Stephen Moore’s ode to the American Workers his Policies Harm

(cross-posted with Benzinga.com)

My next columns address three writings by Stephen Moore, the Wall Street Journal’s “senior economics writer.”

White Collar Witch Hunt: Why do Republicans so easily accept Neobolshevism as a cost of doing business? [The article appeared in the American Spectator in September 2005.] “Bullish on Bush: How the Ownership Society Is Making America Richer.” [Madison Books, 2004.] We’ve Become a Nation of Takers, Not Makers. [Wall Street Journal, April 1, 2011.]

Moore’s column deplores the debasement of the American economy by government employees.

“More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers.”

The claim that employees involved in making physical things that are purchased in the markets are uniquely valorous is an odd argument for someone with his professional career (Moore ran the ultra conservative, “supply side” anti-tax group, the Club for Growth). The trade and tax policies he embraces encouraged U.S. businesses to export their manufacturing plants (and their jobs) to low-wage/low-tax nations and to import food produced in those low-wage/low-tax nations. Moore has praised both states and nations that serve as tax havens. He has singled out the Texas model – low wage, low tax, low government services, and hostile to safety rules. Moore has worked for years to punish the “makers” and produce the condition he deplores in which the number of U.S. “makers” has fallen sharply. His column decries the budgetary crises in states and localities, but it was the Great Recession driven by the criminogenic environment his anti-regulatory policies created together with the anti-tax hysteria generated by his repeatedly falsified fantasy that slashing taxes for the rich increases tax revenues that drove that budgetary crisis. Architects of the crisis like Moore who write primarily to excuse their consistent failures should stop. They have done enough damage to the world for a dozen lifetimes.

Consider the implications of Moore’s assertion that people who do not work in manufacturing and farming are “takers.” Under this dichotomy the world is divided between “makers” and “takers,” the biggest “takers” in the world work on Wall Street, the City of London, and the worst kleptocracies – the Wall Street Journal’s core readership. If “makers” of manufactured goods and crops are uniquely valorous, then Moore’s logic requires that it is the workers in these sectors – not the managers, professionals, and clerical workers – who are the actual “makers” who embody that unique valor. (Again, it is passing strange that Moore has dedicated his life to rewarding these uniquely valorous Americans by exporting their jobs and leaving them unemployed or employed at lower wages.) If one can claim to be a “maker” by performing functions that merely assist the actual “makers” make things, then we are all “makers.”

Moore, however, implicitly makes two assertions about government employees – all government employees are “takers” and only government employees are “takers.” Moore doesn’t attempt to support any of his assertions, and they are logically inconsistent. These truths are apparently self-evident to Mr. Moore – people are not created equal. Americans who choose to be government employees are inferior because they are not endowed by their creator with an adequate taste for risk.

“Surveys of college graduates are finding that more and more of our top minds want to work for the government. Why? Because in recent years only government agencies have been hiring, and because the offer of near lifetime security is highly valued in these times of economic turbulence. When 23-year-olds aren’t willing to take career risks, we have a real problem on our hands. Sadly, we could end up with a generation of Americans who want to work at the Department of Motor Vehicles.”

In Moore’s world, an American who wishes to work as a “maker” and develops the skills to be a “maker” has no inalienable right to a job as a “maker” at a living wage. Why? If (1) there really is something particularly virtuous about working in manufacturing or farming, (2) there are too few Americans working in those industries, and (3) the Americans who wish to work in those industries embrace “tak[ing] career risks” and have prepared themselves by education to be able to be productive “makers” why not commit the U.S. to ensure that these virtuous, risk-loving young people can find jobs in manufacturing and farming in the U.S.

Moore is not strong on nuance. All government employees are “bureaucrats” in his parable of “makers” and “takers.” No corporations are bureaucratic. Moore’s fable is crude propaganda. Let us add some reality. Our largest group of federal employees provides national security (DoD, CIA, NSA, DHS, DOJ/FBI, VA, etc.). Many of these “bureaucrats” are living their parasitical life of ease as “takers” in Iraq and Afghanistan. (The virtuous Taliban are busy being “makers” – cultivating poppies.) I do not recommend telling our troops that they are risk-averse “takers” and bureaucrats. The exact number of federal employees engaged in national security is unknown because many employees in other agencies, e.g., NASA, actually work on national security under various degrees of deliberately misleading information. There are over a million federal military personnel. DoD, Homeland Security (DHS), and the VA have nearly a million civilian employees.

The only other federal sector with very large numbers of employees is the Postal Service (around 600,000 – less than one-third the size of the federal workforce in the national security sector). The Postal Service, of course, provides a productive service – communications. Moore does not even attempt to explain why our federal troops or our federal communications workers are supposedly parasitical “takers.” Moore does not even attempt to prove that Americans choose to work for the nation or their State because they fear taking risks. I took far more risks as a federal employee than as a private sector employee. Charles Keating hired private detectives twice to investigate me. He sued me for $400 million in my individual capacity. Another fraudulent CEO also sued me for millions of dollars. Speaker of the House James Wright sought to get me fired. One of the presidential appointees running my agency conducted what he claimed was an investigation of me with the hope that he would be able to get me fired or sued. Charles Keating gave a “secret file” to senior members of my agency that he purported had adverse information about me. The agency excluded me from meetings with Keating and removed our jurisdiction over Lincoln Savings. The head of my agency attacked me publicly in the press and in congressional testimony. (I returned the favor – he resigned in disgrace.) I was a mere financial regulator.

The overwhelmingly dominant sectors of state and local governmental employment are teaching, police, fire, and prison officers and staff. Each of these jobs would be shunned by those afraid to take risks. Moore views this hypothetical as his nightmare of American decline:

“Sadly, we could end up with a generation of Americans who want to work at the Department of Motor Vehicles.”

I have never met a college graduate (the context of this excerpt from Moore’s column) who aspires to work at DMV. I doubt that Moore has ever met one with that career goal. Moore chooses DMV as his example in order to disparage government and government employees. Moore believes that government workers are mediocre. Too scared and too incompetent to work in real jobs, government workers are parasitical “takers.”

“One way that private companies spur productivity is by firing underperforming employees and rewarding excellence. In government employment, tenure for teachers and near lifetime employment for other civil servants shields workers from this basic system of reward and punishment. It is a system that breeds mediocrity, which is what we’ve gotten.”

Ah, yes, the “rank and yank” system and executive and professional compensation have been a brilliant success in “private companies.” Private systems have worked so brilliantly that they destroyed tens of trillions of dollars of wealth by creating a criminogenic environment in which private incentives became so perverse that they drove the epidemic of accounting control fraud that produced a massive financial crisis and the Great Recession. Moore thinks that failed private system should be our model for the public sector. Moore has been disastrously wrong about nearly every major economic policy issue of importance. He has learned nothing useful from his failures.

Mr. Raines explained in response to a media question what was causing the repeated scandals at elite financial institutions:

We’ve had a terrible scandal on Wall Street. What is your view?

Investment banking is a business that’s so denominated in dollars that the temptations are great, so you have to have very strong rules. My experience is where there is a one-to-one relation between if I do X, money will hit my pocket, you tend to see people doing X a lot. You’ve got to be very careful about that. Don’t just say: “If you hit this revenue number, your bonus is going to be this.” It sets up an incentive that’s overwhelming. You wave enough money in front of people, and good people will do bad things.

Mr. Raines was speaking on behalf of the Business Roundtable, which picked him as its spokesperson to explain to the media why the epidemic of Enron-era accounting control frauds was occurring. (You can’t compete with unintended self-parody.) Raines knew what he was talking about – as Fannie’s CEO he employed an executive compensation system that created these perverse incentives. During the crisis, the fraudulent CEOs running the fraudulent liar’s lenders deliberately created intense, perverse incentives among their loan brokers, loan officers, appraisers, auditors, and rating agencies by creating a “Gresham’s” dynamic in which bad ethics drove good ethics out of the marketplace. They were exceptionally effective in achieving the desired results. The CEOs were consistently able to get overstated appraisals, overstated borrower income, clean opinions for financial statements that were not prepared in accordance with GAAP, and “AAA” ratings for toxic waste. CEOs can and do use compensation for good or evil.

Moore’s discussion reveals more about him than about government employees. He can’t imagine employee excellence not based overwhelmingly on fear or quasi-bribery. He can’t imagine anyone wanting to be a teacher, a regulator, a soldier, a firefighter, a CDC scientist, a VA doctor, an FBI special agent, or a police officer. He can’t imagine people who voluntarily accept lower pay than they could get in the private sector because they want to protect people from harm. He can’t even imagine people who want a job in the local prison because they live in rural areas with high unemployment and the prison job is the best way to continue to live and work where they can help a sick mother. People work for the government for myriad reasons. Effective leaders, whether they are in the private or public sector, do not rely on threats or bribes to motivate their teams. They choose good people, train them, praise them, and give them constructive feedback. Effective leaders demonstrate through their actions integrity and dedication to the mission. Accomplishing that mission – teaching a child to read, closing fraudulent banks, putting out fires, arresting rapists, preventing a terrorist attack, or preventing criminals from escaping prison – becomes a matter of the best kind of pride and purpose. Government employees often work far longer hours than required for no additional compensation. This is, for example, overwhelmingly true of teachers.

Why does Moore believe that human capital is so unimportant? His supposed “takers” are the leading “makers” and protectors of the “makers” he claims epitomize valor. It is teachers that help us become productive (and civilized). The police, firefighters, CDC, and the FDA safeguard lives. Does Moore find that unproductive?

The literature on performance pay shows that even when it is not used deliberately by fraudulent leaders to create perverse incentives it can often disrupt work teams and make them less effective by creating divisiveness. It is as if a mother declared that certain of her children were superior to others.

The effort to create performance pay is also perverse because it leads to demands for quantification of performance. Moore errs when he claims the government does not use performance pay. The “Reinventing Government” movement (championed by Vice President Gore and (then) Texas Governor Bush as well as many academics was premised on applying private sector management practices in the public sector. For example, Moore’s column complains about students’ test scores not improving. Student test scores did, infamously, improve dramatically in Houston, as did graduation rates, in response to performance pay tied to test performance and dropout rates. The Houston “miracle” led to Bush’s education program (“No child left behind”). The miracle was actually a fraud. The dropout rates were scammed by the Houston leadership and teachers simply taught to the test.

The SEC and Justice Department use “objective” performance measures to determine bonuses. This increases the perverse incentive to bring cases against minor wrongdoers rather than against the most damaging frauds in which it is far more difficult and time-consuming to obtain convictions.

The other bright idea of Reinventing Government was to order the bank regulators to refer to the banks they were supposed to regulate as their “customers.” That too was a direct steal from private sector management. It is a destructive practice in the regulatory context.

Moore claims that the private sector is always more efficient in providing services.

“Most reasonable steps to restrain public-sector employment costs are smothered by the unions. Study after study has shown that states and cities could shave 20% to 40% off the cost of many services—fire fighting, public transportation, garbage collection, administrative functions, even prison operations—through competitive contracting to private providers. But unions have blocked many of those efforts. Public employees maintain that they are underpaid relative to equally qualified private-sector workers, yet they are deathly afraid of competitive bidding for government services.”

Yes, there are badly designed studies that make these claims, and then there is the reality of privatization. For example, some studies on prison operations find that private prisons are cheaper than public prisons. The problem is that these studies compare average costs of public imprisonment with the costs of private prisons for the lowest risk prisoners. Security drives prison expense, so these studies are meaningless. Privatization can also create perverse incentives. The most notorious example is the CEO of the private prison who bribed judges to sentence innocent juveniles to extensive imprisonment in order to increase the CEO’s compensation.

The private sector can always cream skim some aspects of public services at what appears to the uninformed to be a saving. A private school that does not provide services to special needs students is not more efficient – it is simply taking advantage of a cross subsidy from the public sector.

Privatization does not typically lead to “competitive bidding for government services” by “equally qualified private-sector workers.” The sales of public assets are often not competitive and are not made at market prices. Privatization tends to be a giveaway, making the cronies with the strongest political connections wealthy (think Mexico). I have provided examples of why the “government services” provided under privatization of prisons and schools are often not equivalent because the private sector cream skims the lowest cost aspects of those services, which does nothing to reduce overall costs. The private parties often do not provide “equally qualified private-sector workers.” In college education, for example, GAO studies have found that “for profit” schools have a terrible reputation for endemic fraud. They do not provide equally qualified staff. Private prisons often do the same. Private military contractors are more expensive than government troops and produce recurrent scandals because of their CEOs’ perverse incentives.

American workers do fear the dynamic Moore has long championed. What is the American worker supposed to do if the outsourcing to the private sector is to India and the wages there are one-twentieth of the U.S. wages? That dynamic would lead to the impoverishment of tens of millions of American workers.

In the regulatory world we have just run a real world experiment with applying private sector management theories to the private sector. We privatized many regulatory activities by adopting self-regulation. We used “early outs” to shrink the FDIC (losing many of our most experienced federal employees). We shrank the FDIC by more than three-quarters. The FDIC adopted “MERIT” (non) examination of banks (the “M” and “E” stood for “maximum efficiency). We brought the bank lobbyists “inside the tent” in financial rulemaking, i.e., in creating Basel II. We gave performance bonuses to senior FDIC officials for dramatically reducing FDIC employees. We preempted the State regulators and AGs seeking to protect consumers from predatory nonprime lenders. Each of these actions contributed to the abject regulatory failure.

To sum it up, private sector financial employees, due to the perverse incentives their CEOs put in place and that Moore wishes to spread, were far worse than “mediocre” at hundreds of lenders. The incentives became so perverse that they produced multiple epidemics of fraud and led our most prestigious professionals to aid those frauds. The results were catastrophic. Moore wants to spread those perverse compensation systems and incentives throughout the public sector, where they are even more inappropriate and destructive. We have a catastrophe because the private sector incentives were perverse and the political leaders appointed anti-regulatory leaders to run the agencies. Moore invariably bases his solutions to the problems of the public sector on the private sector approach without examining the problems of the private sector approach or whether that approach makes sense in the public sector. Moore’s theme song is a straight steal from My Fair Lady: “Why can’t a woman be more like a man?” Real men (“makers”) embrace risk and work in the private sector. If only government workers (“takers” – women and men too scared to take those risks) could be made more like the private sector employees all would be solved. In the movie, the song is satire designed to expose male prejudice. Moore doesn’t get the satire.