The Lifecycle of Bureaucracy   (December 2, 2010)

All bureaucracies share a lifecycle of growth, self-protection and implosion.

Yesterday I discussed the doubling, tripling and quadrupling of the "big ticket" household expenses: property taxes, public college tuition and healthcare costs.
( Inflation Is Rampant in Tuition, Healthcare and Property Taxes).

Correspondent Andrew T. asked:

Why are those things going up so drastically in cost? Cui bono? (To whose benefit?)

The common thread I could immediately see after the first few sentences was the public sector employees and their unions who inhabit those entities.

Andrew writes from Canada, where healthcare is overtly a public/Central State service. But in the U.S., if you tote up Medicare and Medicaid, the Veterans Administration healthcare system (over $1 trillion per year for the three agencies) and all 2,300 pages of regulations on the so-called "private" healthcare system (profits are privatized, costs are socialized), then what you have is a defacto government-controlled healthcare system with all the fraud, fiefdoms, waste, duplication, and resistance to efficiency of a government bureaucracy.

Before we get to the lifecycle of bureaucracy, I want to be clear this is not a slam on people who dutifully work in bureaucracies. Bureaucracies arise to serve a social or political need (or perceived need) in an organized fashion, and systems of management, accounting, oversight and so on are required.

But just as bureaucracies arise, they also ossify, devote their energy to self-preservation and then implode.

We can see how this works in this chart of the University of California system's count of faculty and administrators. I suspect this phenomenon is universal in state-funded universities: bureaucratic staff that have nothing to do with the classroom, research or teaching grow to dominate the payroll and the budget.

Much of this is human nature: if the budget can be expanded to serve my department or agency, then it will be expanded. There are other organizational tropisms as well: ENA, for example: "everyone needs an assistant," including the current assistant.

When an economy is growing rapidly, then the waste, fraud, duplication, inefficiency and bloat go unnoticed because tax revenues and the budget are rising even faster than the bloat and inefficiency. The problem arises when tax revenues fall. Then the bureaucratic impulse to never-ending growth is stymied, and the various bureaucracies turn inward as they muster their forces to wage internecine warfare with other protected fiefdoms.

(That's straight from the Survival+ critique.)

Self-preservation become the paramount concern, and the original purpose of the bureaucracy is buried beneath the urgent priority of saving perquisites, benefits, staffing, and budgets.

When cuts are required, the actual service provided is slashed to maintain bureaucratic bloat. Thus the Administration of a university suffers simulacrum cuts (a "hiring freeze," etc.) while the teaching and graduate-student teaching assistant staff levels are slashed and burned.

"Tip of the spear" military forces and readiness are left twisting in the wind while the thousands of senior officers in the Pentagon and Services jostle for promotions. At the point of implosion, there are more captains, colonels and generals than actual war-fighters. (There are plenty of barbers, cooks, waiters and assistants, though, to serve the senior officers.)

Benefits for the survivors are left basically untouched while new hires are fired to preserve the budget for those with seniority.

At some point, the mission of the bureaucracy is completely lost, and the citizens' patience with institutional incompetence and self-aggrandizement finally runs out. Although it seems "impossible" in an era where the Federal Reserve just conjures up $1 trillion and the Federal governments sells $1.3 trillion in bonds every year to fund its ballooning deficit, bureaucracies can and will implode.

On a small scale, we are seeing this process in action as small-town police forces are disbanded. This process will eventually be seen in smaller cities merging with adjacent cities to cut costs.

I have prepared this visual representation of the bureaucratic lifecycle:

DISCLOSURE: I was stopped out of my short positions yesterday; selling for a loss to protect capital is standard operating procedure for any trade. The market may well have reversed and I am considering a short-term long position.

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