Old Wine in New Bottles

The Machinery of Greed: Public Authority Abuse and What to Do About It, by Diana B. Henriques, Lexington, Mass.: Lexington Books, 161 pages, $18.95

A wide range of government activities, from building sewers to maintaining turnpikes, is conducted not by conventional government agencies but by "public authorities." The best known is probably the Port Authority of New York and New Jersey, but there are numerous others, most of them at the state and local levels. The public authority is often viewed as a business-like alternative to government-run entities, providing government services free of patronage, red tape, and corruption. Public authorities are supposed, in words attributed to Robert Moses, long-time head of the Port Authority, to be "outside and above politics,…prudent, efficient, economical. And they are more. They are the very epitome of prudence, efficiency, economy."

As Diana Henriques makes clear, public authorities, whatever else they may be, are immune to neither corruption nor political influence. In The Machinery of Greed she describes a wide variety of public-authority scandals, including one that she, as a reporter for a New Jersey newspaper, was largely responsible for discovering. They include patronage hiring, kickbacks, embezzlement by enterprising employees, awarding of lucrative contracts to firms connected with officials of the enterprise, and most of the other ills that afflict enterprises both public and private. One is left with the impression that, so far as corruption is concerned, public authorities manage to combine the worst features of government agencies and of private firms.

The author describes, in some detail, how the management structure of public enterprises makes them more vulnerable to corruption than traditional government agencies. The lack of civil service procedures means that managers are free to hire and fire—which frequently means giving jobs as a reward for past political favors or in exchange for future loyalty. The lack of adequate accounting controls makes many public authorities particularly vulnerable to embezzlement. The wide range of objectives and enterprises that characterize some public authorities makes it difficult to tell whether what they are doing has any connection with what they say they are doing.

These problems are not accidental—they result, probably unavoidably, from the attempt to avoid the problems of traditional government administration. "Civil service" is widely regarded as a euphemism for unresponsive bureaucracy—for good reason. Elaborate accounting and management controls can be less favorably described as entangling red tape, and precisely defined goals as bureaucratic compartmentalization.

In offering solutions to the problems of public authorities, the author is caught on the horns of a dilemma, nicely illustrated by the issue of civil service. With civil service rules, it becomes nearly impossible to fire anyone, which is likely to lead to an unresponsive bureaucracy. Without civil service rules, whoever controls the organization can use jobs for political patronage or to ensure loyalty from subordinates. The author's solution: "a merit-based, apolitical personnel system." That, of course, is precisely what civil service was supposed to be. She offers no clear explanation of why we should expect to do any better the second time around.

Henriques sees the problem, but she is not willing to follow her analysis to its logical conclusion. That conclusion is that most of the things government does cannot be done well by government. Public authorities are devices intended to avoid that problem by imitating some of the forms of private firms while retaining the substance of government. The result is, at best, to eliminate certain features of government, such as civil service, at the cost of resurrecting the problems—such as patronage—that those features were created to solve.

There is a reason why government agencies are worse-run than private firms. A small firm is kept honest by the fact that the manager, being the owner, has no one to cheat but himself. A large firm is kept honest by the capital market. If it is badly run it cannot get anyone to buy new issues of its bonds or stocks. If it is sufficiently badly run, somebody finds it in his interest to buy up the existing stock, replace the company's management, and resell the stock at a large profit once the resulting improvement in performance becomes visible.

Neither government agencies nor public authorities face any comparable restraints. Public authorities often get their capital from the bond market, but investors, knowing that if the authority loses money it will almost certainly be bailed out by the government that created it, have no incentive to pay much attention to how well it is run. Government agencies are supposed to be controlled by the voters. But the individual voter has very little incentive to find out whether the agency is well run. One investor's negative vote on a private firm—his decision not to buy the firm's stock—guarantees that he, at least, will not pay for the firm's mistakes. One voter's negative vote on the elected official controlling a public enterprise has no effect at all unless it happens to provide the margin of defeat, which is very unlikely.

Henriques properly rejects the idea that the problem is simply the result of bad individuals in positions of power. She argues, correctly, that if you have large piles of money inadequately guarded you can expect someone to try to steal it. What she does not see is that large sums controlled by government are inherently unguarded, so far as the ultimate victims of the theft are concerned. One can guard against elected thieves selling jobs by instituting civil service—at the cost of turning control over to an entrenched bureaucracy. One can guard against entrenched bureaucrats by giving officials, appointed by elected politicians, the power to freely hire and fire—at the cost of allowing the politicians to sell the jobs. But one can't, in the public sector, guard against both. Changing the form of government from a conventional agency to a public authority doesn't work—the problem is with the substance, not the form.

David Friedman, an economist at Tulane University, is the author of The Machinery of Freedom and Price Theory: An Intermediate Text.