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

BUDGETING AND SPENDING PROCEDURES
The budgeting and spending constraints on government decision makers differ
from those of the private sector in three major ways. The first is in their severity.
Unlike a private firm, which faces the prospect of bankruptcy if enough of its
ventures yield losses, a public enterprise can more easily turn to the government
for budgetary help. This is the problem of soft budget constraints. Amtrak, for
example, continues to lose money in its overall railroad operations, in spite of
government promises that it will turn a profit. A major reason for the continuing
loss is a set of labor rules imposed by the government requiring that workers be
compensated if they are laid off or forced to relocate even a short distance. Soft
budget constraints such as these weaken the incentives for public management
to be efficient. There is nothing quite like the threat of bankruptcy to focus
managerial attention.
The second budgetary difference between the private and public sectors—
a factor that works in the opposite way from the soft budget constraints—is
the annual appropriations process. This can force short-term spending constraints
on the public sector that are not cost-effective in the long run. Limited
investment flexibility is a particularly unfortunate consequence of the annual
appropriations system.
The third budgetary constraint on government is the anti-efficiency effects of
some of the procedures implemented to ensure strict cost control. Government has
instituted detailed accounting, competitive bidding, and other procurement procedures
to avoid waste and corruption. Yet these procedures can cost more than they
save—and not just because of the extra bureaucracy involved. When purchasing
T-shirts, for example, the government in its efforts to ensure that the specifications
were accurate and precise—so that bidders were competing to supply exactly the
same product—created thirty pages of documentation in small print that prospective
bidders had to follow carefully. These forms of bureaucratic red tape reduce
the supply of bidders willing to sell to the government and increase the cost to the
government of goods and services.
IMPERFECTIONS OF INFORMATION
Information problems plague government just as they plague the private sector. As
a result, there are often adverse unintended (and often unforeseen) consequences of
even well-intentioned programs. We already noted one example: the expansion of
the superhighway system in the 1950s may have led to urban sprawl, weakened the
inner cities, and increased air pollution (from increased driving); none of these
effects was even widely discussed, let alone anticipated. Urban renewal programs,
designed to increase the quality of housing, often resulted in a decreased supply of
affordable housing for the poor, thus aggravating the housing problems they faced
and even contributing to homelessness.
GOVERNMENT FAILURES ∂ 393