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Thursday, May 22, 2014

VA Bottleneck: Scandal or Norm?

Problems with the VA go deeper than recent episodes

The revelation of inefficiency in the VA hospital system has caused strong reactions. Critics of the Obama administration regard this as another scandal, evidence of gross incompetence, and some are calling for measures to fix the VA system. Fatal delays in treatment in VA hospitals are tragic. The Obama administration was aware of these problems, but failed to apply solutions. However, there is no reason to simply blame VA inefficiency on the incompetence of one administration.

Bureaucratic organizations are inherently prone to the types of inefficiency seen at the VA. Ludwig von Mises explained bureaucratic rigidity in 1944. What are the key problems with bureaucratic management of economic activity? Government bureaucracies always lack the incentives and coordinating mechanisms of profit-driven entrepreneurship and market prices. Bureaucratization of an industry substitutes either bureaucratic rules or bureaucratic discretion for entrepreneurship.

How do bureaucracies function? If bureaucrats have discretion to act, they may attempt to serve the public. Mises assumed that bureaucrats would at least try to serve the public, and some modern surveys suggest that people in bureaucracies want to serve the public (at least at the outset of their careers), but these attempts fail. Bureaucratic discretion requires a removal of set limits on the ability of each bureaucrat to draw on public funds. If each bureaucrat can spend money (or regulate) based on what they perceive to be “needed,” how will they each decide when costs are excessive? The point here is that benefits are far more obvious than opportunity costs. A well-intentioned bureaucrat faced with an ill veteran sees a need for costly medical treatment. Decisions of one bureaucrat to approve more and more treatments come at the costs of either treatment to other veterans in other facilities (who are seen by other bureaucrats), or at a cost to taxpayers (who perceive the results of losing more of their income). Since benefits are obvious and costs are obscure, well-intentioned bureaucrats will overspend; they need to be reined in with bureaucratic rules or by high authorities.

Gordon Tullock and William Niskanen assumed that bureaucrats are self-interested. Selfish bureaucrats cannot be trusted with discretion. The inability of taxpayers to effectively monitor most bureaucratic activities means that these officials will tend to use public funds and state regulatory powers to benefit themselves, most of the time. Since benefits to bureaucratic malfeasance are real and costs of detecting this malfeasance are high, selfish bureaucrats do misuse authority; again, they need to be reined in with bureaucratic rules or by high authorities.

Can high authorities direct bureaucratic activities? This might be possible in small local bureaucracies. Central direction of a large national bureaucracy is clearly impossible. A bureaucracy such as the VA is far too large for effective central direction. Well-intentioned bureaucrats tend to overspend specifically because they each have local knowledge of the medical needs of specific veterans. The central officials of the VA might have a better idea of the financial costs in the VA generally, but they do not understand the vast trade-offs involved in the direction of these funds to specific needs, so they cannot understand opportunity costs.

Friedrich Hayek explained the importance of prices in communicating knowledge of opportunity costs: Rising prices signal increased relative need and higher costs, while falling prices signal falling relative need. Can relative demands be signaled in a bureaucracy? Tullock explained how bureaucratic reporting distorts knowledge transmitted through a bureaucracy. The bottom line here is that central authorities cannot direct the activities of a large bureaucracy efficiently.

The Obama administration cannot be held directly responsible for specific problems in the VA system. Attempting to prevent inefficiency and rigidity in a large federal bureaucracy is like trying to prevent earthquakes or monsoons. Large federal bureaucracies are necessarily slow, rigid, and inefficient. While it is impossible to make a large bureaucracy efficient, it is quite possible to deconstruct bureaucracies. Deconstruction of bureaucracies means greater reliance on entrepreneurship and private enterprise. It is, of course, obvious that Obama believes in the bureaucratization and regulation of industry and objects to private enterprise. This is the real scandal. The failure here is not that the VA continues to be inefficient. The failure is that Obama and his supporters continue to believe in the fool's errand of bureaucratizing healthcare. It is scandalous that so many people persist in believing in a type of organization that never has worked and never can work.

Nobody should be shocked or surprised by failures of the VA to provide timely and effective medical treatment of veterans. Nobody should be shocked or surprised by the efforts of officials and politicians to cover up their failing: This is all just bureaucracy as usual. It is shocking only to see people cling to a belief in bureaucracy when private enterprise has proven, time and again, to work better.

  • D. W. MacKenzie is an assistant professor of economics at Dickinson College.