Competition and the Efficiency of Bureaucracies

The glitches accompanying the launch of President Obama's Affordable Care Act have invited criticism of government bureaucracy. Bureaucracies indeed have lots of problems, maybe ineradicable, and by no means limited just to government bureaucracies.

The term "bureaucracy" refers to administration by a multi-tiered hierarchy of trained, nonpolitical professionals guided by written rules (thus minimizing discretion). Historically it referred to governmental administration, but nowadays the term is applied to the administration, in the characteristic bureaucratic form, of any institution.

Invariably, bureaucratized institutions are large and complex—too large and complex for face-to-face contact involving informal oral instructions to be a feasible alternative to the formal methods of communication and command that characterize bureaucracy. In very large organizations, such as the U.S. government, there are multiple bureaucracies, and likewise in large private firms and large public or private universities, hospital complexes, foundations, and so on. The driving force of bureaucratic structure is complexity of institutional mission, requiring governance by multiple specialists coordinated hierarchically by formal procedures.

An institution has a mission. But the people who compose it—the bureaucrats—have personal concerns: income, power, job security, promotion, easy working conditions. There are tradeoffs among these elements of a job; in particular, income is traded off against job security, easy working conditions, and other, often nonpecuniary, benefits.

The particular problem of American bureaucracy is the entanglement of government bureaucracies with legislatures in a setting of rivalrous bureaucracies. The recent fiasco of the website for the Affordable Care Act is an important example. This fiasco is an aspect of a much larger problem, which is the incompetence of federal government procurement of computer services. The efficient method of procurement would be to have an agency whose mission was to procure computer services for the government. Different agencies would submit their computer needs to the computer agency, which would evaluate the needs of the applicant agencies and the best (most economical, most suitable) means of meeting those needs. Agencies don't want this because they don't want to share their data with other agencies; information is power and they want to be able to exact a price for sharing their information; normally the prices takes the form of return information. Congress doesn't want a common computer agency because it wants to be able to authorize computer procurement agency by agency, granting procurement to whichever computer provider has political clout with the particular congressional committee responsible for the agency.

Because of the salary levels that skilled computer engineers command, it is difficult for government agencies to hire and retain the most highly qualified computer experts. The logical solution would be outsourcing to computer service providers, and that was the solution chosen for the website of the Affordable Care Act. But when the bureaucrats lack high-level technical skills, it is difficult for them to select and supervise an outside provider of high-level technical services. The bureaucracy needs to be able, at the least, to retain a computer consultant who can steer the agency to a computer provider that will meet the agency's needs and who can supervise the provider to make sure it delivers in timely fashion. But to find and negotiate with and supervise a consultant of the requisite skill and experience itself requires a high level of technical ability again rarely found in government agencies. The combination of modest income with job security and other benefits temds not to be attractive to the highest-quality workers in elite, highly compensated fields. Bureaucracy tends to work well only when it is performing relatively simple, highly familiar tasks, far removed from the entrepreneurial risk common in highly competitive fields.

A particular difficulty in federal bureaucracies is the extraordinary difficulty of actually firing surplus or underperforming employees. Apart from the procedural rights accorded to employees sought to be discharged, employees at risk will often seek to forge alliances with influential managers or even members of Congress, or congressional staff. As a result it's usually too much of a bother actually to fire an underperforming or superfluous worker, and instead the agency will find him or her what is called a "parking place," meaning a job in which the employee can do no harm, be out of the way.

It is not obvious what the solution is, especially since bureaucracy is both a necessity of and a plague upon large private as well as public institutions, including corporations. It is well known that in successful private corporations staff tends to build up until an economic downturn or other shock forces the corporation to cut staff in order to minimize costs. Until that happens staff tends to swell. Managers, their compensation geared to the span of their control, push their superiors to authorize an increase in staff, while the managers' subordinates seek to make themselves indispensable by hoarding information and fostering personal relationships with colleagues, or sometimes with influential suppliers or customers of the corporation. For in private as in public institutions the possession of critical information is a personal asset of great value, typically hoarded by its possessor. And so it may be very difficult for even able administrators to obtain the information they need for optimal management. The bureaucracy yields up its private hoard of information only reluctantly. in exchange for autonomy, security, and privileges.

Despite the problems of bureaucracy that I have been sketching, it must be on balance an efficient means of administration or it wouldn't be so pervasive in both the public and the private sectors. This is a depressing reflection, because bureaucracy is a function of complexity, its pathologies are amplified by complexity—and complexity is growing throughout our governmental and commercial institutions.