Coyote Blog

Kevin Roche, who has done a good job of separating fact from crazy through all of the COVID years, writes:

Lockdowns, school closures, forced masking, plastic barriers, etc. during the epidemic were euphemistically referred to as non-pharmaceutical interventions.  They might better have been referred to as non-effective interventions.  Five years later, the mainstream media is finally taking notice of this lack of effectiveness and stories like this one in the Boston Globe are appearing.  (“New Research Shows COVID Stay-at-Home Orders Did More Harm Than Good”)   Anyone who wasn’t inclined to panic knew this at the time of the epidemic.  I knew it, I published ads about the harms and the lack of benefits, wrote columns.  Anyone like me who took this position was pilloried as a grandma killing, heartless idiot.  Now five years later everyone is saying these steps were irrational, taken out of fear and panic, and all the negative impacts were not considered.

I am going to use this thought as an opportunity to further my previous discussions of organizational incentives and how they help explain government behavior. The following is built on my essay on the topic on August 3, 2021.

Incentives of Government Agencies

Most of the studies and planning among public health researchers and officials in the decades before 2020 came to the conclusion that public masking and lockdowns were both ineffective and largely counter-productive (the 6-foot social distancing rule was so weak it had not even really been studied -- it was a totally made up thing). The CDC's own website had (still has) an infographic that the general run of masks were ineffective and stopping disease inhalation. Meta studies generally concluded lockdowns were counterproductive.

But within weeks of the start of the pandemic in 2020, government agencies like the CDC threw out all this history and all their prior plans and decided to mandate masks and lockdowns.  Masks were mandated for people outdoors, even when we knew from the start that transmission risks outdoors were nil.   In late 2021, officials were still mandating masks for children, who have lower death rates from COVID than the flu and despite a lot of clear research about the importance of facial expressions in childhood development and socialization.  Millions of kids had to stay home from school, some for years, with disastrous affects on their learning (and probably socialization). So why?

One needs to remember that the officials of government agencies like the CDC are not active scientists, they are government bureaucrats.  They may have had a degree in science at one time and still receive some scientific journals, but so do I.  Dr. Fauci has seen about the same number of patients over the last 40 years as Dr. Biden.  These are government officials that think like government officials and have the incentives of government officials.

I will take the CDC as an example but the following could apply to any related agency.  Remember that the CDC has been around for decades, consuming billions of dollars of years of tax money.  And as far as the average American is concerned, the CDC has never done much (at least visibly) as we never have had any sort of public health emergency when the CDC had to roll into action.

If you think this unfair, consider that the CDC itself had previously recognized this problem.  For years they had been trying to expand their mandate to things like gun control and racism, trying to argue that these constitute public health emergencies and thus require the CDC's active participation.  The CDC had for years been actively looking for a publicly-visible role (as opposed to research coordination and planning and preparation and such) that would increase their recognition, prestige, and budget.

So that is the backdrop.  And boom - finally! - there is a public health emergency where they can roll into action.  They see this new and potentially scary respiratory virus, they check their plans on the shelf, and those plans basically say ... there is nothing much to be done, at least in the near term.  Ugh!  How are they going to justify their existence?  Tellingly, by the way, these agencies and folks like Fauci did follow a lot of the prior science in the opening weeks of the pandemic -- for example they discouraged mask wearing.  Later Fauci justified his flip flop by claiming he meant the statement as a way to protect mask supply for health care workers, but I actually think that was a lie.  His initial statements on masks were correct, but government agencies decided they did not like the signal of impotence this was sending.

There was actually plenty these agencies should have been doing, but none of those things looked like immediate things to make the public feel safer.  Agencies should have been:

1. Trying to catalog COVID behavior and characteristics
2. Developing tests
3. Identifying and testing treatment protocols
4. Slashing regulations vis a vis tests and other treatments and protective gear so they could be approved faster
5. Developing a vaccine

If we score these things, #1 was sort of done though with a lot of exaggerated and inaccurate messaging.  #2 the CDC and FDA totally screwed up.  #3 barely happened, with promising treatments politicized and ignored.  #4 totally did not happen, no one even tried.  #5 delivered a vaccine but with over-hyped results and foreshortened testing that has since had the devastating impact of reducing confidence in other, better vaccines.

Instead, the CDC and other agencies decided they had to do something that seemed like it was immediately affecting safety, so it reversed both years of research and several weeks of their own messaging and came down hard for masks and lockdowns.   And, given the nature of government incentives, they had to stick with it right up to today, because an admission today that these NPI aren't needed risks having all their activity in 2020 questioned.

Incentives for Government Officials

Pretty much all of the above also applies to the incentives of government officials.  Our elected officials of both parties, but particularly the Democrats, have been working for decades to have the average American think of them as super-dad.  Got a problem?  Don't spend too much time trying to solve it yourself because it's the government's job to do so.  Against this background, the option to do nothing, at least nothing with immediate and dramatic apparent potency, did not exist.  "They had to do "something."

It might have been possible for some officials to resist this temptation of action for action's sake, except for a second incentive.  Once one prominent official requires masks and lockdowns, the media began creating pressure on all other government officials.  New York has locked down, why haven't you?  Does New York care more than you?  We had a cascade, where each official who adopted these NPI added to the pressure on all the others to do so.  Further, as this NPI became the standard government intervention, the media began to blame deaths in states with fewer interventions on that state's leaders.  Florida had far fewer COVID deaths, particularly given their age demographics, than New York but in the media the NY leaders were angels and the Florida ones were butchers.  For a brief time terrible rushed "studies" were created to prove that these interventions were working, generally by the dishonest tactic of cherry-picking a state with NPI mandates that was not in its seasonal disease peak and comparing it to another state without NPI mandates that was in the heart of its seasonal peak. 

The other positive feedback loop was that at the same time, the public health leaders issuing these needless mandates were lionized as heroes. Fauci was smothered in positive press and numerous non-profits and universities lined up to hand him both scientific and ethics awards.

And then the whole thing got polarized around party affiliation and any last vestige of scientific thinking got thrown to the curb.   Take Chloroquine as a possible treatment protocol.  Personally, I never saw much evidence in its favor but early in 2020 we did not know yet one way or another and there were some reasons to think it might be promising.  And then Donald Trump mentioned it.  After that we had the spectacle of the Michigan Governor banning this treatment absolutely without evidence solely because Trump had touted it on pretty limited evidence.  What a freaking mess.  In addition to giving us all a really beautiful view of the hypocrisy of politicians, it also added another great lie to the standard list.  To "The check is in the mail" and "I will respect you in the morning" is now added "We are following the science."

Postscript: Incentives for the Public

I won't dwell on this too long, but one thing COVID has made clear to me is that a LOT of people are looking for the world to provide them with drama and meaning.  The degree to which many folks (mostly all well-off white professionals and their families) seem to have enthusiastically embraced COVID restrictions and been reluctant to give them up has just been an amazing eye-opener for me.

Just before inauguration day I wrote a post about the state of the world, saying in part:

To a large extent, US moral and intellection leadership post WWII on free speech and free trade has been critical to keeping these concepts alive around the world against the headwinds of authoritarianism.  Now, with a breakdown of support in the US for both, one wonders what future they have.

I held out some small hope that while it was depressing to consider that Trump was likely to further trash the notion of free trade (and he has certainly delivered on this bad promise), Republicans -- after years in the wilderness rightly complaining about government censorship and growing opposition on the Left to free speech -- might, just might, do something to make things a bit better. I thought JD Vance calling out Europe on its deteriorating free speech environment in his Munich speech was great. But its easy to call out other countries on this topic, much harder to remain disciplined in one's own country. It takes a lot of backbone to respect speech from people you really dislike and disagree with. And apparently this administration lacks such a backbone:

It’s been three days since the government arrested and detained Mahmoud Khalil for deportation. This afternoon, the administration finally stated the basis for its actions. Its explanation threatens the free speech of millions of people.

Yesterday, an administration official told The Free Press, “The allegation here is not that [Khalil] was breaking the law.” This was confirmed today by White House Press Secretary Karoline Leavitt, who announced Khalil is being targeted under a law that she characterized as allowing the secretary of state to personally deem individuals “adversarial to the foreign policy and national security interests of the United States of America.”

WTF? Is that really a law? Some holdover from the Alien and Sedition acts? I can't believe it would stand up to First Amendment scrutiny and as a minimum any court should demand a LOT more due process before a green card holder was kicked out of the country. Heck had the Biden Administration dug up this particular chestnut they likely would have slapped the label on Trump.

The administration is wielding this standard — deportation for people whose activities could cause “serious adverse foreign policy consequences for the United States” — to arrest and detain an individual graduate student. In explaining how he met this standard, the administration did not allege Khalil committed a crime. But it did explicitly cite the content of his speech,  characterizing it as “anti-American” and “pro-Hamas.” Protesting government policy is protected by the First Amendment, as is rhetorical support for a terrorist group (if not directly coordinated with it, which the government has not alleged here).

Disrupting college classes and harassing students is not protected expression, to be sure, and Leavitt stated that Khalil organized protests that may have done so. But the administration has not detailed Khalil’s specific actions with respect to those protests, so it remains unclear whether Khalil himself violated any campus rules against discriminatory harassment. Whether any such violation justifies detention and deportation is a separate question. In either adjudication, Khalil must be afforded due process. 

Congrats to the Trump Administration for taking a random asshole -- who few have heard of and many would disagree with and probably dislike -- and making him famous and likely far more effective in the future. Its like they never even heard of the Streisand Effect.

So my thin hopes that this Administration might have some positive effect on free speech are likely dashed. But that is no surprise. As I wrote in the article linked a the top:

I am not a Pollyanna -- I see threats and worrying trends in every direction, and will be writing about them.  For example, tomorrow we trade a President with an immense set of flaws for another with an immense set of entirely different flaws.  Perhaps I am not as disappointed as some by recent trends because I have always treated politicians and the media and academia with immense skepticism, so I am less surprised by their obvious failings.  I have always expected people in power -- government, corporations, wherever -- to abuse their power and believe the trick is to wire the system in a way that they cannot do too much damage.  In preparation for blogging again, and looking back over my old writing, one consistent theme I see is a disdain for solutions that boil down to "if only we replace their people with our people."  That's a hopeless approach.  We have flip-flopped the Coke and Pepsi parties in power more times in the last 50 years than we did in 100+ years before that, and its not making things better.  If anything its escalating a tit for tat power grab as each new administration pushes the precedent frontier forward more toward Presidential authoritarian power.  This is not a secret: Trump is bragging about it.

In late 1964, the United States faced a decision about Vietnam. The war had dragged on for 10 years, and the US had steadily poured more dollars and arms and "advisors" into supporting the South Vietnamese against North Vietnamese aggression. "Saving" the South Vietnamese and punishing the North Vietnamese, along with their Chinese and Soviet backers, for their aggression clearly was going to require a larger US commitment, both of arms and probably men. Was it time to ramp up, or find a formula for peace? Here are some of the elements, partially in hindsight, of this decision:

• Everyone wanted to see military aggression punished
• Most Americans at the time would would have been thrilled to hand the Soviets and Chinese communists an "L". There was an definite attraction to fighting the communists down to the last Vietnamese in a proxy war far from home
• Many were increasingly skeptical of the South Vietnamese -- the South Vietnamese government was a corrupt mess and not even really democratic after a military coup the US winked at. But we liked them better than the Russians and Chinese
• After 10 years, it was clear that the military stalemate could not be broken except for an extraordinary infusion of US arms and manpower.

I know there are folks who hold out that America and the South Vietnamese could have won if the war was fought smarter. But I think a majority of folks -- including most everyone on the Left -- would agree the post 1964 escalation was a mistake that cost over a million deaths on both sides and did not prevent -- and maybe even made worse -- a horrific aftermath of reeducation and genocide. All to try to prevent the emergence of the unified Vietnam of today, that appears to most American visitors as one of the most capitalistic countries they have visited.

I set this up all as an unsubtle analog to the Ukraine today:

• I think most people would like to see Russia's military aggression punished. I saw General Milley speak at Princeton and this was his main argument, that we have to establish a red line against military attempts to move borders.
• Many of us find the Putin regime in Russia to be distasteful and would be happy to hand it an "L". It is not much of an exaggeration to say that many Americans would like to see us fight Russia down to the last Ukrainian. I often wonder if the average X user with a Ukrainian flag icon is really knowledgeably pro-Ukrainian or just anti-Russian.
• Until the moment of invasion, the Ukraine was considered by the Left, Right, and media to be on of the most corrupt nations in the West. Their current strong censorship regime and suspension of elections smell bad, particularly given that we live in a county that managed to hold free elections during our Civil War (Lincoln until a few months before the 1964 election was sure he was going to lose and let elections go forward anyway -- god bless general Sherman).
• After 3 years, the war is in a stalemate and Ukraine finds itself in an extended war of attrition with a country four times its size. It strikes me that the only way to break the stalemate is to have some kind of order of magnitude larger external intervention, eg US and NATO troops on the ground

I got started on this post as the result of a pro-Ukraine meme I saw the other day. Unfortunately I cannot find it because X is a river that flows really fast and stuff from a day ago is a few miles downstream and hard to find. But basically it asked this question -- what part of your country would you willingly give up? If the answer is nowhere, don't ask Ukraine to give up Donbas and the Crimea for peace.

Totally reasonable question. And except maybe for parts of California and the District of Columbia, I would answer "nowhere." But there are problems. The first is that the Ukraine did indeed voluntarily give up the Crimea in exchange for peace in 2014. One thing I have never understood is that the same people in this country who are rabidly against any Ukrainian peace deal and want to fight on forever mostly had a collective YAWN over the 2014 Russian invasion of the Ukraine.

The biggest question is -- what is the alternative? The implication is that there is somehow a hope to get the territory under Russian occupation back by military force. But I just don't see it. The Ukrainians have certainly been scrappy and creative and did a better job beating back the Russian thrusts at Kiev in the early days of the war than I would have guessed they would. They are now, though, fighting a static war of attrition with a county 4x its size. So what, at this point after 3 years, is the alternate plan that preserves territory? If that plan is to send a million American soldiers to Ukraine and risk escalation of the war, a nuclear exchange, and possibly a Chinese attack on Taiwan while our back is turned, then I am not going to agree.

Again, I would be happy to see Russia lose, but short of sending the American military into the line of fire, what is the plan? Perhaps Russia's will collapses before Ukraine's, but no one has presented me any evidence of that. That would be a sort of WWI outcome, where one side was eventually exhausted (though only after the intervention of US troops). As an aside, I wonder sometimes, would peace in 1915 perhaps with Germany retaining control of Alsace and Lorraine have been worse than all the deaths that followed, not to mention the platform the war built for the later rise of Hitler and the Nazi party?

As I said before, I am amazed that our ex-peace-protesting-hippies of the Left who would 100% retroactively say that the US should never have escalated in Vietnam after 1964 are in the lead of those who want us to fight in the Ukraine to the very end. Someone needs to tell me what's different, and I have not heard a good answer yet. Comments are open and I would love to be convinced. I can't stand Putin and would be thrilled to see him disgraced but don't know how to do it at any acceptable cost.

Postscript #1: I have a tradition here of pissing off everyone to make sure my followers and readership never get very high. So I would apply much of the same logic above to the war in Gaza. I see conservatives saying stuff like "the Gazans need to know they are defeated" but I must say after over a year of war I sure don't see it. After the cease fire the Hamas army emerged from the rubble with clean uniforms and huge crowds of crazed civilians still braying for Jewish blood. I continue to support Israel and was frankly a supporter of their trying to kick ass in Gaza in retaliation for the October massacres. But I wonder, did the last year of killing and levelling seemingly all the buildings in Gaza do a bit of f*cking good? I don't know.

Postscript #2: Gato Malo, who I enjoy and respect greatly, is among those who make the case that a peace deal with no territorial loss was available early on, but was blocked by US and UK officials who wanted a proxy war with Russia and at the end of the day likely didn't give a sh*t about the people of Ukraine.

Postscript #3: Apropos of nothing in this post, this is pretty funny. I am still looking for the Ukrainian refugee with the lhasa apso.

Headlines on Conservative outlets bragged that Trump was already turning the economy around. Breitbart was typical with this headline:

US Manufacturing Expands For Second Month Under Trump, Driven by Stronger Demand and Policy Shifts

In the body of the story they write:

After years of stagnation, the U.S. manufacturing sector is showing renewed strength under President Trump’s leadership. The latest data signal a reversal from the prolonged contraction during Biden’s term. Businesses are responding to policy shifts aimed at strengthening domestic industry, securing supply chains, and encouraging investment. [ed: no evidence is supplied for this last sentence]

This is an example of a the totally irritating genre of media stories that take the form of "President blames his predecessor for bad economic numbers" and "President takes credit for good economic numbers." Politicians' ability to do this, even when the narrative they use reverses month to month, is just amazing. Biden to the end of his Presidency was blaming Trump for every bad economic story and now, barely 42 days into in term, Trump supporters are taking credit for good economic numbers, even those magically created by time-travelling Trump in the first 20 days of January.

This connection between Jan/Feb manufacturing numbers and Trump is dead wrong for two reasons

1. The economy does not work this fast. The economy is a massive river like the Mississippi where changes in flow in Minneapolis won't be seen for quite some time in New Orleans. In particular, manufacturers are producing to orders they received weeks or months ago for customers in turn who likely are responding to orders and demand they saw even further in the past. If they are sourcing from overseas or selling overseas the delay is even longer. And negative things flow through more slowly than positive. I suppose the President on January 20 could order the CEO's of the 3 largest companies in America put up against a wall and shot and we might see the panic in the economic numbers by March 3, but I am not even sure of that.
2. I can say with total confidence -- having been a strategic planner at the top levels of Emerson Electric, Honeywell, and AlliedSignal -- that there are very few manufacturing companies in the last 60 days who have been racing to expand their business. The chaos of Trump's changing tariff demands is making planning impossible. Again, nothing changes quickly and projects in progress have to be finished, but I guarantee no one is starting new capital investments in manufacturing that they can defer. Everyone is frozen. And anyone doing business with the government or who needs Federal approval of permits is totally frozen as well because none of that work is getting done. Even if we give Trump the benefit of the doubt to say his intention is to streamline permitting and approvals, right now it is total gridlock. In government offices right now, it is gridlock where everyone has walked away from their cars. I think it is a total lock that we are going to see a dip in manufacturing investment in the coming months.

Economists have given this chaos the name "regime uncertainty" and among many free market economists exactly this sort of shifting regulatory environment under FDR gets part of the blame for the length of the Great Depression. Alex Tabarrok has more here.

The current version of Coyote's Law is something like this:

Don't give the government a power that you would not like your worst political enemy to wield

The reason for this should be obvious -- unless you intend to be the last one in power, ie your goal is to initiate a totalitarian coup with yourself left in charge -- then in the normal course of the political cycle in democratic countries, your group will eventually be out of power and your hated political enemies ensconced in your place. From today's example below, it appears that this is NOT obvious to many politicians.

A decade ago I wrote this about hate speech restrictions:

So you think that "hate speech" or speech that makes someone uncomfortable or mocks someone or criticizes some particular group should not be protected under the First Amendment.  For those on the Left (who seem to disproportionately hold this opinion), I ask you to define anti-hate-speech laws in a way that you will be entirely comfortable if, say, President Lindsey Graham (God forbid) were to inherit the power to enforce them.

A President Graham might consider speech mocking Christianity or Jesus to be hate speech.  And if mocking Christianity is hate speech, wouldn't support for gay marriage or abortion be as well?  What about mocking the military, or police -- isn't that hate speech?

If you ban some speech but not other speech, someone has to be in charge of what is in the "ban" category.  When most people advocate for such a ban, they presume that "their guys" are going to be in charge of enforcing it, but outside of places like Detroit and Baltimore, sustained one-party rule in this country just does not happen.  That is why most calls for speech restriction are so short-sighted -- they assume that people of a like mind will always be in charge of wielding these restrictions, and that is a terribly historical assumption.

The recent chaotic transition to the Trump Administration would, in a rational world, give a lot of opposing politicians second thoughts about setting precedents and creating powers that were then ready for Trump to wield and expand. Heck el gato malo discussed this very topic in the context of a future Trump Presidency back in 2023.

Robby Soave of Reason brings us a great example today, Senator Amy Klobuchar's attempt in 2021 to give the Department of Health and Human Services the power to regulate speech that touched on health:

By the summer of 2021, the COVID-19 pandemic had entered a new phase.... [and] The frustration from the public health establishment was palpable, and top policymakers within the Biden administration blamed vaccine hesitant individuals for exacerbating the pandemic. In July, President Joe Biden said, "the only pandemic we have is among the unvaccinated." Among government health advisors, a consensus quickly formed that the main culprit was medical misinformation on social media.

Biden asserted that Facebook had blood on its hands and implied that regulation would follow if moderation did not improve...

The anti-misinformation efforts were not just talk: They had a legislative component as well. Sen. Amy Klobuchar (D–Minn.) was particularly animated on this issue. On July 22, 2021, she introduced the Health Misinformation Act, which would have granted broad new powers to the secretary of Health and Human Services (HHS). These powers would have included the ability of the secretary to reduce online platforms' protection from liability under Section 230, the federal law that immunizes websites from liability for users' speech. In effect, Klobuchar's bill would have established that the federal government could use a public health emergency as a pretext to erode vital free speech protections at the whims of HHS.

It is clear whose speech Klobuchar was interested in censoring: The press release accompanying her bill explicitly mentions the so-called disinformation dozen. Klobuchar and her fellow Democrats sought to empower the HHS secretary to censor COVID-19-related speech with which they disagreed.

Needless to say, the Health Misinformation Act never became law, which might be a relief to Klobuchar at present. That's because the secretary of HHS is now Robert F. Kennedy Jr., one of the very social media users accused of being a misinformation super-spreader. If her bill had been enacted, it would have eventually empowered Kennedy—someone who has been accused by Democrats and the mainstream media of encouraging vaccine hesitancy by promoting the idea that vaccines are dangerous—to make determinations about what counts as misinformation online.

It would be hilarious to ask Ms., Klobuchar if she intended to reintroduce her legislation in this session.

In the first part of this series, I wrote

Many readers will know that I have spent 25 years working with government agencies in a company that privately operates public recreation facilities.  Not infrequently I have had my managers, in frustration over something our agency partners have done or not done, complain that the folks they are working with in the government are “bad” people.  More generally this is a common refrain of government critics, that state agencies are full of “bad” people.  I always disagree with them.

The people that the government hires are no different on average than the people hired in private industry.  Sure, there is some self-selection as people may migrate to institutions they trust more than others or to work cultures they find more appealing, but this is true as well among private entities (e.g. choosing to work at a startup vs Exxon).  My strong belief, from theory and long experience, is that when government employees appear to act “badly” or irrationally, it is not because they are (or began as) bad people but because they are working in an organization with terrible incentives and a counter-productive performance management system.  This is not unique to government organizations – many or most of the great failures of once-proud private companies have come about due to issues with incentives.  The difference is that when private organizations go bad, there is a culling by customers and competitors that has no equivalent in the perfect monopoly of government agencies.

In this post, I want to go further into incentives and metrics helping to explain the behavior of government agencies. In particular, I want to look at two interrelated complaints often voiced about government agencies: "why are they so inefficient and/or slow?" and "why do they say 'no' to every new idea?" The answer to both comes down to performance metrics.

But in looking at the performance metrics of government agencies, we immediately run into a problem: many, perhaps most, government agencies don't have any written performance metrics or productivity standards for the majority of their employees. I have worked with public recreation agencies for decades (think NPS, USFS, BLM, state parks, etc) and I have never once seen anyone with a set of written performance metrics relevant to their job (some agencies will claim hey have metrics and then point to their 200-page strategic plan that was crafted a decade ago).

I understand that creating a good set of job-related performance metrics might be hard for some staff functions, but even for people, say, running a park I have never seen any goals for expense reduction, visitation increases, or visitor satisfaction (eg customer review scores) -- all metrics every one of our managers who privately operate public parks have. And even when they do have performance metrics, they are often for the wrong things (** see bonus story in the postscript).

So is Coyote full of sh*t? How can their behaviors be driven by performance metrics when they don't seem to have any?

Here is Coyote's first law of incentives: There are always incentives. If they are not embodied in written performance metrics, then there are unwritten ones that rule behaviors. And these unwritten incentives are generally a) very powerful and b) almost never aligned with the greater organization's goals.

If there is a very good manager, the incentive might be that manager's praise and recognition. Small teams can sometimes be energized by a shared mission they all believe in. To some extent the agencies I worked with were better than most because public lands agencies (eg NPS, state parks) attracted people with a sense of mission which could motivate people even when the organization did not.

But in general, government employees operate in a vacuum without any positive metrics -- they can't prove themselves by meeting or exceeding this or that goal because the goals have not been assigned and are not measured. So the default metric becomes this: to avoid screwing up.

Government employees operate in a web of hundreds, even thousands of procedural rules. The most obvious of these are very strict budgeting rules where (unlike in the private world) money is not fungible but is divided up into scores of buckets and has to be spent within both the dollar limit of its bucket and the narrow expense categories the bucket is assigned for. Everyone lives in fear of violating these spending and budget rules. I will give one example -- I know of $4 million from a private insurance settlement in favor of a public agency that has languished in a private bank account FOR FIVE YEARS because the government agency can't figure out how to receive the money and decide what account it should go in. Fearful of making a mistake, the money sits dormant.

But beyond money-related rules there are scores of others -- rules for environmental reviews and approvals and rules for archeological reviews of any digging. We had to replace a road culvert a year ago in California on public lands and among the 12 reviews that had to be completed was an historical review to make sure the culvert was not some sort of historical artifact. I remember we inherited a shack on the end of a dock that we wanted to replace (because it was falling apart) and the agency who owned the dock said "wait a minute, we think that is a historic building." I have to admit I laughed pretty hard when my COO lost it and said "then I will drop the f*cker on the Washington Mall in front of the Smithsonian for all the tourists to see but it is unsafe where it is and needs to be replaced."

And the list of rules keeps getting longer. When the organization has new top-down initiatives, they are layered on top of all the other initiatives and mandates to add more layers of review. In several California agencies, for example, simple contract changes have to be reviewed automatically by BIPOC and gender groups. There are climate and sustainability reviews of everything.

And all of the above does not even get to the subject of decision-making authority. In many organizations people are unclear who has the authority to make a decision, so "to be safe" they will kick it upstairs to their boss. Who might kick it upstairs to their boss. The hardest problem we often had in working with agencies was, even when we were pretty sure person X could approve our request, person X often felt safer kicking the decision to a higher level. Now the decision is on the desk of someone who isn't directly involved with the issue, and thus who is reluctant to do make a decision for something they don't really understand.

I want to remind folks that this is intended to be sympathetic -- the behaviors that can be so irritating are NOT the result of bad people being jerks. They are the rational responses of absolutely normal people operating without positive incentives and walking through a minefield of ways to screw up.

All of this leads logically to several behaviors:

• If you go to an agency for a decision, there is absolutely nothing positive they can gain from the situation. They don't get rewarded for satisfied citizens or number of requests approved. What looks like a simple decision to you is fraught for them. Every decision is a chance to screw up on any one of scores of rules without any possible upside for them.
• Even the simplest approvals and decisions take forever. Given that they are now saddled with your request, they are going to make sure they respond to the only incentive they have, which is to make sure they can't get criticized later. They are going to run an environmental review even if it is not necessarily required. They are going to insist a historian does an evaluation. They are going to check with their DEI folks to make sure you are being inclusive. They are going to kick the decision upstairs one or more levels higher than they actually need to. Meeting after meeting will be held with everyone who could possibly be involved, sometimes over a dozen people.
• They will not care about the time, because they are not rewarded for responding quickly. They have no upside and can only focus on making sure that they don't skip a step some later Monday morning quarterback thinks they should have followed. This could, by the way, be by an external group -- say the Audubon Society or a tribal group -- that sues the agency for its decision. The US Forest Service, which has to balance diverse activities on public land from mining and off-road vehicles to conservation, is sued over everything.
• The default answer is "no." Every "yes" is a risk, and government employees don't get any reward or recognition for a "yes." But they frequently get called on the carpet or trigger a lawsuit when they say "yes."

I will add that every agency has brave people who get positive things done for the public and their agency despite the incentives above. I met one such person a few weeks ago, Superintendent Trimble at Mammoth Cave National Park. He and his team are doing a fabulous job creating new ways for the public to enjoy the park. But folks like this are recognized and stand out as exceptions. It takes an unusual person to rise above this quagmire of bad incentives. Many folks that see these problems but don't have the nerve or energy or skill or will to persevere eventually leave government service for other things.

There is a lot more I want to get into on this, but before I do I want to step back and review another old business-economics chestnut, the agency problem. That will be the next post.

**Postscript -- Bonus Story. It used to be that California State Parks had a rule that only front-line employees badged as law enforcement could be promoted to higher ranks of the Agency. This was incredibly limiting and distorting and my favorite parks director Ruth Coleman got the rule changed 10-15 years ago (she later took the fall for a financial problem in the state, in part I think because the union was still angry about this change).

Anyway, before this change (and as a good illustration of why the change needed to be made) I was going to visit one of their parks and looked at the online reviews. They were terrible! Apparently the state park rangers handed out a zillion parking and related citations. When I visited their office, I saw on the wall a performance metric! Apparently there was a tracking sheet showing who had made their minimum citation goals and issued the most tickets. Apparently since this was the only metric they had, this is the one they focused on. And according to the reviews, they did a bang-up job finding any excuse to drop a citation on their visitors. But these were the folks responsible for the parks management -- it was like a McDonald's manager spending all their time citing customer cars in the parking lot. It was crazy.

Part of a Series:  Organizational Design, Behavior, and Change

To understand why organizations grow senescent, get fat, and fail – whether they be public or private – there is probably no topic more important than performance measures and incentives.  Many readers will know that I have spent 25 years working with government agencies in a company that privately operates public recreation facilities.  Not infrequently I have had my managers, in frustration over something our agency partners have done or not done, complain that the folks they are working with in the government are “bad” people.  More generally this is a common refrain of government critics, that state agencies are full of “bad” people.  I always disagree with them.

The people that the government hires are no different on average than the people hired in private industry.  Sure, there is some self-selection as people may migrate to institutions they trust more than others or to work cultures they find more appealing, but this is true as well among private entities (e.g. choosing to work at a startup vs Exxon).  My strong belief, from theory and long experience, is that when government employees appear to act “badly” or irrationally, it is not because they are (or began as) bad people but because they are working in an organization with terrible incentives and a counter-productive performance management system.  This is not unique to government organizations – many or most of the great failures of once-proud private companies have come about due to issues with incentives.  The difference is that when private organizations go bad, there is a culling by customers and competitors that has no equivalent in the perfect monopoly of government agencies.

I will return to the issue of government incentives in the next post, but I want to reinforce the importance of incentives to organizational failure by discussing one famous private example, a company everyone thinks of as failing due to fraud and malfeasance – ie bad people – but whose downfall was at its core due to bad incentives:  Enron.  In what follows I don’t want to take away from the criminality of various executives.  But I believe the failure at Enron started WAY before the criminality and was rooted in bad incentives.

The story starts with Jeff Skilling coming to Enron to implement the gas bank model he came up with at McKinsey.  Having personally been on this study for a brief time (as a very junior associate), I don’t think there was anything particularly wrong with the strategy.  The problem was perhaps in Jeff himself.   As has been reported many times, he was certainly brilliant, but my guess is that he was likely manic-depressive, and he certainly did not have a very good read on people.  I won’t say he was on the spectrum but had a sort of quasi-autistic inability to understand how people really tick.  He could fall in love with his own intellectual creations, which might be marvelous in theory, but fraught in actual implementation with real people.

Here is my theory – the downfall of Enron can be traced directly to Jeff Skilling’s implementation of what he called “mark-to-market accounting” for new Enron contracts, an academically intriguing idea that met with disaster in the face of real people.  To understand it, we first need to know what he meant by “mark-to-market accounting."

Since the dawn of capitalism, enterprises have struggled with how to provide the proper incentives to their sales force and dealmakers.  The simplest example to reward salespeople with a percentage-of-revenue commission.  It certainly seems logical to reward salespeople for making sales.  But even something so simple quickly becomes fraught when it encounters real human behavior.  The problem is that sales people will chase the easiest sales with the highest discounts, building a book of business that maximizes their commissions but may miss the most profitable sales. The same is true for deal makers, who (if allowed) will pursue the riskiest deals with the highest potential returns, leaving the company on the hook for future potential losses.

And this problem was an order of magnitude worse at Enron, where Skilling implemented a strategy in which traders are tasked with executing complicated long-term deals.  Traders were executing deals as long as 20 years in which natural gas might be bought here and then sold there and then converted to electricity which is sold somewhere else all tied to a capital investment at a certain plant and sale of tax credits to other companies.    Most, meaning pretty much all, companies would account for this by simply reporting the net profits from this deal in each year as they occur.  But what if most of the profit in the deal was 10+ years out?  Should the company, or the individual dealmaker, really have to wait 10 years to be rewarded?  Would the organization even bother pursuing these contracts if that were the case?

Skilling hated this traditional accounting.  Companies are often criticized for not thinking about the long term – how can one reward the organization for selling business 20 years out? He believed strongly that once the deal was signed these gains were all earned and locked in, such that the present value of the contract was essentially earned at signing and should be booked at signing.  Rather than waiting 20 years for the earnings to flow through, Skilling wanted to book the whole profit immediately, crediting both the company and the individual deal-maker with the entire value immediately.  This is what he called mark-to-market.  All the present value of profits from a multi-year contract would be booked when signing the contract.  And the deal maker would be rewarded for a percentage of those profits on signing.  Like much of Skilling’s thinking, this was a theoretically compelling approach.

Mark-to-market was a term well known at the time in the banking and securities world.  It refers to the process of adjusting the book value of investments to their market price.  All well and good – this was something the government was trying to get banks and financial institutions to adopt – so the government was open to approving Enron’s proposal for what was very unusual accounting in the energy world.

The problem for Enron was that they were, by their own admission, doing deals that were unique, that no one else was doing.  So how does one establish a market price?  Not everything was locked in by the contract – profits might depend on commodity prices or cost overruns or interest rates or even the bankruptcy of a counter-party.  Skilling may have called it mark-to-market, but that was effectively impossible. What Enron was really doing could more reasonably be called mark to forecast.  The forecasted revenue and profits for the contract would be recognized immediately on signing.

And now we arrive at the disaster.  Enron had the dealmakers themselves creating the pro formas or forecasts from their deals from which the present value determination was made.  So, what is this forecast going to look like?  The forecasts were going to be hugely optimistic -- the deal is going to make a freaking fortune with little risk, the forecast is going to be a hockey stick upwards.   This does not necessarily even require fraud – every sales person and deal maker who has ever existed is optimistic about their own deals.  And given that these are 20-year forecasts, the valuation of the deal might turn on the price of natural gas 20 years out.  Whose to say that $5 is more or less reasonable than $3?  The net effect is that all the mark-to-market valuations skewed high.

Skilling and Lay seemed mostly blind to this problem.  They did (nominally) create internal agencies that were meant to neutrally review deals and these mark to market valuations.  But these groups got little support from executives, particularly when deal makers seemed to be making so much money for the company (at least on this mark-to-market basis).  Deal makers had become the elite of the organization, virtually unchallengeable even by staff originally tasked with challenging them.  And remember that Lay & Skilling’s prestige and compensation – not to mention the compensation of every manager at Enron given their compensation system -- was largely stock-based, and the stock price was being driven up by the stacking up of these skewed mark-to-market valuations of projects, causing the company to effectively pull forward years of future (potential) earnings into the current year.  Anyone who started challenging project valuations was effectively attacking the entire organization’s compensation.

Enron eventually applied mark-to-market accounting to everything.  Change in tax law?  Take a one-time gain for expected net present value of decades of tax breaks.   Sign a video streaming deal with Blockbuster?  Immediately book profits for 20 years of hypothesized streaming revenue.  Of course, if the assumptions behind a deal were to change for the worse – say a reduction in natural gas prices from those forecast – then there should have been a mark-to-market loss taken on the contract, but that almost never happened. 

This was Skilling’s underlying ethical failure – mark-to-market was his conception, and he was responsible for making sure both halves of the process were implemented:  both taking credit for future gains when contracts were signed but also taking losses for impairments on those future results as they became obvious. I am not sure the mark-to-forecast approach could ever have worked in the real world, but its only chance was to have Skilling create a strong ethics and value structure in the company around rigorous and honest evaluation of current and past marks. And that sure as hell did not happen. If anything, Skilling behaved in the opposite manner, rewarding creativity in evading any loss and eking out new gains from re-marking past projects with rosier assumptions.

Enron’s reported results quickly began diverging from reality.  Reported results looked fabulous, as they were based on stacked project valuations that were in turn based on optimistic forecasts of dealmakers who had every incentive to be optimistic.  But at the same time many of the deals were crap – some just projects where core assumptions such as natural gas prices had not played out as expected but increasingly including dumb domestic merchant investments and even worse international projects.  Crap projects were being approved based on insanely optimistic forecasts that no one had an incentive to challenge. Eventually, in bankruptcy, outsiders would be staggered by how much of Enron’s investments were absolute money-losing garbage.  Enron’s strategy went awry almost from the beginning, but that fact was hidden by the bad measurement system and so Enron kept doubling down on worse and worse investments, with the inflated mark-to-forecast numbers convincing everyone, especially themselves, that they were brilliant.

At some point the divergence between mark-to-market project values and actual results could not be ignored, and with the refusal to mark project values down, some other alternative was needed.   The solution they found was via corporate weasel Andy Fastow, their CFO who created off-books entities to hide losses from bad merchant investments rather than mark the losses to market.  Because the bad deals created little cash, new borrowing was constantly required which again was dumped into off-books entities (which were made worse by Fastow’s gluttonous self-dealing). 

It is these deals that get most of the historic attention, but in my mind, the off-books fraud merely delayed (and magnified) the reckoning of an organization already set up for disaster by the incentives and measurement plan of mark-to-market accounting that Skilling put in place.

Today I am starting a new series on organizational design and behavior and the very difficult process of creating organizational change.  To some extent this is a return to my roots on this blog, and to some extent it is an admission that I have no desire to hover around my computer for enough hours in the day to keep up with the incredibly rapid news cycle the Trump Administration is driving.

But that does not mean I intend this to be irrelevant to current politics.  At the core of a lot of what is hitting the news – DOGE investigations, government headcount reductions, government employee accountability – are issues of organizational design and behavior and of how organizational change can be managed.  Most of the media discussion of current actions by the Trump Administration is not at all informed by any reasonable assumptions about how organizations work or how they can be improved. 

To some extent I started this series out of order, beginning with a post on downsizing before I ever thought of this as a series.  I realized after I wrote that post that I wanted to take a step back and cover more background first.  In my next post I shall embark on the series, starting first with incentives and performance measures.