An idea to improve governance

The era of massive American corporations reached its zenith in the 1950s. The dominant way of thinking at that time was simple:  hierarchical, chain of command and working your way up were valued tremendously. 

As a worker in 1950s corporate America, you followed your boss’ instructions. You worked for GE, showed up from 9-5 every day and were loyal to a T. In return, GE made an implicit promise: stay here for decades, work hard, we’ve got you. We’ll take care of you, ensure you and yours a stable income, and give you a Rolex and a pension when you retire. 

Loyalty – not efficacy, skill or initiative – was rewarded. Show up every day, don’t fuck up too badly, and we’ve got a place for you. 

This approach worked, to an extent. The corporate structure incentivized a lack of individual mistakes rather than risk-takings and “capturing the heavens”. In micro, these decisions make sense for the individuals in the system. In the macro, it led to bulky corporations that were wildly inefficient. 

What else does the 1950s corporation remind you of? 

– Slow

– Rewards loyalty, not risk-taking

– Inefficient

– Run largely by those of average achievement 

– Known for cost-overruns, time-overruns

– Highly bureaucratic 

What happened between the slow corporation of the 1950s and the rise of today’s crop of startups, which are among the most nimble and innovative companies in the world?

Skin in the game. 

Startups (beginning with the “Traitorous Eight” of Fairchild Semiconductor) gave their employees equity. For the first time, early employees had a feasible path to getting rich by joining a new company and sharing in the upside. 

The second-order effects of giving employees skin in the game was even more important. Because employees (by and large) wanted to *win* more than they wanted *not to be wrong*, they created an organizational culture that was far more tolerant of failure than the corporate behemoths of the 1950s. They were open to new management techniques, trying new organizational structures, new funding mechanisms and new ways of dressing at the office. 

And, if the new things they tried ended up working, everybody got rich. 

***

Today’s government operates similarly to the corporate behemoths of the 1950s. Slow, bureaucratic, inefficient and largely ineffective. 

Never before in my lifetime has this been more obvious than in how our government agencies have (at large) bungled the COVID-19 situation. 

Comparing the US’s response to that of other countries (South Korea, Taiwan, etc) makes it clear: the virus is not an indomitable enemy. It can be beaten. But not by our current  institutions. 

Our institutions (media, government, etc) are sick, dying. For lack of a functional FDA, tens of thousands will likely die. For lack of a coordinated national (or even state-wide) response, tens of thousands will die. Trillions will be spent to resuscitate our economy. It’s unclear if it will be enough. 

Why? How could the world’s largest, wealthiest economy be brought to its knees by a virus that Taiwan contained with far fewer costs and lives lost? 

It comes down to our institutions. Even within this crisis, it’s been shocking to compare the response of our government with the responses of America’s highest-functioning institutions (entrepreneurs and startups). You want masks delivered? Where cities and states have failed you, Flexport will provide

While the state of Massachusetts waits on masks from the government, private individuals step up and fly them in from China. 

While the FDA bungles an at-home test, delaying domestic testing for a whole month, as soon as regulations are lifted Abbot (link) roll out tens of thousands of tests a day, ready for approval. 

While the government puts the economy on life support, waiting 18 months for vaccines to pass a safety threshold, the Gates Foundation begins to spin up manufacturing processes to manufacture each of the 7 vaccines most likely to work. 

Why is it that our largest institutions have more power, more resources and more capacity for action… yet have handled this crisis worse than anything I can remember in living memory?

I believe a big reason is because government employees have a very similar incentive structure to those of the 1950s American corporation: don’t stick your neck out and don’t get fired. And I believe the key to unlocking the next wave of innovative, effective American institutions is the same that unlocked startup innovations in the 1950s: skin in the game. 

***

Today, if you’re a government employee, you’re getting paid to not make mistakes. And, if mistakes are made, it’s unlikely you’ll be fired (as Dominic Cummings covers). You have no skin in the game: you keep the same job if things go poorly, and get none of the rewards if things go well. 

Your incentives are not to save money as it doesn’t benefit you. Nor are you incentivized to try new things, as it’s (1) more work and (2) even if it works and drives improvements, you don’t get any of that upside. 

This widespread risk aversion and lack of incentives (financial and otherwise) make it very hard to reform the government. There’s near-zero incentives in place to try new things. 

This applies at every level of the government. If you’re the best mayor the city of Tulsa, OK has ever seen… how do you benefit? *Maybe* it translates to increased odds of later political success, but it certainly doesn’t make you immediately richer. You could be the best mayor, governor or senator in US history, and it’s hard to see how it directly benefits you… unless you later make money in the private sector a la Bob Rubin (as Taleb often mentions).

With the latest COVID-19 crisis, I’ve been wondering how we could materially reform our government institutions. And how these reforms could happen in a plausible way, from the outside: without swapping out the heads of the FDA or other government agency wholesale. And I think I have an idea. 

I’ve long been interested in the idea of Social Impact Bonds (link). Effectively, bonds that pay out upon the achievement of some previously-defined outcome. For example, you could create a green impact bond that pays out when a certain company (or set of companies) in a town lowers their CO2 emissions to a predetermined amount. Or another bond that pays out when a certain rate of recidivism is reached by prison systems in that state. 

I wonder if you could create a bond or other financial instrument that incentivized politicians to achieve a major initiative they promised on their campaign. For example, I could easily imagine some portion of the denizens of San Francisco willing to pay $100 for the streets of their neighborhood to improve, or for their local schools to get better. 

These citizens could sign a contract where they pledge to pay $100 upon completion of a pre-agreed upon milestone around street cleanliness. If that milestone was completed, that politician could receive a portion of that bond, either as a straight cash payment or as a campaign donation. 

Ideally, you’d even have politicians betting their personal funds to get something done. That’d be fun 😉 

That’s one option. The other would be to give someone – like a mayor – equity in the cities they run. If you’re the mayor of Austin, the many policies you’ve enacted over the past decade have helped Austin become the boomtown it now is. Housing prices have gone up a tremendous amount, as have tax revenues and the number of local businesses. 

As mayor, even if you were to get a tiny slice of the economic upside you’ve helped create (perhaps capped at a predetermined amount, say $10mm), you’d be a wealthy man. You’d benefit from the positive change you helped bring, and would be FAR more incentivized to work with people based on their propensity to get shit done rather than just out of a sense of loyalty. 

In short, politicians would have skin in the game. 

What’s more, it would once again make it possible (or even feasible) that the best minds of each generation enter into public service in some way. Today, the best minds of our generation are definitively not working in government. The best people (for the most part) are trying to make it in startups or finance, both domains where excellence can be richly rewarded and there is far less bureaucracy. You’d have the best operators running America’s largest, most important institutions: exactly what the country needs. 

I could imagine this working for the FDA, where a social impact bond had a QALY improvement directive, or reduction in obesity as a goal. I could imagine this working for towns and cities, where mayor’s could enact policies to promote economic growth. I could imagine this working in housing, where zoning boards are incentivized to keep the cost of housing below a certain number. 

In essence, I think a structure like the one I’m describing could work. In my opinion, it’d put us more on the path of optimal governance: once where a combination of government and the people are responsible for setting the **goals** of each administration, and the individuals are incentivized to figure out the **methods**. Rather than the horrendously inefficient, ineffective structure we have today. 

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