Contra Niskanen

why a rational bureaucrat would not maximize his budget

William Niskanen, in a book published many years ago, proposed a simple model of government bureaucracy. The more money a bureaucrat controls the more important he is, so bureaucrats want to maximize their budgets. The legislature knows how much any level of output from a bureau is worth to it. The bureaucracy knows — and the legislature does not — what a government bureau can do at what cost. So the rational bureau finds the largest level of output that it can produce at a cost below the value of that level of output to the legislature and exaggerates the cost of any lower level of output by enough to make it higher than its value, thus tricking the legislature into giving it the largest possible budget.

When I first read the argument it struck me as implausible. Consider two bureaucrats. Abe has a ten million dollar budget and is required to purchase $9,900,000 worth of paper to be sent to the IRS for printing tax forms, leaving him $100,000 for himself, his secretary, and rent for his office. Bernie has a one million dollar budget and is required to do nothing at all. Which would you rather be?

Generalizing the example, I suggest that the size of the budget in Niskanen’s model ought to be replaced with the surplus, the difference between the size of the budget and the lowest cost at which the output the bureau has agreed to can be produced. That difference represents resources that bureaucrats can divert to their own purposes.

When I made that argument on my blog twenty years ago I ended the post by asking whether other people had proposed the same modification to Niskanen’s model, replacing budget maximization with surplus maximization. Coming across that post in a recent reread of my old blog — I am mining it for ideas to incorporate in posts here — it occurred to me to do a quick search online to see if my argument had appeared in the relevant literature. As far as I can tell it has not; there have been criticisms of Niskanen’s approach but I could not find that one.

I offer it as a project to any aspiring public choice scholar in search of a topic.

The theoretical point is simple, as I have just demonstrated. The challenge would be coming up with tests to distinguish the implications of the alternative theories, Niskanen’s and mine.

The Surplus

How might bureaucrats consume that part of their budget not needed to produce the output they have promised the legislature? They could take it in cash but if bureaucrats working for the legislature are paid substantially more than other people doing similar work the legislature might notice. Better, perhaps, to consume the surplus in less transparent ways.

One possibility is leisure:

It is the interest of every man to live as much at his ease as he can; and if his emoluments are to be precisely the same, whether he does or does not perform some very laborious duty, it is certainly his interest, at least as interest is vulgarly understood, either to neglect it altogether, or, if he is subject to some authority which will not suffer him to do this, to perform it in as careless and slovenly a manner as that authority will permit. If he is naturally active and a lover of labour, it is his interest to employ that activity in any way from which he can derive some advantage, rather than in the performance of his duty, from which he can derive none.

If the authority to which he is subject resides in the body corporate, the college, or university, of which he himself is a member, and in which the greater part of the other members are, like himself, persons who either are, or ought to be teachers, they are likely to make a common cause, to be all very indulgent to one another, and every man to consent that his neighbour may neglect his duty, provided he himself is allowed to neglect his own. In the university of Oxford, the greater part of the public professors have, for these many years, given up altogether even the pretence of teaching. (The Wealth of Nations, Book V chapter 1 part e)

The quote is about salaried professors — Smith thought professors should be paid by their students — but it applies as well to bureaucrats with forty paid hours in which to do twenty hours of work.

If that is how bureaucrats consume their surplus they should take more leisure, produce less per hour, than they could. Niskanen’s theory, on the other hand, implies that a bureau will produce as much as it can with the resources its budget can buy since if it produced more it could get the legislature to give it a larger budget. If you could find an objective measure of output per hour for a government bureaucrat and for someone doing similar work in a private firm that would give you a way of distinguishing between the predictions of the two theories.

The surplus might be used by bureaucrats for their own consumption, luxurious offices, lavish “working meals,” conferences at vacation spots with lots of free time.¹ Here again the two theories yield different predictions and one might be able to find a measure of such consumption and use it to distinguish between them.

The surplus might be spent producing output, but output of value to the bureaucrats not the legislature. An example would be material in support of political positions favored by the left produced by a bureau in a Republican state. An example at the federal level would be work in support of gun control at the Center for Disease Control, done under Republican as well as Democratic administrations.

Readers may have others.

One problem with all of these is that they compare government bureaus to other institutions, some of which may for other reasons, ultimately the principal/agent problem, also have a surplus to be appropriated by employees. A broader research project along similar lines would be to look at a variety of institutions for evidence of a surplus controlled by employees, used for their purposes rather than the nominal purpose of the institution.

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1. “One smoking hot employee is a coincidence. Beyond that you are looking at a hiring strategy.”