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Indiana’s Mitch Daniels and the structure of incentives in government

Those of you who follow my blog know that I've long been concerned that the incentives for people that work in government tend to lead to perverse consequences.  You get rewarded for having big budgets and lots of people to supervise.  Cutting costs and making things more efficient is often rejected by the system.  Doing things more productively, which is rewarded in the private sector, is not in the public one, by and large.  Let me also include my usual disclaimer – I'm not anti-government at all and have a degree in public policy.  It's just that the adverse incentive problem requires highly skilled political skill to overcome, and is not particularly well rewarded. 

It was really encouraging, therefore, to read this article about Mitch Daniels of Indiana.  Daniels, the article reported, has tied cash and other incentives to job growth and cost reduction.  It reports that Indiana, which has 2% of the nation's population, has generated 7 percent of its new jobs.  Among other things he's supported are outsourcing some services, getting a handle on labor costs, privatizing a toll road and, ironically, increasing the number of caseworkers who look after children at risk and increasing the number of troopers patrolling the roads. 

One myth that many believe is that the private sector always does things better than the public sector.  Research fails to support that idea.  What is true, instead, is that the structure of incentives matter, and that all too often in the public sector they do not align with the public interest.  This was pointed out in a very enlightening editorial in the Wall Street Journal that suggests some practices that could bring incentives into better alignment.  Perhaps Governor Daniels gives us an additional practical example of how we might help government to become more efficient. 

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