Government Failure: An Example

John Goodman’s post about “Government Failure” is chock-full of wisdom. Among other things, Goodman nails the model of “market failure” used by some economists and many politicians:

When economists talk about “market failure” they begin with a model in which consumer welfare is maximized. “Market failure” arises when imperfections cause outcomes that fall short of the ideal.  If we were to do the same thing in politics, we would begin with a model in which the political system produced ideal outcomes and then consider factors that take us away from the ideal.

The model “in which consumer welfare is maximized” — perfect competition — is unattainable in most of the real world, given constant shifts in tastes, preferences, technologies, the availability of factors of production. “Market failure” is nothing more than a label that a left-wing economist or politician pins out market a outcome of which he or his constituents (e.g., labor unions) happen to disapprove. (The long version of my case against “market failure” is here.)

Goodman continues:

[W]hereas in economics, “market failure” is considered an exception to the norm, in politics, “government failure” is the norm.  In general, there is no model of political decision making that can reliably produce ideal outcomes.

I offer an example of a not-unusual kind of government failure: the scam perpetrated by Dennis Montgomery on intelligence officials, and the subsequent effort to cover up the gullibility of those officials. This is from “Hiding Details of Dubious Deal, U.S. Invokes National Security” (The New York Times, February 19, 2011):

For eight years, government officials turned to Dennis Montgomery, a California computer programmer, for eye-popping technology that he said could catch terrorists. Now, federal officials want nothing to do with him and are going to extraordinary lengths to ensure that his dealings with Washington stay secret.

The Justice Department, which in the last few months has gotten protective orders from two federal judges keeping details of the technology out of court, says it is guarding state secrets that would threaten national security if disclosed. But others involved in the case say that what the government is trying to avoid is public embarrassment over evidence that Mr. Montgomery bamboozled federal officials….

Interviews with more than two dozen current and former officials and business associates and a review of documents show that Mr. Montgomery and his associates received more than $20 million in government contracts by claiming that software he had developed could help stop Al Qaeda’s next attack on the United States. But the technology appears to have been a hoax, and a series of government agencies, including the Central Intelligence Agency and the Air Force, repeatedly missed the warning signs, the records and interviews show.

Mr. Montgomery’s former lawyer, Michael Flynn — who now describes Mr. Montgomery as a “con man” — says he believes that the administration has been shutting off scrutiny of Mr. Montgomery’s business for fear of revealing that the government has been duped.

“The Justice Department is trying to cover this up,” Mr. Flynn said. “If this unravels, all of the evidence, all of the phony terror alerts and all the embarrassment comes up publicly, too. The government knew this technology was bogus, but these guys got paid millions for it.”

Similar cases abound in the unrecorded history of government contracting. Most of them don’t involve outright scams, but they do involve vain, gullible, and pressured government officials who tolerate — and even encourage — shoddy work on the part of contractors. Why? Because (a) they have money to spend, (b) they’re expected to spend it, and (c) there’s no bottom-line accountability.

If the flaws in government programs and systems are detected, it’s usually years or decades after their inception, by which time the responsible individuals have gone on (usually) to better jobs or cushy pensions. And when the flaws are detected, the usual response of the politicians, officials, and bureaucrats with a stake in a program is to throw more money at it. It’s not their money, so what do they care?

I offer an illustrative example from my long-ago days as a defense analyst. There was an ambitious rear admiral (as they all are) whose “shop” in the Pentagon was responsible for preparing the Navy’s long-range plan for the development and acquisition of new ships, aircraft, long-range detections systems, missiles, and so on.

The admiral — like many of his contemporaries in the officer corps of the armed forces — had been indoctrinated in the RAND-McNamara tradition of quantitative analysis. Which is to say that most of them were either naïve or opportunistic believers in the reductionism of cost-effectiveness analysis.

By that time (this was in the early 1980s) I had long outgrown my own naïveté about the power of quantification. (An account of my conversion is here.) But I was still naïve about admirals and their motivations. Having been asked by the admiral for a simple, quantitative model with which he could compare the effectiveness of alternative future weapon systems, I marched into his office with a presentation that was meant to convince him of his folly. (This post contains the essence of my presentation.)

For my pains, I was banished forever from the admiral’s presence and given a new assignment. (I was working for a non-profit advisory organization with fixed funding, so my employment wasn’t at stake.) The admiral wanted to know how to do what he had made up his mind to do, not why he had chosen to do something that couldn’t be done except by committing intellectual fraud.

Multiply this kind of government-contractor relationship by a million, throw in the usual kind of contractor who is willing to sell the client what the client wants — feasible or not — and you have a general picture of the kind of failure that pervades government contracting. Adapt that picture to inter-governmental relationships, where the primary job of each bureaucracy (and its political patrons) is to preserve its funding, without regard for the (questionable) value of its services to taxpayers, and you have a general picture of what drives government spending.

In sum, what drives government spending is not the welfare of the American public. It is cupidity, ego, power-lust, ignorance, stupidity, and — above all — lack of real accountability. Private enterprises pay for their mistakes because, in the end, they are held accountable by consumers. Governments, by contrast, hold consumers accountable (as taxpayers).

Perhaps — just perhaps — the era of governmental non-accountability is coming to an end. We shall see.

The McNamara Legacy: A Personal Perspective

The death earlier this year of former secretary of defense Robert S. McNamara caused me to reflect on my brief time as a “whiz kid” in McNamara’s Systems Analysis office. SA was run by assistant secretary of defense Alain Enthoven, a quintessential whiz kid who was only 30 when he began his eight-year reign as the Pentagon’s “doubting Thomas.”

My own days as a minor whiz kid ran from July 1967 to March 1969, that is, from late in McNamara’s regime (January 21, 1961 – February 29, 1968), through the interregnum of Clark Clifford (March 1, 1968 – January 20, 1969), and into the early months of Nixon’s appointee, Melvin Laird (January 22, 1969 – January 29, 1973). SA’s influence dwindled sharply upon McNamara’s departure from the Pentagon, but SA had been very powerful until then, for three reasons.

First, of course, SA was a key ingredient of McNamara’s management
“revolution,” which came straight from the playbook of RAND — the Air Force’s influential think-tank. McNamara recruited Charles Hitch from RAND to serve as comptroller of the Department of Defense. Hitch — a leading proponent of the use of planning, programming, and budgeting systems (PPBS) and co-author of the “bible” of systems analysis, The Economics of Defense in the Nuclear Age — brought with him Alain Enthoven, who began as deputy assistant aecretary of defense for systems analysis in 1961 and was elevated to assistant secretary of defense for SA in 1965. (For a recounting of McNamara’s love affair with RAND-ites and their techniques, see “Early RAND and the McNamara Revolution,” which begins on p. 4 of the RAND Review, Fall 1998. A Time magazine piece from 1962 about McNamara’s “whiz kids” profiles five top McNamara aides, including two RAND-ites, Enthoven and Henry Rowen.)

A second, closely related reason for SA’s power was its central position in McNamara’s decision process. SA exercised its power mainly through the so-called draft presidential memorandum (DPM). DPMs, which originated in SA, took the form of lengthy memos from the secretary of defense to the president, none of which — as far as I know — actually went to the president. DPMs were, in fact, vehicles for obtaining and recording McNamara’s decisions on major program issues. Each DPM treated a broad set of issues (e.g., force structure, force mix, manning levels, major procurement programs) in a particular mission area (e.g., strategic forces; tactical air forces, naval forces, and land forces). For each of the dozen or so issues addressed in a DPM (e.g., the number and mix of amphibious ships), the responsible SA analyst(s) would (in about a page) summarize the sponsoring service’s proposed program and the analytical basis for the service’s position, criticize the service’s analysis (usually by focusing on critical but debatable assumptions and the inevitable uncertainty of cost estimates), briefly discuss alternatives (almost always less ambitious and expensive than the service’s proposal), recommend one of them, and give a tabular comparison of the alternatives, using simple figures of merit chosen for the purpose of making the recommended alternative look good. (We called it “tablesmanship.”) The coup de grace often would be a “clinching” reason for approving SA’s recommended (less-expensive) alternative (e.g., the unlikelihood of another amphibious assault on the scale of the landing at Inchon, given the location of approved planning scenarios). DPMs would be sent to the services and the Joint Chiefs of Staff (JCS) for comment. After some back and forth, decision versions would go up to McNamara, who almost always chose the alternatives recommended by SA.

In sum, we SA civilians played “gotcha.” We did it because we were encouraged to do it, though not in so many words. And we got away with it, not because we were better analysts — most of our work was simplistic stuff — but because we usually had the last word. (Only an impassioned personal intercession by a service chief might persuade McNamara to go against SA — and the key word is “might.”) The irony of the whole process was that McNamara, in effect, substituted “civilian judgment” for oft-scorned “military judgment.” McNamara revealed his preference for “civilian judgment” by elevating Enthoven and SA a level in the hierarchy, 1965, even though (or perhaps because) the services and JCS had been open in their disdain of SA and its snotty young civilians.

A third reason for SA’s power, and its ability to play “gotcha,” was the essential lack of structure in the Department of Defense’s PPBS. For all of the formality and supposed rigor of the system, it lacked an essential ingredient: budget constraints against which the services could submit realistic program proposals. Budget constraints had existed de facto under Eisenhower and were to exist de jure under Nixon. In fact, Melvin Laird introduced a decision process built around fiscal constraints soon after taking office, on the recommendation of a former subordinate of Enthoven’s who stayed on as acting assistant secretary for about a year into Laird’s regime.

In any event, because McNamara didn’t give the services budget targets, the services were effectively encouraged to ask for a lot more than they could get. That incentive was reinforced by the reorientation of the defense program toward “flexible response” in the 1960s. Each service, naturally, sought a piece of the new action, and — lacking fiscal guidance — each of them did the sensible thing by asking for a lot more than it was likely to get. Under such a system, SA was bound to look good, and SA analysts were bound to make the services look bad by playing “gotcha.” It turns out that I didn’t have the stomach for it, which is why I left SA after 20 increasingly depressing months.

And that brings me to the players and their “tone.” What did the SA staff look like?

– There were a lot of youngish civilians, like me, who were bereft of military service and may never have seen a military unit or military equipment, except in a parade. Many of the young civilians had Harvard MBAs, and they were notorious, even within SA, for their brashness and rudeness.

– There was a smaller cadre of lightly less-young civilians, imported from other parts of DoD and the defense industry. Their SA experience lent them a certain cachet that they could trade on for advancement in government and industry.

– There were many junior officers with ROTC commissions who had deferred their active service to pursue graduate degrees. Because of those degrees, they were snatched up by SA instead of being sent to Vietnam. They were really civilians, at heart, who happened to carry military ranks.

– Most of the major components of SA had one or two “service reps” — senior officers nominated by the services. Some of them were dead-enders with nothing to lose (which worked against their sponsoring services). Others (notably the Navy reps) were rising stars who (a) tried to keep SA “honest” and (b) kept their sponsoring services informed of what SA was up to.

– The higher echelons were populated by “seasoned” civilians, with military analysis experience at places like RAND and the aerospace industry. One such senior civilian exemplified the tone of SA. He wrote a white paper in which he discussed (among other things) the role of amphibious forces in defense strategy. In the course of that discussion, he pointedly and sneeringly referred to amphibious forces as “ambiguous forces.”

In my 20 months at the Pentagon, I came to understand the essential difference between Systems Analysis, as it was in McNamara’s day, and outfits like the Operations Evaluation Group, a Navy-sponsored civilian organization. SA, to put it baldly, existed to work against the services. OEG, by contrast, existed (and exists) to work with a service, to help it make the best use of its forces and systems. There is no doubt in my mind that the contributions of OEG were (and are) far more valuable to the nation’s defense than the “contributions” of SA, which may well have harmed it.

Analysis per se is neither a good thing nor a bad thing. It’s like a loaded gun, in that its goodness or badness depends on who wields it and for what purpose.