Sunday, September 26, 2010

Evil Corporations vs. Evil Government

A problem with the Obama administration is that it seems to be increasingly based on the Benevolent Dictator model. History tells us that policies based on the assumption that people will act benevolently or against their own self interest will always fail. People will always act in their own self interest in the long run. It might be enlightened long-term self interest, but it will still be self interest.

The genius of our form of government is that it's based on the reality that people can be counted on to act in their self interests, and it is set up structurally to harness conflicts of self-interest in a way that results in a functioning government. This is also the reason that communism failed. The idea of "work according to ability; receive according to need" is based on the false premise that people want to act benevolently toward each other, and they don't.

People who criticize "evil corporations" and assume that government is better than corporations are committing the error of believing the people in corporations are evil and the people in government are good. This is a mistake. Corporations and governments are all human institutions and all are subject to human weaknesses. The difference is that they have different inherent drives and therefore different inherent human failure modes.

A corporation's drive is to maximize profit. The profit motive is good in many significant ways. It forces prioritization in decision making and supports efficient use of resources. But the profit motive isn't 100% good. Left unchecked, there will be cases where the drive to maximize profits results in greed -- behavior that we as a society find unacceptable, e.g., denying insurance coverage to someone who has a policy that was originally sold under the supposition that it would cover the condition.

Government, on the other hand, does not have a profit motive. It's inherent drive is to maximize power. Therefore government agencies will seek to increase their staffing and scope of regulation. Their incentive is the opposite of efficiency. Efficiency means smaller staff and less power, which is the opposite of government's natural drive, so there's an inherent tendency toward inefficiency. Government agencies' failure mode is therefore not greed but bloat. We should not be surprised when government agencies are bloated. We should be surprised when they run efficiently.

The drive to power/bloat doesn't just apply to government agencies; it applies to elected officials. The holy grail of any elected official is to stay in government long enough to get a committee appointment that allows them to direct funds back to projects in their electoral district so that they can be reelected.

Aside from the general pork issue, this also creates a disincentive to shut down programs that aren't working. The people who are employed by a program don't want it to be shut down, so they'll actively work to keep it going even if it's a dumb idea or has outlived its usefulness. Essentially what this means is that there's an inherent conflict of interest between deciding what the best form of government assistance is and simultaneously being responsible for providing that assistance.

How do you solve this problem? I think Reagan had it right when he said you have to starve the beast (i.e., deny it funding, whether it's an agency or a politician). But Reagan era politicians didn't follow up the general notion of starving the beast with any ideological basis for deciding what to fund and what not to fund.

In my mind, the key criteria should be that Federal Regulations should be heavily biased toward approaches that do not result in additional funds passing through any part of national government. In other words, initiatives that increase the money flowing through the national government should be rejected if there is any remotely comparable solution that doesn't increase the money flowing through the government.

Applying this criteria to healthcare, this would mean that laws like "no exclusion for pre-existing conditions" are fine (from this perspective, anyway), because they don't create any new agencies or any more funding flowing through the national government. Moreover, government has no conflict of interest in enforcing this law. It doesn't lose anything by enforcing it, but if the law turns out to be a bad idea it doesn't lose anything by repealing it either.

On the other hand, any part of government healthcare that increases the flow of money through the centralized government's hands should be rejected because it creates a conflict of interest for the government. Single payer is the poster child for this problem. If we ever did adopt single payer, and after a few years experience made it clear that it was a bad idea, the government would have a conflict of interest in shutting it down because it would mean reducing government power. That's an unnatural act for a government just like reducing profit is an unnatural act for a corporation. So we need to have a heavy bias toward solutions that do not increase the flow of money through the government's sticky, inefficient fingers.

National government policing corporations is consistent with the Founding Father's idea of balance of power. Government can guard against Corporations' excessive greed without becoming excessively greedy itself. When government seeks to replace corporations (as it does with single payer health insurance), we are wise to keep one hand on our wallets and the other on speed dial to our congressman.

Socialism is Not the Issue; Central Planning Is

People accuse Obama of being a socialist, but that misses the point. The issue isn't socialism, per se. It's central planning. We have abundant examples from the Soviets and their satellites that central planning doesn't work. Central planning in the Soviet Union resulted in antiquated food distribution systems in which 25% of farm output was lost on the way to the centralized distribution center. It led to factories making nothing but left shoes in size 8. It led to the Soviet bromide, "We pretend to work, and they pretend to pay us."
My background is in software development. In software we have learned that creating big, centralized designs for complex large-scale systems is usually impossible. We've found that it works better to start with a small piece of a system, get that working, and then evolve the design of the larger system incrementally.
In software, compared to government, we have the advantage that our solution is "pure" -- our sole objective to make the system work. In politics, the solution is never "pure." It's muddled by various political calculations--attaching unrelated riders, funneling pork to the home district, cashing in favors, and so on.
Central planning of complex systems is simply beyond what we as humans are capable of, especially when the people who are supposed to be solving the problem are continuously sidetracked by issues that have nothing to do with the problem they're trying to solve.
Last Spring NPR ran two stories back to back that made an interesting comparison. The first story was about how the Obama administration was revising No Child Left Behind to give more latitude to the states. They had concluded that the issues involved in No Child Left Behind were too complex to plan centrally, and so they wanted to give the states more ability to optimize at the state level.
The next story NPR ran was about ObamaCare and how the Democrats were still hopeful that they could get the single payer provision put into the bill.
The juxtaposition of these two stories struck me. Is there anyone in America who thinks that medical care is less complex than education? If not, why does anyone think that we can centrally plan medical care if we can't centrally plan education?
The free market isn't perfect, but if you think of the issues as centralized vs. decentralized decision making, a thousand people making a thousand decisions that are locally optimal in their best interests is going to produce better results than 1 person trying to decide what's best for each of those thousand people from some centralized vantage point.
Absent that, at least pushing decision making down to the states on health care would make a lot of sense. Let's do some experiments at the state level, launch some pilot programs, see what works, and see where the problems are. Let's not standardize and bureaucraticze our ignorance before we even know what we're talking about. During the Obamacare debates there were many comments along the lines of "This won't work because New York tried it and it failed" or "This is a good idea because it worked in Oregon" or "This was proposed in Massachusetts but ultimately rejected." There were many comments about the efficacy of various state programs, but no one seemed to draw the obvious conclusion: The results of "experiments" with healthcare at the state level have been inconclusive so far. That conclusion does not imply that it's time to centralize planning for healthcare. It implies that we need to experiment more before we commit to any One Big Program.
The fallacy of trying to central plan complex entities is easy to see if you think of other complex entities. Think about trying to "plan out the internet" in a centralized way. Would a centralized planning body ever come up with Facebook, LinkedIn, Bloggin, or developing an iPhone to access all of that?
Going forward, I think one good litmus test for national government initiatives is:
Does the initiative require God-like omniscience to be successful? If it does, then has the sponser obtained a commitment from the Supreme Being to be directly involved in the initiative? If not, then we shouldn't do it.
None of this implies that government can't take an active role where it's needed. I think it comes down to where you want to start. Do you want to start with the free marketplace and decentralized decision making, and correct the problems that arise from that foundation? Or do you want to start with government-controlled markets/industries and centralized planning and correct the problems that arise from that? History shows that starting with the free market and correcting its excesses works best.