Can Markets Govern?

WORKS DISCUSSED IN THIS ESSAY

David Osborne and Ted Gaebler, Reinventing Government (Addison-Wesley, 1992).

Michael Barzelay, Breaking Through Bureaucracy (University of California Press, 1992).

It's time to make our government work for the people, learn to do more with less and treat taxpayers like customers," according to Vice President Al Gore's report Creating a Government that Works Better and Costs Less. That sentiment springs almost full-blown from Reinventing Government, the surprise best-seller by David Osborne, a journalist, and Ted Gaebler, a local government consultant. On the thorny problem of government responsiveness, this book dominates the contemporary discourse.

What ails the government, Osborne and Gaebler argue, is public sector "monopoly"; their remedy is to inject government at all levels with competition, substituting market mechanisms—such as contracting and vouchers—for public service provision. Their book addresses a nonpartisan audience and has been well received on the left and the right, to the point of eclipsing more thoughtful books like Breaking Through Bureaucracy, by Michael Barzelay.

Why has Reinventing Government become a bible for politicians and policymakers? In large measure, the answer lies in widespread disaffection with the performance of government. Ronald Reagan and his disciples fomented cynicism about government's capacities and fears about its intrusiveness. But Reagan was merely tapping into latent public frustration. People are angry that government has failed to meet public expectations, especially given the collective memory of a time when it seemed nearly to do so.

Yet even as citizens bemoan the ineffectiveness and rising cost of government, they still ask it to address virtually every social ill. Many Americans assume a standard for government conduct that they would rarely demand of a private business. To a considerable extent, it is this tension between expectations and performance—often exacerbated by the exorbitant promises campaigning politicians make—that has led to frustration with government.

Osborne and Gaebler propose to resolve these tensions through a 10-step program reminiscent of the 12-step programs prevalent for righting personal crises. With the same kind of anecdotal evidence that characterizes best-selling self-help manuals, they vividly recount horror stories of dysfunctional government programs. For all who have experienced the irrationality, turpitude, or infuriating rigidity of one public agency or another, Reinventing Government provides both affirmation and apparent remedy.

Part of the book's cachet is that it has won endorsements from across the political spectrum. Indeed, the authors explicitly set out to establish a "new paradigm" that transcends traditional political distinctions. But this unusually inclusive chorus of support has stifled serious critique of Reinventing Government's central themes. The core idea—one that begs for careful scrutiny—is a claim that it is possible to transcend the very nature of politics.

Rather than arguing, as progressives long have, for fostering greater democracy in the workings of private enterprise, the authors instead advocate the marketizing of government itself. Permeating their work is a profound pessimism about the possibility of citizens acting in concert to direct governmental activity, or of public sector managers and employees revitalizing bureaus from within. Their tenets—their sanguine assessment of the efficacy of markets, their preference for competition over cooperation and internal renewal, and their pessimism toward democratic governance—all overreach.


THE DIAGNOSIS AND THE CURE

Osborne and Gaebler argue that contemporary government's central problem is its bureaucratic nature, which renders it inflexible and inefficient. In their alternative model, government should become "catalytic," steering rather than rowing the boat: it should not produce services directly but fund private sector delivery while continuing to set policy.

The heart of their complaint is that public employees exercise a "monopoly" on service provision. The civil service, they argue, makes it virtually impossible to transfer or fire employees, thus hampering any programmatic change. When a police department, for instance, wants to shift toward a community-friendly approach, it is "stuck with" police officers trained in apprehending criminals rather than in helping communities "solve their social and economic problems." Only by shifting service delivery to private entities that have the flexibility to dispose of employees without cumbersome procedures can government break the lock that its workers now have on program structure, Osborne and Gaebler conclude.

The authors argue that competition is essential to motivate public employees. Thus where services are not privatized, an ever-present threat of privatization is necessary to force the public entity to perform more efficiently. Where privatization is unlikely, they suggest new structures to stimulate competition among various elements of a public entity, such as public school choice.

Continuing their market analogy, Osborne and Gaebler characterize the user of a government service as its "customer." Ultimately, they argue, the only means of guaranteeing quality from either a public service provider or a private contractor is ensuring that the customer has a choice. Customers, they say, will choose that which best meets their needs. Providers failing to satisfy them will not long survive.

Extending their reconceptualization of government in business terms, Osborne and Gaebler propose governments consider relying more on fees than taxes, and investing their resources so that they are "earning rather than spending." And where the market metaphor weakens, as in the provision of social services, Osborne and Gaebler call for "empowering" communities by shifting service delivery from public agencies to nonprofit organizations. They postulate a sharp dichotomy between bureaucratic government programs that provide services to people—and thus foster dependency—and nonprofit agencies based in communities that "care" and empower people.


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Finally, Reinventing Government argues that it is possible for governments to do more with less, allowing for significant downsizing. Moreover, they conclude, political conflict is one of the key barriers to efficient government. The challenge for "entrepreneurial" leaders is to find a way around the traditional political structures and to create a new service delivery paradigm. If they do, they will be able to solve problems such as education, crime, and health care without significant additional resources.


REINVENTING GOVERNMENT'S LOGIC AND METHOD

Osborne and Gaebler write with such zest as they zing from argument to example and back again that it is easy to miss troubling gaps in their logic and their less-than-rigorous marshaling of evidence.

Take Reinventing Government's central argument that government should separate steering (policy setting) from rowing (direct service provision). First, Osborne and Gaebler assert that public institutions cannot have flexibility if "policy makers can use only one method—services produced by their own bureaucracy." In fact, there is not now—and hasn't been for many decades—a level of government that relies on only that one option. Government has long contracted out tasks ranging from military research to information systems to child protection. Yet Osborne and Gaebler set up the straw man of one-option government service provider to argue that government cannot function effectively unless it contracts out. The fact that they go on to claim that they do not necessarily favor privatization in every instance does not negate the force of this opening argument.

Furthermore, in their zeal to make their case against the power of public employees, the authors greatly overstate the rigidity of public sector operations. In practice, despite the presence of civil service rules and labor unions, governments have made massive programmatic shifts, ranging from the closures of hundreds of mental institutions in the last two decades to the military base closures under way today. Tens of thousands of employees have been retrained to take on revised responsibilities. And new programs have been mounted to respond to emerging social problems—AIDS, for instance.

Ultimately, the book's entire architecture rests upon the construct of public sector as monopoly. In attempting to make this analogy with the private sector, however, the authors profoundly misconstrue the essential difference between a market economy and the public sector. In the United States, citizens developed an aversion to corporate monopolies because they led to predatory practices, collusion to keep prices high, and suppression of innovation. Only competition could force such firms to lower their prices and/or improve product quality; in its absence, government regulation was needed.

But the analogy between government and firms doesn't hold water. Since the public sector is not driven by the same profit motive—citizens' priorities are different from stockholders'—it has no inherent reason to price its services more expensively. Private sector bureaucracies will reform only to the extent that they must to remain profitable. Public sector bureaucracies face a more complicated challenge. Their responsibilities are diffuse and often inherently unprofitable. Their mission is to achieve defined social goals, not merely to improve the bottom line. They are disciplined not by consumer sovereignty but by the value the polity places on particular goals. Competition may have its uses in the public sector, as it does in many human endeavors, but it is not the central disciplining feature of public enterprise.


SHIPWRECKED METAPHOR

Of all Reinventing Government's clever aphorisms, "Government should steer and not row"—a catch-all for contracting, vouchers, and the market-knows-best approach—is probably the most oft-cited. But its catchiness belies a seriously flawed argument for marketization, as well as a naivete.

Osborne and Gaebler view public servants as rent-seeking bureaucrats whose interests inevitably collide with those of the community. But the wall that the authors erect between public employees and the citizenry is artificial. Most public employees are not indifferent paper pushers. They are cops, firefighters, nurse aides, teachers, and engineers. Many came from or live in the communities they serve. Throughout their ranks are those who forgo financial or status rewards because they believe in the mission of public service.

Moreover, Osborne and Gaebler's empirical evidence is spotty. It bears noting here, since they fail to, that many public enterprises are quite successful, even innovative. Public universities such as California and Michigan best Harvard and Princeton in more than a few areas. Public utilities have provided power and water at cheaper prices than private utilities and without the regulatory costs. More important, Osborne and Gaebler do not confront the more troubling instances of government steering. The Pentagon, for example, has for some time contracted out weapons development and production, and the results have hardly been salutary. Cost overruns have been enormous and chronic; corruption is rampant. Still, despite convictions and huge fines, no major contractor has gone out of business in the postwar period. Some, like Lockheed, had to be bailed out.

Contracting out is no guaranteed formula for efficiency. In most cases, only a small number of bidders compete, creating a less than fully competitive situation and vast potential for monopolistic profits. Absent considerable rigor, the potential for bid-rigging and other forms of corruption remains. Total costs to the public sector may actually rise, because private contractors demand profits and even "steering" still costs the government money.

Nor are vouchers a panacea for ungainly bureaucracy and mediocre institutions. Take worker retraining, which works essentially as a voucher program. Private institutions such as cosmetology schools and secretarial "colleges" currently provide over 90 percent of worker retraining. Abuses in this (unregulated) sector are notorious—misleading recruitment practices, failures to return tuition when courses are discontinued, bait-and-switch promises about job placement. Medicaid is essentially a voucher system, but its low-income recipients have a dwindling pool of doctors and routinely receive shoddy care.

In celebrating facile market solutions, Osborne and Gaebler miss the boat. Rather than addressing the fundamental problems of governance and government in our society, they turn to the chimera of contracting out and privatization, which at best will only displace these problems to new forums.

It's easy to see why private business groups and many politicians might be enthusiastic about the Reinventing Government prescription. For politicians, contracting out frequently decreases government accountability and provides insulation from the kind of media scrutiny and citizen feedback that enhances democratic participation. For all of the flaws in government service provision, citizens feel far more ownership, and therefore demand far greater responsiveness, from a government agency than from a private business.

Contracting out lets political leaders evade the anger people feel when government fails them. The media show far less zeal in tracking down private contractors and scrutinizing their operations; private firms' proprietary information is much more difficult and expensive to investigate. This is one of the prime attractions that contracting out of particularly difficult social problems—child abuse, mental illness, or drug rehabilitation—holds for politicians.

What's more, contracting out often offers a way to bypass fair standards. Minority groups and public sector unions have helped create a work force that has a higher proportion of women and minorities than the private sector; that pays a living wage; offers reasonable, if moderate, health care and pension benefits; and is protected against arbitrary firings. Increasingly, private sector firms whose aims are securing public sector contracts are relying on low-wage, no-benefit policies to give them the competitive edge. As privatization increases, it could well have even wider impact, serving to sanction labor force practices that reinforce private companies' efforts to cut labor costs and renegotiate the social contract.

In their zeal to propagate market solutions, Osborne and Gaebler all but ignore the checkered record of private enterprises. Giant firms fail to pay their taxes, cheat on government contracts, bilk their customers, make false advertisements, and more. Nor are private corporations perfect models of efficiency. The business pages are full of tales of the waste and mismanagement at companies like GM and IBM—despite the intensely competitive terrain on which they must operate.

Conversely, there is much to be said for the accountability and durability of public sector service providers. Their books must be open, and they must abide by a set of procedures designed to discourage corruption, favoritism, prejudice, arbitrariness. They cannot go out of business overnight, leaving customers dangling. They can provide continuity of knowledge and skill, and they have structural incentives to plan better for the long term. Private sector contractors eyeing the bottom line are less apt to perform well on these criteria.


PRIVATIZATION AS EMPOWERMENT

When Osborne and Gaebler do not rely on the vocabulary of markets, they evoke progressive concepts. "Community empowerment" once meant ensuring that every community and constituency had full and equal access to the political process and thus an equivalent voice in government. But Osborne and Gaebler co-opt the concept as an argument for contracting out to nonprofit agencies. They set up dichotomies like "professionals offer `service,' communities offer `care.'"

This sounds attractive, yet there are at least three flaws to the community-does-it-better argument. First, we are witnessing the decline of identifiable geographic communities, with internal commonalities and external distinctions. Urban neighborhoods, suburbs, and small towns across America are increasingly fragmented, lacking any identifiable voice speaking for the whole. Second, who decides who the community is? Does it consist of all people living within a certain jurisdiction, or does it consist of a group of self-identified people, often with professional leadership? In practice, it is usually the latter, and in these instances, it is difficult to ascertain whether all members of the locality have access to the service and receive equal treatment. Self-declared communities run the risk of corruption, abuse, and exclusion.

Third, such agencies are not necessarily the paragons of caring and empowerment that Osborne and Gaebler so glibly portray. Some have proven far from immune to the lure of political patronage—using jobs to further their influence in their communities and using their community clout to win contracts from elected officials. Some have garnered as much notoriety as any government agency for mismanagement, graft, and programmatic failures. And some function much more as overseers in their communities, squelching political dissent, than as empowerers of community activism.

Nonprofit agencies and community-based organizations can play a significant and beneficial role in the provision of human services. But the inconsistent quality and accountability of such arrangements hardly justify the lopsided preference that Reinventing Government affords them.


DESPAIRING OF DEMOCRACY?

Oddly absent from the book is an understanding of why we need a public sector at all. Government provision of services evolved historically because the market cannot handle certain social functions—defense, education, land use planning— without risking serious damage to the polity. In many cases public provision involves what we call "public goods," those items that are most efficiently produced for all because they possess large economies of scale and are not excludable—if you provide them for one citizen, everyone else can have a free ride. And taxes, rather than individual fees for service, fund public enterprise because we have deemed it a positive value to socialize the costs of those activities essential to the common good.

In the pages of Reinventing Government, the idea of Americans as citizens completely disappears, and in its place emerge the atomistic customer and the amorphous, lumpy "community." Putting power in the hands of either customers or communities is the basis on which Osborne and Gaebler propose to transform government. But identifying the customer or the community is not so simple a task. What community is a board of education supposed to be serving and who are the customers? Parents? Taxpayers?

This focus on the user of a particular government service as customer fragments the society into units that undercut the notion of a commonweal. The authors thus evade the difficult questions that arise when one extends the notion that the "customer is always right" to its logical conclusion. What happens, for instance, when the needs of particular customers conflict with the greater public good? Osborne and Gaebler contend that transportation departments are not sufficiently responsive to their customers—drivers of private automobiles—who have an almost insatiable desire for improved roads, new roads, toll-free roads. Yet more highways may be at odds with society's desire to curtail pollution, with the need to develop efficient mass transit, or with demands for other kinds of public services.

And what happens when there aren't enough customers to make a particular service sufficiently "profitable"? Should an el line in Chicago be closed down because it runs in the wee hours of the morning when few want to take public transportation, even if those few are precisely the people who cannot afford any other means of transportation? What if that el offers their only means of getting to a job that keeps them off welfare or the unemployment lines—thereby reducing costs to another arm of government?

These issues are at the heart of the democratic process. While the notion of customer may have its uses in structuring the delivery of certain public services, it cannot hold up as the defining unit of social organization. The resolution of the conflicting claims of citizens, not customers, is the essence of democratic governance. There can be little doubt that politics has become too much of a spectator sport or that political contests have become too much the province of high-tech salesmanship and big-money contributions that weight legislative deliberations toward the wealthy. But these distortions of the process demand a serious strategy for reform, not the cynicism of Reinventing Government.

Their jaundiced view leads Osborne and Gaebler to overstate the divorce between politics and governmental operations. They allege that the "ultimate test of government is not performance but reelection." Politicians get reelected on how voters perceive them, not on how well their government provides services, or so they say.

But of course elections are the prime form of competition in the public sector. While voters may not carefully scrutinize the operations of each and every governmental agency, there can be no doubt that for state and local elected officials in administrative offices, the provision of services is indeed a central issue in most elections.

Elections provide another incentive for efficiency that eludes Osborne and Gaebler—voter concern with levels of taxation. Asserting that government has unlimited resources, the authors seek to portray a public sector with bottomless pockets and thus without inducement to mend its wastrel ways. The reality is very different. Compare the average corporate office suite, with its richly appointed furnishings, with the oddly matched decor of the office of even high-ranking public officials. Compare further the astronomical salaries and bonuses of corporate executives, with the wages of those in the public sector. The deep pockets are all on the business side. As Derek Bok's recent book, The Cost of Talent, documents, real salaries of public managers have steadily declined relative to private ones.

For all its flaws, the democratic process still offers the average citizen a powerful tool to shape public goods provision. Some run for office, others are run out. You would not know, reading this book, that millions of Americans turn out for school board meetings and are intimately involved in decisions about land use, environmental protection, and waste disposal in their communities. The authors, in embracing a slightly more liberal variant of public choice theory, favor "exit" over "voice" as a form of public accountability. The unhappy public service consumer, rather than voting, lobbying, or organizing politically to improve service performance, could jump ship and sign up elsewhere. By essentially abandoning hope of revitalizing the democratic process, Osborne and Gaebler fail to grapple with the critical questions of how decisions can be made in our complex society in ways that restore public confidence in government and that foster greater citizen participation.


BREAKING THROUGH BUREAUCRACY

There is, clearly, a need to revamp government. If Reinventing Government is not the solution, what is?

A superior approach to public service improvement would tackle the harder work of facing what lies below the boat metaphor. It would certainly incorporate some of the reforms advocated by Osborne and Gaebler, many of which are already under way around the country: quality improvement programs, introduction of technologically sophisticated systems, a clear definition of mission, and reduction in burdensome regulation and paperwork. But real reform must embrace two more fundamental restructuring strategies: employee empowerment and citizen involvement. Democracy—not markets—is at the core of both these efforts.

Unfortunately, the Osborne and Gaebler paradigm dominates contemporary discourse about governmental reform, crowding out more empirically grounded analyses that favor internal revitalization over privatization. One such work is Michael Barzelay's Breaking Through Bureaucracy. Barzelay, too, is preoccupied with the lackluster and sometimes maddening performance of government, but his prescriptions concentrate on improving public employee creativity and flexibility rather than privatizing services.

Barzelay also takes his evidence from real world practice, but from an intensive and painstaking study of just one initiative—Minnesota's Striving Toward Excellence in Performance (STEP) program. Barzelay, too, invokes the customer service model but applies it to the internal working of the bureaucracy, especially in relationships between the staff agencies (accounting, personnel, purchasing) and the line, or service delivery, agencies. In Governor Rudy Perpich's Minnesota effort, central bureaus were asked to consider line agencies their customers, attending to their needs and evaluating how well these were met. Agency service teams were set up, scrapping models of performance based on narrow and separate technical functions.

The internal bureaucratic politics of the Perpich story are illustrative. In 1976, in his first term as governor, Perpich set up a highly touted Task Force on Waste and Mismanagement, charged with cost-cutting and the introduction of business-like practices into government. Among other things, this task force proposed a curtailment of training programs, a moratorium on the purchase of filing cabinets as a way to reduce paperwork, and a ban on electric coffee pots in state office buildings, on the grounds that this would save cleaning bills for coffee-stained carpets. These recommendations, which Barzelay calls "employee beating," may have contributed to the governor's election loss two years later. Reelected again in 1982, Perpich took another tack, this time directing his deputies to improve the management of state government rather than to reduce its costs.

The result was a series of initiatives that offered employees greater opportunities for flexibility and the exercise of discretionary judgment. Barzelay documents how employee participation and productivity in state government subsequently increased in tandem. While Barzelay's claim to have conceptualized, with his collaborator Babak Armajani, a new "post-bureaucratic paradigm" seems overstated, his book offers interesting ideas about how to motivate managers and encourage internal creativity. He takes pains to distinguish between "the often-conflated concepts of developing a customer orientation and introducing marketlike processes into government." In this, he parts determined company from the Reinventing Government formula and offers a more satisfying vision of progress.

Barzelay's book is methodologically superior, too. He offers a fascinating historical retrospective on the crossover of private sector business innovations, both past and present, into public sector reform. His book is refreshingly self-conscious about the importance that language, metaphor, and argumentation play in the overhaul of bureaucracy. In evoking the customer-driven metaphor, for instance, he acknowledges that there may be more than one group of stakeholders. And unlike Osborne and Gaebler, who uncritically accept the claims of their public sector entrepreneurs, Barzelay investigates both the enthusiasms of program reformers and the complaints of STEP critics.

Barzelay's book cogently demonstrates that fostering genuine empowerment in the public workplace has far greater potential to transform public sector service delivery than using the threat of competition to create fear of job loss. In our experience, fear is far more often a factor that demoralizes and hence demotivates workers over the long term.

Though Breaking Through Bureaucracy covers just one intensively researched case, many other success stories around the country support his conclusions. In Madison, Wisconsin, the city government has boosted employee morale and reduced costs in several departments as a result of a joint labor-management total quality management program that draws extensively on employees' experiences and ideas. New York City's Bureau of Motor Equipment dramatically reduced the amount of time vehicles are out of service by shifting controls of the maintenance process to frontline workers. An Illinois state prison all but eliminated last-minute mandatory overtime assignments, which took a huge toll on employees' personal lives, through a labor-management program that revamped the system for overtime assignment. That initiative produced an unexpected cost savings as well—absenteeism and reliance on overtime declined. These examples offer not only support for a model with better prospects for genuine public sector renewal, but also a far more humane vision of what work can and should be.

Beyond any doubt, there are severe strains on democracy in a society as complex and bureaucratic as our own. But in our view, the continuous reinvigoration of the democratic process is one of the most critical tasks we face as a nation. Stimulating greater involvement of citizens in deciding what services government will provide and how they can best be provided must be recognized as the crucial underpinning of reform, not dismissed as it is in the pages of Reinventing Government.

There is no way to separate government from politics, operations from substance. Frustration with government is not just a function of its rigidity or inefficiencies. People are unhappy with government performance for more important reasons—the burgeoning of poverty and urban decay and the decline in people's real incomes and therefore ability to pay taxes, both of which are products of market forces in the private sector and both of which contribute to the Herculean task confronting the public sector. State and local programs have been under siege for more than a decade due to federal government spending cuts. Federal social spending, housing, and infrastructure programs languished while the military budget grew by 50 percent in real terms.

No wonder citizens with fewer resources and greater demands are dissatisfied with government. No wonder public servants are demoralized. What we need is a government that respects citizens and public employees alike, that is honest about the difficulties that face this nation, and that relies on cooperation and positive incentives, rather than fear, as a reshaper of bureaucracy. Only with an innovative and committed public sector and an aroused citizenry can we face up to the real task—not reinventing government on market terms but reinventing democracy as a social order.

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