make protocols: sets of instructions. A software program is a protocol for organizing information. A new drug is a protocol for organizing chemicals. Wal-Mart produces protocols for moving and marketing consumer goods. Even when you are buying a car, you are mostly paying for the knowledge embedded in its design, not the metal and glass. Over the past decades, many economists have sought to define the differences between the physical goods economy and the modern protocol economy. In 2000, Larry Summers, then the Treasury secretary, gave a speech called “The New Wealth of Nations,” laying out some principles. Leading work has been done by Douglass North of Washington University, Robert Fogel of the University of Chicago, Joel Mokyr of Northwestern and Paul Romer of Stanford. Protocols are intangible, so the traits needed to invent and absorb them are intangible, too. First, a nation has to have a good operating system: laws, regulations and property rights. Second, a nation has to have a good economic culture. “From Poverty to Prosperity” includes interviews with major economists, and it is striking how they are moving away from mathematical modeling and toward fields like sociology and anthropology. What really matters, Edmund S. Phelps of Columbia argues, is economic culture — attitudes toward uncertainty, the willingness to exert leadership, the willingness to follow orders. A strong economy needs daring consumers (Phelps says China lacks this) and young researchers with money to play with (Romer notes that N.I.H. grants used to go to 35-year-olds but now they go to 50-year-olds).
The God That Fails During the middle third of the 20th century, Americans had impressive faith in their own institutions. It was not because these institutions always worked well. The Congress and the Federal Reserve exacerbated the Great Depression. The military made horrific mistakes during World War II, which led to American planes bombing American troops and American torpedoes sinking ships with American prisoners of war. But there was a realistic sense that human institutions are necessarily flawed. History is not knowable or controllable. People should be grateful for whatever assistance that government can provide and had better do what they can to be responsible for their own fates. That mature attitude seems to have largely vanished. Now we seem to expect perfection from government and then throw temper tantrums when it is not achieved. We seem to be in the position of young adolescents — who believe mommy and daddy can take care of everything, and then grow angry and cynical when it becomes clear they can’t. Reality is unpredictable, and no amount of computer technology is going to change that. Bureaucracies are always blind because they convert the rich flow of personalities and events into crude notations that can be filed and collated. Human institutions are always going to miss crucial clues because the information in the universe is infinite and events do not conform to algorithmic regularity. Resilient societies have a level-headed understanding of the risks inherent in this kind of warfare.But, of course, this is not how the country has reacted over the past week. There have been outraged calls for Secretary Janet Napolitano of the Department of Homeland Security to resign, as if changing the leader of the bureaucracy would fix the flaws inherent in the bureaucracy. There have been demands for systemic reform — for more protocols, more layers and more review systems. Much of the criticism has been contemptuous and hysterical. For better or worse, over the past 50 years we have concentrated authority in centralized agencies and reduced the role of decentralized citizen action. We’ve done this in many spheres of life. Maybe that’s wise, maybe it’s not. But we shouldn’t imagine that these centralized institutions are going to work perfectly or even well most of the time. It would be nice if we reacted to their inevitable failures not with rabid denunciation and cynicism, but with a little resiliency, an awareness that human systems fail and bad things will happen and we don’t have to lose our heads every time they do.