Statue of Liberty

The Dysfunction of the Most Common Budget Negotiation Tactic

Malicious Compliance

Policymaking in a large organization is a complex activity. Everyone likes to compare public budgeting to household budgeting, but they are actually very different processes. In a household budget, one -at most 2 -people have total control over both the inflows and outflows and have a generally complete understanding of all the assets and liabilities of the household. All the necessary information is contained in a single mind, or shared with a very simpatico mind, and the required balances can be made with full information.

Large organizations, and especially governments, do not have this. Large private organizations can condense information down using markets and price signals. All the information about tradeoffs, inflows, and outflows for a privately purchased production input is contained in the price for that input. Large organizations, however, still have to make quite a few judgements themselves. Which inputs do we use? Do we substitute capital for labor? And if the organization is large enough that all the requisite information cannot be held in a single mind, but must be spread throughout the organization or decentralized, then there will be coordinators (we call them managers) who the organization cannot live without, but for whom there is no market price for their product. How many managers do we need? How many lawyers and accountants? Indeed, entire branches of Accounting exist to answer these coordinating and costing questions.

But governments lack even the bottom line of private producers. There is no market for what government produces. Furthermore, government has a very hard time segmenting its products for its clients. We can only have one foreign policy, one army, one road network, and so forth. As a result, Governments have to make decisions by bringing in tremendous amounts of information, synthesizing it down, and making authoritative decisions. Once those decisions are made, governments then have to rely on their agencies to implement those decisions and report back the tremendous amount of information necessary to make adjustments to the policy. And you may have noticed a weakness in the system at that last step.

Lately we’ve heard a lot about “Malicious Compliance” by the Federal Agencies in response to Donald Trump’s executive orders at the start of his second term. Strictly speaking, this is not what is happening. Malicious Compliance, also called Work to Rule or a White Mutiny, is obeying commands exactly as stated rather applying common sense, generally accepted behaviors, or other forms of tact to obey both the letter and the spirit of the order. In this particular case, the orders are being creatively interpreted to create political problems. However, “malicious compliance” certainly gets the gist of the complaint. The problem, however, is much worse than it sounds. These are the signs of dysfunctional organizations.

Getting in the Loop

The above described process of information gathering, decisionmaking, implementation, and review is called “the loop” and is a key enough concept that at some future date I’ll do a whole essay about it. For today, the important thing to realize is that in large organizations there are no single decisionmakers. The CEO does not say “do this” and it is done. Rather, the CEO says “do this.” And that information travels along the loop the CFO who says “do that.” And that information travels the loop to the factory managers who say “do thusly.” And that information travels the loop, and travels the loop, and eventually the loop closes back at the CEO who learns what, exactly was done and what the results were.

If the CEO doesn’t like the results, he issues another “do this” order and the loop runs again. Malicious Compliance is like an anti-telephone game on the loop. Every order is applied exactly as stated, so important information that would usually be added by the participants in the loop is not added, and thus the decisionmaking is bad, and the hope is that when the loop closes on the CEO he will recognize the need to incorporate more of the loop in the decision process (say, via labor negotiations). What we’re seeing today is, instead, bad information being deliberately injected into the loop. When I worked in government, this was called the Statue of Liberty Play.

Statue of Liberty

An important thing to know about the kind of people who go to work in local government is that they are both very smart and also very cool (dweebs don’t get elected -quarterbacks do). As a result, they like both puns and sports. The Statue of Liberty scratches both itches. In football, the Statue of Liberty play is a trick play formation where, after the snap, the quarterback hands the ball to a running back while falling back and raising his arm as if to throw. As a result, he looks like he’s raising a torch, and hence “Statue of Liberty.” When it works, it convinces the defense that the ball is going one way via throw, while its actually going the other way via running back. The defense then jumps all over the quarterback and the receivers while the offense gets what they really want: improved field position or a touchdown.

The prototypical political version of the stunt is that the governing body, say Congress or the City Council, solicits budget requests and, having received them through the loop, sends back through the loop that the budget is too high and needs to be reduced. Then an agency, say the National Parks Service or just the Parks Department, reports back through the loop that the only way they comply with that order is by closing the Statue of Liberty. Hence “Statue of Liberty play.”

I didn’t say they were good puns. I guess some people thought it was lame enough I’ve also heard this called the “Washington Monument Plan” which is descriptive, but honestly I find it considerably less evocative.

When it works, the entire budget conversation gets sidelined while the City Council instead goes to war with the Parks Department over that particular decision rather than focusing on balancing the budget, and meanwhile the departments are creating hostile political positions that the City Council has to deal with rather than balancing the budget.

And if you are guessing that a primary way to solve this problem is to just cave and paper over the fiscal hole, you now understand how “independent bureaucracies” bankrupted New York City in the 1970s.

But Wait, It Gets Worse

All this information is getting passed through the loop, but the information coming back to the governing body isn’t accurate information. There are many ways the parks department could reduce their budget. Maybe all of them suck, but that isn’t the information being put back in the loop. The information being put back in the loop is “we’re going to close the parks,” and that information is transparently false.

So when the information gets back to the governing body, they are responding not to accurate information but to false information and, more importantly, information they know was deliberately falsified and put in the loop.

How do you respond to people who you know are lying to you? How do you respond to people you know are trying to manipulate you?

There are many healthy ways to respond to manipulation, but unfortunately they are not often available to governments or large organizations (“fire all of them” is, in fact, a healthy response, but usually impractical). So what we have instead are dysfunctional responses -most prominently, counter-manipulation.

If the Parks Department threatens to close a park if their budget is slashed, the Council can respond by ordering the parks open -but this will simply result in the dysfunction moving to another part of the department, like squeezing a balloon. To control the bad behavior, the council will have to micromanage the department to a level that if it were possible the city wouldn’t have created a parks department in the first place. Meanwhile, oversight of other departments suffers.

So the more common dysfunctional response is the “Black and White Make Gray” response. You let it slide this year -the department got one up on you. But the council knows that this department lies. So, next year when the budget request is sent out, when the budget numbers come back to the Council, they discount the information being sent to them. There’s no request for clarification or revision. The council just takes the numbers they are given, reduces all of them by 20%, and promulgates the budget accordingly.

The following year, the Parks Department responds by inflating their budget request by 20% and the City Council responds by deflating it 40%. It does not take long for this dysfunctional process to get to the point where all the numbers are completely disconnected from reality, all the information is lies meant to provoke a particular reaction, and the loop completely breaks down.

And this is how governments and organizations go bankrupt and get to the end of it and say “we never saw it coming.” Because all the information they were working with was bad and aimed at controlling the actions of others and not actually communicating good information.

But wait, it gets even worse. Once this process starts, even honest managers have to participate in it. Not knowing which agencies are lying in the loop, governing bodies usually apply these Black and White responses to the entire organization. So if you, foolish administrator, report accurate numbers and needs, you will still get your budget cut. And if you try to appeal that your information is accurate, the governing body has no reason to believe you because the liars say that, too.

It’s Gresham’s Law for bureaucracy.

Can Anybody Play This Game?

Solutions to problems in the Loop are a topic for another day. But, briefly, this is the reason why good administrators know to resign when they have lost the confidence of their governing bodies, and it’s the reason why new leadership often sweeps aside all the old department heads and brings in their own team which has a track record of trust.

But, unfortunately, once this behavior becomes ingrained in the process and Gresham’s Law kicks in, often the only way to address it is to fire everyone -even the janitors -and rebuild the organization.