To the victor go the spoils: who answers the phone in the US Treasury?

Nobody home in Washington DC

Since the Obama administration took over on January 20, the US Treasury has effectively been out to lunch.  As widely reported (see e.g. this account in the Financial Times),  Sir Gus O’Donnell (as cabinet secretary the top UK civil servant) has attacked the “absolute madness’ of the US spoils system, where a new Federal administration replaces the entire top stratum of the civil service with new officials possessing the right political connections and leanings.  Quite a few of these top officials need to be confirmed before they can start working.  This can take months.  Many of the new officials have no political, government or administrative experience and spend most of their first months in office trying to figure out where the washroom is instead of designing and implementing policy.

It is a system designed to produce protracted policy paralysis.  Often this does not matter much.  It may even be helpful to the greater good at times – “That government is best which governs least.” – but in times of war and deep economic crisis, when the world we thought we knew may be falling apart, it is not a bad idea to have a government that can both think and act.  The current US administration neither thinks nor acts much, judging from the results.

The reason Gus O’Donnell made his remarks is that the UK government are busy organising next month’s G20 summit in London, and found that when they ring the US Treasury, either nobody answers the phone or they get put on hold and have to listen to Vivaldi’s Four Seasons for hours on end.

In the UK system, there is a permanent civil service which smoothes the transition from one government to the next. This is also the norm in most other advanced industrial countries today.  The permanent professional civil service system also has its flaws – it can become a state within the state, running rings around their supposed political masters (watch Yes Minister or Yes, Prime Minister to get a wonderful and accurate depiction of an out-of-control professional civil service) – but there are ways of minimizing and mitigating the risk of rule by a professional civil service other than the US ‘solution’: paralyzing and demoralising the professional civil service.

The price of the US spoils system: the emasculation of US macroecononomic policy making

The price of the US spoils system has been high, if the quality of economic policy making in Washington DC by the Obama administration is anything to go by.  The Obama administration’s handling of the financial crisis and the recession-verging-on-depression has been surprisingly fumbling and kak-handed.   The economic team should have hit the ground running following a lengthy transition period and the appointment to the top positions of experienced economic policy makers like Tim Geithner, Larry Summers, Peter Orszag and Paul Volcker.  But there is little evidence of coherent teamwork. Instead we are treated to repeated examples of the Unfinished Symphony (Geithner) or of  A Night at the Improv (Summers).

In the US Treasury, Timothy Geithner has come up with a number of half-baked plans, under the grand umbrella of the Financial Stability Plan of February 10.  These plans are not worked out to the point that they can even be evaluated properly, they are not costed properly and, except for the money left from the TARP and the funds approved by the Congress for the US$ 787 bn fiscal stimulus plan, they are not funded.

That the half-worked-out fiscal-financial rescue plans of the US government are not funded is due to a deeper flaw in the US political economy than the spoils system.  It reflects the extreme polarisation of American society and of the polity.  This may have started as early as the Vietnam War years, accelerated during the Reagan administrations and exploded during the George W. Bush administrations.  Almost any departure from the status-quo is subject to de-facto veto from some well-organised and well-funded special interest coalition.  During times of war and economic crisis, policy paralysis is costly.

But the fact that the economic plans of the administration are only half worked out is due to the fact that, except for the Treasury Secretary himself, the entire top of the Treasury is vacant.  it is even possible that Geithner has to make his own coffee, a task normally delegated to a Deputy Secretary. This is an insane situation that no self-respecting country should allow to continue.

With Geithner under-supported and over-worked, Larry Summers, Director of the National Economic Council, has jumped into the macroeconomic policy fray with gusto, but not, unfortunately, with the benefit and backing of careful analysis. Larry’s understanding of policy-oriented macroeconomics is fully ecompassed by the ‘Keynesian cross’ of introductory macroeconomics textbook fame.  We have a recession.  The world has a recession.  During recessions, firms don’t spend. So households and governments must spend.  Part of any national spending boost leaks abroad through imports.  The global public good of demand expansion will therefore be under-supplied unless there is international coordination and cooperation.  Therefore governments everythwere must cut taxes and/or boost public spending.

I will explain in a future post why the Keynesian cross is a dangerous half-truth, even under depression-economics conditions.  Here I will say only that even if two of the necessary conditions for Summers’ Keynesian cross-based policy prescriptions are met – (1) there are widespread idle resources of labour and capital to meet demand and (2) there are sufficient numbers of liquidity-constrained and current-disposable-income constrained households that act as ‘myopic’ current income-constrained, Keynesian consumers – there is still an important and potentially binding financial crowding out constraint on the ability of governments to use expansionary fiscal policy to boost aggregate demand.

In addition to (1) and (2) being met, there must be sufficient ‘fiscal spare capacity’ – confidence and trust in the financial markets and among permanent-income consumers, that the government will raise future taxes or cut future public spending by the same amount, in present discounted value terms, that they want to boost spending or cut taxes today.  Without this confidence and trust, financial markets and forward-looking consumers will be spooked by the spectre of unsustainable fiscal deficits.  Fear of future monetisation of public debt and deficits, or of future sovereign default will cause nominal and real long-term interest rates to rise.  Ultimately, the sovereign will be rationed out of its own debt market.  The US government (and the US economy as a whole) will encounter a ‘sudden stop’.

These are not tales to frighten the children.  I am deeply concerned that, when the US Federal government starts to run Federal budget deficits of 14 percent of GDP or over, the markets will get spooked and will simply refuse to fund the US authorities at any interest rate.  Summers’  naive proposal for expansion now, virtue later, is simply not credible given the political economy of the US budget, now and in the foreseeable future.

Of course there are always the printing presses.  But these are most effective if their use is unanticipated.  Seigniorage or the expected inflation tax are a much more limited source of government revenue that the capital levy on the holders (domestic and foreign) of fixed-interest US-dollar denominated non-index-linked debt that can be inflicted through an unanticipated increase in the rate of inflation – the unexpected inflation tax.  So the US Treasury and the other members of the US macropolicy chorus plus the Fed have to simultaneously convince the holders of US Treasury debt that the real value of their investment is safe, and prepare to inflate that real value away if and when the need arises.

Summers’ macroeconomic policy prescriptions have dire ‘tail risks’ associated with them.  Effective fiscal expansions are not part of the US policy menu.  The spoils system has created the policy vacuum that permits Summers to make such ill-thought-out and dangerous proposals.  That alone should be sufficient reason to get rid of the system.

Abolish the spoils system

The spoils system – the manisfestation of government patronage (grants and favours) in the domain of civil service and government agency jobs – is, historically, the ubiquitous system.  It was the prevailing system in the UK and all other now-advanced industrial countries before the spread of electoral democracy and accountable government -except the US.  For some reason the US has been the only advanced industrial country to get stuck in a time-warp, with a 19th century spoils system at the level of the central government. Not surprisingly, the level of performance the US gets out of its government bureaucracy tends to be more like that found in developing countries and emerging-but-not-yet-emerged market economies, than the level one would expect from one of the world’s oldest and richest democracies.

The solution to the spoils system is simple: abolish it.  Cabinet-level positions are for political appointees.  All other civil service and government agency positions are filled by members of a non-partisan professional civil service, appointed on the basis of merit, that is, competence and independence.  You may also have to start rewarding public service competitively, and not just through a comprehensive health insurance package, if you want to attract high quality men and women into the civil service and to retain them.

Gus O’Donnell may get an F for tact and may even have committed a major diplomatic gaffe.  But what is really unforgivable is that he spoke the truth.  If your friends are people who point out your weaknesses when these weaknesses threaten to harm you and those around you, Gus O’Donnell is a good friend of America indeed.  Truth before tact.

To the victor go the spoils.  But the losers in this silly spoils game are the American people and those in the rest of the world who are waiting in vain for thoughtful and decisive American leadership.  They are getting neither.  And the spoils system is part of the problem.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website