Coyote Blog

Currently, most Americans seem to be largely carrying on as normal during the Federal government shutdown.  I know I am able to pretty much completely ignore it.  Looking at front pages of sites like the WSJ and CNN, stories on the shutdown are still there but are certainly not the lead, center pieces.  This is the government employee's nightmare, where they effectively go on strike and no one notices.

So where will enough public pain come from to force concessions on one or the other party in Congress? The game used to be closing high visibility public parks to tick the citizens off, but a lot of parks are still open today under private management (I know, my company operates hundreds of them).  Want to see the volcano erupting in Hawaii?  The Volcano House we operate in the National Park is still open.

My new hypothesis came from my wife, who was worrying the other day whether we would be able to make some critical flights in early November.  I initially scoffed, but thinking about it more, I think the TSA and more particularly the FAA may be the key to this shutdown.  Already this year, antiquated systems from years of government mal-investment combined with understaffing and poor training have led to manpower shortages and sick-outs in certain locations, particularly Newark.  Now, the FAA is apparently working unpaid. If they were walking out when they were being paid, things can only get worse with them not being paid.  I can easily imagine rising flight cancellations that will get great play in the media -- TV news is very experienced at showing masses of people camped out at the airport due to cancelled flights and interviewing people with heartbreaking stories about weddings and such missed.  Three or four days of that kind of mess leading the news each night and the R's and D's will quickly find some sort of accommodation.

This is all ironic, and somewhat infuriating to this libertarian, as the FAA and TSA should have been privatized years ago, and such privatization works just fine in Canada.  This issue of privatizing the FAA actually came up last April during the bad Newark slowdowns but the Trump Administration passed on the opportunity.  If the FAA is the entity that generates the most pain in the shutdown, these discussions might get restarted.

A two-fer!  This is from Yglesias's very good article on passenger rail also quoted in the previous post.  In discussing why Amtrak is generally uninterested in making incremental improvements on the Northeast Corridor, he writes:

The way Amtrak is currently set up, there's no real incentive to undertake incremental improvements. The Northeast Corridor already generates an operating profit, which simply defrays losses elsewhere in the system. Making it run better doesn't generate any wins for the people who would have to do the work, and would plausibly just lead Congress to reduce subsidies. If the NEC were spun off as an independent entity — perhaps even a private company — then it could internalize the gains from improved service and seek private financing to make cost-effective investments.

Long-time readers will know that my company privatizes the operation (but not the ownership) of public parks.  I will make two-hour presentations to parks agencies about how we can improve operations quality while cutting costs by 30-50% or more, and the near-universal response is, "well, if you reduce costs, then the legislature will just reduce our appropriations."  More efficient park operations, and at the margin better visitor service, don't create any wins for agency employees given their incentives.  In fact, if the parks are improved and more people show up, their job is just harder.  I had the manager of Arizona's premier state park tell me, absolutely in all seriousness, that he had the best job in the world if it wasn't for all the visitors.  Can you imagine a McDonald's franchise manager saying that?   As I have always said, government is not populated with bad people, it is populated with perfectly normal people who have terrible incentives.

When agencies choose how to spend incremental funds, they will almost always try to route these to the agency staff, in the form of more headcount and/or more pay.  When money is actually spent to make investments in the parks themselves, projects are chosen not by return on investment or customer priorities, but based on which ones will create the most prestige for the agency and its leaders.  This latter is one reason the Washington Metro is the mess it is, as the agency and the politicians who make appropriations will always prioritize system expansions over capital maintenance and sensible incremental improvements.

Folks on the Left prefer public institutions over private ones because they percieve them as more "fair."  But the power of lawmaking and police and prisons allows public institutions to be far more abusive than private entities could ever be.  We spent months and years torturing ourselves about accounting abuses at Enron, but these are trivial compared the accounting shenanigans state institutions engage in every day.

Or consider this, from Europe, particularly the first bit

“In the event of default (i) any non-official bond holder is junior to all official creditors and (ii) the issuer reserves the right to change law as needed to negate any rights of the nonofficial bond holder.

.

“We should not underestimate the damage these steps have inflicted on Europe’s €8.4 trillion sovereign bond markets. For example, the Italian government has issued bonds with a face value of over €1.6 trillion. The groups holding these bonds are banks, pension funds, insurance companies, and Italian households. These investors bought them as safe, low-return instruments that could be used to hedge liabilities and provide for future income needs. It was once hard to imagine these could ever be restructured or default.

.

“Now, however, it is clear they are not safe. They have default risk, and their ultimate value is subject to the political constraint and subjective decisions by a collective of individuals in the Italian government and society, the ECB, the European Union, and the International Monetary Fund (IMF). An investor buying an Italian bond today needs to forecast an immediate, complex process that has been evolving in unpredictable ways. Investors naturally want a high return in order to bear these risks.

.

“Investors must also weigh carefully the costs and benefits to them of official intervention. Each time official creditors provide loans or buy bonds, the nonofficial holders become more subordinated, because official creditors including the IMF, ECB, and now the European Union continue to claim preferential status.”

This is not to say that bondholders in private entities don't get crammed down in a refinancing or bankruptcy.  But here we are talking about differential treatment of holders of the exact same class, even issue, of securities.