Thursday, June 12, 2014

The Banishment of the Profit Motive from American Government -- and Its Return?

Guest Blogger

Nicholas Parrillo

This post is part of an online symposium discussing Nicholas Parrillo, Against the Profit Motive: The Salary Revolution in American Government, 1780-1940 (Yale University Press 2013).
            It’s a privilege to engage in this discussion with Kristin Collins, William Novak, Nicholas Bagley, Jon Michaels, and Gautham Rao.  Thanks also to Heather Gerken for organizing and Jack Balkin for providing the venue. 
            Here I’ll respond to a few of the many thought-provoking comments made by the contributors.  My responses rely upon some events and concepts set forth in the book, so I’m going to provide a summary of the book, then circle back to engage with the comments. 

* * *

            The book pursues two objectives: (1) to show that American government operations in the 19th century were largely for-profit, in that prosecutors received a fee for every conviction, tax collectors received a percentage of evasions uncovered, and numerous other officials were paid in similar fashion; and (2) to explain why lawmakers abolished these forms of compensation and replaced them with the fixed salaries we now take for granted in our public service.  That is, I’ve sought to trace how the absence of the profit motive became a defining feature of “the public.” 
            The conventional explanation for the shift toward salaries in modern government is that salaries form an integral part of Max Weber’s ideal type of bureaucracy -- a style of organization in which officials serve as cogs in a top-down hierarchy, devoting their careers to the agency.  Fixed annual compensation guarantees that the official’s income matches his/her level within the hierarchy, reinforcing the bureaucracy’s internal status distinctions and the official’s incentive to seek promotion up the ladder.  Also, the attraction of a bureaucratic career lies in its life-long security, and nothing says “security” like a guaranteed annual sum of compensation. 
            In seeking to understand the decline of the profit motive in American government, I didn’t find the Weberian story satisfactory.  When American offices were converted to salary, I found, too often, that the features of government organization that Weber links to salary -- top-down control of the official and the official’s career stability -- did not come with it.  Sometimes these features never came at all (e.g., in the case of district attorneys, who must stand for election every few years), or they came long after the profit motive had been banished for apparently independent reasons (e.g., in the case of federal and state tax enforcers, prison managers, etc.).  This mismatch with Weber isn’t surprising.  It’s well-known that American government today doesn’t conform as closely to Weber’s ideal-type as do the governments of most other developed nations -- something Weber himself recognized.
            Yet American lawmakers still converted their officials from profit-seeking to salaries.  Why? 

            The answer lies in how American lawmakers sought to shape the relationship between American officials and the laypersons with whom they dealt.  To understand this, we must distinguish between two different kinds of government services: (1) services that laypersons wanted, like processing people’s applications for citizenship, benefits, or homesteads; and (2) services that laypersons didn’t want and might resist, such as collecting taxes, conducting prosecutions, or forcing prisoners to labor. 
            When officials were paid by the task for the first kind of service, the fee caused the official to view the laypersons who sought his services as “customers.”  The more immigrants the officer naturalized (or the more pension applications he processed, or the more homesteads he granted, etc.), the more fees he made.  I term these fees “facilitative payments.” 
            When officials were paid by the task for the second kind of service, the fee had the opposite effect: it induced the official to take action against the layperson.  The more pain the officer inflicted -- the more tax evaders he caught, the more convictions he won, the more labor he squeezed from prisoners, etc. -- the more he profited.  I term these payments “bounties.” 
            Each type of payment had a virtue and a vice.  In the early experimental days of American democracy, the virtue of each loomed large.  But as American democracy developed, the vice of each came to the fore, and legislators acted accordingly. 
            The virtue of the facilitative payment was that, by causing the official to view laypersons as customers, it infused government with a “customer service” mentality.  Government was responsive to the needs of service recipients in a way that seems remarkable now.  It was especially important that the payments weren’t much regulated in their amounts, so the officer and the layperson could adjust the price to reflect exactly what the layperson needed from the officer (e.g., a little extra money for faster service, or for finding a way around some technical problem with a form or regulation).  But in the American Revolution and the generation after, unregulated exchange between officers and laypersons came to seem dangerous.  Revolutionary ideology was suspicious of monopoly, and unregulated exchange opened the way for monopolistic price-gouging; plus, the unregulated flow of fees into official pockets meant officials could effectively “tax” the people and keep government up-and-running even without the consent of the people’s representatives, and this proved inconsistent with the rising belief in legislative supremacy.  Thus, in circa 1775-1850, lawmakers increasingly passed statutes to regulate the sum that an officer could charge for any particular service, and when these statutory regulations proved too cumbersome to keep pace with the growth and dynamism of official business (thus encouraging ad hoc bargains between officers and laity to keep services flowing, which were extra-statutory and now defined as “corrupt”), lawmakers decided to ban officers from taking any facilitative payments whatever -- a crude but easy-to-administer guarantee against corruption -- and to give them salaries instead.  Meanwhile, the virtue of customer service came into doubt in yet another way: facilitative payments caused officers to view service recipients as a class as their “customer base,” and they construed the law in such a way as to favor the wishes of that base.  Naturalization clerks construed the law to make it easy for immigrants to get citizenship; land officers construed the Homestead Act to make it easy for settlers to get homesteads, etc.  But this style of administration -- strongly favoring the office’s customer class -- is sustainable only when the customer class is the overwhelmingly dominant interest group in the legislative politics surrounding the office.  As American politics became better-organized and more complex circa 1900 -- as more groups formed to speak for previously diffuse and voiceless interests -- they tended to lobby for administrative reforms that put officers on salary and thus took away their incentive to favor the customer class.  Thus, the new nativist movement helped get rid of the old fee-paid naturalization clerks, replacing them with examiners enjoying the salary-based independence to say “no” to immigrants.  The new conservationist movement helped get rid of the old fee-paid land officers, replacing them with salaried agents who could say “no” to homestead applicants.  Thus did American government become sensitive to the rivalry of mass interests that surrounds the typical program in a mature democracy. 
            What about bounties?  The bounty’s virtue was that it incentivized the officer to enforce legislation in the face of resistance (perhaps violent) from the person targeted and from that person’s neighbors, friends, and surrounding community.  This incentive was especially attractive to American lawmakers in the mid- to late 19th century, and so the virtue of bounties seemed (at that time) especially great.  The attraction is understandable when we consider that, up to the mid-19th century, the usual American law enforcers -- justices of the peace, constables, grand jurors, town tax assessors, etc. -- weren’t paid anything at all, or were paid so little that money didn’t motivate them.  What motivated them was that they each lived in a relatively small, homogenous local community, where serving in an office was something you did as a social obligation to your neighbors and your town, normally on a part-time, casual, rotating basis.  These people were community members first and law enforcers second.  This approach to law enforcement -- which I term “familiar imposition” -- worked fine so long as the laws to be enforced had the support of a relatively broad consensus within the community, so that enforcement was only necessary against occasional deviants.  That is, it worked so long as government refrained from making demands that were out-of-phase with a local community’s prevailing expectations.  (Interestingly, this could work even for federal governance: as Gautham Rao shows, early federal tax administration was successful in part because customs collectors at each port were deliberately appointed from within the port’s preexisting family and business networks, and these collectors bent and shaped federal law to fit the needs of their neighbors.)  But around the mid-19th century, American lawmakers -- in Congress, state legislatures, and big-city councils -- began to make more ambitious and intrusive demands that clashed with the expectations of local communities more frequently than before (e.g., permanently high protective tariffs, permanent federal excise taxes, skyrocketing property taxes, outright prohibition of alcohol and gambling, etc.).  I term these demands “alien imposition.”  Such laws were extremely unpopular among some portions of the population, and unpaid community members serving part-time were not sufficiently courageous (or, we might say, anti-social) to enforce them.  Legislators therefore began offering bounties more frequently than ever before, to provide extrinsic motivation to the officers, and they coupled the bounty offers with unprecedented grants of official power in the areas of punishment and surveillance.  But the very intensity of this experiment with the bounty proved to be the bounty’s undoing.  Lawmakers found that bounties produced lots of enforcement, yet bounty-driven enforcement did not reduce -- and quite possibly increased -- lay resistance to locally unpopular laws.  This may seem surprising, but it’s understandable in light of studies in present-day psychology and sociology indicating that governments cannot achieve mass compliance through brute deterrence and that laypersons are more likely to comply with an authority if they’re able to attribute disinterested motives to that authority.  Consistent with this kind of thinking, lawmakers of the late 19th and early 20th centuries converted enforcers from bounties to salaries, concluding that the change was necessary to make the officers seem selfless and thereby get people to trust government more, even (or especially) as its demands became more alien.  The salary aimed at the legitimation of power. 

* * *
            William Novak, in his contribution to the symposium, suggests that the evidence I present in the book “on the peculiar structures of power and authority exercised by modern democratic states” cannot be assimilated by any of “the prevailing modes of thinking about the state,” including the Weberian mode -- a problem that renders more urgent the agenda of recent scholars to develop “a more robust genealogy of the characteristics and trajectories of democratic states.”  By “democratic states,” I take it Novak means not only states that have elections but that also aren’t defined primarily by hierarchy, centralization, or insulation of officials from society.  I agree with what Novak says, and I think the book provides some potentially useful tools for the project he advocates on democratic state development.  Let me elaborate:
            In the story I tell about facilitative payments, America moves from one version of a democratic state to a different one, with opposite implications for the appropriateness of a “customer-serving” officialdom.  In the early version, politics is sufficiently simple that what’s required is the basic responsiveness of the official to the lay claimant of government largesse: a fee-for-service will keep the largesse flowing.  In the later version, politics is still democratic, but in a different way: more interest groups have coalesced and muscled their way into the legislature, beyond the original “customer class,” and a balance between them must be struck, one that involves taking away the officers’ fees and replacing them with a more complicated and ambiguous set of incentives befitting the “noisier signal” that emanates from a politics that is now divided and rivalrous, no longer as freely “distributive” (in the sense that Richard L. McCormick used that term). 
            In the story I tell about bounties, America moves from familiar imposition to alien imposition.  Again, both can be understood as democratic modes of governance, but different from each other.  Familiar imposition means that governance is melded with society at the local level -- hence the part-time, barely-paid, rotating nature of office.  This is “democratic” in the sense that local community consensus, to the extent it exists, is hard to displace.  But as alien imposition becomes more frequent -- in the form of higher taxes on novel bases, outright prohibition of alcohol or gambling, etc. -- we observe democratic legislatures (whether they be Congress, state legislatures, or councils governing large, diverse cities) asserting the power to alter mass social behavior.  This is also “democratic” governance, but it’s a different meaning of democracy.  First, it’s positivist, aiming to change society rather than reflect its immanent prevailing norms.  Second, it operates through a legislature elected by a large population, encompassing diverse communities.  Third, it’s democratic in another, more subtle way.  Ultimately achieving mass compliance with the dictates of these ambitious legislative majorities proves impossible (as bounty-loving legislators eventually learn) unless the state builds up a modest but crucial minimum of goodwill among the many laypersons who’d prefer not to follow the majority’s choices but will do so if they have some minimum trust in the state generally.  Building that minimum trust -- arguably a necessity for a modern democracy -- is why lawmakers replace the bounty with the salary.  (In distinguishing these two phases of democratic development, I happily note that I’ve been inspired by -- among many works that I cite in the book -- that of Novak himself, esp. the concluding chapter of The People’s Welfare.) 

* * *
            Gautham Rao and Kristin Collins, in their contributions, point out that the intersection of profit-seeking and government is significant not only for our understanding of government, but also for how we think about profit-seeking -- that is, about capitalism and commodification.  Rao interprets the book as offering a “twist on the essential functionalist premise of the legal history of administration,” i.e., the premise that capitalism created the need for regulation, which the administrative state emerged to meet.  Instead, observes Rao, the book “seems to ponder” the reverse question -- “how capitalism changed the nature and character of the state.”  This is certainly a worthy question, and one that I hope the book helps illuminate, though I give no head-on treatment (hence Rao finds me “a bit coy on this point”).  The part of the book that I think most implicates the history of capitalism and markets (which are broader phenomena than profit-seeking per se) is the story of facilitative payments, since they (unlike bounties) involved the sale of services by a mass of sellers to a mass of buyers, at prices that were initially bargained-for individually and later regulated by legislation (before the final switch to salaries).  I hope that historians of American capitalism will see the book (especially Chapter 2) as adding a dimension to the emergence of laissez-faire ideology in the 19th century: just as an anti-regulatory ideology was emerging for private industry, a mirror-image process occurred whereby governmental services shifted to became a totally regulated industry, in which nobody could buy or sell any service unless the legislature fixed its price by statute.  What this means for the history of capitalism, I leave to specialists on that subject.  (I gesture at the point on p. 93.) 
            On the matter of commodification, Collins considers whether immigrants paying facilitative payments to clerks for grants of naturalization should be understood as “buying” citizenship.  She doubts that immigrants or clerks subjectively experienced it that way, but she also notes (rightly) that critics saw it that way -- and that people today will find the idea of buying citizenship “disconcerting.”  To illustrate, she refers to “relatively recent proposals that would allow the United States government to sell the right to immigrate and naturalize,” which include a 1987 proposal by Gary Becker to set the price of entry at whatever the traffic would bear (on the order of $50,000 per person), such that the persons “buying in” would be the ones likely to make the most, financially, of their U.S. residency.  As Collins notes, such ideas have been attacked by Michael Sandel, who argues in What Money Can’t Buy that the commodification of immigration and citizenship is morally wrong.  This raises the intriguing question of whether the disturbing thing about paying for citizenship (in our eyes) is commodification per se or instead the setting of the price and its distributive consequences.  In the 19th century, facilitative payments were often low and thus affordable to the low-income claimants who sought public services (if they paid the fees at all; immigrants often had their naturalization fees paid by party machines competing for their votes).  In my historical research, I’ve never seen a facilitative payment remotely approaching Becker’s $50,000 figure (even adjusting for inflation).  To some degree, this relative affordability was the result of statutory regulation (motivated by anxiety about monopoly price-gouging), but sometimes, it was simply officers’ self-interested acknowledgment of what their low-income customers could shell out.  That is, officers chose to seek facilitative payments on a high-volume, low-margin basis.  Notably, in terms of practical outcomes for those seeking citizenship, the fee system was clearly favorable to immigrants: fee-driven clerks naturalized people much faster and more willingly than did their salaried successors.  Accordingly, critiques of the fees as corrupting generally came from nativists.  Becker’s strategy is to treat immigration status as a scarce resource to be allocated to the highest-value user, but the effect of (low) 19th-century facilitative payments was to make the system generally more open to low-income claimants.  I suspect this pro-access version of cash-for-citizenship would win over many (though not all) liberals who would initially nod in agreement at Sandel’s attack on Becker. 

* * *
            Jon Michaels and Nicholas Bagley ask how the salary revolution of America’s past should be understood in light of government’s diminishing insulation from the profit motive over the past few decades.  Sometimes by deliberate design and sometimes by half-conscious processes, the profit motive now seems to be playing a larger role in the administration of public benefits and in the enforcement of public law than during the generation (circa 1930-1970) that immediately followed the salary revolution’s culmination.  My book focuses on the historical formation of the non-profit norm against which today’s trends push; it does not chronicle those trends or directly address them normatively, though I do think (as briefly noted in the book’s Epilogue) that the reasons why past lawmakers abolished facilitative payment and bounties imply arguments (though not necessarily decisive ones) against the use of similar incentives in government today. 
            Though the comparisons are complex, I would say that some (if not all) of the new profit-seeking arrangements resonate with the old types of facilitative payments and bounties whose downfall I trace.  As to facilitative payments, Bagley makes a powerful argument that we are observing this very dynamic in today’s Medicare program, which was founded in 1965 and has grown to mammoth proportions in recent decades (more than 15% of the federal budget in 2010).  “By deciding which treatments are medically necessary for qualifying individuals,” writes Bagley, private physicians taking Medicare “effectively decide which treatments the government will pay for,” and these physicians “receive fees keyed to the costs of those treatments,” which incentivizes them to prescribe more treatments, expanding the program in a way that meets the immediate wishes of beneficiaries but threatens the public fisc. 
            As to bounties, one can argue that we’ve seen a resurgence of profit-seeking enforcement of public regulation.  This seems hard to deny when it comes to the False Claims Act of 1986 and the consequent rise of qui tam suits against defense contractors (and, more recently, health-care providers) who allegedly defraud the government.  One might similarly characterize the past decades’ explosion of private lawsuits to enforce regulatory statutes pertaining to securities fraud (which took off after the class-action reforms of 1966) or employment discrimination (which took off after Congress expanded prospective rewards for winning attorneys in 1976 and 1991).  Some might put environmental “citizen suits” (which Congress invented during the 1970s) in the same category, though I’m skeptical about that, since the rewards allowed have not been big enough to call into being a truly profit-motivated environmental plaintiffs’ bar -- the private enforcers bringing those suits are motivated more by environmental ideology. 
            But perhaps there’s a limit to the analogy between public profit-seeking in the 19th century and today.  The governmental profit-seekers of the 19th century -- characters like the fee-paid naturalization clerks, fee-paid pension examining surgeons, fee-paid land registers, fee-paid jailors, commission-paid tax ferrets, moiety-seeking customs collectors, fee-paid district attorneys, for-profit prison contractors, or prize-seeking naval officers -- were nearly all oath-taking public officers, and in the few cases where they weren’t (prison contractors and some of the tax ferrets), they did all their work under contracts with the government to provide services for which only the government could contract.  Doctors taking Medicare and “private attorneys general” have much looser institutional ties to the state (if any), and accordingly they are not culturally identified as part of “the government.”  Because of this, the state can maintain “plausible deniability” as to whether its own power is channeled or tainted by the profit motive of these actors.  This seems particularly important for “private attorneys general” and bounty-seeking: the state itself can still profess to be disinterested -- it’s those private attorneys who are self-seekers.  I suspect this helps maintain a reservoir of legitimacy for the state and for the regulatory schemes associated with it.  And it may have practical implications too: when non-profit state actors and for-profit private actors enforce the same statute (e.g., the SEC and private securities bar), the state actor will typically have more formidable investigative and coercive powers, meaning that some degree of separation between profit motive and power is preserved. 
            All this suggests that the definition of government as non-profit that American lawmakers constructed a century ago retains substantial normative power, even if it has recently been practically diminished in some important contexts and -- as Michaels emphasizes -- now faces a conscious and well-articulated intellectual critique.  That critique, explains Michaels, is part of a broader decline of faith in the very notion of government as having an organizational logic distinct from private industry.  Listening to high-ranking agency officials speak about management in recent years, one constantly hears them parroting some business buzzword or other (entrepreneurship, innovation, flexibility, outcomes, performance, metrics, customer service, deliverables, etc.).  In Michaels’s view, administrators today need to find a way of understanding, explaining, and justifying their mode of work that is less obeisant to private-sector thinking.  Perhaps the book can help them in doing that, for it shows that the non-profit norm (however beleaguered today) was forged through the kind of process that every manager, private or public, must respect: experimentation, trial and error, hard experience.  The norm is not the result of ignorance or timidity about the wonders of the profit motive, but instead of more than a century of trying to harness the profit motive and finding it unworkable in the context of the kind of democracy that emerged in the 19th and early 20th centuries.  As I write in the book’s Epilogue, “the imperatives that historically drove salarization in America were especially and sometimes exclusively directed at public offices -- at their peculiarly monopolistic status, at their unique control of scarce public resources subject to rival democratic claims, or at their distinctive mission to foster the population’s cooperation and support for legislative mandates.”