September 23, 2013


Kludgeocracy in America (STEVEN M. TELES, Fall 2013, National Affairs)

The most insidious feature of kludgeocracy is the hidden, indirect, and frequently corrupt distribution of its costs. Those costs can be put into three categories -- costs borne by individual citizens, costs borne by the government that must implement the complex policies, and costs tothe character of our democracy.

The price paid by ordinary citizens to comply with governmental complexity is the most obvious downside of kludgeocracy. For example, one of the often overlooked benefits of the Social Security program -- which represents an earlier era's approach to public policy -- is that recipients automatically have taxes taken out of their paychecks, and, then without much effort on their part, checks begin to appear upon retirement. It's simple and direct. By contrast, 401(k) retirement accounts, IRAs, state-run 529 plans to save for college costs, and the rest of our intricate maze of incentivized-savings programs require enormous investments of time, effort, and stress to manage responsibly. But behavioral economics -- not to mention common sense -- makes clear that few investors are willing to make these investments, and those who do are hampered by basic flaws in decision-making.

Health insurance, too, is made nearly impossible to understand by the interplay of federal and state rules that only insurance companies fully understand. In fact, a recent study by George Loewenstein found that only 14% of people with health insurance could correctly answer basic questions about the definitions of deductibles and co-pays. Understanding the rules and the options involved requires an enormous amount of time (and often money); failing to understand them can be even more costly. Straightforward social insurance would dramatically reduce the transaction costs in the system -- not to mention the rents paid to asset managers and health insurers -- while depending far less on the free time and capacity for calculation of ordinary citizens.

The transaction costs of the tax code are just as impressive and disturbing. The American tax code is almost certainly the most complicated in the Western world. The Internal Revenue Service's taxpayer advocate estimates that in 2008 the direct and indirect costs of complying with that complexity amount to $163 billion each year. Included in that cost are the remarkable 6.1 billion hours a year that American individuals and businesses spend complying with the filing requirements of the tax code.

The web of deductions and credits also pushes up marginal tax rates for everyone: The National Commission on Fiscal Responsibility and Reform (more commonly known as the Simpson-Bowles commission) estimated that eliminating all tax deductions other than the Earned Income Tax Credit, the child tax credit, and a few others would allow marginal rates on middle-income taxpayers to be cut in half and those on the top earners to be cut by about a third, without reducing government revenue. It's highly unlikely we could achieve anything like that level of tax simplicity, but it is a striking illustration of just how much we are paying in higher marginal tax rates to preserve our kludgey tax system.

The compliance costs that kludgeocracy imposes on governments are just as impressive as those that confront private citizens. The complexity of our grant-in-aid system makes the actual business of governing difficult and wasteful, sometimes with tragic results. As Melissa Junge and Sheara Krvaric argue in a recent report published by the American Enterprise Institute, the multiplicity of overlapping and bewildering federal programs for K-12 education creates a compliance mentality among school leaders, making them wary of new ideas and pushing them to focus on staying on the right side of the rules rather than on improving their schools.

Similarly, in a 2007 paper published in Public Administration Review, Martha Derthick showed that the tangled joint administration of the flood-protection system in New Orleans played a key role in the system's failure during Hurricane Katrina. Derthick quotes Maine senator Susan Collins as having found that there was "confusion about the basic question of who is in charge of the levees" -- the type of problem that is common as a consequence of our pervasive, kludgey interweaving of federal and state responsibilities. Because administering programs through inter-governmental cooperation introduces pervasive coordination problems into even rather simple governmental functions, the odds are high that programs involving shared responsibility will suffer from sluggish administration, blame-shifting, and unintended consequences.

Kludgeocracy is also a significant threat to the quality of our democracy. The complexity that makes so much of American public policy vexing and wasteful for ordinary citizens and governments is also what makes it so easy for organized interests to profit from the state's largesse. The power of such interests varies in direct proportion to the visibility of the issue in question. As Mark Smith argues in his book American Business and Political Power, corporations are most likely to get their way when political issues are out of the public gaze. It is when the "scope of conflict" expands that the power of organized interests is easiest to challenge. That is why business invests so much money in politics -- to keep issues off the agenda.

Policy complexity is valuable for those seeking to extract rents from government because it makes it hard to see just who is benefitting and how; complexity so thoroughly obscures the actual mechanism of political action that it is difficult to mobilize against. That is why businesses prefer to receive benefits through the tax code or through obscure regulatory advantages rather than in straightforward handouts from the state. Politicians may posture against "corporate welfare," but kludge-ocracy makes it hard for voters to see how much business profits from government, which makes it difficult to effectively target their anger. As a consequence, that anger diffuses onto our system of government as a whole, leading to a loss of trust and to skepticism of the possibility that the public sector could ever be an effective instrument of the public good.

Policy complexity also benefits interests other than business. For example, the federal government has become increasingly involved in funding K-12 education over the last 50 years. But instead of just handing over big checks to school districts on the basis of need, the federal government showers the states with dozens of small programs. There is not much evidence that federal funding has improved the quality of schooling, and yet the morass of federal grant programs in primary and secondary schooling survives and grows. It persists because the system's sheer complexity makes it easier to organize a supportive coalition for federal education funding. When that funding is divided into individual grants targeted to specific constituencies, those recipients will act to secure their particular aid. The complicated structure of federal education policy has thus created an army of Lilliputians who lock in the multitude of grants even though the work of keeping those grants coming often makes it harder to actually run school districts. Kludgeocracy ensures that what William Bennett and Chester Finn have called the "blob" of education interests wins, while the capacity of the federal government to actually improve educational opportunity diminishes.

Neither party is immune to the costs of kludgeocracy -- the interests of both liberals and conservatives are ill-served by policy complexity. It hurts conservatives by concealing the true size of government. As Suzanne Mettler argues in her important recent book The Submerged State, our complex, hidden welfare state obscures government action, leading citizens to mistake as "private" programs that are in fact pervasively shaped by government. Mettler's research shows, for instance, that Americans who benefit from education-savings programs run through the tax code (like 529 plans) do not experience them as government at all, despite the fact that they redistribute huge sums of money. The same is true for the deduction for employer-provided health care and a variety of other pieces of the welfare state hidden in the tax and regulatory codes. This perpetuates the national myth of radical individualism and independence while creating the impression that only other, less deserving people draw upon government largesse.

Pursuing public goals through regulation and litigation does not eliminate the costs of government, but it does make it hard for citizens to see the costs of public action, which appear in the prices of goods and services rather than on the government's books. Perversely, pushing inevitable government action into these lower-profile mechanisms results in trading a type of government institution that is well understood and relatively easy to control for one that conservatives have always found difficult to rein in. We know, for instance, what the government spends down to the dollar and have a reasonably centralized means of allocating it, but serious estimates of the costs of litigation (like that encouraged by laws such as the Americans with Disabilities Act) vary by orders of magnitude, and the individuals imposing the costs are often hundreds of very imperfectly coordinated judges and juries.

Kludgeocracy also harms liberalism, by creating both the image and the reality that government is incompetent and corrupt. The complexity of the tax code, for instance, facilitates tax cheating and creative accounting, and along with it the impression that tax compliance is lower than it actually is. Much of the legitimacy of the law and the willingness of citizens to contribute to public goods rests on the perception that others are doing their share. Complexity eats away at this perception, which is crucial for maintaining public support for the expansion of the kinds of state activity that liberals favor.

Because the current political environment nurtures suspicion of government action, liberal politicians have developed the sneaky habit of finding back doors through which to advance their goals. This habit has had a corrosive effect on liberalism. In searching for ways to promote public activism in spite of institutional and cultural resistance, liberals have developed a pattern of dishonesty and evasiveness instead of openly making the argument for a muscular role for government. This is why, despite liberalism's legislative victories, very few recent liberal policies have successfully provided platforms from which to launch new rounds of policy innovation.

So while liberals are harmed by the opacity of kludgeocracy's successes, conservatives are hurt by the inscrutability of its failures. In both cases, the complexity of government is not good for our politics. And the fact that so much of our welfare state is jointly administered -- either inter-governmentally or through contracting with private agents -- makes it hard for Americans to attribute responsibility when things go wrong, thus leading to blame being spread over the government in general, rather than targeted precisely where it could do some good. Complexity thereby leads to diffuse cynicism, an attitude certain to undermine good citizenship -- of either the conservative or liberal form -- in our republic.

Posted by at September 23, 2013 7:57 PM

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