Government Inefficiencies: Problems of Direct Democracy

Overview
1. Individuals express their desirability for a private good based on the price that they are willing to pay for its quantity.
2. There is no equivalent mechanism for public goods.
Majority voting rule
1. in the choice between two alternatives, the alternative that receives the majority of votes wins.
2. Individual’s voter calculus is marginal (total) costs of voting for some good versus marginal (total) benefits derived from getting it.
3. Diminishing marginal utility suggests that voter satisfaction with any public good diminishes as it increases in quantity (e.g., park).
4. More spent on public goods implies less left to consume on private goods.
5. Thus, the marginal benefits from public goods are diminishing, and the marginal costs are increasing. The net marginal benefit – the marginal benefit minus the marginal cost – while positive for low values of government expenditures, is negative for high values of government expenditures.

How's that Performance

Last night the Council started my performance review. The majority of it is good and a positive experience – but some of the discussions remind me of a Charles Swindoll illustration.

He uses the example of the northeastern codfish and their known adversary the catfish. “In the northeastern United States codfish are a big commercial business. There is a market for eastern cod all over, especially in sections farthest removed from the northeast coastline. This public demand posed a problem to the shippers. At first they froze the cod, then shipped them elsewhere, but the freeze took away much of the flavor. So they experimented with shipping them alive, in tanks of seawater, but that proved even worse. Not only was it more expensive, the cod still lost its flavor and, in addition, became soft and mushy. The texture was seriously affected. Finally, some creative person solved the problem in a most innovative manner. The codfish were placed in the tank of water along with their natural enemy–the catfish. From the time the cod left the East Coast until it arrived at its westernmost destination, those ornery catfish chased the cod all over the tank. And, you guessed it, when the cod arrived at the market; they were as fresh as when they were first caught. There was no loss of flavor nor was the texture affected. If anything, it was better than before.

Each one of us is in a tank of particular and inescapable circumstances. It is painful enough to stay in the tank. But in addition to our situation, there are “catfish” to bring sufficient tension that keeps us alive, alert, fresh and growing. It’s all part of shaping our character.

Would you like me to give you a formula for... success? It's quite simply, really. Double your rate of failure... You're thinking of failure as the enemy of success. But it isn't at all... You can be discouraged by failure -- or you can learn from it. So go ahead and make mistakes. Make all you can. Because, remember that's where you'll find success. On the far side of failure. Thomas J. Watson

From the way one makes it sound – I’ll be a success real soon.

My thought

Absence does not make the heart grow fonder. But absence makes the heart wander

Quote of the Day

“Think of the long view of life, not just what's going to happen today or tomorrow. Don't give up what you most want in life for something you think you want now.” Elder Richard G. Scott

A Qualifier

"Economic efficiency" is a powerful economic concept used when discussing the distribution of resources. Yet it is often misused and misunderstood in how it is applied in practice. Also often poorly understood are the strengths and limitations of economic efficiency alone as a guide to practical public policy-making, and the relationship of economic efficiency to social justice.
The usual definitions of economic efficiency are generally obscure. It can be argued that economic efficiency is "oversold" at the expense of other societal objectives and is misleading in other ways as well, notably concerning how economic efficiency is usually measured in practice. The usual definitions generally define economic efficiency in terms of the ability of those who gain from a change to fully compensate those who lose from it and still be better off.

Whose rights rule?

Inner city residents claim rights to a livable environment with less auto pollution, non-car drivers claim a right to intermodal transportation options, suburban car drivers claim access/mobility rights, preservationists claim rights to preserve artifacts which embody cultural memories, existing business people claim rights to protection from new businesses and downtown business owners claim rights to protection from businesses outside of the downtown. How do we reconcile such claims? What kind of rights should a moral society recognize? Any interference with the freedom of individual persons must be morally/ethically justified. Otherwise, the individuals interfered with are being used as tools (or mere means) to achieve the objectives of some other individuals. Thus, individuals have a right to pursue their own goals subject to other’s rights (Nozick 1974).

Incomplete

The city’s public streets are an uncongested, nonrivalrous (in consumption), nonexcludable pure public good. The debate of who benefits from the provision of this good is not relevant when discussing contracting; the debate starts at who benefits from how the good is maintained. It should be expected that cities will provide maintenance of public goods, but will use a diverse array of service arrangements. This includes direct provision, joint contracting and complete contracting with external suppliers to provide services. In questioning market failures (equilibrium market behavior fails to provide maximum social surplus) related to maintaining the good (local public streets) there must be an understanding of the true qualities of the services purchased (direct provision, contract). The contracting of city services, which is part of a broader process of market liberalization, has implications for the efficiency of markets and the political process as well as for the efficiency of the city organization. How do you evaluate the efficiency, equity, administrative and political feasibility of direct provision or contracting all services of the city?
The procurement of goods and services is commonly performed using a bidding process of one type or another, the benefits of which are well known and vigorously advocated. Namely, competitive bidding will result in low prices and sets rules that limit the influence of favoritism and political ties. For standard goods, such as pencils, photocopy machines, and simple book-keeping software, it is rather straightforward to describe the item and proceed with a competitive bidding process.
Unique goods (street construction) and services (audit) that need to be custom made to fit the city’s needs are different. It is generally quite costly for the city to translate its operational needs into well defined and communicable specifications that become the product’s definition. Also, as is often the case with custom ordered goods and services, during the production and delivery phase there will likely be unforeseen variables that requires some adaptations and changes. These problems are often due to inadequate designs and specifications, due to changes in the external environment, or more commonly, to the incompleteness of the initial contract. In these events, the buyer and supplier will have to agree on the ways in which to adapt the original contract, both in terms of production specifications, and in terms of compensation. This may result in considerable discrepancies between the lowest winning bid and the actual costs that are incurred by the buyer. Changing the contract after it is awarded generates substantial extra costs for both parties for two reasons: First, there may be costs due to ex post bargaining, haggling and lawsuits over the payments made from changing the project specifications after the contract is awarded. Second, changing the contract disrupts the project work flow.

Contracting

Contracts have a very important role in the structuring and administering of the government/contractor relationships. Analysts estimate that savings from better management of contracts, and therefore better management of the relationships they represent, are very significant. Contracted services differ significantly from government provided services. Contracted services rely on contract authority based in contract law, and the contract policies, processes, and procedures that support contract law.
Given the significant transactions costs associated with writing, monitoring, and enforcing a contract, and given relationship-specific assets necessary for providing the services, governments often choose to own and operate these assets themselves. The city managerial structure would involve a tradeoff between two different kinds of costs, namely, the cost of private service delivery and the cost of public service delivery.

I Knew That!

The law of unintended consequences is that actions of people and particularly of government—always have effects that are unanticipated or "unintended." Economists and other social scientists have heeded its power for centuries; for just as long, politicians and popular opinion have largely ignored it.

American sociologist Robert K. Merton identified five sources of unanticipated consequences. The first two sources are ignorance and error. The third source is the "imperious immediacy of interest." By that he was referring to instances in which an individual wants the intended consequence of an action so much that he purposefully chooses to ignore any unintended effects. "Basic values" was Merton's fourth example. The Protestant ethic of hard work and asceticism, he wrote, "paradoxically leads to its own decline through the accumulation of wealth and possessions." His final case was the "self-defeating prediction." Here he was referring to the instances when the public prediction of a social development proves false precisely because the prediction changes the course of history.

The law of unintended consequences is at work always and everywhere. The law of unintended consequences is what happens when a simple system tries to influence a complex system. The political system is simple; it operates with limited information (rational ignorance), short time horizons, limited feedback, and poor and misaligned incentives. Society in contrast is a complex, evolving, high but imperfect-feedback, self interested system. When a simple system tries to influence a complex system you often get unintended consequences.

An example is in the 1970s - Iran was an ally of the United States. Although the Shah was a brutal ditator, he was anti-communist and many of the nations to the north of Iran were becoming Soviet satelites. To maintain positive relations with Iran, the United States government agreed to sell Iran the very same intaglio presses used to print American currency for printing their currency. The Shah was deposed and a new government hostile to the United States took over. Soon counterfeit $100 bills began spreading around the world. Known as "superbills" by the US Treasury due to the quality of the forgeries, these $100 bills became a problem not only for the US and its economy, but also for people all over the world that depend on the surety of American money. Although never proven, most suspect the culprit to be the Iranian government who is deeply hostile to the United States... and even worse, an Iranian government that possesses the very same printing presses used to create American money. This required the redesign of American money in the 1990s. The desire to eliminate communism almost led to the destablization of the American economy.

The internet developers never thought of spam or spyware. An interstate highway system designed to evacuate urban masses in the event of nuclear attack begets unsightly urban sprawl and every-greater traffic congestion. Technological innovations intended to save labor and deliver us from stress and drudgery lead to information overload and unrelenting workplace stress. Televised court proceedings meant to reinforce democracy and freedom of information in an open society creates celebrity jurists and undermine public trust.” - Fredrikson & Byron P.A.

Does the law of unintended consequences mean that the government should never try to influence complex systems? No, of course not, but it does mean that policy makers should be careful and not rush to make changes until they are well debated and critically thought out.

Segregation of Duties

The City must maintain sufficient segregation of duties through adequate staff to maintain independent verification and oversight. The City assumes a much higher level of risk when the number of employees is inadequate to ensure appropriate segregation of duties and sufficient supervision.

Segregation of Duties is aimed at preventing an individual from committing fraud, or misusing or abusing City resources by being able to conceal the activity through the normal course of their duties. It also provides an internal check to minimize human errors. Typical examples of fraud in a municipal organization include theft of cash and ordering goods for personal use with City funds. A typical example of abuse of position is fixing a parking ticket.

Segregation of Duties is particularly important with the cash handling employees in the finance area of the City.

It's Rational and Reasonable

The very nature of zoning is discrimination in the sense of distinguishing one thing from another and treating the different things differently. Absent First Amendment issues that can arise with adult entertainment uses, religious institutions, and the like, there is considerable deference to the distinctions a municipality or county enshrines as policy in its zoning ordinance. The general rule is that a zoning provision is valid unless it is arbitrary and capricious, or denies the landowner all reasonable use of their land. While there is no silver bullet to prevent any legal challenge, it is prudent to state in the zoning ordinance a reasonable basis or foundation for the distinctions being made. This does not necessarily have to be supported by a long list of particular evidence or findings (although the inclusion of solid evidence, if it exists, is desirable) so long as it is made clear that the legislative body adopting the ordinance made its decision on a rational and reasonable basis. And though there may be legal authority to completely exclude a type of use from the jurisdiction, regulating a lawful use so that it is not totally excluded, either formally or de facto, can go a long way to avoiding legal challenges.

Today's Quote

“The terms public and private are fundamental to the language of our law, politics, and social life, but they are the source of continual frustration. Many things seem to be public and private at the same time in varying degrees or in different ways. As a result, we quarrel endlessly about whether some act or institution is really one or the other.” (Starr, 1988).

Consistency

Consistency in the dictionary sense is taken to mean general harmony or agreement or coherence within the parts of a whole. It is assumed that full or perfect consistency in public policy is not obtainable. The goal is to attain a reasonable amount of consistency when the conditions have numerous, complex and conflicting variables. Our democratic republic lends to the inconsistencies of decision making. If you expect consistency in the policy decisions of one individual policy maker – you are probably going to pull your hair out. That’s why there are a lot of bald guys in this profession.

Who Repaired What?

The budget repair bill allows employers to review the contract language and determine those practices, rules or restrictions that the employer no longer wishes to follow and ensure that those items are removed from personnel policies and procedures.
They are also allowed to review salary schedules, pay plans, wage classifications and other wage-related items to determine whether to maintain, change or remove existing pay practices.
Boy are we going to have fun.
The Budget Repair Bill uses the term "public safety" employees throughout the language, but that really means police officers, firefighters and deputy sheriffs who are covered by a collective bargaining agreement and will remain covered by collective bargaining agreements. If collective bargaining is a bad monopoly, why are police and fire exempt?

Can You?

Socrates was known for confusing, stinging and stunning his debate partners into realizing their own ignorance, a thought process usually requiring genuine intellectual curiosity. Yet he transmitted no information, just the ability to think critically.
He wanted others to join with him in his question-and-answer mode of critical thinking. His lifework consisted in the examination of people's lives, his own and others', because “the unexamined life is not worth living for a human being.”

Justice and Equity

Social is/or pertains to society; relating to men living in society, or to the public as an aggregate body; as, social interest or concerns; social pleasure; social benefits; social happiness; social duties. Justice is rendering to every one that which is his due. Justice is the upholding of what is just, especially fair treatment and due reward in accordance with honor, standards, or law. It has been distinguished from equity in this respect, that while justice means merely the doing what positive law demands, equity means the doing of what is fair and right in every separate case. The aim is to make our principles and judgments coincide in a balance that is reflective in that we know to what principles our judgments conform and the premises of their derivation.

Now You're a Policy Analyst

The art of policy analysis is the balancing of time and resources to provide relevant information to the decision makers. Policy analysis in its simplest form has four distinct steps that need to be considered and implemented. These steps are: what is the problem; what are the alternatives; which is the best alternative; and selling the recommendation. These four steps encompass Bardach’s1 eight-fold process. The amount of time and resources the analyst puts into each step may well determine the usefulness of the recommendation. Policy analysis generally happens as a continuum and tends to be iterative. The initial problem definition may change as the alternatives are reviewed and the analyst learns more about how things are and how the client wants them to be. The analyst must understand the process for coming to a decision and be able to choose the problem solving method and/or models appropriate for the issue being debated. The experienced analyst can generally think through the competing value systems, abstract factors deemed relevant from complex problems and provide a point at which to start winnowing the problem definition. The analyst should use the simplest decision method the problem will allow to build enough rational and political evidence to justify the recommendation. The analyst should attempt to “connect the dots” so that the decision makers understand enough of the information and the recommendation so that they feel it will provide some level of problem resolution. The decision makers should not be able to say they did not understand the information and then justify the recommendation on someone’s technical expertise. The summation of my debate is that the available resources should be allocated based on the problem being analyzed, the skills and abilities of the analyst, the political environment or value systems and the time constraints. The analyst should then re-evaluate the resource distribution at regular intervals and adjust as needed. I believe that the analyst will generally enjoy the process more and feel better about the results when using this method of resource distribution.

Basics

The public sector (i.e. government) does not undertake activities to achieve a profit, but to achieve equity (The definition for equity here is the fair or just distribution between those who gain from a change and those who lose from it). The public sector provides services that are deemed necessary by the community and that are not effectively provided by the private sector because the optimal quality and quantity are difficult to measure and generating a profit is difficult.
Today, most of us think it is the collective responsibility of our governments to ensure each citizen's equality, rights, safety, and freedom by ensuring fairness, transparency, and a healthy balance between private opportunity and the public interest. Based on this perceived social contract, a municipality provides services and goods that would otherwise be difficult for people, acting as individuals, to provide for themselves. It can be argued that municipalities are not only involved in exploiting gains from markets arising from free riding and market failure. But, like it or not, municipalities are also institutions for redistribution. This redistribution occurs in many ways, including through equalizing outcomes, equalizing opportunities, and providing social insurance. All policies then, even those with efficiency objectives, have gainers and losers, and it is impossible to avoid taking account of that somehow.
Given that pure public goods require a social decision, it is the consequences for economic welfare (total surplus), rather than mere profit, that matter. This decision includes notions such as equality of opportunity and capability, fairness, and poverty alleviation. Most individuals are pragmatic and are inclined to favor the organizational form that “works best.” A policy-maker should consider the distribution of burden and benefit across residents in a manner that is consistent with the accepted norms of fairness and equity. These norms typically define fairness according to the relationship between the amount of revenue collected from residents and their respective abilities to pay the tax, charge, fee or assessment along with the benefits received by them from government programs. Three widely-accepted norms of fairness are:
• Vertical Equity. This principle of fairness requires that the amount of revenue collected from residents with different income levels should reflect their respective abilities to pay the tax, charge, fee or assessment. Specifically, the cost of government as a percentage of income should not unduly burden taxpayers with limited ability to pay. Some would view this principle as satisfied by a proportional revenue system, where revenues collected are the same percentage of income for taxpayers at all income levels. Others believe that the principle requires that revenues collected as a percentage of income should be higher for residents with more income than those with less income (a progressive tax burden). To our knowledge, almost no one believes that revenues collected should be a higher percentage of income for less affluent residents than for those with more income (a regressive tax burden).
• Benefits Received. A revenue system may be considered fair if the revenues collected are matched by benefits received by a resident from the government. This principle is most relevant when a cost is charged specifically for the purpose of providing a particular government service to a specific group of residents. Such “benefit charges” are impractical for much of government spending because the “benefits” received cannot be determined for each resident. Therefore, this principle is relevant mainly for certain types of selective fees, charges and assessments which are termed user fees.
• Horizontal Equity. According to this principle, residents with similar abilities to pay a tax should pay comparable amounts of the costs. More generally, the principle of horizontal equity enjoins the government from levying charges that have arbitrary and peculiar distributions of costs across residents or from levying dissimilar tax burdens on taxpayers that are not justified by differences in their ability to pay or by distinctions in the benefits they receive from government programs.

Let's start at the Beginning

“For profit” corporations are interested in monitoring and managing liquidity which refers to how quickly an asset can be converted to cash (a three-month treasury note is probably more liquid than a water tower but less liquid than money in a checking account), solvency (refers to ability of a corporation to meet its long-term fixed expenses and to accomplish long-term expansion and growth) and profitability which refers to the residual assets after liabilities have been paid and is referred to as net worth. Corporations use an accounting equation to monitor the performance of these areas. The accounting equation A=L+E, where A stands for assets, L for liabilities, and E for equity, is a simple algebraic equation and a great technique for describing an economic unit and keeping track of its financial performance. This equation can be used at the beginning and end of an accounting cycle to show the business’s financial status and change in financial performance.
This equation communicates the central elements of an economic operation. In the equation, assets represents the resources of the unit (cash, buildings), liabilities are resources received from others that must be repaid (notes payable, accounts payable), and equity exhibits the contributions and distributions of owners (retained earnings, dividends).
Equity is a complex concept in that it includes results of operations and contributions and withdrawals of owners. The results of operations address whether revenues exceed or do not exceed expenses. Contributions are what the owners put in, hoping for a good return. Withdrawals are what the owners take out for themselves. The word equity is usually associated with business activities in that it connotes ownership. For example, the accounting equation can be rearranged in the form of:
A - L = E
Equity is a residual interest after all the liabilities have been taken out or paid by existing assets. The residual equity belongs to the owners. Equity is sometimes called net worth or how much a business is worth (on the books, not on the market) after paying all the liabilities. All private sector businesses set out to increase equity and profit/net income.
Most municipal activities, however, function quite differently than private sector businesses. First, municipal activities are not undertaken to achieve a profit. They provide needed services that are not effectively provided by the private sector because the optimal quality and quantity are difficult to measure. Second, the activities provided have no direct relationship between the benefits received and the taxes paid. Finally, participation in municipal activities and taxes is involuntary.
Generally, municipal accounts are organized on the basis of funds and account groups, each of which is considered a separate entity. The operations of each fund are accounted for with a separate set of self-balancing accounts that comprise its assets, liabilities, fund equity, revenue, and expenditures, or expenses, as appropriate. The various funds are grouped into five generic fund types and three broad fund categories. These broad fund categories consist of governmental funds, proprietary funds and fiduciary funds. This report will focus on the governmental funds.
Municipal governmental funds are divided into three categories. The General Fund is the general operating fund of the municipal. It is used to account for all the financial resources except those required to be accounted for in another fund. Special Revenue Funds (Special Assessment, CableTV, etc) are used to account for the proceeds of specific revenue sources (other than expendable trusts or major capital projects) that are legally restricted to expenditures for specific purposes. Capital Project Funds (TID) are used to account for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by proprietary funds and trust funds). Most funds are established by governing bodies (such as state legislatures, municipal councils, or school boards) to show restrictions on the planned use of resources or to measure, in the short term, the inflows and outflows arising from certain activities.
The municipal governmental fund method of accounting designates any generated municipal equity as a fund balance. With governmental fund accounting, the accounting equation is somewhat different from that used in business. For governmental funds, the equation takes the form:
CA = CL + FB
Current assets = Current liabilities + Fund balance
Essentially the equation is comparable to that of the equation for businesses, although two changes are made. (1) Equity is changed to fund balance. Equity connotes ownership and, in government, citizens do not own any of the excess that might accumulate. Thus, fund balance is used to measure inflows over or under outflows. The balance, if positive, is what can be appropriated for later spending. The term fund is used since the equation relates to each individual governmental fund, not the government as a whole. As noted, if the inflows are greater than the outflows, then the fund has a surplus for the period and the legislature can authorize how it is to be used in the next period. Inflows and outflows are used instead of just revenues and expenditures since fund balances can actually be increased by borrowing, whereas equity in business cannot be increased by borrowing. (2) Notice also, the focus of the equation for governmental funds is on current assets and current liabilities since governmental funds revolve around annual budgets or annual appropriations. In governmental funds, items that go beyond a year are placed outside the funds, in account groups.
Assets have been divided into two main groups, expendable and capital. Expendable assets are cash, investments, supplies, and accounts payable that are all short term. Capital assets are land, buildings, and equipment which is all items not expected to become available for spending in the short term. When accountants are reporting both short and long term assets, they call it the economic resources measurement focus. When they are reporting only the current assets and liabilities, they call it the current financial measurement focus. When municipal accountants are using the economic resources measurement focus, they will report net assets (A – L = NA) and when they refer to the current financial measurement focus they will report the fund balance (CA – CL = FB).

Statewide Interest

The Governor's budget bill does not repeal the maintenance of effort on emergency services spending requirement that was included in the last state budget. His mother must be a police officer.
The largest single cost factor in most of the state's municipalities is untouchable.

Brave New World

The new leadership role of the Supervisor in the Walker world. I just can’t wait to hear this discussion at conference. Is it a “how to strip the employees of more benefits” or how to lead local governments to fairly handle their new given powers? The new “at will” supervisor will often to be in a “no win” situation and they will turn over their employees or they will turnover.
The history of local governments is some sort of cyclical swing right to left until there is some specific resolution to the issue. I just can’t wait to start the zig zag.