[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

budgeting problems, information problems, and the nature of political decision making.
While the first three can afflict any large organization, including private-sector
businesses, they often have particularly severe effects in government programs.
INCENTIVES AND CONSTRAINTS
Unlike private organizations, government has the power of coercion. It can force
people to pay taxes, it can prohibit firms from paying less than the minimum wage
if they engage in interstate commerce, and so on. But since this power carries with
it enormous potential for abuse, certain procedures have been developed to protect
the public against arbitrary use of government power. These procedures are
collectively called due process.
Such procedures have the potential to create incentive problems, as can be seen
from the set of rules governing civil service employment. These rules are designed
to ensure that there is no discrimination against or other arbitrary treatment of
government workers. But the rules are often inflexible and make it difficult to pay
comparable salaries to public officials who do their jobs as well as similarly qualified
and dedicated persons in the private sector—or to offer them the same opportunities
for rapid promotion. It is even more difficult for government to demote or fire
incompetent and lazy workers. Thus, the public sector’s ability to recruit and manage
staff with maximum efficiency typically is limited.
In addition to the constraints of due process, the government has trouble making
long-term commitments that are perceived to be binding. Any Congress can reverse
decisions made by previous Congresses, though it may try to design both legislation
and legislative rules in ways that discourage later about-faces. Such limitations
on the government’s ability to make binding commitments can have major economic
consequences. Take, for example, a government promise that it will pursue a policy
of maintaining low inflation. The current government may convince investors of its
commitment to keeping inflation low. But it has no control at all over what happens
after the next election—as investors know. They therefore make their own assessments
of inflation risk, which may interfere with the effectiveness of what the
government is trying to do today. The current government can make it more costly
for future governments to increase the rate of inflation; for instance, it can issue
short-term bonds, so that the interest cost to the government would rise quickly if
inflation started to pick up.
Also undermining government efficiency, and sometimes leading to perverse
decisions against the broad interests of society, are the political pressures inherent
in the democratic process. A prime example here is legislators’ concerns about the
next election. These can lead to so-called pork barrel projects that create jobs in a
pivotal legislator’s home district but make no economic sense from a national perspective.
Moreover, the enormous cost of running for office provides incentives for
elected officials to pay particular attention to the views and needs of those who contribute
to their campaign funds. Thus lobbyists, among others, can wield influence
far out of proportion to the importance of the interests they represent.
392 ∂ CHAPTER 17 THE PUBLIC SECTOR