March 04, 2006

The Incentive Problem and National Security

Veronique de Rugy argues that we are ill prepared for the next "9/11" given the way spending is being mishandled by the Department of Homeland Security. In reading the article one part in particular jumped out at me,

That’s not to say it isn’t prudent to prepare for an attack. But federalizing first-responder programs accentuates the incentive problems that already plague the political process. When such programs are a state responsibility, legislators have a strong incentive to accurately assess the risk and potential damages to their states. They have to decide whether to spend more on homeland security or on other accounts. When these programs are funded at the federal level, by contrast, a congressman from Wyoming has no incentive to admit that his state is not a likely target or that if it ever were a target, the damages would be limited. He has no incentive to turn down federal money and even less incentive to volunteer taxpayers’ dollars for other states.

Clearly there is an incentive problem here. If "homeland security" spending were more decentralized (at least in some regards) then it is likely that the spending would be more focused to where it is most needed. For example, suppose somebody sets off a dirty nuclear bomb in the middle of Wyoming, is it bad? Sure, but is it as bad as a dirty bomb set off in downtown San Francisco or New York? Should Wyomming spend as much on safe guarding against dirty bombs as California or New York? But when such funding is federalized then they politicians in Wyoming have little incentive to turn down such money and make sure it goes to places that need it more. In fact, they have an incentive to take the money. They can hire people to prevent dirty bombs from being set off in the middle of nowhere. This is basically pork barrel spending. It does damn little, but it generates good will for the politician. Further, since funds are finite, then this means that locales that are more at risk are now less well protected.

This is why it is bad to provide at least a minimum amount of funding for homeland security to each state. Or as Ms. de Rugy notes,

To make matters worse, Congress provides every state with a guaranteed minimum amount of grant money regardless of risk. As a result, rural, less-populated areas receive a disproportionate amount of money. Of the top 10 grant recipients, only the District of Columbia also appears on a list of the 10 places most at risk of attack.

You know, it would be one thing if we incurred a deficit to ensure there wasn't going to be another terrorist attack of a magnitude similar to or larger than 9/11. However, to incur a deficit and have it be so blatantly wasted is galling. Exactly how does a tip line on child pornography help improve national security? It may be a laudable program and such funding probably should be granted, but doing so in the name of national security is despicable, IMO.

Posted by Steve at March 4, 2006 08:02 PM
Comments

Why do we think an individual state is more capable of assessing its risks and threats than experts at the federal level?

It seems to me the choice here isn't (1) overpsend on lying states vs. (2) spend appropriately on self-interested states. Rather, it's (1) spend on fifty separate groups of experts to do threat assessments for inconsistent results vs. (2) spend on one group of experts to do fifty threat assessments. Even if they got consistently good results, it's a waste of money, brains, and time to have every state do it individually.

Regardless of where you put the responsibility, the politicians have the same dilema of spending (perhaps a lot of) money on something that, in the best case, is never used.

Posted by: Kyle Hasselbacher on March 5, 2006 11:56 AM

Kyle,
You have a false assumption there. Suppose the minimum spending per state is say $200 million. Now further suppose that Wyomming, Montana and North Dekota together need only 100 million. Each state will want its $200 million so that the state representatives and senators can "bring home the bacon" and waste $500 million. Now, if each state is responsible for providing the money for the federally mandated spending then each state is not going to spend anymore than it has to spend.

In other words, a better policy would be for the federal experts to assess the risks, and then for a mandate to require each state raise and spend the money to address the risks. This would actually work better for the tax payers in that they'd save $500 million and still get adequate security.

Posted by: Steve on March 5, 2006 02:57 PM

I might understand what you're saying better if you'd state what false assumption you think I'm making. Regardless, I think I should clarify.

1. The goal is to have adequate security for every state (for some definition of "adequate"). Basically, every state should be equally secure regardless of how large or small the threats are.

2. Some states have larger (more expensive) threats than others.

3. Right now, some states are getting more than needed, and others are getting less than they need. This doesn't jibe with the goal.

I think up to this point, we're in agreement (correct me if I'm wrong). You've proposed that states pay for their own security.

3. The threats to a state are not proportional to the money they have to address them. States with large threats might be relatively poor and less able to address their threats.

In fact, I assume further that some states don't have the money to address their threats. What happens when states don't address the threats they can't? I'm not a gambler, but I suspect the answer varies from "nothing" to "catastrophe." What happens when the feds force them to spend money they don't have? I'm not an economist, but I suspect the answer is grim.

4. It is in the interest of every American that some states be secured (e.g., LA, NY).

5. More to the point, I don't want to jeapardize my interests because a poor state can't address its severe security problems. I'd rather pay the taxes to the feds to fix the problem.

If we're wasting in Wyoming and negligent in New York, I have no problem with moving money from one to the other. I'm not here to defend minimum spending; I agree it's a bad policy. I will say, though, that between those two (waste and negligence), the one I'd want to address first is the latter. Get the threats under control before getting the spending under control.

It's possible that every state has enough money to address the security problems within its borders to a reasonable degree. In that case, I still think it's unfair for Nebraska to benefit from heavy spending in New York, but that's also a minor concern compared to getting both states secure somehow.

Posted by: Kyle Hasselbacher on March 5, 2006 05:59 PM

Your false assumption is that there would have to be 50 seperate sets of "experts" when in fact there could only be one, the Feds who are the experts, and then the States who decide how to spend funds to address the meet the risks set out by the federal experts.

3. The threats to a state are not proportional to the money they have to address them. States with large threats might be relatively poor and less able to address their threats.

I think you'd find that there is a very strong correlation between the state's ability to meet the risks they face and the wealth of the state. California probably has one of the highest risk "factors", but is also one of the richest states in the union. In short, what you have here is an assumption that strikes me as being somewhat without merit. What big security risks face states like Nebraska and Iowa vs. say the port in Long Beach CA? Long Beach is the busiest port in the U.S. How many ports are there in Nebraska?

n fact, I assume further that some states don't have the money to address their threats.

But the question is how much of this is due to current fiscal mismanagement? CA has precious little money left over after spending for things like prisons and teachers. Of course, CA squanders most of its tax dollars on idiotic things like midnight basketball and far too many politicians are held captive to very strong special interest groups such as the unions for prison guards/sheriff's departments. So money is misspent right from the get go and then they go begging to the feds.

You raise a good point, but it merely underscores the problem: Government is generally incompetent at doing things. Money is not spent intelligently already and thus, the Feds flining more money at the problem wont make the problem go away.

What happens when states don't address the threats they can't? I'm not a gambler, but I suspect the answer varies from "nothing" to "catastrophe."What happens when states don't address the threats they can't? I'm not a gambler, but I suspect the answer varies from "nothing" to "catastrophe."

Again, recall that the premise de Rugy and I are working from is that those states that face small risks get little or no money. And also states might need to raise taxes, but the federal government could lower taxes to partially offset this. Further, it is part of the cost to living in a high risk state. One is always free to move to a state with a lower risk profile.

More to the point, I don't want to jeapardize my interests because a poor state can't address its severe security problems. I'd rather pay the taxes to the feds to fix the problem.

I'd be far more convinced of this argument if you could point to a "poor" state that has "severe" security risks.

If we're wasting in Wyoming and negligent in New York, I have no problem with moving money from one to the other.

Sure this sounds reasonable, but in politics something reasonable is almost never ever accomplished. The Senators and Representative from Wyoming will scream bloody murder, trot out the "national security being weakened" card, and/or the Senators or Representative will start being difficult on other issues. In the end, your eminently reasonable suggestion will not be acted on and the status quo preserved. Too much "national security" in Wyomming and not enough in New York.

I will say, though, that between those two (waste and negligence), the one I'd want to address first is the latter. Get the threats under control before getting the spending under control.

The problem here is a fundamental disagreement on how government works. I see as: it isn't about making sure things get done, but that each Senator and Representative gets their goodies to take back to their constituents. Why do you think that for the past 50 years we have almost always had a budget deficit?

Posted by: Steve on March 5, 2006 08:07 PM

I'd be far more convinced of this argument if you could point to a "poor" state that has "severe" security risks.

I looked at tax revenue numbers from census.gov. Mean revenue was about $3M for the quarter I looked at. Louisiana had $1.8M, and I would consider recent events to be pretty clear that Louisiana is important to national security. I'm nowhere near LA, but I heard a lot of talk about my gas prices going up when Katrina had been and gone.

Alaska: $382K Its pipeline cost $8B to construct (30 years ago). Since I think I've exceeded my research budget for a little comment already, I leave as an exercise to the reader to estimate the relative value of the oil that goes through it.

Bed time. Perhaps more tomorrow.

Posted by: Kyle Hasselbacher on March 5, 2006 10:21 PM

Your false assumption is that there would have to be 50 seperate sets of "experts" ...

Fair enough.

I think you'd find that there is a very strong correlation between the state's ability to meet the risks they face and the wealth of the state.

I agree. By definition, states with wealth have things of value that are worth attacking. That said, I hope my previous comment illustrates that value and vulnerability do not always follow wealth and capability. In my brief skim over the Alaskan Pipeline Wikipedia article, I notice that a while back a drunken gunman managed to find a weak spot in a pipe designed to take gunshots and cause a spill of 285,600 gallons of oil into two acres of land (cite). I know next to nothing about how the Pipeline is secured (or not), but my assumption is that keeping an eye on 800 miles of pipe is no small task. I further assume that if we failed to stop random, stupidity-fueled destruction, we're not prepared for a determined attacker. (Who knows? Maybe spending a couple years on cleanup every so often is cheaper than guarding the thing, but I guess that'd depend on how often the bad guys decided to poke the weak spot.)

Government is generally incompetent at doing things.

There are things governments are good at and things they aren't good at. (For instance, I think the REA did a bang-up job getting electricty and phone service to people corporations saw no profit in servicing, the interstate I drive to work sure is spiffy, and I hear we have a pretty good military.) If national security is something government isn't very good at (even if it's for exactly the reasons you state—and I agree the incentives for Congress aren't ideal), then I'm not sure I see how shifting the problem to state governments vs. federal government helps. The feds who write the rules the states will have to follow still have the same (wrong) insentives.

Given that some states can't well cope with their security, how will the federal legislators from those states act? Will they break the state's budget? Risk lives? Raise taxes? Or will they gamble that the state's threats never materialize so they can be reelected without causing any pain to their constituents?

I view democracy as pretty inefficient by its very nature (tell me a dictator can't make decisions faster and cheaper than voters). You're correct that Congress does not have exactly the incentives we'd want for them to make the best decisions, and the result is often precisely that they don't make the best decisions. That said, I don't accept that government is simply generally incompetent. I further think that, even when the government is ill-suited to the problems it faces, it's sometimes "the only game in town." There just plain isn't anyone else who'll electrify farmers, build roads for common use, field an army, etc. That they do these things inefficiently is certainly to be opposed and mitigated as much as possible, but I don't think it's reason to take the tasks away from them.

One is always free to move to a state with a lower risk profile.

One of my premises is that poor states sometimes have high risks. People who lack resources for security also lack resources for travel. (I'll point out Katrina again.)

Sure this sounds reasonable, but in politics something reasonable is almost never ever accomplished.

So what are we talking about? If you're correct that threats follow wealth, I think your proposal is reasonable (though I still disagree with it because I don't want my security to depend on a state I don't influence). How do you expect that to happen? If we're hypothetically solving the problem of national security here, why are we hypothetically preserving the problem of legislative corruption?

The problem here is a fundamental disagreement on how government works. I see as: it isn't about making sure things get done, but that each Senator and Representative gets their goodies to take back to their constituents.

Yes, frequently it works that way. I agree that changing that about the system would be difficult, but I'm not resigned to accepting it as it is. Perhaps this is why I still would like the feds to handle security in spite of the things that make them bad at it. It's not the placement of responsibility that's the problem but the failure of those who have it. Assign it to new legislators, not a whole 'nother system.

Why do you think that for the past 50 years we have almost always had a budget deficit?

I don't know about 50 years, but in my lifetime, I'm convinced it has something to do with Republican Presidents. Since you asked.

Posted by: Kyle Hasselbacher on March 6, 2006 09:49 AM

What kind of absurdist hyperbole are you aspiring to, in your claim that 'most' of CA's tax dollars go to midnight basketball and, I guess, other things of that sort? Really? Billions of dollars, and in fact, the majority of CA's expenditures, to after school activities boondoggles, but WAIT! also the amount by which unionized employees are paid beyond what the market would otherwise dictate.

What about the extreme cost that CA bears to handle the huge expenses attendant to the large population of illegal immigrants, which is caused by the feds not handling a specifically federal role, that of securing the borders and enforcing the immigration laws?

The fact that the very easily identified and most vulnerable national security risks (power grids, water supplies, chemical and nuclear plants, ports, etc.) have not been funded and fixed now 4-1/2 years from 9/11 may be for the reasons of pork barrel infighting among the states that you claim.

However, another likely reason presents itself in the reason given by the administration and those supporting its budget priorities themselves. And that is (drumroll, please) that simply, given the large drain on the Treasury that Bush's tax cuts have caused, and the large costs of the growth of the military budget (even apart from the costs of operations in Afghanistan and Iraq), the relatively smallish costs in the single billions or low double digit billions for most of these projects has been deemed unaffordable in the light of these budgetary realities.


Posted by: sofla on March 6, 2006 05:41 PM

Did you see this yet...

Dubai Company to Give Up Stake in U.S. Ports Deal

Posted by: lj on March 9, 2006 08:58 PM
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