Government Competence During Recessions

An often raised objection to President Obama’s economic policy (or its natural extensions) is that the government is ill-suited to run private firms. I want to raise two counter-arguments that I think diminishes the force of that claim, and which I haven’t seen elsewhere: (1) government workers are smarter during severe recessions; and (2) we know more than we used to about what makes non-profit governance work.

1. Government Eats Brains During Severe Downturns

Because it is familiar, consider the market for legal jobs. A year ago, or two, top law students would be trading present income for the possibility of future income & (difficult to quantify) life satisfaction if they took a job with a government agency instead of a large private firm. That calculation being uncertain, many argued that government jobs were disproportionately filled by individuals seeking to increase the power and prestige of the State, i.e., that they weren’t maximizing wealth. Today, that calculation looks different. Students have to consider the likelihood that the firm will rescind their offers, either before they start work or after. (Odds helpfully summarized here.) So, assume that a student has an offer from (say) Ditto Dot, LLP, with a starting salary of $150K, and she determines that the likelihood that the firm will honor its offer is 50%. The student’s expected salary, obviously, is 75K. A DOJ job (taken after a clerkship) pays in that zone, and there is zero chance that the job will disappear. Since the likelihood that some of these firms will honor their offers appears to be significantly lower than 50%, the DOJ now “pays more” than large parts of the private sector. (Incidentally: another argument against increased federal judicial pay.) Thus, the competition for government jobs should be much more fierce today than it was last year, and will be severe in the Fall hiring season. The result ought to be better qualified government lawyers at all levels.

This same dynamic will be in play in other government departments, including the Treasury & the Fed. During very severe recessions, Washington will be a tremendous talent magnet. Thus, though it is true that the government will never be as nimble as a private firm, our views about its relative level of competence may be unduly influenced by its performance during the times of plenty that we’ve had over the last two generations. Better employees should lead to better government work.

2. Non-profit organizations can work well

At the same time, I think that the claim that the profit motive is necessary to drive effectively governed institutions also needs a bit of rethinking. Universities and other complex non-profits thrive because of internal cultures of performance, driven by strong leaders. Nonetheless, they can be incredibly effective, at making money (consider the success of Yale’s endowment), at inculcating loyalty, at being stable, etc. The literature on non-profit governance is just beginning to influence the legal academy, but appears to offer some promising ideas about how to structure a non-profit so that it can function well absent traditional market pressures. The government, though not a non-profit technically, ends up looking something like it in terms of how its employees are governed and rewarded. We might draw on the lessons of the NP literature in thinking about how to organize the new public-private firms that we’ve seized – at least for the brief period of time that we will be running them.

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4 Responses

  1. Colin C says:

    “Thus, the competition for government jobs should be much more fierce today than it was last year, and will be severe in the Fall hiring season. The result ought to be better qualified government lawyers at all levels.”

    I think this is a bold and likely unfounded assumption. Perhaps, (though I’m not sold) competition and competence are directly proportional in the private sector (at least some areas of the private sector), but I don’t believe we have the evidence to show the same would be true for government-run orgs.

    The other assumption in your argument is that those that sought, were offered, and now cannot take BigLaw gigs would actually be more competent in government positions than those that would have obtained those government positions otherwise. I don’t believe this necessarily true. The skill set for each is qualitatively different. The proposition that one’s higher IQ (on average, and likely marginally so), better grades (perhaps obtained not through rigor and cooperation but by stepping over the bodies on one’s way up), and participation on law review (a steaming mess that only the worst of masochists would seek to endure) would lead to greater competence in a government position seems riddled with missing internal logical links.

    And that those deferring (or simply delayed) would potentially be compensated by both their BigLaw firm and the government is nauseating. What nonsense. More importantly, though, after a year or so in bureaucracy, I’d wager a large percentage of these future Hamptonites will move into BigLaw. The result is a waste of training on someone quite likely less competent — a waste of money, a reduction in efficiency.

    I’ve a better idea. Why don’t the bloated partners at these big firms take a hit (3 million to 1 million?) for a coupla years and hire the folks they’ve made these grand promises to? Or, why not vote to boot deadwood partners out instead of cutting the incoming class, the assistants, AND the janitorial staff from your payroll? I’m sure there are quite a few partners that are merely collection agents at the top of giant pyramid schemes. Give them the boot.

    That way, all of us that intended to give our LIVES to public service don’t have to wait in line for 1, 2, or 3 years while these parvenus bottleneck a system already held together with duct tape and a Swiss army knife.

    Off my soap box.

  2. JP says:

    I don’t think the DOJ, Treasury, and Fed comparisons are very apt. These agencies perform functions that are necessarily different from what happens in the private sector. Jobs with these agencies provide experience, connections, or both that are valued by the private sector. Because of this, a stint with one of these agencies probably doesn’t reduce lifetime earning expectations much at all. Because of this, and the life-satisfaction and ideological reasons you note, DOJ was able to attract top-quality attorneys even in the midst of a bidding war by private firms (support staff is another story entirely).

    I don’t see how these factors will apply to a “public-private” firm. What is the motivation to apply for a position as the public face of a likely-to-fail automaker or bank? As anyone in AIG’s financial products division can attest, the government will not hesitate to turn on you if you become a public scapegoat.

    Your analysis ignores the public choice argument (e.g., public-private firms will be operated for the benefit of well-organized political interests).

    Finally, agency creep is a real issue. You assume that the government will run these firms for a “brief period of time,” but it is very difficult to end a government program. Particularly if these firms are initially successful, some bureaucratic entity will surely continue to exist. Moreover, it will be populated by those who couldn’t get jobs in a recovering economy, or true-believers in the idea that the federal government should be in the business of manufacturing Chevy Suburbans.

  3. A.W. says:

    I always find it faintly amusing when my comments seem to spark an entire blog post (here and elseswhere).

    First off, the notion that law firms are going to continue to be undependable in their job offers is probably fallacious. Most firms do not want to rescind their offers, if only because they don’t want that reputation. The ones that did, did so out of unexpected necessity. Now we are fully in the downturn, you can expect them to adjust by making fewer offers in the first place, which upsets your entire analysis.

    And I might add, losing your offer is not a disaster. The guy who loses an offer from a firm in the A class, can still get a job from the B class, or even the C class, and still be making a whole hell of a lot more money than they would have in the public sector.

    And that is one part of the economy. There is no good reason to think this calculus expands beyond the legal profession. And, bluntly having the best possible lawyers is not the same as having the best possible government officials. And I say this as a lawyer with a humble recognition of the limits of my knowledge and expertise. Our current president is a brilliant attorney, but a monumentally bad businessman. Which shouldn’t surprise us: he has no training and no experience in this area. That’s why I didn’t vote for him, and indeed, I was not totally happen with any of the choices. So he is advocating policies that will destroy entire industries, and most damningly, not one single person has sat him down and made him understand why his policies are economically illiterate. That speaks either to his arrogance, or his subordinates’ sycophancy and/or incompetence. Take your pick, but none of those happy answers.

    Certainly the downturn in the economy hasn’t helped to fill posts like in the treasury department. Or maybe they are consulting a list of “paid up” (tax-wise) democrats and just having trouble filling the 18 some odd slots. All those stories of how brilliant Obama’s transition was, now seem pretty quaint, don’t they? But that problem kind of casts doubt on your private sector brain drain theory.

    As for point two, oy, where to begin? First, “non profit” for tax purposes doesn’t mean that the company pays no attention to money. And to cite Yale as a model of efficiency? Look, I love the school, but among the nice adjectives that come to mind when I think of it, “efficient” isn’t one of them. And for that matter, that is a perfect example of a “non-profit” that has profit motive written all over it. I can assure you that none of those professors have sworn a vow of poverty, and only the most junior professors are actually poor, if any. When Guido Calabresi can take regular trips to Italy and literally spend millions of dollars on Shakespeare performances for the people of New Haven, its hard to say he has sworn off profit.

    And the problem with government is not merely that it lacks the profit motive, but that in fact the incentives are often downright perverse. When I was in high school, for instance, the school was brand new. The principal there said he was determined that our first senior class would have a 100% graduation rate. Sounds good, right? well, that same year, if you were a senior, it was damn near impossible to be thrown out of the school, because he wanted that stat. By contrast, meanwhile, there was a crackdown on the junior class, throwing out every person they thought was a loser. Why? Because he wanted to prime that class to have the best chance of having that 100% senior class graduation rate the next year. And as troubling as that is, let me say, bluntly, in my personal observation, there was a severe racial disparity when it came to school discipline so you have to worry that some African American students who might have graduated were denied that opportunity.

    That cruelty hit me personally, too. I had disabilities and I asked for the mildest of accommodations. Instead, not only did they refuse, but they began to actively discriminate against me. I can’t say if it was simple ignorance and prejudice or one of those perverse incentives like the fear I would tear down their SAT scores. But eventually it got so bad, I dropped out.

    And my subsequent educational career—a GED, a mid-level university, and then one of the best law schools in the country—attests to how utterly irrational this all was. And I can say this, too. Almost all of the discrimination I have faced was at the hands of purely government institutions. But every time I was at an institution that considered me as both a student and a customer, I have been treated generally equally. And in the one case where I wasn’t, the school instantly worked to disempower the bigoted teacher, which I guess is about all I can expect from them.

    Indeed, it is the fact that government monopolization transforms you into something other than a customer is, in my humble opinion, the single greatest problem when government takes over anything. Making things “free” and giving you little other choice leaves you disempowered, and makes those giving the service think they are doing you a favor by providing you anything. I remember a few years back when a principal in North Carolina decided to segregate the prom between black and white students. When a biracial girl asked him, more or less, what the hell am I supposed to do, he told her that her parents made a mistake. I remember reading an article where the low-income parents of some black students cried because they had no choice but to send their school children there. It is almost criminal that they DON’T have a choice.

    Which is one of many reasons why I think the idea of the government taking over health care is just insane. “From the same people who brought you the ‘Tuskegee Study of Untreated Syphilis on the Negro Male,’ now we give you all health coverage. Trust us, we won’t let members of unpopular groups suffer and die. Pinky swear!” Sorry if I, as a member of a discriminated against minority group, am not jumping up and down at the chance of having one centralized authority deciding whether my life is worth saving. I’d rather be a customer who can take his business elsewhere than be seen by some bureaucrat as a whiney beneficiary looking for a “hand out”, thank you very much.

  4. A.W. says:

    Dang typo fairy has struck again. i wrote:

    > That’s why I didn’t vote for him, and indeed, I was not totally happen with any of the choices.

    And i meant to say:

    > That’s why I didn’t vote for him, and indeed, I was not totally HAPPY with any of the choices.


    And i will add that i am not picking on Guido for making lots of money. More power to him. I am just using him as an example of a very rich man working for a “non profit.”