Why Politicians and Bureaucrats Choose Politics over Sound Economics

by
Sean Twomey
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We are taught from a very young age; “Government works for you”, or “the Government is the embodiment of the populous.” We accept these slogans blindly and carry on day to day. However, reality does not match up with these catch phrases. This is painfully clear when looking at the incentives that face these officeholders. After examining just a few, it’s clear we ought to adopt slogans that align with reality like, “the Government works for themselves.”

The Big misconception of government

Before exploring these incentives, we must first realize, incentives are crucial in understanding human behavior. Even the most determined individual will not work toward a goal if there is no incentive to do so. Therefore, it is fair to say incentives are the catalysts for motivation, directing individual effort toward the most rewarding goals. All individuals naturally weigh what incentives are available (consciously and subconsciously) and align their actions to the strongest ones. Politicians and bureaucrats are no different in this regard.

What are the incentives?

Win Votes

The primary incentive of politicians revolves around securing votes. This foundational incentive is the root cause of short-term thinking, and shifts focus on election cycle prioritization. Decisions and policies are now crafted for immediate voter approval, while making decisions and passing policies that are logically sound, take a back seat. Some examples of policies for immediate voter approval are price controls, implementing subsidies, loans, or tariffs that favor certain industries, and printing money. Each of these actions seek to address short-term political gains rather than economic stability in the long run.

Win Votes by Price Controls

In New York City, price controls are rampant, especially when it comes to rent. “According to the 2021 NYC Housing and Vacancy Survey (HVS), there are about 16,400 rent-controlled apartments and about 1,048,860 rent stabilized apartments.” The difference between “rent controlled” and “rent stabilized” does not matter here. The point is rent stabilization, much like rent control, functions as a form of price control within the housing market. Each policy is enacted to limit the amount landlords can charge tenants. In the short term the politician has won, the voters are satisfied, and they will re-elect their “champion.” What is hard to see for the voters however are the long-term effects of these policies.

Landlords now cannot keep up with the costs to maintain buildings and certainly cannot think about upgrading them for tenants. Therefore, tenants now live in deteriorating buildings and landlords are left grappling with financial strains. This economic dynamic will lead to a shortage of well-maintained rental properties in the market, exacerbating the city's housing crisis. These price controls also discourage the construction of new rental units. This tightens the housing supply making affordable housing even scarcer. While voters were told rent control and stabilization protect tenants, they produce the opposite effect.

(It is worth noting that tenants outnumber landlords, so politicians stand to gain more votes by catering to tenant interests.)

Win Votes by Commodity Loans.

A similar phenomenon can be seen with commodity control. The government intervenes in commodity markets, (whether it be subsidies, loans, tariffs, or price controls) to “save” farmers. This so-called salvation means setting a “just price” higher than what it would be in a free market. However, this is only an attempt to buy the farmers’ votes, while the costs are borne by the population. For example, a government loan (taxpayer money) is used to allow farmers to keep crops off the market to achieve the artificial “just price.”

Henry Hazlitt’s Economics in One Lesson provides a compelling analysis of the unintended consequences of this type of government intervention, including the 1950s and 60s cotton program. Hazlitt highlights how these government loans not only create temporary price distortions, but also lead to more severe market imbalances down the line. This policy (aimed at securing a higher price for farmers by creating an artificial shortage) results in an inevitable surplus in the following year, thereby exacerbating the problem it sought to solve. This is another example of manipulating market prices (under the guise of supporting farmers) to primarily serve political ends, resulting in widespread economic inefficiencies and societal costs.

 Personal Enrichment

Once electoral victory is ensured, the secondary incentive officeholders face is personal enrichment. One of the most effective ways available to politicians and bureaucrats to enrich themselves is insider trading, particularly by passing policies that favor companies in which they hold stocks. This not only constitutes a profound ethical breach, but also exemplifies how government officials can prioritize personal gain over the public good.

Another way, in particular bureaucrats, can enrich themselves is known as the “revolving door.” This phenomenon refers to the movement of individuals between roles as legislators or regulators, and then into positions in the very industries affected by their legislation and regulation (or vice versa).

The New York Times compared the revolving door to “appointing the fox to guard the henhouse.” This practice raises valid concerns about conflicts of interest and the potential prioritization of private gains over public service. The revolving door also risks perpetuating a cycle where regulatory measures can inadvertently benefit the very sectors they are meant to oversee. This puts the public at risk and distorts market competition and efficiency.

Perpetuation of Problems

Bureaucratic inertia and resistance to efficiency improvements are two significant incentives in government agencies. Bureaucratic inertia is the proclivity of a bureaucracy to perpetuate their existence. This is done by maintaining or even complicating problems, rather than finding solutions to them. This effectively justifies their continued role and funding (after all no one wants to get fired). The same logic can be applied to the resistance to adopting more efficient procedures, which would streamline performance, but would also make certain bureaucratic positions obsolete. When looking at the operations of agencies like the Nuclear Regulatory Commission (NRC) these two tendencies become clear.

The regulatory red tape of the NRC has been significantly detrimental to the nuclear energy sector. Historical data from the University of Pittsburgh highlights a concerning trend. “The time from ground-breaking to operation testing was increased from 42 months in 1967, to 54 months in 1972, to 70 months in 1980.”

In recent times, the trend of over regulation has not slowed down. A study by the American Action Forum found that, “the average nuclear plant must bear a regulatory burden of $60 million annually.” In the same study they found on average, the complete process from receiving NRC license approval to the construction of a nuclear plant spans approximately 15.7 years. Another recent study in Energy Policy has identified the U.S. as distinct for its swift escalation of costs, with the research asserting “there is no inherent cost escalation trend associated with nuclear technology.” Given this absence of an inherent cost escalation trend in nuclear technology, it becomes evident that the regulatory burdens imposed are a significant factor contributing to the increased costs within the sector.

The visible bureaucratic inertia and resistance to adopting more efficient practices, illustrated by the NRC's impact on the nuclear energy sector, reveal a broader systemic issue with significant societal costs. Such tendencies, while highlighted in the nuclear sector, are indicative of wider governmental inefficiencies that not only hinder the development of affordable energy, but also impose unnecessary financial burdens across various sectors. This ultimately deprives society of both innovation and cost-effective solutions to many areas of their life.

What are the Solutions?

Fortunately, the issues outlined do not represent an unchangeable fate. There are simple steps that can be implemented to remedy the perverse incentives that face these officeholders.

Implementing term limits would directly address the issue of short-term thinking, focus on election cycle prioritization, and personal enrichment. The intention of these limits is to minimize the entrenchment of officeholders whose actions might be guided more by personal gain than by the principles of a free and competitive market. This approach seeks to ensure that those in office remain committed to policies that support economic freedom, market efficiency, and broader economic health (rather than pursuing policies that serve their interests or secure their position).

Another simple solution is a ban on stock trading and ownership for those in office. This would eliminate motivations for enacting legislation that unfairly benefits personal investments, leading to a reduction in market distortions and enhancing competition and efficiency across the economy.

Finally, reforming or even dismantling certain agencies is essential to address systemic inefficiencies and align governmental operations more closely with the needs of the public. These agencies (through bureaucratic inertia and resistance to change) often stifle innovation and more cost-effective solutions by imposing unnecessary regulations. Ultimately, it's the public that bears the financial burden of these inefficiencies, paying the price for a system structured to preserve bureaucratic jobs over fostering a dynamic, responsive, and efficient government.

Bad incentives, afuera!