I was reading an old post when I stumbled across a rather interesting footnote:

This quote provides an almost perfect summary of what is wrong with government.

It is very unusual for any government program to be scrapped because of simple failure. Instead, failure is usually interpreted to be due to a lack of funding, or not being granted enough authority. As in this case, that usually results in giving the failed project even more power. It is ironic, but in government, the less successful a project is the more money and power it will be granted. (Which is one of the reasons I am very leery of government solutions.)

Of  course, the basic premises all make sense. If a project or department does not spend all of its yearly allotment of money, clearly it could use less. If a project is unable to achieve its objectives, then likely it has insufficient power.  And so on.

However, in practice, these ideas lead to horribly damaging results. For example, the assumption that a department only needs money if it spends all of its current funds leads to the well known phenomenon of departments creating useless projects just to make sure the coffers are empty by the end of the fiscal year. Worse still, truly inefficient or wasteful projects spend so much money that the planners assume they are in dire need of an infusion of cash, and end up funding them more. The one result which will never come about is an increase in efficiency or economy. As any cost cutting measures will end up resulting in a budget decrease, while excessive spending and inefficiency will result in an increase, there is simply no incentive for cost effective solutions, and every reason to over spend.

Likewise, the tendency to blame failure on a lack of power leads the government to overlook failures.When they have embarked on a simply impossible project, or one which should not have been undertaken, or even one simply mismanaged to the point of failure, rather than admit it, the government tends to grant them additional legal authority. Of course there are reasons other than honest desire for success behind this. Most often the politicians, or the party, which sponsored the original creation have no desire to see their names attached to a failure, and so they choose to grant additional power in hopes of staving off that collapse, rather than admit defeat and accept the blame. Second, projects which tend to be granted additional power are those enjoying public support, or which are suitable for populist demagoguery, and so anyone opposing them is subject to easy political attacks. And so, no matter how impossible, or how inefficient, government projects tend to gain power in direct proportion to the degree to which they fail.

All of which means that the least efficient, least successful government agencies will tend to accumulate the most staff and greatest resources. And so we see the Department of Defense, relative to the mission, is quite slender, compared to say HUD or the Department of Education. Likewise NASA is rather light in terms of staff and funding when compared to the Department of Labor.  (I exclude the State Department as it is a strange hybrid. It has a legitimate function, but has bloated up with needless foreign aid programs, and so is quite as bloated as simple unnecessary bureaus like the Department of Education.)

As I sued it in my previous post, allow em to draw one example from the past. Banking provides a perfect example of power growing with each failure.

From the time of Andrew Jackson's defeat of the Second Bank of the US, until about the start of Civil War, banking was mostly free. There were state regulations, but if those regulations were too unfriendly, most banks fled to other states, and if they were too strongly in favor of bankers, then the depositors put their money outside the state. So banking was mostly free. And, as a result, sometimes individual banks, or even small groups of banks, found they had overextended and went out of business, sometimes harming depositors.

To solve this a variety of national banking schemes were put in place, requiring banks maintain either a certain reserve made up of specie and treasure notes, or else maintain such deposits in certain regional or national banks. It sounded like a good plan to prevent depositors form being bankrupted by a bank run. But in reality, the three tiered bank structure allowed multiple banks to inflate the money supply using the same specie as backing, and the introduction of treasury notes as a reserve on par with specie allowed eve more inflation as the ballooning national debt allowed banks to create more money backed by nothing but a promise to repay form the government. In the end this centralized inflationary pyramid ended up creating the familiar boom/bust cycle that is blamed on the free market.

But the failure of this national banking scheme did not deter the government. The failure of the national banking scheme convinced them they had simply failed to centralize enough, and so the Federal Reserve was born. Of course, it had all the problems of the previous system. By moving the choice of reserve rations from individual bankers to a single board, it created an inflation engine which intensified the boom/bust cycle, and by continuing to treat government debt as a valid reserve, it continued to allow massive monetary inflation backed by nothing at all. And so, less than two decades after it was formed, the Federal Reserve saw the worst deflationary crash in history, and the beginning of a nearly decade long depression.

And again, faced with the inability of their creation to live up to the promise that it would stabilize the economy, what did the government do? Change course? Scale back their ambitions? No, they blamed the fact that the dollar was tied to "anachronistic" gold, and outlawed the holding of monetary gold. This, in effect, ended most fears of bank runs. With only foreign investors and note holders able to withdraw from their reserves, banks were free to inflate much more rapidly, and they did. And so the inflation grew, backed with some gold and a lot of government debt, debt which grew and grew, until it threatened yet another collapse in the early seventies.

And how did the government respond to this? By cutting adrift from the gold standard entirely, again giving even more power to the Federal Reserve. And the outcome? The Carter inflation, the depression of the early eighties, the feverish economy of the 90's and the dot com crash, the slump of the early 2000's, the crazed housing boom and subsequent bust, and, fo course, ourr current deflationary crisis (which no one is brave enough to label as such).

And the solution? More government control of the remaining private segments of the financial industry. That is, yet mroe power being granted in the field to government regulators, despite the fact that every past intervention haas only made things worse.

And that, in a nutshell, is how government thought processes serve to perpetuate problems. By never asking "how much do they need?" or "is this the right idea?" or even "should we be doing this at all?" government ends up rewarding failure with more money and pwoer, and the worse the failure the greater the reward. And so we see, year after year, government growing ever larger, and yet, at the same time, managing to do less and less while costing more.

POSTSCRIPT

Granted, the Great Depression was not an entirely monetary phenomenon. Its origins were monetary, brought about both by the Fed's policies, and by the choice of most of the world to sue the pound as a valid reserve, while the pound was backed by dollars. Once the Depression started, however, bad ideas such as Smoot-Hawley, and FDR's many interventions served to prolong what would ahve been a much shorter monetary crisis into a prolonged depression.

POSTSCRIPT II

Many will not believe the boom/bust cycle is impossible in a totally free banking system, but that is the truth, or almost. For the boom/bust cycle to work in a free market, one would have to postulate not only that a bank chose to issue too many bank notes relative to its reserves, but that another bank followed suit, and another, and another, until the majority of the banking system had followed the same policy. And then, when the mistake became obvious, rather than deflating, each bank would continue issuing notes until the entire system collapsed. It is possible, but it would be analogous to every fast food place deciding to sell fries for $0.02, or for $100.00. Mistakes of that scale almost always require both centralized control and insulation from market forces. Otherwise either wise competitors or outside investors will notice the mistake and cash in on it, causing the market to correct.

Which is all just a round about way of saying, without government intervention and the central control of either legislated reserves (pre-Fed banking regulations) or a single central decision maker (the Fed), it is unthinkable that a single boom and bust, much less a cyclical repetition of boom and bust, could ever take place.