Starving the Beast

A central theme of conservative fiscal policy is the idea of "starving the beast", which is the idea that if you cut the government's budget, you will force them to cut wasteful spending.  This is nonsense.  In fact, undirected budget cutting increases wasteful spending.  There are a couple of simple reasons for this.

Let's say we have an organization with 4 equal sized divisions.    Divisions A and B have low wasteful spending.  Divisions C and D have higher wasteful spending.  The managers of A and C are skillful organizational politicians, and the managers of B and D are weaker politicians.  So what happens when a 10% budget cut comes down from on high?  There are three paths that might be taken.  If the executive does the "right" thing, A and B would keep all of their budgets, and C and D get cut 20%.  If politics decides, A and C keep all of their budgets and B and C get cut 20%.   If the executive does the "fair" thing, each division gets cut 10%.  The reality of most organizations is a mixture.

The beast starvers want us to believe that the "right" scenario, the optimal one, is what happens.  But it almost never does.  In all the other scenarios, the more wasteful divisions suffer less than their fair share and the more efficient ones suffer more than their fair share.  Consequently, wasteful spending becomes a larger share of the organizations total budget.  Every time this happens, the problem gets worse.  Far from starving the beast, the well run divisions are being punished for the sins of the beast.

In any large organization, effective politicians rise.   Often, this rise is based less on their ability to actually provide the service the organization is there to provide, and more on how well liked they are by the people above them making the decisions, or how effective they are in political knife fights.   It is the goal of politicians to preserve or grow their personal empires. That may mean many different things: budget, head count, freedom of direction, etc..    To the extent that the actual effectiveness at providing their service is a factor in this, this is a good thing.  But that's rarely the biggest factor, and as organizations grow, the more pure politicians there are and the more incentives there are to feed the executives self-serving information.   Since the goal of the politician is first and foremost to grow their organization, this creates an inverse relationship between organization size and efficiency.

Government is necessarily big.  But unlike big companies, government has lots of people watching the works, and the ultimate purpose of government is to provide a service, not make a profit.  Consequently, you get anomalies like Medicare having 6% overhead and private medical insurance having 30%.  Medicare has plenty of problems--fraud being a big one--but the point is that government can work better than the market.  Big organizations, whether public or private, need to have this sort of open review.  Privacy is an invitation to corruption.  When there's a really free market, with dozens of companies competing, the better decision makers will tend to win and problems like inefficiency and fraud will quickly be exposed.  But when there's too little competition, the problems can hide and a bad decision maker with a lot of power can win.  Paradoxically, only when the government imposes very strong limits on the power of businesses can the free market truly thrive.

The beast starvers want us to believe that by cutting off the government's budget, they can reduce government.  But in fact all they're doing is making it less efficient.  Government serves too many vital roles--infrastructure, the social safety net,  law enforcement and the judiciary, safety regulation, the military and so forth.  While there are certainly some people who would like to see these things eliminated, they are very few.

What's the solution?  We need to maximize the free market where we can, and socialize, with full disclosure, where we can't.  We need to cut wasteful spending where we can find it, but be careful to not cut useful spending while we're at it.

addenda: 21 Feb 2012
"In any bureaucracy, the people devoted to the benefit of the bureaucracy itself always get in control and those dedicated to the goals the bureaucracy is supposed to accomplish have less and less influence, and sometimes are eliminated entirely."  -Jerry Pournelle