Conflicts of interest in government

I want my government to be run as efficiently as possible for the benefit of all of us. Appointing people to run it with experience in what they oversee contributes to that objective. Conflicts of interest–serving the interests of friends and former associates rather than the interests of the general public –detract from that objective. Hiring bankers to supervise banks, for example, draws on those most knowledgeable about the banking risks needing supervision, but they are also the most vulnerable to conflicts of interest. What should we do about this dilemma?

President elect Joe Biden’s choice to run his Office of Management and Budget: “’Neera Tanden has spent the last decade raising money from the top companies and highest-net-worth individuals in the country, which is a bit at odds with what Biden pitched during the campaign,’ said Matt Bruenig, president of the People’s Policy Project, a left-wing think tank that accepts only small donations.”  On the other hand, “Tanden’s experience leading CAP, which publishes policy recommendations for many domestic and foreign issues, has given her the policy chops needed to lead OMB, Ettlinger said.” Michael Ettlinger, is director of the University of New Hampshire’s Carsey School of Public Policy and a former vice president for economic policy at CAP.  “Neera Tanden-Biden-OMB-CAP”

The authors of the above Washington Post article note with alarm that CAP (Center for American Progress) has received contributions from the likes of Facebook, Bain Capital, Blackstone, Evercore, Walmart, CareFirst BlueCross BlueShield, defense contractor Northrop Grumman and for-profit college operator DeVry Education Group. Though I have not checked, I would not be surprised to find the same author’s urging such companies to shift from seeking shareholder value to stakeholder value by making just such contributions.

How can we maximize the benefits while minimizing the risks of appointing experienced people to positions in government? Our constitution provides one element of a resolution of this conflict by dividing the legislative function from the administrative function between Congress and the White House.  The administration’s regulators are implementing the laws passed by Congress, which provides some checks and balances. Nonetheless, the programs and financing approved by Congress can potentially benefit the friends of congressmen and women. Boeing moved its headquarters from Seattle to Chicago and disbursed its manufacturing facilities from the Seattle area to as many congressional districts as possible to increase congressional votes for its projects not because of economic factors.

Another element of protection is the adherence to transparent bidding and contracting standards when awarding government business to private firms. When designing the taxes to finance government, economist push the principle of economic neutrality (not favoring one market activity over another). Though the tax reforms of 2017 (the so-called Tax Cuts and Jobs Act of 2017) made our income taxes more neutral, many special subsidies remain in our tax laws and the special interests that benefit lobby hard to keep them. “Next up-tax-reform”  “Tax reform and the press”

But regulation potentially offers the most corruptive powers of government to deliver favors to the private sector. We benefit from regulations that help keep products and working conditions safe. But it is easy for regulations to slide into protecting incumbents from competition from challengers. This is a pronounced feature of professional licensing. “Cato: Professional Licensure and Quality”

In short, keeping government activities in the service of the public interest is challenging and requires constant vigilance. By far the most effective approach is to tightly limit government involvement in the economy to the minimum truly necessary for a well-functioning free society. Hire people with the experience to know what they are doing and to do it efficiently but limit the government’s role in the economy to what only government can effectively do.  In establishing the legal and regulatory foundation for private economic activity, limit it to the essentials–the foundation–so that the superstructure can be competitively built by innovative private individuals.

Our national defense is clearly a necessary government responsibility. Thus the “military/industrial complex” is and will remain a problem. The incentives for this industry are particularly dangerous because these firms benefit from the wars we have been fighting all over the place.  It is rather like keeping off those extra pounds that those of us who enjoy good food must struggle with eternally. It is a never ending battle, but losing it would be the death of us.

About wcoats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My most recent book is One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon.
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1 Response to Conflicts of interest in government

  1. Carol Hoban Blakeslee says:

    Very timely and applies also to General Austin.

    His 4 year’s absence from military service should have sufficed; now we know he has served on Raytheon BOD, not clear to me he can be neutral.

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