Invest in Smarter Government

Those who hire armies of lobbyists, lawyers, and accountants get and then milk their special breaks and loopholes for significant profits. Those who can't are at a disadvantage. Either way, companies make many decisions not in response to market forces, but in response to the confusing and often outdated incentives that litter the tax code. General Electric, for example, managed to pay no taxes in 2010, filing a 57,000-page tax return. As the economist Alex Tabarrok astutely noted: "Consider the resources that GE spends to lower its tax bill, not just the many millions spent on clever accounting and accountants and the many millions spent on lobbying but also the many inefficient ways that GE structures its businesses just to avoid paying taxes and the many millions it invests in socially wasteful projects just in order to produce privately valuable tax credits."²

But here's the funny thing: despite the near-consensus on the disaster that is the U.S. tax code, the thing only gets more complex with each passing year — more crammed with conflicting incentives, and almost certainly more of a burden on the overall economy. According to the National Taxpayer Advocate, there were 4,428 changes to the tax code between 2001 and 2010.³ At last count, the tax code was 3.8 million words (about six and half times the length of War and Peace). Estimates on the compliance costs range from $215 to $987 billion per year.⁴

Why is simplification so elusive? It is certainly not for lack of consensus about the problem, or for lack of smart people thinking about it. The problem is politics: when you have a tax code so over-filled with special interest provisions, those special interests are going to lobby aggressively to defend those proposals. They all have their allies in Congress, and they all have their carefully calibrated stories about why they need these special provisions. And so tax reform always seems to fail before it can get started.

If one wanted another way in which public policy limits economic growth, how about the rules around intellectual property? One recent study found that the existing regime, which allow so-called "patent trolls" to do nothing but hold patents and file lawsuits, has caused a significant decline in R&D spending.⁵ Decent patent reform actually looked like it might pass in 2014. But after clearing the House by a substantial margin, patent reform died in the Senate, killed by trial lawyers, pharmaceutical companies, and a few other beneficiaries of the current rules.

A longer essay could provide a longer litany of public policies that retard economic growth by limiting competition and imposing heavy costs on new market entrants. But I want to make a more general point in this essay. So let's simply posit two premises that can generalize more broadly from these two examples:

1) there many ways in which public policies distort market outcomes and limit economic growth; and
2) these growth-constricting public policies have been very hard to change.

Certainly, I'm not the first to make these observations. Both Jonathan Rauch⁶ and Mancur Olson⁷ have written excellent books on this pathology. Nor will I be the first to pose a solution to this problem.

But before I get to my "magic wand" solution, let me first explain what existing thinking around this problem has missed. For the sake of brevity, I'll generalize broadly about liberals and conservatives here. (While there are many disagreements on certain policy outcomes between liberals and conservatives, I think there ought to be reasonable consensus on a wide range of policies that would limit rent-seeking.⁸)

Liberals tend to be optimistic about the potential for government to just create better public policies if only we could take money out of politics, or get lobbyists out of Washington — then government could finally pass reforms that get rid of all these market-distorting corporate giveaways that slow economic growth and allow for rent-seeking. Conservatives, by contrast, are pessimistic about the potential of government. They see every government rule and regulation as an opportunity for rent-seeking. They don't like placing limits on money or lobbying (which they tend to see as valuable forms of participation) — rather, they say, just make government smaller, and there will nothing left for the special interests to lobby for.

Both solutions actually suffer from the same omission. They ignore both policy complexity and government capacity.

Conservatives tend to conflate the size of government with the complexity of government. Even if you want a limited government, you still need some government, because markets require clear and predictably enforced rules in order to work well. Uncertainty and instability are inimical to economic growth. The question is whether those rules will be straightforward and clear, and thus capable of being predictably enforced (good for economic growth), or whether those rules will be needlessly complex, and thus open to all kinds of manipulation and rent-seeking (bad for economic growth). Liberals also ignore complexity. Liberals like making rules, and they tend see market failures more often then conservatives do. But in making new rules, they tend to ignore old rules. They tend to view new rules in isolation, ignoring the overall complexity that they add to the system, and ways in which this complexity becomes self-defeating of the very principle of government efficiency.⁹

If we accept that complexity is a problem, the next question is how do you reduce that complexity?

To understand my "magic wand" solution, a quick review of a basic law of physics is in order. Specifically, the second law of thermodynamics, which states that in any system, the amount of entropy is always increasing. In other words, everything tends towards disorder and randomness. The second law of thermodynamics is the reason why your home gets messier over time. There are infinite possible arrangements of your household items and detritus. Only a few would you consider "ordered." If you never bothered to clean your home (the path of least resistance, and least energy), it would become more and more difficult to live your life. The chaos and the clutter would intrude on basic daily tasks. So if you're like most people, you invest energy into keeping your home clean. You may even pay somebody to keep it clean for you. But the important point is that your home doesn't stay clean on its own. You have to invest resources into keeping it that way. This is how the second law of thermodynamics works. The only way to reduce the disorder in a particular system is to take energy from outside the system.

Government, like all other systems in the universe, adheres to the second law of thermodynamics. Governments make laws. Over time, they make more laws. The laws become more complicated. For government to follow the path of least resistance is simply to yield to the most direct pressures it faces. These pressures tend to be the special interests that hire lobbyists to pressure government, and the narrow short-term electoral incentives that re-election minded members of Congress face. Often, special interests influence the electoral pressures. Rent-seeking public policies resistant to change are simply the path of least resistance, given the forces at stake.

Both conservatives and liberals miss this fundamental point. Conservatives simply assume that the logic of their regulation-cutting reforms is apparent. But all the trimming and cutting requires hard work and constant maintenance (like your home, or your garden). The existing physics of the political system is against it. Almost every rule benefits somebody, and that somebody will fight to defend it. Changing the status quo in a system of checks and balances requires a good deal of energy. Somebody has to invest that energy. This means government needs more resources in order to get smaller.

Liberals, meanwhile, have a tendency to subscribe to the fantasy of the Solomonic lawmaker — the idea that our politicians would be wise and just if only they could legislate without interaction with those businesses who are actually affected by their rules. This ignores the fact that to make good decisions, lawmakers actually need lots of information. They also need knowledge, and they need wisdom. These are hard to acquire — they take considerable resources.

Let's face some facts. Congress is full of many smart, dedicated, hard-working staffers. But most of them are short-termers. They work in Congress for a few years, and then they move on. The hours are long and unpredictable, the pressure is high, and the quarters are cramped. They tend to be young and stretched thin. Many hope to become lobbyists someday. After all, Congress doesn't pay nearly as well as K Street. As Congressman Jim Cooper (D-Tenn.), once put it, "Capitol Hill is a farm league for K Street."¹⁰

Congressional offices are thus stretched thin. They lack resources to develop and execute policies. What this means is that to get its work done, Congress has to rely significantly on lobbyists representing some very narrow interests, primarily large corporations and business associations who tend to benefit from the status quo. It's hard to get anything done in Washington if you don't have significant help from outside lobbyists, anyway. Lobbyists play essential roles in shepherding legislation through — drafting and vetting laws, building coalitions, and ensuring widespread support.¹¹

By my count (looking at disbursement data), the Senate spent $490 million on compensation, and the House spends $876 million, a total of $1.37 billion, in 2013. If this seems like a lot of money, consider that it is 0.03% of the total federal budget of $3.6 trillion. It is also less than half of the $3.24 billion spent on direct lobbying in 2013 (which itself is probably less than half of the money actually spent on lobbying). Since the Republicans took control of the House in January 2011, they've cut committee staffs by 20 percent. Congress is being run on the cheap.

Here's what I would do with my wave of the magic wand. I would triple the amount the Congress spends on staff (keeping it still at just under 0.1% of the total federal budget). I'd also concentrate that spending in the policy committees. I'd give those committees the resources to be leading institutions for expertise on the issues on which they deal. I'd also give these committees the resources to hire their own experts — economists, lawyers, consultants, etc.¹² But I'd also make sure that these committees were not explicitly partisan. Rather than Republicans and Democrats having separate committee staffs, have one committee staff of professionals and experts. Staff could be a mix of political leanings. But let them be one team, where they argue and hash out ideas together.

Imagine if the Senate Judiciary Committee could hire top attorneys in the field of intellectual property. It could develop the policy capacity to develop patent reform, and feel confident in passing it through. It could convince other Senators not to listen to the trial attorneys and pharmaceutical companies. Imagine if the House Ways and Means Committee or Senate Finance Committee had the policy capacity to develop meaningful tax reform, and the resources to control and shape the process. Imagine also if committees could hire top economists and lawyers to help them develop and vet these proposals and convince other members. Congressional committees would have the energy and capacity to reduce the entropy that inevitably creeps into the public policy process, rather than merely contribute to it by following the path of least resistance. Rather than simply responding to pressure from lobbyists, they'd have authority and capacity to integrate suggestions from lobbyists and think more broadly about the system in its entirety.

Writing this essay for the Cato Institute, I hear my small-government doubters, skeptical that I want to spend more money on government. But let's face it: Congress is going to exist no matter what, and government is going to continue to write rules and regulations because new problems will continue to arise in society. Moreover, there are thousands of pages of rules and regulations that already exist, many of which are inimical to economic growth. The level of entropy in the system is already frighteningly high, and it is constricting the long-term growth prospects of the economy. The only way to simplify government regulation, and to fix the policies that cripple economic growth, is to invest outside energy to combat the entropy. Consider Singapore: Government there pays top dollar to attract high-quality bureaucrats. As a result, the country is exceptionally well-run. And it consistently ranks atop the list of the most economically free countries in the world.

If we do government on the cheap, we get what we pay for. If we ignore the second law of thermodynamics, we get entropy. If we want a government that can maintain policies that support economic growth, we need to invest in government that has the energy and capacity to fight the paths of least resistance that draw us towards complexity, that limit competition and innovation, and allow for massive rent-seeking. To think otherwise is to ignore the basic laws of physics.

Notes:
¹ Bill Frenzel, "The Tax Code Is A Hopeless Complex, Economy-Suffocating Mess," Forbes, April 4, 2013.
² Alex Tabarrok, "The 57,000 Page Tax Return," Marginal Revolution, November 21, 2011.
³ Jason J. Fichtner and Jacob Feldman, The Hidden Costs of Tax Compliance (The Mercatus Center, May 20, 2013).
⁴ Ibid.
⁵ Timothy B. Lee, "New Study Shows Exactly How Patent Trolls Destroy Innovation," Vox, August 19, 2014.
⁶ Jonathan Rauch, Government’s End: Why Washington Stopped Working, (New York: PublicAffairs, 1999).
⁷ Mancur Olson, The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, (New Haven: Yale University Press, 1982).
⁸ Ralph Nader, Unstoppable: The Emerging Left-Right Alliance to Dismantle the Corporate State, (New York: Nation Books, 2014).
⁹ Steven M. Teles, "Kludgeocracy in America," National Affairs, 2013.
¹⁰ Lawrence Lessig, Republic, Lost: How Money Corrupts Congress — and a Plan to Stop It (Twelve, 2011), p. 123.
¹¹ Richard L Hall and Alan V Deardorff, "Lobbying as Legislative Subsidy," American Political Science Review 100, no. 1 (2006): 69–84.
¹² See, e.g., Heather K. Gerken and Alex Tausanovitch, "A Public Finance Model for Lobbying: Lobbying, Campaign Finance, and the Privatization of Democracy," Election Law Journal: Rules, Politics, and Policy 13, no. 1 (March 1, 2014): 75–90.

The opinions expressed here are solely those of the author and do not necessarily reflect the views of the Cato Institute. This essay was prepared as part of a special Cato online forum on reviving economic growth.