January 16, 2003

Chapter 14

Inefficiency of Bureaucracy

Modern discussions of bureaucracy in Public Choice begin with a model proposed by William Niskanen in 1971. This model assumes that government bureaus are the suppliers and that elected politicians are demanders of some good or service. The assumed goal of a bureau chief, who is the manager of supply, is to maximize the size of her budget. The model assumes that she can, in large measure, achieve this goal because politicians have little incentive to promote efficiency and little ability to determine whether a particular budget is too high or too low.

     The main purpose of this chapter is to present the Niskanen model and the reasoning behind it. Part one describes the environment of the Niskanen bureau. In other words, it discusses the bureau's relationship with politicians. Part two describes the assumptions we shall make about the bureau chief. Part three presents the model in its simplest form. Part four identifies several reasons why politicians would demand budgets that are higher than the optimal size. Part five presents a simple framework that helps to capture the essential features of the interaction between bureau chiefs and politicians. We conclude that the final budget is likely to be considerably higher than the optimal one from the voters’ standpoints.

      Like most economic models, the one used in this chapter assumes that the individuals are self-interested. We assume that the bureau chief, other workers in the bureau, and politicians, aim to satisfy their personal wants. This assumption contradicts what many people feel ought to be the goal of bureaucrats. Part six discusses the assumption that bureaucrats act in their self interest and shows why the assumption is realistic in a democracy.

     As pointed out earlier, the Niskanen model is very simple. Moreover, it was developed specifically for the presidential system and even more specifically, to help understand bureaucracy in the U.S. Other models, or explanations, of bureaucratic behavior in the U.S. have taken a broader political view. In addition, specific models have been developed that appear more suitable in explaining behavior in a parliamentary system. Part seven describes some of these models.

1. ENVIRONMENT OF THE BUREAU

     As we have noted previously, there are two major forms of democratic government: the parliamentary system and the presidential system. The main difference between them is in the way that the chief executive (prime minister, president) is elected. In a parliamentary system, the prime minister is elected by the members of the legislature who are themselves elected by the citizens. Thus, if a citizen wants Mr. X to be prime minister, he can only register his preference indirectly by voting for legislators. In a strict presidential system, a citizen can vote directly for the president in a separate presidential election.

     A second difference is in the appointment of bureau chiefs, or ministers. In the parliamentary system, these chiefs are also chosen by legislators. They are chosen at the time that the prime minister is selected. In a presidential system, the bureau chiefs are chosen after the presidential election. The president nominates a chief and then hearings are held in the legislature. If the legislature approves, the appointment is confirmed.

     The prime minister in a parliamentary system can be replaced at any time. If a majority in the parliament decides to replace the prime minister, they simply take a vote and, given some amount of lead time, the prime minister must step down. Ordinarily, a new election for all legislators is called, after which the new legislature elects a new prime minister to replace the existing one. In a presidential system, a president cannot be replaced until the next scheduled popular election, unless there are grounds for impeachment. For impeachment to result in the president’s removal from office, a supra-majority must vote for it.

     Because of these differences, there is also a difference between the two systems regarding the power of the legislature over the bureau chiefs, or ministers. In a parliamentary system, however, if a majority in parliament is displeased with the action of a minister, they can demand her resignation. If she refuses, they can, by simple majority vote, form a new government. They could form a government with the same other ministers but a new one to replace the one with whom they are displeased. Or, at the other extreme, they could replace all the ministers. The following discussion assumes a presidential system. In the presidential system, once a bureau chief is appointed by the president and approved by the legislature, a simple legislative majority cannot remove her.

The Budgeting Interaction

     The ultimate responsibility for determining each bureau's budget belongs to the legislature. The legislature carries out its responsibility by passing a budget bill, typically once each year. The budget bill is a proposal that allocates money to each bureau. It may also contain directives on how the money is to be spent and/or on how a bureau is to be organized. The budget bill, however, comes at the very end of the budgeting interaction. So lets start at the beginning.

From the Bureau to the Legislature

     If we view budgeting as a series of actions through time, we can say that the budgeting interaction begins in the bureaus. Part of the job of each bureau chief is to send the chief executive (or a committee of parliament) a proposed budget for her bureau. Thus, every year, each bureau chief proposes that during the next year, her bureau will provide a given quantity and quality of some service and that to provide it, the bureau requires x amount of money. The chiefs of the transportation department, police department, education department, and so on, submit proposals, as a contractor might submit a bid to construct an addition to your house.

     The chief executive (or special parliamentary committee) then has the task of combining the separate proposals into a package. To do this, he must review and evaluate each one according to his beliefs about the services that should be supplied. Evaluating the proposals of all the bureaus is a difficult and time-consuming activity. As a result, many specialists must be employed to sort through and analyze them. These specialists may ask bureau chiefs for clarifications or additional information. And they may recommend modifications.

     At the end of the evaluation process, the chief executive (or committee) sends the budget package, or bill, to the full legislature. The bill then enters another intense evaluation process. It is debated and legislators are free to propose changes, which may be voted on. Much of the debate and proposals for change occur outside of public view, "behind closed doors." The debate provides numerous opportunities for logrolling.

The Committee System

     To evaluate a budget bill, the U.S. legislature separates the bill into parts, typically according to the names of the bureaus that originally made the proposals to the chief executive. Each part is then sent to a special committee of the legislature. Thus, the transportation part of the budget is separated from the defense and education parts and sent to the transportation committee.

     A committee consists of members of the legislature who were previously appointed or elected to the committee according to legislative rules. These are the oversight committees discussed in Chapter Thirteen. If the committee system has been operating for some time, each committee is likely to be peopled by legislators with a particular interest in the specific bureau. For example, most of the members of the U.S. House of Representatives Agriculture committee are likely to live in voting districts with a disproportionately large amount of farm businesses. Such people have the greatest number of votes or campaign contributions at stake when the legislature votes on that part of the budget. Accordingly, they use their logrolling power to attain the key positions where they can influence the committee's recommendations.

     The members of a committee may employ many assistants to help them in their review. With the exception of some national security issues which are handled separately, committees ordinarily have the power to call upon the bureau chief and his assistants to explain their proposals and to submit supporting documents and testimony. Of course, some bureaus receive more attention than others.

     After the specialized committees review the respective budgets of their bureaus, they submit recommendations to the legislature. The legislators then meet as a group in order to discuss the recommendations and, eventually, to vote on the budget. The voting begins with a motion to accept or reject each committee's recommendation. If the recommendation is rejected, there is further discussion and the committee may be asked to meet again in order to consider revising its recommendation. Alternatively, changes in the recommendations may be voted on and approved.

Why Committees?

     The committee system assigns particular legislators to a committee. This gives them certain legal rights to interact with bureaucrats that legislators who are not members of the committee lack. It does not prevent non-committee members from providing input. But it does make it more costly for them to gather information about the bureau. And, of course, they cannot vote for or against a committee recommendation. The latter restriction is not especially important, however. Since the committee recommendation must eventually be approved by the legislature anyhow, all legislators still have ample opportunities to contribute their input during the legislative meeting. Of course, if a legislator is a member of a minority party and there is a strong and loyal majority, his input might not have much effect. But this is true whether or not he is a member of a specialized committee. The important thing to remember is that the ultimate decision on the budget bill rests with the legislature.

     Why have committees? In other words, why give certain members of the legislature special rights to acquire information about bureaus? The first possible answer we shall consider is that a committee system may economize on monitoring. One function of the legislature, as envisioned by the members of a collective at the time they make the constitution, is to monitor the supply of public goods. Assuming that many public goods are supplied by different bureaus, it might seem efficient to divide the monitoring of all the bureaus into parts, each part being carried out by specialists who are charged with learning about a particular bureau. However, an important problem of monitoring government agents is that of who will monitor the monitor?

     To understand this problem, put yourself in the shoes of a politician who is assigned to a special committee to monitor a particular bureau. Because of your appointment you can inspect various documents that other legislators and ordinary citizens cannot easily see and you can observe behavior that is not shown to others. Suppose that you observe a serious violation of the law. If your sole concern was to act as the monitoring agent for the collective, you would immediately report it to the legislature and the public. However, your self interest may lead you to act differently. For example, you may perceive that your new knowledge can help you or your party in the next reelection bid. In this case you may not report it. Alternatively, you may believe that some change in the bureau's services would be in the "public" interest, as you define this. If so, you may proceed to make a deal with the people responsible for the violation. If they make changes that you demand, then you will help them avoid the harsh consequences of punishment and you will keep the violation away from public view. To show that you are performing your monitoring duty, you may also demand that the bureau take positive and visible steps, supervised by you, to stop the violation. In this case, you achieve your goal of serving the public interest at the expense of the monitoring goal. Of course, your view of what is in the public interest might be quite different from the views of others.

     Another possibility is that you would demand a bribe or other favors in exchange for not reporting that the bureau is not performing according to its directives.

     To assign the monitoring task to specialist committees of politicians would seem to give them opportunities to use bureaus for their own purposes. This might lead to external costs of collective decision-making (see Chapter Four). Since members of the collective want bureaus to efficiently supply public goods, they would presumably oppose such an assignment if they knew about its effects. So it seems that we can reject this first explanation.

     If we are wrong to believe that specialist committees provide effective monitoring, perhaps they have some other function. A second possible explanation for such committees is that members of the collective believe that they can best achieve efficiency in information-gathering by institutionalizing the activity.

     To help us judge this explanation, we must ask how information-gathering would occur proceed in the absence of these legal rights. Even without committees, some legislators would be specialized, when compared with other legislators, in gathering information about particular bureaus. Other legislators would come to rely on these “specialists” for information and advice about bureaus and issues about which they themselves know very little. Thus informal networks of information would develop. Informal networks have the advantage of being flexible. Suppose that you are a legislator. You suddenly come to judge that another legislator upon whom you have relied for information and advice is unreliable. If the information network is informal, you can quickly shift to a different legislator. However, under the committee system, committee members have special information-gathering rights. This limits the number of other legislators from whom a non-committee member might choose to obtain information. As a legislator, you must rely on a committee member. And if the member on which you rely becomes unreliable in your eyes, you cannot so easily replace him. As a result, it may be difficult for you to locate reliable insider information. Thus, it seems that the committee system does not improve efficiency in the gathering of information needed to make the budget decision. Apparently, we can reject this explanation also.

     A third possible explanation for specialist legislative committees is that they benefit the legislators themselves by increasing their abilities to trade for campaign contributions, to help the party, and to obtain favors and bribes. To understand this explanation, we must recognize two facts about the committee system. First, by organizing themselves into groups, legislators can make it easier for lobbyists, pressure groups, and other special interests to trade for influence. The committee system raises the value of a legislator's right to vote on laws by reducing the costs to lobbyists and pressure groups of dealing with him. To facilitate this process, the legislators can require senior members of the legislature to be committee chairpersons. Senior members already have substantial experience in dealing with lobbyists, pressure groups, and special interests.

     The second fact is that a committee has some control over the legislative agenda. Recall from Chapter Eight that in paired comparisons under majority rule, a person who can control the agenda can often manipulate the presentation of voting alternatives so that his preferred option wins. Assuming that the full legislature respects the oversight committee's recommendation regarding the agenda, the committee can manipulate the voting. The committee may also be able to exclude what would otherwise be regarded as relevant alternatives from the legislative vote. According to this explanation, the agenda-setting power of the committee raises the committee's attractiveness as a channel for lobbyists, pressure groups, and special interests.

Passing the Budget Bill

     In a parliamentary system, a single ruling party may be able to pass a budget bill without discussing it in the legislature. The members can decide on the budget at a closed party meeting. Assuming that all members are loyal, they will vote for it even though various members may disagree with some parts. If there is a coalition government, different political parties will have to agree before a budget bill can be passed. However, the bill may still be passed without a discussion in the legislature, since a coalition can agree on a bill in private meetings. In a presidential system, however, members are typically less loyal to their parties. Moreover, even if a single party dominates, the legislature ordinarily has rules that allow a legislator to demand a discussion. As a result, legislators may have long and complex debates over the budget before passing it.

     After legislators have made their desired changes to the chief executive's budget bill, they take a vote. If enough of them agree, the bill is passed. If not, further changes are proposed and a new bill is voted on. This combination of revision and vote-taking continues until a final bill is passed by simple majority vote.

     Assuming that the chief executive has veto power, as in the United States, the bill is then sent to the chief for his approval. If the chief executive approves, the bill becomes law. If the chief does not approve, it is sent back to the legislature. The legislature can override the veto with, say, a two-thirds vote or it can revise the bill and try again for the chief executive's approval. In practice, the executive and legislature typically try to resolve disagreements informally.

Demand and Supply of Public Goods and Private Goods Compared

     This, then, is a broad outline of the budgeting process -- of the means by which politicians determine the amount and quality of services that are demanded. Note how different this is from the usual economic analysis of the demand for and supply of goods in markets. In the latter, we typically assume that there are many demanders and that there is competition in supply. In the economic analysis of bureaucracy, we assume that the government (through the interaction of the legislative and executive branches) is the only demander and that a set of specialized monopolistic bureaucracies are the only suppliers. We also assume that the government buys a large quantity only once a year. This compares with separate consumers in markets buying goods at times that are, respectively, most convenient for them.

2. THE BUREAU CHIEF

     The usual economic models of supply are models of private firms. So let us begin by describing the difference between the manager of a private firm in the market economy and the bureau chief.

Business Heads and Bureau Chiefs: The Fixed Salary Assumption

     The manager of a private firm may (1) be the owner, (2) be hired by the owner, or (3) be hired by the board of directors of a corporation. In the first case, the manager possesses the right to any profit that results from his running the business efficiently. Thus the profit incentive motivates efficiency. In the second case, the right of a manager to any additional profit is determined by the owner. As a result, the owner has an incentive to transfer profit rights to the manager or to reward him in some other way if he believes that he can increase his own profit by doing so. In other words, the owner has an incentive to find out the most efficient method of production and to employ a manager who is efficient. An inefficient manager is not likely to be able to keep his job. As in the first case, the profit incentive motivates efficiency, albeit less directly. In the third case, corporation laws require the hiring decision to be made by the majority of shareholders.

     Corporations may become very inefficient at times because the collective of stockholders typically have only a weak incentive to hire an efficient manager. The problem is that the stockholders must share in the profit. Let's suppose that you own 10% of the stock in a corporation. Then you have a right to 10% of the profit. Also, you have 10% of the voting rights. Suppose further that you know that replacing the current manager will increase profit by $1 million. To cause the replacement, you must convince holders of at least 40+% of the remaining stock that you are correct. Suppose that you estimate that your personal cost of doing this is $150,000. Since your share of the profit is only $100,000, you would, in your own interest, decide to use your time and energy elsewhere. As a result the corporation will continue to be managed inefficiently.

     The same kind of incentive problem applies to all efforts by a single stockholder to monitor and improve a corporation. The collective benefits to all stockholders exceed the private benefits to any single stockholder. As a result, each individual will produce an inefficiently small amount of information. Inefficiency in the corporation may persist.

     The stock market contains a partial remedy for this incentive problem, however. If a corporation is being run inefficiently, the price of its stock is likely to be low relative to what it would be if the corporation was run efficiently. If you have the money or the ability to borrow it, you can buy 40+ percent more stock and replace the manager by yourself. Later, when the corporation becomes more efficient and the share price rises, you can sell the stock. In the above case, if, stock speculators correctly evaluate the stock; you could earn nearly $500,000 in stock market profits. In addition, you would not have to convince anyone to replace the current manager. You could do this by yourself because you would own 50+% of the voting rights.

     The fact that someone can buy the stock of an inefficient corporation gives a current manager an incentive to be efficient. If he is inefficient, he faces the prospect of losing his job as the result of a takeover bid by an alert speculator. Thus, as in the first two cases, the profit incentive motivates efficiency. In the case of the corporation, the connection is less direct than for a single owner who hires a manager but it still operates in part.

     A bureau chief cannot earn money profit. In the first place, many bureaus supply public goods for which prices cannot be charged because of the nonexclusion problem. Some government-supplied services are at least partly excludable, however, and the bureau charges a fee for their use. In these cases, the bureau receives money. However, the bureau chief cannot keep this money. She must either turn it over to the government or use it in accordance with rules that are set by the legislature and/or chief executive. In both cases, the only money that the bureau chief is permitted to receive according to law is her salary. This salary is fixed. Politicians cannot raise it or lower it like the owners of a private firm can. Why? Because members of the collective want to control the potential external costs of collective decision making and abuse of power. They limit the power of politicians to increase and decrease a bureau chief's pay because they do not want politicians to use bureaus for their own purposes.

     Politicians can sometimes reward a favored bureau chief with a new, higher paying or more desirable assignment. Conversely, they can punish a bureau chief for what they regard as inefficiency by removing her from office. Moreover, bureau chiefs in practice may be able to earn rewards from customers or from lower-level bureaucrats if they improve a bureau's efficiency. But such rewards are small and they can often be earned by reducing rather than raising efficiency.

     The fixed salary assumption seems reasonably realistic. It also greatly simplifies the task of making a model of bureaucratic efficiency. Thus we build our model of the bureau on the basis of it.

The Bureau Chief as a Budget-Maximizer

     If the bureau chief does not maximize profit, what is her goal? Niskanen assumed that her main goal is to make her bureau as large as she can. Another way to say this is that the bureau chief tries to maximize her budget. Two reasons can be given for this assumption. First, assuming a single maximand greatly simplifies the job of building a model of the government bureaucracy. Second, it does not seem too unrealistic.

     It does not seem too unrealistic because obtaining a higher budget is a good way for the bureau chief to satisfy other wants that she seems likely to have. Some of a bureau chief's wants are purely personal and unique to the individual. For example, the chief of the transportation bureaucracy may set a personal goal of making roads more scenic. Aside from personal goals, a bureau chief is likely to have goals that she has in common with other bureau chiefs. These include prestige, transfer to a larger or better bureau or other government position in the future, being elected to a political office, and getting a good job in the private sector after leaving the bureau. Almost all of these personal and common goals are more capable of being achieved with a higher budget, other things equal.

     The exception is a goal of decreasing bureau size and making it more cost efficient. If a bureau chief has this goal, she will surely not try to maximize the budget.

Maximizing the Budget to Obtain Trading Credits

     A bureau chief's achievement of her personal goals may be aided by those with whom she regularly interacts. Her most frequent contacts are politicians, lower-level bureaucrats, consumers of the service she supplies, and resource suppliers. She is more likely to get their help if she, in turn, helps them. Because these people also typically want higher budgets, the chief has an additional incentive to promote a high budget. Another way to put this is that the bureau chief has an incentive to maximize the budget as a means of obtaining trading credits that she can use in her dealings with those who have a special interest in the bureau. Consider each of the groups with which she interacts in turn.

Politicians

     Politicians ordinarily aim to be reelected or to help their political party. A bureau chief can help politicians by having a budget that is large enough to supply special services to their constituents or campaign contributors. The opposition in the legislature is likely to oppose a bureau chief's use of funds to help the ruling party. In a two-party parliamentary system, however, the opposition has no power; so the views of the opposition are unimportant. In a presidential system, if the legislature and the president are from the same party, the signal to the bureaucrat to help the president and his party may be clear. If the legislature and the president are from different parties, bureaus will receive mixed signals. The incentive to maximize the budget on this account would be less strong, other things equal. The benefits to politicians are discussed more thoroughly later in this chapter.

Lower Level Bureaucrats

     Lower level bureaucrats practically always want a high budget, as we pointed out in Chapter Thirteen. A higher budget enables the bureau to increase the size of its work force. This increases the lower level bureaucrats' opportunities for promotion in rank relative to opportunities in other bureaus, since more employees typically require more supervisors. A higher budget also means the possibility of more other resources to work with -- more machines, a larger or more modern building, etc. This may help lower level bureaucrats achieve a variety of personal goals, including making their jobs more comfortable. If a lower level bureaucrat believes that the bureau chief is working hard to maintain a high budget, he is more likely to cooperate with her than if he believes that her aim is to cut the budget. Looking at the situation from the bureau chief's perspective, she realizes that if she wants to achieve the greatest cooperation from the lower level bureaucrats, she must appear to advocate a high budget.

Consumers of the Bureau's Service

     Most bureaus serve a distinct clientele. For example the education ministry typically services school administrators, teachers, parents and students. The people in these groups ordinarily associate a higher budget with higher amounts of service for themselves. A bureau chief who aims to please the consumers of the service she provides can ordinarily do so by attaining a higher budget.

Resource Suppliers

     Resource suppliers include the suppliers of equipment and other items, the contractors who construct new buildings, and the suppliers of services. Each of these groups stands to gain if, other things equal, a bureau's budget is higher. Accordingly, a bureau chief who wants to gain the favor of people in these classes can ordinarily do so by advocating a higher budget.

Leisure as a Goal

     There is one important check on budget maximization. A bureau chief, like other people, may not like hard work! Consider a specific task that the chief executive might assign to a bureau. Suppose that the chief executive asks the bureau chief to improve the way that private contractors are selected for building roads. The chief would spend some of her time trying to achieve this task. She would also spend some of her time trying to expand the size of her bureau, and hence to improve her probability of promotion, prestige, etc. However, she may not work particularly hard to achieve either of these goals. Instead she may spend hours at luncheon meetings, travel extensively, read romance novels, do personal research, and so on. In short, she may substitute leisure for the other benefits.

     Regarding the goal of leisure, there is one significant difference between the bureau chief and the profit-maximizing business head. If the business head chooses leisure over higher profit, he directly reduces the profit that his company could have earned. If he is the owner, he sacrifices his own profit; if he works for someone else, he risks being fired by profit-conscious owners. If the bureau chief chooses leisure over expanding the bureau, she does not directly lose money. Ordinarily, she gives up something less valuable.

3. A MODEL OF BUREAUCRATIC DEMAND AND SUPPLY

     Niskanen's model of demand and supply is what economists call a bilateral monopoly. The bureau is said to be a monopolist seller of government services; the combination of the executive and legislature, as expressed through the budgeting process, is said to be a monopsonist buyer, or sponsor. Because his model is so widely used in Public Choice and also because it helps express the general pressure to maximize the budget, we use it as a focal point of our discussion.

                                           Figure 14-1

THE OPTIMUM BUDGET AND CONSUMERS' SURPLUS

                                (CONSUMERS' VIEW)

The Optimal Budget from the Consumers' Standpoints

     We begin by building a model of the optimal budget for the bureaucratic supply of a pure public good from the standpoint of consumers. Suppose that we can quantify a bureau’s services and that we know the demands of all the consumers and the costs of producing the bureau's services. Then we could calculate the optimal budget. Figure 14-1 shows a hypothetical demand curve for an imaginary pure public good and a hypothetical marginal cost line like the ones we used in Chapter Nine. For simplicity, we assume constant marginal costs. The cost of producing each unit is the same. In our discussion in that chapter, we pointed out that the net gain to consumers is highest at the point where ΣD = MC. In the example in figure 14-1, this is at a quantity of 10 units. Ten units is the optimal quantity from the consumers' standpoints. The optimal budget is b x q, $100 x 10 = $1,000. The net gain, or consumers' surplus, would be approximately abc, as we saw in Chapter Nine.

The Zero-Surplus Budget

     Let us now explore the properties of budgets other than the optimal one. For the time being, we will assume that the bureau is efficient in its supply of the good. In other words, we assume that it uses its entire budget to produce the public good in the most efficient way. We shall see below that there are good reasons to believe that bureaus will not be efficient.

                                           Figure 14-2

                            ZERO-SURPLUS BUDGET

                                (CONSUMERS' VIEW)

     Refer to Figure 14-2. It shows the optimal budget to be the area of the rectangle ceq0. The approximate consumers' surplus at that budget is the triangle ace. Suppose that the budget was only half as much, say cdh0. Then there would still be a consumers’ surplus. However, it would only be abdc at most.

     Now suppose that the budget was twice as high, or cfk0. Then the bureau would produce 2q. There would be a consumers' loss on each unit beyond q. In the model, the surplus of ace would be offset by a equivalent deficit of efg. Overall, consumers would be no better off than they would be if none of the good was produced.

     Let us call this the zero-surplus budget. Technically there are two zero surplus budgets, cfk0 and zero. If consumers dealt directly with a public goods supplier, they would never agree to a budget higher than cfk0.

4. WHY BUDGETS TEND TO BE HIGHER

THAN OPTIMAL

     We have already considered many reasons why we would not expect bureau budgets to be optimal from the consumers' point of view. First, some voters are likely to choose not to vote (Chapter 7). Second, voters are unlikely to have optimal information about the effects of a bureau's actions (Chapter 7). Third, politicians typically try to get what they regard as best for the voters in their voting districts and for campaign contributors rather than for consumers in general (Chapter 11). Fourth, budget decisions must be made by majority rule, which we have seen is inefficient for any given tax-sharing rule (Chapter 9, parts 2-4). Fifth, to benefit their constituents, politicians are likely to engage in logrolling. The logrolling may lead to a more efficient outcome but it may also lead to a less efficient one (Chapters 10 and 12). Sixth, the decisions made by a president and the legislature are influenced by pressure groups, who make campaign contributions. As a result, some voters are persuaded to vote differently than they would vote if they had more accurate information about the candidates and issues.

     It is difficult to say how all of these factors combined would effect actual budget decisions. But there are several reasons to believe that the budgets demanded by the politicians will be higher than the one that is optimal from the consumers' standpoints. First, incumbent politicians ordinarily favor higher budgets because the higher budgets can be partly used to help them or their parties in their election campaigns. Second, national taxes are often used to supply local public goods and club goods. The consumer benefits of such goods are concentrated in relatively small groups while the costs are spread about among all of the nation's taxpayers. Other things equal, the expected net gains from forming pressure groups are greater for the small consumer groups than for the taxpayers. As a result there is asymmetric pressure on politicians to favor a higher than optimal budget. Third, members of the collective can be easily fooled about the burden they must bear in financing bureaus. (Recall rational ignorance from Chapter Seven.) Fourth, there is a bias among voters who supply resources. Those who supply resources to bureaus are more likely to know how they will gain from a higher bureau budget than those who supply resources to private firms are likely to know how they lose from higher taxes. The purpose of this section is to discuss these reasons in greater detail.

Politicians' Demands for High Bureau Budgets

     We have pointed out that ruling party politicians have an incentive to support high bureau budgets. The reason is that they know that bureau chiefs who have more resources can better help the incumbent politicians and the party.

     Of course, opposition party legislators would like to minimize the use of bureaus to help the ruling party. On this account, they would oppose high budgets for bureaus. However, they also want to serve their constituents. They sometimes can do this best by advocating higher budgets for particular bureaus. This is especially likely in a presidential system, where legislators are less likely to be loyal to a political party. We conclude that because (1) the opposition party is necessarily weaker than the ruling party and (2) because some opposition politicians may favor the expansion of particular bureaus, there appears to be a bias on the part of politicians, in general, to favor a budget that is higher than optimal.

Use of National Taxes to Finance Local Public Goods and Club

Goods

     In Chapter Eleven, we pointed out that local public goods should be supplied by local governments when possible. When this is not possible, only the beneficiaries of local public goods should be taxed to pay for them. Club goods should be supplied by private businesses. But in most tax systems, the burden of financing many local public goods and even club goods is shared by all the nation’s taxpayers. As a result, the beneficiaries have an incentive to form pressure groups in order to increase the amounts of the goods beyond the optimal amounts. Also, legislators from local voting districts have an incentive to engage in logrolling with legislators in other districts to which other local public goods are supplied.

     Taxpayers in general have an incentive to oppose the supply of nationally-financed, local public goods and club goods. However, there are two reasons why the demanders are likely to be politically successful in causing the supply to expand beyond the optimal amount. First, the number of demanders who must join together to form a pressure group is smaller than the number of taxpayers who must pay for the goods. Second, the benefit to a local public good demander of joining a pressure group to promote greater spending on the good is likely to be much greater than the benefit to a national taxpayer of joining a group to oppose this.

     Suppose that the sum of the benefits of an additional unit of the local public good is $1,000,000 and that the number of beneficiaries is 10,000. Then the average benefit is $100. This may be enough to induce the average beneficiary to join a pressure group. Suppose further that the cost of the additional local public good is $1,100,000 but that it is spread out among 11,000,000 people. Then the average cost to taxpayers of funding the project is $.10. A taxpayer may not even pay attention to such a cost. Even if a taxpayer paid close attention to her tax costs, her total costs of joining an opposition group are likely to be much higher than her tax losses.

     Henry Wallich has described this process with a simple metaphor:

[W]hen it comes to accepting benefits, citizen-taxpayers act like a group of men who sit down at a restaurant table knowing that they will split the check evenly. In this situation everybody orders generously; it adds little to one's own share of the bill and for the extravagance of his friends he will have to pay anyhow. What happens at the restaurant table explains -- though it does not excuse -- what happens at the public trough.(Wallich 1965: 53, as quoted by Mitchell and Simmons 1994: 70)

How the Method of Financing Can Fool Taxpayers

     The method of financing can make it difficult for voters to determine the sacrifice they must make to pay for the budget. To see why, we must consider the three ways that government services can be financed: taxes, borrowing, and inflation. We introduced these in Chapter Eleven.

Taxes

     When higher spending is financed by higher taxes, the tax costs are typically concealed. A good example is the sales tax. Suppose that the government uses a sales tax on private goods to raise the revenue needed to pay for a public good. The tax causes a higher price than otherwise. It is borne in the long run by a combination of the consumers of the private goods and the owners of the specialized resources used in supplying them. However, neither group may realize that the higher prices of private goods are due to the tax. If not, they may think that the government-supplied service is free. Economists are not deceived, of course, but ordinary citizens may be. The same is true for property taxes and taxes on businesses. Even the personal income tax can be deceptive, especially if the money is withheld from the income-earner's pay. Taxpayers seldom pay attention to the amount withheld. Instead, they focus on the after-tax amount, which is available for spending and investing. In many countries, most taxpayers must calculate their income taxes once a year. People who do this at least have an opportunity to see how much money has been withheld. But the people who make these calculations are mainly interested in finding out whether they owe money or whether they deserve a refund. They are typically not interested in the total amount withheld. This problem might be lessened by a law that required every new budget proposal to be accompanied by an estimate of the tax cost to the average taxpayer.

Borrowing

     Next suppose that the budgets are financed by borrowing in private loan markets. Through borrowing, the government can shift the payment burden to future generations. If current voters take their children into account and if they are aware of the shift in the burden, they will vote against this form of finance. They will not want their children to have to bear the burden. However, many voters seem to not recognize the shifting. nd some who do recognize it do not have children and do not care very much about others' children.

Creation of New Money

     Finally, suppose that the budgets are financed by new money. A thorough analysis of monetary theory is necessary to fully understand this process. However, the principles are simple enough. Most democratic countries have a central bank which is controlled "by the government." The central bank has the power to create paper money either by issuing new paper currency or by writing checks that are payable in paper currency. Because politicians control the bank, they also control its lending policies. Thus they have the capacity to finance the budget with newly created money. A typical way that this happens is for the politicians to authorize the central bank to make a "loan" to the government. But they have no intention of ever raising the money needed to repay the loan.

     The result of such a process is price inflation. When the government pays out the newly-created money to the suppliers of bureau resources, the spenders of the new money compete with the spenders of the already existing money. Prices, on average, rise to a higher level than otherwise. Ordinary buyers and sellers wind up paying for the higher budget because their money is worth less than it would have been. Economists sometimes call this an inflation tax. Unless there is strong anti-inflationary sentiment – as there might be following a period of increasing inflation – politicians in power typically prefer the inflation tax because it spreads the cost of a government program out over a larger number of citizens than borrowing. As a result, opposition to the program is likely to be lower.

     The inflation tax is not the only burden. Some people in an economy predict the inflation and do fairly well. But many people do not predict it and do poorly. As people adjust to the price inflation, they come to invest unnecessary resources in attempting to predict how high the price increases that are most important to them will be. Or they adopt costly measures to avoid being harmed by an unexpected inflation of prices (e.g., buying gold). This waste of resources is an additional burden. Besides this, there is the possibility that inflation will cause major economic disorder.(Wagner 1980: 252-9)

     The majority of citizens in the more mature democracies have been wise enough to not give politicians direct control over the central bank. They have learned from experience that politicians who can borrow freely will cause price inflation. So they make it clear that they do not usually support politicians who cause inflation. In such countries, if politicians cause inflation through "reckless" borrowing from the central bank, they will tend to lose the next election because their rivals will remind voters of the lessons learned from past inflations. In some of the newer democracies, however, the lesson has not yet been learned. As a democracy becomes more mature, one might expect that the inefficiency described here will become less important.

Voter Bias Due to Asymmetry of Knowledge Among Resource

Suppliers

     A last reason for higher than optimal budgets is the asymmetry of knowledge on the part of resources suppliers. Put yourself in the shoes of the owner of a stationary store. Assume that you sell one-tenth of your supplies of paper and other materials to a government bureau and the rest to private companies. If a bureau’s budget is expanded, the bureau demand for your supplies will rise. However, since the money needed for the budget must come from taxes, consumer demand for goods and services from private companies will fall by more or less the same amount. With the fall in consumer demand, the private companies will reduce their demand for your supplies. For simplicity, we assume that the fall in demand leads to a drop in sales to the companies that completely offsets the increase in your sales to the government.

     Now suppose that you must make a voting choice between a politician who advocates a bill that would both raise the budget of the bureaus and increase taxes on incomes in the way described. You will be well aware of the fact that if the bill passes, the bureau will increase its demand for your supplies. An increase in bureau’s budget translates directly into an increase in demand. On the other hand, the effects of the higher taxes are indirect. When taxpayers cut back on their demands for private goods, the companies that supply them will later reduce their demands for your supplies. You may not realize or take full account of this effect even if the fall in private demand exceeds the rise in bureau demand. If so, you will tend to vote for a politician who advocates the bill and against a rival who opposes it.

     Of course, if you had studied economics, you might realize that the increase in bureau demand would be neutralized. However, few resource suppliers think like economics students.

5. DESCRIBING THE BUDGETING OUTCOME

     In Part four we gave a number of reasons why politicians ordinarily prefer to have a budget that is higher than the optimal budget as defined in economics. Let us represent these ideas in a simple diagram. Figure 14-3 shows a hypothetical budget scale for a pure public good. We assume that the optimal budget from the viewpoint of the consumers is OC and that the zero surplus budget is ZC in the left panel. Then the optimal budget from the viewpoint of politicians might be OP in the right panel. Politicians are likely to prefer a budget that is higher than the optimal one but they will still want consumers to receive some net gain from public goods supply.

Budget-Maximization and Information Asymmetry

                                           Figure 14-3

                                        WHICH BUDGET?

The question we now want to ask is where the actual budget is likely to appear on the scale. Is the interaction between the politicians and the bureau chief likely to lead to the optimal budget OC? It should be clear from the earlier discussion that OC will not be the goal of the politicians, taken as a group. Generally speaking, they care about efficiency only to the extent that it wins them votes. From their point of view, the optimum budget is OP. Since the sponsor desires a budget that is higher than the optimum, our answer must be "no." The actual budget will be higher than OC.

     However, it is not likely to be OP either, according to Niskanen. The reason is bureaucratic budget maximization. The bureau chief wants a budget that is as high as she can get. Given this desire, the question is: how high a budget can she persuade the legislature to give her?

     To answer this question, Niskanen focussed on information asymmetry between politicians and bureaucrats. There are two types of relevant information in a bargaining situation: information about costs of supply and information about demand. Consider a situation that is a little bit like the relationship between the bureau chief and politicians: the sale of a new car. The seller does not want the buyer to know her true costs and the buyer does not want the seller to know his true demand. The same situation may be present in the budget negotiation. A bureau chief who wants to maximize her budget does not want the politicians to know her true costs; and the politicians do not want the bureau chief to know the maximum budget they are willing to give. But the bureau chief has an advantage. Consider first the information about a bureau's costs. The bureau chief and other bureaucrats usually know better than anyone whether a particular style of desk, vehicle, office location, working environment, employee, etc. is worth buying in relation to the alternatives. Politicians are at a distinct disadvantage. Their ability to find out whether a bureau is wasting money is limited. Even the "experts" who advise the politicians seldom know as much about the technology and costs of resources as the bureau chief and other bureaucrats.

     Niskanen also recognized the propensity for the heads of bureaus and other bureaucrats to be secretive. These people deliberately attempt to increase the information asymmetry beyond what it would otherwise be in order to make monitoring more difficult. Secrecy has long been recognized as a characteristic of bureaucracy. The main reason is that bureaucrats who supply a particular service have a common interest in avoiding any action that might reduce the budget. In addition, they often have special knowledge about the conditions of service supply that ordinary people lack.

     Now let us look at information about demand. A bureau chief can easily learn about the politicians' demands for bureau services, since the legislature's meetings and the chief executive's policies are typically open to the public. The chief has access to the newspapers, television, etc. In a typical constitutional democracy, the politicians cannot keep their demands a secret.

     Considering these factors, there appears to be information asymmetry. The bureau chief has information about politicians' demands but the politicians lack information about the bureau's costs.

A Bloated Government

     By assuming budget-maximization and information asymmetry, we can deduce something more definite about the size of budget that the bureau chief can persuade politicians to appropriate. Suppose that the bureau chief is able to exploit her position to the fullest because of information asymmetry. Then she could persuade the politicians to approve a budget at which their gain, or surplus, would be zero.

     Niskanen hypothesized that the outcome would be the consumers' zero surplus budget, or ZC in figure 14-3. This seems to assume that consumers who face a serious information deficiency would ultimately control the budget. However, we have pointed out that politicians control the budget. And we have given several reasons why the politicians would demand a higher budget than that demanded by consumers of public goods. Thus it would seem more realistic to refer to the zero-surplus budget not as it is viewed by consumers but as it is viewed by politicians. In figure 14-3 we represent this possibility by the budget ZP, which we call the politicians' zero surplus budget. It is the budget at which politicians would get zero surplus. Our assumption that there is a politicians' zero-surplus budget implies that even if consumers were harmed by the budget -- that is, even if the budget was higher than ZC -- politicians might approve it.

     Suppose that there was so much information asymmetry between politicians and bureaucrats that the bureau chief could persuade politicians to approve the highest possible budget. Then the budget would be very close to ZP in figure 14-3.

     We can understand the relationship between ZC and ZP in the following way. Suppose that the bureau chief was at the moment supplying the consumers' zero surplus budget and that she was using all of her resources to efficiently produce the public good. She could offer to shift some of those resources from the production of the good to the production of campaign contributions for a political party. Consumers as a group would be harmed by this and the political party might have to sacrifice some votes as a consequence. However, the additional campaign contributions could be used to win a larger number of additional votes than the ones sacrificed (see Chapter Eight). In addition, politicians could gain votes from demanders of the local public good and the suppliers of resources to the bureau. Because the method of financing conceals the costs of the budget expansion, consumers would not realize their losses.

     We can readily imagine what would happen if all bureaus could succeed in this way. Bureau chiefs, aiming for status, prestige, promotions, or whatever would expand their bureaus to the max. Voters and taxpayers would probably be worse off than if the bureaus did not exist. And massive amounts of resources would be diverted from the private sector into a bloated public sector. There would be plenty of government services, of course, but this would not be good from the standpoint of most citizens.

Limits to the Budget-Maximization Model

     There are a number of reasons why bureaucracies would not expand their budgets to ZP. First, and obviously, politicians ordinarily have at least some information about the bureau's costs. Second, even if politicians lack information, they can refuse to approve a budget until the bureau chief gives them information that they believe is useful. In buying a share of stock in a gold exploration company, for example, most people suffer from asymmetry of information. However, they are wise enough to demand that information be given, that enforceable promises be made, etc. before they invest. Politicians also have such alternatives available. Third, the bureau chief is appointed by politicians. She may feel a special loyalty or have a special desire to serve the chief executive, a legislative majority, or the oversight committee. Fourth, the bureau chief may take a number of actions that cause the costs of the bureau to be higher than otherwise. She may be able to gain by offering special services to particular consumers. Or the chief may agree to pay higher costs than necessary for factors of production. She may decide not to incur the costs necessary to make good deals, she may accept favors or bribes from suppliers, or she may buy for the purpose of making her own work environment more enjoyable or aiding her in her personal life. For example, she may authorize the bureau to buy an unnecessarily luxurious vehicle for her personal use or she may ask bureau employees to perform personal services for her. Such actions reduce the amount of service she can supply for each dollar of budget. In so doing they reduce taxpayer willingness to finance the bureau.

     A fifth reason why the budget might not grow to ZP is that the bureau chief also wants leisure. If she demands leisure, she is unlikely to devote the concentration and hard work required to exploit the collective to the theoretical maximum. Ironically, the desire for leisure -- what we normally call laziness -- may have a net benefit for consumers of a public good. Consider an example. Suppose that, other things the same, a bureau chief only works 80 per cent as hard as she could. Her demand for leisure would have two effects. First it would raise costs or reduce service, since she would be less attentive to the actions of her subordinates. Second, she would not devote as much energy to exploiting her information advantage. She would leave some surplus for the politicians. Because the bureau would receive a lower budget, it would draw fewer resources away from other parts of the economy. This combination of effects would probably make the average citizen-taxpayer better off than if the bureaucrat was not lazy. This is one case where laziness may be a virtue, although not by intention. Just for fun, we have added to our graph a budget labeled ZP_L and referred to it as the politicians' zero surplus budget with a lazy bureau chief.

6. BUREAUS AND SELF INTEREST

     The assumption that bureau chiefs try to maximize the size of the bureau budget may seem strange to some scholars of bureaucracy. Before Public Choice, most of the academic writers on government bureaus assumed that bureaucrats were public servants. They believed that if the bureau chief was called upon to exercise discretion, she would, or should, act in accord with the "public interest," whether she benefits personally or not. In the enduring dictatorships like China, traditional beliefs are similar. Chinese schools and traditional Chinese families teach that it is the duty of a civil servant to sacrifice her own interest for the greater interest of the people. As a result, bureau chiefs are expected to make decisions in the interest of the people. Because of these prevailing views, it seems worth discussing the Public Choice assumption of self-interest in greater detail.

     Let us first specify more clearly what we mean when we say that a bureau chief acts in her self interest. We mean that a bureau chief is an ordinary person. As such she ordinarily makes decisions on the basis of what, in her view, benefits her. She first thinks about herself and those who are close to her and not about her sponsor or the clients she is hired to serve. She may care a great deal about her family and close friends. But outsiders, including the general public, are not so important. She may occasionally sacrifice her own well-being for what she believes is the wider good, but we would expect such actions to be exceptional.

     When we say that the bureau chief acts in her self interest, we do not mean that she ignores others when she is on the job. She must serve her clients and sponsor to some extent; otherwise she may be fired. A businessperson does the same. The difference is that, in business, there is usually a more direct link between the service offered to clients and the businessperson's self-interest. The motivation to earn profit gives the businessperson an incentive to supply goods that consumers want. And competition demands that he do so at a reasonable price. Because the bureau chief does not earn profit and usually does not face competition, her motivation is not so strong.

     Even if the bureau chief cares about the "wider good" or the "public interest," how can she find this out? Consumers of private goods have a strong incentive to truthfully reveal their preferences since if they conceal them, they will not be able to persuade suppliers to supply them. Consumers of public goods are different, however. The free-problem suggests that they will not reveal their preferences.

The Decline of the Idea of the Public-Interested Bureaucrat

     The idea of a public-interested bureaucrat is probably derived from the idea that the government ought to act in the interests of the people. In a dictatorship, the dictator would want to indoctrinate his bureaucrats with this attitude and might foster it through the education system and media. Since dictatorship was the dominant form of government for thousands of years before democracy, it is not surprising that this idea is still common. With the growth of the presidential system of democracy, however, we would expect such an idea to become less and less significant. Two reasons can be given.

     In the first place, whereas a dictator can control both education and the media, a democratic constitution would foster free speech. Any attempt by the government to "teach values" would be subject to competition from other teaching.

      In the second place, the politicians in government are not themselves ordinarily interested in the public. Their goals are to get reelected and to help their party. Because of this, it seems reasonable to expect that the main criterion they would use in deciding whether to employ a particular bureau chief is the extent to which she can help win votes, not her concern for the "public interest."

     Of course, if ordinary voters know about a bureau's inefficiency, they will regard it as a negative factor in evaluating the politician who appointed the bureau chief. This possibility puts some pressure on politicians to demand that bureau chiefs take account of the "public interest." However, this pressure is weak since obtaining information about bureau efficiency is a public good.(see Chapter Seven)

     Thus the idea that a bureaucrat should act in the public interest would appear to be in decline; even though it is still strong in some of the newer democracies and in successful parliamentary systems.

7. OTHER EXPLANATIONS AND MODELS OF BUREAUS

     The budget maximization model presented in parts three to five of this chapter was deliberately intended to be simple. To achieve the goal of simplicity, it assumed among other things that the political interaction that occurs in creating a bureau and in making the annual budget interaction could be captured by the simple concept of a monopsonistic sponsor. In this part, we want to broaden our analysis in two ways. First, we want to deal with the political context within which the bureau operates. This context includes (1) interaction among political parties and (2) interaction among the branches of the government. Because the presidential and the parliamentary systems differ, we present a discussion of the political context of each. Second, we want to deal specifically with the case of bureaus in a parliamentary system. These can be distinguished from bureaus in a presidential system by the need in the latter system for bureaucracy to be a partial check on the abuse of power by the government in general. The bureau in a parliamentary system is, in part, a substitute for the separation of powers that constrains the different branches in a presidential system. As a result, the position of the bureau chief and of the lower-level bureaucrats has some special characteristics.

Bureaus as the Outcome of a Political Process

     The creation of a bureau and its maintenance are outcomes of a political process involving competing interests. The nature of these interests varies with the nature of the democratic political system. In other words, the term "sponsor," while useful as a starting point, is misleading; since services demanded from a bureau are the outcome of a political process. In this subsection, we discuss the relationship between the political process and the demands for services from a bureau in the presidential and parliamentary systems, respectively.

The Presidential System

     Consider first the presidential system. In this system, the legislature passes the law that creates the bureau. In addition, it decides the budget, subject to the president’s veto, and it sets constraints on what the bureau can and cannot do. The president has the primary authority to appoint the bureau chief and, most importantly, to direct the day-to-day affairs of the bureau. The president and his bureau chief must operate within the constraints imposed by the legislature, but they necessarily have some discretion in their actions. The distinction between the presidential and legislative influence over the bureau reflects the separation of powers characteristic of the presidential system.

     The demands on a bureau that result from the political process in a presidential system depends on how the separation of powers works out in practice. Let us begin by assuming that the president and the legislature are adversaries in their efforts to dictate the actions of a bureau. This may not always be true but it is useful starting point. If the two branches were adversaries, we might best regard the bureau as a kind of political football, which the various politicians attempt to move in the direction of their own goal and against the direction of the others’ goals. The more discretion a bureau has, the greater the opportunity a president has to use the bureau to provide special services for pressure groups and voters that promise to support him with funding and votes. Greater discretion within the bureau enables him to move closer to his goal. As a corollary, the legislature has less opportunity to use the bureaus and therefore less opportunity to attract funding and support from the pressure groups and others. Greater discretion for the bureau hinders legislators’ movements toward their goals. Efforts by each branch to control the bureaucracy would be a zero-sum, or even a negative sum, game. Whatever support the president gains through bureaucratic discretion comes at the expense of support for the legislature. And resources may be used in the process of play.

     Given these incentives, it is reasonable to conclude that legislators in general would oppose substantial discretion for bureaus and that they would support substantial constraints on that discretion. In other words, when they create the bureau and make decisions on constraints, including the budget, they would aim to limit discretion in order to restrict the president’s power to use his office to gain support from pressure groups and voters. The president and the bureau chief, on the other hand, would aim to expand the range of discretion. The outcome of this game would help determine each one’s share of pressure group and voter support.

     Note that in this image of the political pressures on the creators of bureau constraints, efficiency and even the supply of service demanded by pressure groups and voters are secondary. Even if granting a bureau greater discretion would increase efficiency and cause more of a valuable service to be supplied, legislators may oppose it on the grounds that it would reduce their power vis a vis the president. By the same token, the president may support greater discretion even if she knows that it will reduce efficiency and service.

     Within the environment created by the legislature and president, a bureau chief would still have an incentive to maximize the budget. However, this source of inefficiency may be less important than the inefficiency due to the fact that politicians always face a tradeoff between efficiency and gaining support from pressure groups and voters.

     The extent to which the president and legislature are adversaries depends partly on whether the legislative majority is of the same political party as the president as well as on their party loyalties. Suppose that the legislative majority is in the same party as the president and the president is a party loyalist. Then his interests and those of the legislative majority are more likely to coincide. Agreement on what the bureaus should do is more likely. The likelihood that their interests will coincide is weakened by the fact that legislators represent voting districts, whereas a president who aims to get reelected or to help her party must direct her attention to all voting districts simultaneously.

The Parliamentary System

     Compare this with the parliamentary system. Recall that in the absence of separation of powers, there is a greater threat to voters of external costs and the costs of power abuse. For a parliamentary system to be viable over time, methods other than the separation of powers must be found to reduce this threat. If they are not found, there may be periodic coups by dissatisfied citizens. The property system, along with the market economy it supports, will not be strong. Thus, in those parliamentary systems that have experienced substantial economic development and growth, we must presume that means have been found to avoid such political instability. But what are they?

     We can begin to understand them by recognizing that in a parliamentary system the ruling party uses the bureaucracy as a means of serving pressure groups and voters. However, it is also a means for a ruling party to restrict political competition and, in the extreme, to overthrow the democracy. A strong efficient bureaucracy that follows the orders of the ruling party is, on the one hand, a means of enabling the party to provide efficient service to supporters and, on the other, a potential threat to the democracy. To avoid the subversion of democracy, either the power of the ruling party over the tool must be weakened or the tool itself must be blunted.

     The problem that a parliamentary system must solve in order to be viable is that of reducing the fears of voters that some future ruling party will use bureaus to damage them. Moe and Caldwell suggest that this problem can be solved in two ways. The first is to design new agencies in such a way that “tampering with them produces a strong political backlash.”(ibid.: 181-2) This can be accomplished by vesting clients with rights to benefits. In other words, when the bureau is created, the government can make sure that many members of pressure groups and voters have credible rights to receive future service. If the ruling party acts in a way that reduces these benefits, the clients who expect to receive them will immediately rise up as a political force against the party, thereby threatening the power of the prime minister and reducing the party’s ability to win the next election. The second is what Moe and Caldwell refer to as cooptation. One means of cooptation is to permanently include members and supporters of the opposition party in the bureau. A second is to assure that the opposition has permanent rights to bureau services.

     Why would the ruling party settle for allowing its otherwise sharp bureau tool to become blunted in these two ways. One answer, which we have already discussed, is that unless it does, the parliamentary system itself will not remain viable. Everyone, including the members of the ruling party, has a stake in keeping the system viable in order to promote economic development and growth. Through trial and error, all of the potential ruling parties may learn that they must have bureaucracies that are not too responsive to the partisan wishes of any particular ruling party. It is okay for the bureau to be very responsive to the wishes of a broad-based set of pressure groups and voters. But if the bureau is too responsive to a ruling party’s partisan wishes, the democracy will be threatened and economic development and growth will be stifled. According to this scenario, social norms and reputations develop through the repeated play of the power game among the political parties. One of these norms corresponds to expectations by voters that a bureau chief will act in the public interest. In line with these expectations, the bureau chief must develop and maintain a reputation for fair dealing (impartiality) and efficiency in operating the bureau.

     In the view of Moe and Caldwell, these differences help to explain why the bureau that regulates pollution in the U.S. is “rigid and rule-oriented, leaving little discretion for regulators.” In Britain's parliamentary system, on the other hand, regulation of pollution is highly flexible, the regulators have more discretion in dealing with individual cases, and the regulatory bureaus stand ready to take into account all sorts of diverse interests.(ibid.: 184)

Other Approaches to Bureaucracy

     The budget maximizing model is so general that it cannot possibly apply to all of the various bureaus that exist in the typical modern government. Building on this premise, Patrick Dunleavy has created no less than eight classes of bureaus: delivery agencies, regulatory agencies, transfer agencies, contracts agencies, control agencies, taxing agencies, trading agencies, and servicing agencies.(Dunleavy 1991: 183-6) With so many different types, there must be at least some bureaus that are not in a good position to maximize their budgets. As a general theory to cover all bureaus, he recommends assuming a different kind of goal, or set of goals, which he calls "bureau-shaping." In his view, senior bureaucrats aim to obtain work-related utilities. They may do this by maximizing the budget if possible. However, this may not be possible or it may be too costly for them. If so, they will try to create an atmosphere where bureaucrats at various levels have substantial discretion to be innovative and to broaden their scope of concerns yet where their actions are shielded from public scrutiny. They would also aim for a "collegial atmosphere and a central location."(ibid.: 203)

     Dunleavy's model captures a lot of behavior that the budget maximizing model and, indeed, most economic models leave out. However, it also makes the analysis of bureaus so complex that one who uses it risks losing sight of the main reason we study bureaus in the first place. Our purpose is to provide a more complete understanding of democracy than would be possible without studying bureaucracy. In trying to achieve this purpose, simplicity is an advantage.

     The aim of Dunleavy's exercise is somewhat different from our goal in this text of describing the role of bureaucracy in democratic government. Dunleavy is interested in the interaction among bureaucrats within the bureau. A similar interest motivated another modern book in bureaucracy by Albert Breton and Ronald Wintrobe.(1982) Breton and Wintrobe focus on trust relationships among bureaucrats, the particular choices that individuals within bureaus are likely to make under the conditions they face, competition among the bureaucrats within a bureau, and competition between bureaus for funds and other concessions from the government. We recommend this book as further reading about interaction within a bureau.

Questions for Chapter 14

1.  Tell the difference between the presidential and the parliamentary systems regarding how bureau chiefs are appointed.

2.  The presidential and the parliamentary systems differ regarding the power of the chief executive over bureau chiefs. Describe this difference.

3.  Describe the U.S. legislature's committee system for evaluating a budget bill.

4.  "The purpose of the committee system in the U.S. legislature is to monitor the bureaus in their supply of public goods." Is the committee system a good means of achieving this purpose? Explain.

5.  "The purpose of the committee system in the U.S. legislature is to gain from specialization in acquiring the information needed to make an informed decision about the annual budget for bureaus. Is the committee system a good means of achieving this purpose? Explain.

6.  According to the text the committee system of overseeing bureaus and of gathering information relevant to the annual budget decision in the U.S. legislature enables legislators to raise their prospects for getting elected and for otherwise serving their personal interests. How does the system help them achieve this purpose?

7.  Describe the budgeting process in a presidential system, beginning with the submission of proposals from bureau chiefs and ending with the legislature's vote to override a presidential veto.

8.  On what basis can we say that the hired manager (president) of a corporation bureaucracy has an incentive to manage his bureaucracy efficiently? When you answer this question, demonstrate that you understand the role of the stock market.

9.  Some bureaus charge a user fee for services they provide. Thus, these bureaus receive revenue and pay costs. In these cases, why does the bureau chief not have a profit incentive to operate his bureaucracy efficiently?

10.   The text says that the efficiency problem for a government bureau is due to the absence of the bureau chief's incentive to operate efficiently. Politicians could provide this incentive by offering to raise the pay of efficient bureau chiefs while threatening to reduce the pay of inefficient ones. Why don't members of a collective ordinarily give such power to their politicians?

11.   All of the goals that a bureau chief is likely to have can be better achieved if he can increase the size of his budget except one. Name the one.

12.   A bureau chief usually wants to please politicians, lower-level bureaucrats, consumers of the service he supplies, and suppliers of resources to the bureau. Tell how a high budget helps him to please each of theses groups of people. In your answer tell how each group can benefit from a high budget.

13.   Leisure is likely to give satisfaction to both the head of a business bureau and the chief of a government bureau. Explain why the desire for leisure is less likely to effect the choices of the business bureau head than it is to effect the choices of a government bureau chief

14.   On a graph using demand and cost curves, use the Niskanen model to compare the optimal budget with the zero surplus budget for a bureaucracy.

15.   According to the text, the budget of a government bureau is likely to be higher than the one demanded by consumers. List four reasons why this is so, according to the text.

16.   Even if they did not face pressure from voters and special interests, politicians as a whole would demand higher-than-optimal bureau budgets. Explain why.

17.   Suppose that a government bureau’s supply of a local public good could be financed by a tax only on the local demanders or by a national tax which is paid by all taxpayers. Compare these methods of financing by discussing the likely effects on the size of the bureau's budget.

18.   Suppose that the only method of financing government spending is the sales tax. Explain how this method can fool taxpayers about the sacrifice they must make to pay for a government spending program.

19.   Suppose that the only method of financing government spending is the personal income tax. Explain how this method can fool taxpayers about the sacrifice they must make to pay for a government spending program.

20.   Suppose that the only method of financing government spending is borrowing from private capital markets. Explain how this method can fool taxpayers about the sacrifice they must make to pay for a government spending program.

21.   Suppose that the only method of financing government spending is the creation of additional money. Explain how this method can fool taxpayers about the sacrifice they must make to pay for a government spending program.

22.   How does asymmetry of knowledge among resource suppliers lead politicians to favor higher-than-optimal budgets for bureaus?

23.   Professor Niskanen's model of bureaucracy assumes information asymmetry between the sponsor of the bureau (politicians) and the bureau chief. Describe this information asymmetry. (In other words, describe the relevant information and tell who has it and who does not.)

24.   Tell why the zero-surplus budget from the standpoint of politicians differs from the zero surplus budget from the standpoint of consumers.

25.   According to the Niskanen model of bureau budget maximization, the result is a bloated government. But there are limits to the assumption of budget maximization by the bureau chief. In other words there are reasons why we would not expect budget maximization to occur in reality. Describe four reasons why the assumption is unrealistic.

26.   Describe the idea that a bureau in a presidential system is a political football.

27.   "Laziness among bureau chiefs may be a good thing for consumers." Explain the logic behind this statement.

28.   In a parliamentary system, we can regard a bureaus as a means of limiting the power of parliament. Explain the reasoning behind this idea. In other words, describe two ways that bureaus can limit the power of the parliament.

29.   The traditional view of bureaucrats in countries like South Korea, Japan, and Taiwan is that they should conform to the ideal of the "public-interested bureaucrat." As time passes in these new democracies, the bureaucrats are likely to deviate more and more from this ideal. Explain why.

Gunning’s Address
J. Patrick Gunning
Professor of Economics/ College of Business
Feng Chia University
100 Wenhwa Rd, Taichung
Taiwan, R.O.C.
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