Learning While Governing:
Information, Accountability, and
Executive Branch Institutions
Sean Gailmard1
John W. Patty2
May 8, 2011
1
Judith E. Gruber Associate Professor, Travers Department of Political Science,
UC Berkeley; [email protected]
2
Associate Professor, Departnment of Political Science and Center for Political Economy,
Washington University in St. Louis; [email protected]
LEARNING WHILE GOVERNING
2
Contents
1 Introduction
1.1 Overview of the Book
1.2 Theoretical Foundations and Methodological Considerations
I
Acquiring Information
7
18
24
31
2 Developing Administrative Expertise
2.1 A Model of Delegation, Expertise, and Career Choices
2.2 Expertise Development by Public Servants
2.3 Using Discretion to Induce Expertise
2.4 Taking the Theory into the Field
33
37
48
53
57
3 Expertise and Deference
3.1 Congress and Administration
3.1.1 The First Hundred Years: 1787-1887
3.1.2 The Birth of Modern Regulation: 1887-1900
3.1.3 The Early 20th Century
3.2 Judicial Notice of Expertise
59
61
61
70
75
80
4 The
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
Federal Civil Service
Growth and Administration: 1789-1829
The Spoils System: 1829-1865
The Need for Administration: 1865-1883
Growing A Civil Service: 1883-1910
Classification, Efficiency, and Unions: 1910-1933
Patronage as Stimulus: 1933-1945
Sustaining Expertise: 1946-2000
Conclusion
3
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LEARNING WHILE GOVERNING
II
Sharing Information
165
5 Agents for Policy Advice under Separation of Powers
5.1 Cheap Talk with Agents
5.2 Sequential Choice of Agents: Three Versions
5.3 Political Goals: Information as a Public Good
5.4 Equilibrium Analysis
5.5 Congress’s Agent and the President’s Preferences
5.6 Extensions and Limitations
5.7 Conclusion
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189
191
194
6 Congressional Development of the Institutional Presidency
6.1 The Institutional Presidency in the Federalist Era
6.2 Re-Institutionalizing the Presidency
6.2.1 Executive Reorganization Requests, Taft to FDR
6.2.2 The Commission on Economy and Efficiency
6.2.3 The Bureau of Efficiency and Bureau of the Budget
6.2.4 The Joint Committee on Reorganization
6.2.5 The President’s Committee on Administrative Management
6.2.6 Summary
6.3 Presidential Foreign Policy Authority
6.3.1 Variation in Executive Department Structure in the 1790’s
6.3.2 The National Security Council
6.3.3 Competing Explanations
6.3.4 Summary
6.4 Conclusion
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237
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250
256
261
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271
272
III
Eliciting Information
275
7 Information, Regulated Interests, and Administrative Policy Making
7.1 Models of Policy Making
7.2 Uncertainty, Administrative Policy Making, and Agency Design
7.3 Policy Uncertainty and Incentive Compatibility
7.4 Incentive Compatibility and Agency Structure
7.4.1 Incentive Compatibility and Agency vs. Legislative Authority
7.4.2 Incentive Compatibility and Agency Policy Preferences
7.4.3 Summary: Clarity, Finality, and Participation
7.5 Conclusions and Implications
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285
286
287
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290
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297
8 The SEC and the Regulation of Finance
8.1 An Overview of the SEC and its Statutory Powers
8.2 The Creation and Structure of the SEC
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309
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CONTENTS
8.3
8.4
8.5
Securities Registration
Stock Exchange Reorganization
Conclusion
315
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336
9 Conclusion
339
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LEARNING WHILE GOVERNING
6
Chapter 1
Introduction
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LEARNING WHILE GOVERNING
Information is the lifeblood of executive branch action. Or at least, it is for effective
action. At least three of the four virtues of executive action that Alexander Hamilton
cited in Federalist 70 — unity, activity, secrecy, and dispatch — presuppose information
to act.1 Information is also the bedrock of bureaucratic legitimacy in the United States.
Bureaucratization is indisputably one of the most important developments in American
government in the last 100 years, and information is its principal justification. Bureaucrats are elected by no one. They lack the measure of “democratic pedigree” that elected
officials can claim. Most of the vast cadre of professional bureaucrats in Washington
and around the country is not even appointed by anyone who is elected to office. Yet
bureaucrats have the power to make policy decisions with the full force of law (even
trumping, as far as federal bureaucrats are concerned, the decisions of duly elected state
legislatures, thanks to judicial decree). What they do have, or are supposed to have, is
information.
Correspondingly, the analysis of information has become central to the analysis of
executive branch politics. The key premise of the informational literature on bureaucratic politics in particular is that bureaucrats have access not only to reasonably high
quality information about policies and programs under their purview, but often better
information than other concerned political actors. This in turn gives rise to an information asymmetry between bureaucrats and political overseers that engenders problems for
holding bureaucrats accountable to the aims and vision of elected officials. Similarly, the
informational advantages enjoyed by Presidents can make it difficult for Congress and
other observers of presidential policy making to determine whether their interests are
served by a particular course of action.
There are several variants of this accountability problem. First, actions taken by
executive branch officials may be difficult for elected authorities to observe at all, and
1
Namely, activity, secrecy, and dispatch.
8
CHAPTER 1. INTRODUCTION
therefore scrutinize. This may be either because of claims of secrecy or executive privilege
(particularly as pertains to the President), or because the vast scope of the federal bureaucracy relative to Congress raises high barriers simply to figuring out what is going on
in all corners of the executive branch. Compounding the difficulty, even when executive
actions are perfectly observed (and Congress has evolved practices to help in this respect;
see McCubbins and Schwartz [1984]; McCubbins et al. [1987]), they are often pursued
by executive branch policy makers with deeper knowledge of the subtleties of a problem or with information to which Congress and outside observers are not privy. When
a policy choice is made in the executive branch — escalating a war (e.g. the Vietnam
War or the War on Terror), pursuing a particular program of economic recovery (e.g.,
TARP, auto industry bailouts), deferring to industry in response to an environmental
catastrophe (e.g. British Petroleum’s interminable response to the Deepwater Horizon
explosion in the Gulf of Mexico) — does it represent a generally beneficial response to
delicate circumstances, or does it represent the elevation of executives’ own personal ideological (worse, economic) projects over the public (or at least the legislature’s) interest?
Asymmetric information between executive branch actors and Congress (and beyond),
combined with conflicting ideological goals or visions of good public policy, makes the
assessment of executive branch action problematic, and colors our political discourse.
Yet for all the accountability problems it presents, the value of high quality information in bureaucracies cannot be seriously doubted. We still largely accept the formulation
that James M. Landis presented in The Administrative Process in 1938: the informational demands of modern policy making are excessively taxing on the institutions of
government established in 1787, and the need for effective public action trumps the joy
of constitutional kabuki theater. Therefore we must reconcile ourselves to institutional
forms that leverage the information necessary for policy making through the power to
act on it.
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LEARNING WHILE GOVERNING
With some exceptions we note below, analysis of the politics of executive branch
policymaking has largely taken its informational advantage as given. This is true of the
literature on bureaucratic statutory discretion, especially as articulated by Epstein and
O’Halloran [1999]; Gailmard [2002]; Volden [2002]; and Huber and McCarty [2004], but
also to some extent by Huber and Shipan [2002].2 This assumed exogeneity of information
is also true of a large strand of literature on the presidency following Neustadt [1960],
which focuses on the President’s informational advantage as a linchpin of the President’s
power to persuade (e.g., Canes-Wrone et al. [2007]). When scholars do focus on the
development of informational supports for the presidency (or, only somewhat less directly,
on the sources of the President’s bargaining powers, e.g. Dickinson [1996]), they typically
explore these developments as presidentially-initiated and determined.
Taking information and information asymmetries as given can make some sense when
analyzing the behavior of mature bureaucracies; they are background conditions that
in fact are often satisfied, and the implications of which it is obviously important to
explore. Yet policy-relevant information held by executive branch actors does not emerge
from the ether. Information must be acquired, expertise must be obtained, capacity
must be developed. In short, information held by executive branch policy makers is
endogenous. In particular, it is endogenous to the incentives that executive branch actors
have to acquire, share, and use it, and these incentives are in part determined by the
organizational structure and political position of executive branch institutions. Taking
executive branch information as given elides the paramount developmental problem in
executive branch organizations: how can we ensure that they cultivate it?
In this book we analyze the microfoundations of information acquisition in the ex2
Huber and Shipan’s theoretical treatment is similar in many ways to Epstein and O’Halloran [1999]
and Gailmard [2002], but Huber and Shipan focus on information asymmetries as one reason among
several that limiting bureaucratic discretion might be costly for legislatures. In Epstein and O’Halloran’s
analysis this information asymmetry is the whole story.
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CHAPTER 1. INTRODUCTION
ecutive branch. We consider the effects of organizational structure on the development
of the expertise that has been taken as given in models to date that explicitly consider
information asymmetries. The implicit assumption in our analysis is that acquiring expertise and information is more complicated than declaring in a legislative edict that it
shall exist. When an executive branch bureaucracy or regulatory agency opens its doors,
it cannot ensure that it will be staffed by experts in the policy areas under its domain by
putting out a want-ad announcing that “only experts need apply.” Selecting individuals
who pass a merit exam does not per se ensure that those individuals will bring with them
or develop any particular understanding of the policy or administrative problems their
agency will face.3 Requiring individuals to undergo university training in a general subject does not per se ensure that they will vigorously apply themselves in the development
of their expertise, or that any expertise they might develop will translate into policy- or
administratively-relevant expertise.
Instead, we analyze the development of information and expertise in executive branch
bureaucracies as the product of incentives that bureaucratic agents face to acquire and
share it. We assume that information development and transmission must be consistent
with the incentives of individuals and organizations that do the developing and transmitting.4 We argue in the chapters below that the organizational structure and political
position of executive branch organizations can decisively affect their and their members’ incentives to make costly investments in information and expertise, and therefore
condition whether they live up to their promise in the policy process.
3
To say nothing of the fact that knowing the answer to “How many times does 65 go into 10,350” or
“how many cubits are in a yard” and such-like questions as early merit exam takers were asked does not
convey any particular policy or administrative acumen in the first place.
4
We are willing to admit of the possibility that some policy- or administratively-relevant information
may not require much or particularly costly effort to acquire, as one acquires information about the
weather by looking out a window. But we do not think this sort of situation adequately characterizes
policy and administrative problems as fall, by dint of Constitutional stricture or Congressional delegation,
within the purview of the executive branch.
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LEARNING WHILE GOVERNING
In so doing, we revisit the logic of accountability and political responsiveness as
applied to executive branch bureaucrats. Taking bureaucratic expertise as given gives
rise to certain tropes of accountability: a pithy synopsis is furnished by the formulation
that expert bureaucrats can be considered fully accountable to political principals when
they make the same decisions the principals would have made, if they held the information
the bureaucrats hold. We call this the “standard logic of bureaucratic accountability.”
This logic of accountability emerges straightforwardly from a basic variant of a model
in which “principals” seek to obtain the best possible results from “agents” who take some
action on the principal’s behalf. The casting when these models are applied to executive
branch politics places the bureaucrats in the role of agents and political elites — usually
some subset of Congress, possibly also the President or his immediate assistants — in
the role of principal(s).
Depending on the problem at hand, the principal(s) may be thought of as having
various tools to influence the agent’s choices, and the assumption in principal-agent
modeling is that any principal anticipates the effect of its interactions with the agent on
the agent’s decisions, and will use whatever tools are at its disposal to induce the most
favorable possible action (from the principal’s own point of view) from the agent. For
instance, principals may be able to select the policy preferences and ideological disposition
of their agents. In that case the standard logic would imply that the the principal selects
its ideological clone to be its agent; this implication of the standard logic is dubbed the
“ally principle” by Bendor and Meirowitz [2004]. Such an agent is perfectly trustworthy
to use its information in the principal’s interest, without labor-intensive monitoring of the
agent or the need to double-check its information. If principals cannot entirely determine
the agent’s policy preferences, they may be able to use oversight strategies to monitor
the agent’s actions and ensure fidelity to the principal’s goals, revise or nullify policy
choices the agent makes that do not serve the principal’s ex post interests (as in, e.g.,
12
CHAPTER 1. INTRODUCTION
legislative vetoes or Joint Resolutions of Disapproval under the Congressional Review Act
of 1996), make threats of costly (for the agent) budget reductions or withering contumely
in Congressional hearings to elicit information, tailor the discretion agents can use to set
policy that they can reveal information without concern over adverse policy consequences,
and so forth.
Our problem with the standard logic and its oft-noted implications is not that they
are inaccurate as far as they go. The standard logic is, in fact, a fine summary of the
accountability problem that political principals face with respect to bureaucratic agents
who possess the relevant information and expertise to make informed policy. Rather, our
concern is with the precondition assumed by this trope. Where does bureaucratic information, competence, and capacity come from, or more generally, how can bureaucratic
agents be induced to learn and to share the information that justifies their existence
in a titular democracy? Our approach highlights a logic of bureaucratic accountability
under endogenous information that is qualitatively different than versions that suffice
when information is exogenously given. The interests of political principals include not
just using available information as the principals would use it if they had it, but also acquiring policy-relevant information in the first place. Faithfully reflecting those interests,
therefore, includes the development of bureaucratic expertise.
A central tension in our analysis is that inducing an agent faithfully to apply information it already possesses may conflict with inducing that agent to acquire the information
in the first place. The former goal, excising the issue of acquiring information, suggests
making one’s agent an ideological clone of one’s self. In that case the agent internalizes all
the costs and benefits of alternative courses of action that the principal would consider,
only with the benefit of superior information to evaluate their effects on policy outcomes
of interest. This logic has deeply affected the analysis of bureaucratic structure.
However, the latter goal — inducing an agent to acquire, share, or elicit information
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LEARNING WHILE GOVERNING
— potentially poses a very different problem. First consider acquiring, by which we mean
making costly investments in information. An agent’s willingness to do so implies that
the agent will somehow gain from doing so. For career agents in conventional civil service
systems, direct pecuniary incentives (e.g., merit pay) for doing so are all but ruled out.
But pecuniary incentives are not the only or even necessarily a particularly powerful
channel for inducing costly investments in information. If agents care about the quality
of public policy, and acquiring information allows them to improve it, then affording
agents some discretion to shape policy choices can serve as a strong incentive to acquire
information and expertise. If agents care about public policy, the discretion to affect it
is essentially an incentive to acquire expertise.
Ensuring relatively stable tenure of employment despite partisan currents, as achetype
civil service systems do, can amplify this incentive because it provides a longer time
horizon over which investments in expertise can pay off. True, political principals would
have nothing to worry about if, consistent with the ally principle, they selected their
ideological clones and gave them plenary discretion to choose public policy. But real
principals do not have such fine-grained and instantaneous control to select (and change)
executive agents to suit their ideological goals — and given the value of relatively long
tenure for ensuring the value of expertise investments they may not want it. Given
that constraint and the need for bureaucratic expertise, it can be useful for political
principals to provide bureaucratic agents with both discretion to determine the course
of public policy and relatively stable tenure — even though those agents do not share
the principals’ goals. While such an approach sacrifices control over policy, its upside is
better information in the bureaucracy.
“Sharing” and “eliciting” information both imply some sort of communication between a holder and a seeker of it. Strategically, the completeness and value of this
communication depends on the congruence of preferences on the two sides of the commu14
CHAPTER 1. INTRODUCTION
nication about what to do with the information revealed or communicated. Given this
the key question for political principals is, with whom is the agent communicating? The
structure of the policy process often implies that executive branch agents are not communicating only or primarily with the political principals to whom the agent is ultimately
answerable. Instead the agent may be communicating with other actors in the executive
branch, or with private interests that hold policy-relevant information. In either case,
an agent is only useful if they can effectively exchange information with those they communicate with. This requires a concordance of ideologies and preferences not between
the agent and its principals, as the ally principle implies, but between the agent and its
confidantes. If an agent is funneling information to executive branch policy makers, it
must provide information that is credible and believable to those policy makers — which
in turn requires that the agent’s ideology is closely linked with those it advises. If an
agent elicits information from, say, private interests, it must have enough in common with
them ideologically to be a credible repository of information. Additionally, in this case
it must have enough discretion about how to use the information in making policy that
the informed private interests do not simply assume that any proposal the agent makes
will be overridden by a political principal once the relevant information is revealed.
In sum, in all these cases where the availability of information is key — where it
is acquired, shared, or elicited — standard tropes of accountability are turned on their
head. Rather than an agent that is a perfect ideological replicant of its principal, an
effective agent will be ideologically differentiated from its principal. And rather than an
agent whose policy decisions are easily overseen and revised by its principal, an effective
agent will have a zone of relatively durable discretion to determine policy choices. The
effectiveness of an agent at bringing greater information to bear on public policy is
endogenous to the organizational and political features that map into its ideological
predispositions and its responsiveness to its principals.
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LEARNING WHILE GOVERNING
Though the study of information has deeply affected the political science literature on
bureaucratic behavior, organization, and accountability, very little of that literature has
considered the issue of why or how executive actors develop their informational capacity, or the effect of organizational structure on that development.5 There are, however,
some prominent exceptions to this general tendency. First, Feldman [1989] presents a
penetrating study of information production by bureaucratic analysts in the US Department of Energy. Though Feldman finds that analysts’ information is often not used in
policy making, analysts produce it “because it is the only way that they can hope to
have an influence on policy making,” and because they “value the work” for intrinsic,
professional, and social reasons (Feldman [1989], p. 13). Feldman’s ethnographic analysis
taps into similar sorts of microfoundations of organizational incentives for information
production that we analyze theoretically and historically in this book.6 Second, Carpenter [2001] argues that bureaucratic information and the capacity to act on it form one
pillar of bureaucratic autonomy, i.e. the ability of bureaucrats to pursue an agenda that
is not chosen by titular principals and may be at odds with their goals. The drive for
autonomy, Carpenter argues, therefore provides one important incentive for the development of capacity in bureaucracies. Third, Lewis [2008] contends that the thickening
of layers of presidential appointees in the bureaucracy dampens the application of programmatic expertise by career bureaucrats, and thereby undermines the effectiveness of
5
Some exceptions are found in the authors’ previously published work, much of which considers the
theme of endogenous information in bureaucratic agencies (Boehmke et al. [2006]; Gailmard and Patty
[2007]; Gailmard [2009]; Patty [2009]). Some of the material in subsequent chapters elaborates on points
made in these articles and so we do not review them here.
6
Though Feldman’s work is not as widely cited as it should be in political science, it is well known
in the sociological and management studies literatures on organizational learning (Levitt and March
[1988], Stephenson [1991]; see also Wilensky [1967] on organizational intelligence as an implication of
structural arrangement). Though our analysis is in a sense also about how organizations learn, manage,
and transmit knowledge, these literatures are largely tangential or unrelated to our work. They focus
on psychological processes in social learning, the effect of organizational structure and routines on the
interpretability and cognizability of decision problems, and the need to encourage a culture of innovation
and experimentation. They do not focus on incentives or strategic issues in the acquisition and sharing
of information.
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CHAPTER 1. INTRODUCTION
executive branch agencies.7 Lewis’s analysis therefore draws a link between the politicalorganizational structure of bureaucracies and the availability of information possessed by
bureaucrats.8
In addition, our theoretical analysis is related to several published models that address the issue of endogenous information in agency policy making. An early contribution
is due to Bawn [1995], who analyzes a tradeoff between accountability and expertise in
administrative agencies, though Bawn’s model assumes this tradeoff without modeling or
providing microfoundations for it. Aghion and Tirole [1997], leading a large subsequent
contract theory literature, develop a principal-agent model in which delegation of authority to an agent induces the agent to acquire information.9 Bendor and Meirowitz [2004],
upon naming the “ally principle,” developed several proto-models in which it would fail
due to endogenous information. Ting [2009] models a bureaucratic agency’s investment
in capacity to implement policy; the central point is that capacity can give the agent
some “agenda setting” power with respect to a legislative principal, and thus investment
in it may actually be higher when the legislature and agency are ideologically divergent.
The work of Gilligan and Krehbiel [1987], Gilligan and Krehbiel [1989], Gilligan and
Krehbiel [1990], and Krehbiel [1991], while focused on legislative organization, is also
closely related to our analysis. Gilligan and Krehbiel’s central theme is the effects of
7
See also Krause et al. [2006].
Also closely related to our themes in this book is a sequence of articles by Matthew Stephenson
(Stephenson [2006], Stephenson [2007], Stephenson [2008], Stephenson [2011]). Stephenson analyzes the
effects on incentives for information acquisition stemming from a variety of well-known legislative and
judicial devices for controlling the decisions of administrative agents (e.g., postures of judicial scrutiny
of or deference to agency actions). An important difference between our work and that of Stephenson is
the type of institutional details that are analyzed. Stephenson’s work provides an understanding of how
administrative-legal institutions that map into, e.g., “policy enactment costs” facing agents promote
both agency activity and the quality of policymaking, but does not (and is not intended to) provide
insight into why the agent does not share the principal’s preferences or why the agent has been given
discretionary control of the policy lever in question.
9
Also peripherally related in substance but clearly related in theory is the analysis of incentives for
innovation in contract theory and law, e.g. the information rents provided by patent protection and
attendent incentives to innovate; see Scotchmer [2004].
8
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organizational structures in Congress on the incentives of legislators and committees to
acquire policy-relevant information and bring it to bear when enacting legislation. The
allocation of decision authority is the primary reason why our analysis leads to different
results than the Gilligan and Krehbiel’s (1987) model, which is consistent with the ally
principle. In Gilligan and Krehbiel’s model, the “principal” designing the committees is
also the ultimate policy maker. It clearly cannot get more information from any expert
agent besides its own ideological clone. We consider situations in which the agent’s
designing principal may (i) set it up to communicate with other policy makers, or (ii)
may set it up as a decision maker to receive information from an informed party. In both
of those situations, as we will argue, the ally principle clearly can fail.
Despite the quality and insight of this work, endogenous information—particularly
any attention to microfoundations of information provision—is still relatively peripheral
in the analysis of bureaucratic organization and accountability. In addition, the theoretical issues that endogenous information raises have not been squared with the development
of executive branch institutions in the US, nor have the forms of institutions that we have
inherited been systematically analyzed from this perspective. This book is our attempt
to push the bureaucracy and executive branch literatures in that direction.
1.1
Overview of the Book
The core of the book consists of three sections. Each section examines a particular type
of endogenous information problem. The first chapter of each section is devoted to a
theoretical exposition of the problem and the second to an analysis of historical cases
or episodes in light of the models. The sections and endogenous information problems
pertain to situations in which (1) an agent has to acquire information “from scratch”
by investing time in learning it, (2) an agent who is informed of some policy-relevant
18
CHAPTER 1. INTRODUCTION
information has to decide to what extent it should be shared with other executive-branch
policy makers, and (3) an agent has to elicit information from private, regulated interests
outside the government that may be particularly privy to it. Our working shorthand for
this typology is that the endogenous information problem may be variously (1) acquiring
information, (2) sharing information, or (3) eliciting information. We can think of this
typology as resulting from a two-dimensional classification of endogenous information
problems in which (A) some actor is exogenously informed of the relevant information
or not; and (B) whether the actor that formally depends on that information to make
a decision is formally part of the executive branch policy making process. When the
answers to these two questions are no and yes, respectively, we wind up with problems
of type (1); when the answers are yes and yes, respectively, we wind up with problems of
type (2); when the answers are yes and no, respectively, we wind up with problems of type
(3). It is of course entirely possible that the answers are no and no, but such situations
are apparently outside the scope of an analysis of public policy making institutions.
For each class of endogenous information problem we consider, we analyze historical
episodes of organizational development in the executive branch from the perspective of
the attendant theoretical model. The purpose of the models is not so much to make
“predictions” in a narrow sense about what event should have occurred, as to provide an
interpretive lens to understand the cases.
For the first class of endogenous information problem — inducing an agent to acquire
information — we analyze the development and consolidation of civil service in the federal government. The central argument is that policy discretion for bureaucratic agents
combined with stable careers subject to merit protection provides strong incentives for
individuals particularly motivated by substantive public policy issues to (i) select themselves into public sector employment, and (ii) dedicate themselves to developing expertise
in the policy issues and programs within their purview. Merit system protection obvi19
LEARNING WHILE GOVERNING
ously dulls the incentives of bureaucrats in the sense that they face limited discipline
in the event of poor performance, and these points are sufficiently well understood and
sufficiently obvious that we do not need to spend a great deal of time making them. Our
point in this section is that the very dullness of discipline (or termination) threats in
civil service provides a long time horizon over which personal dedication to policy and
program details can bear fruit, and this in turn provides motivation for policy-motivated
agents to make those investments. When agents are strongly policy motivated in the first
place — and do not need strong extrinsic incentives to obtain utility from exerting themselves — civil service’s incentives supporting dedication and personal investment create
value for a political principal that can outweigh the costs of weak extrinsic incentives for
good performance.10
This theoretical argument is developed in the first chapter of the book’s first section.
In the second chapter we review the evolution of civil service in the federal government,
with particular attention to the period from the passage of the Pendleton Act in 1883
to the New Deal. Over this time period civil service employment was transformed from
a regime of clerkship on the job and rotation of offices based on party affiliation to a
regime of stable employment irrespective of partisan changes and greater and greater
responsibility for and impact on policy at the top levels of the civil service hierarchy. We
argue that the developments in the civil service that took place over this half-century
operated in a reinforcing pattern.
The second section of the book addresses endogenous information problems in which
an agent of some political principals holds some policy-relevant information, and must
decide whether to share it with other policy makers. If these latter policy makers who
receive the agent’s communication are the same as the agent’s principals, the principal
obviously wants a complete clone of itself. This problem is more interesting when con10
See also Bertelli and Lynn [2006].
20
CHAPTER 1. INTRODUCTION
sidered in light of expansive and growing unilateral power for presidents and their agents
in the executive branch. When these actors are the recipients of an informed agent’s
communication, that agent’s principals are better off not when the agent’s ideology and
worldview are linked to the principal’s, but to the recipients of the agent’s communication. Only when the informed sender of this information and its recipient share common
policy preferences and ideological commitments can it be guaranteed that the sender has
an incentive to fully and completely inform the receiver without dissembling.
We apply this theoretical framework in the second section to understand the growth
of the “institutional presidency,” particularly the incentives for Congress to proactively
facilitate this growth. The President’s informational advantage with respect to Congress
is sometimes taken as exogenous and an underlying cause of the growth of Presidential policy influence relative to Congress. But it is not exogenous to the PresidentialCongressional relationship—it is determined by that relationship. The informational support that underpins the President’s de facto role as “policy maker in chief” is provided
by the institutional presidency, and the institutional presidency is created and supported
by Congress. This seems at one level paradoxical, from a principal-agent standpoint at
least: Congress has actively participated in creating an agent that is more responsive to
the President than to Congress itself. Yet it is easily resolved by considering the purpose
that this particular sort of agent serves for Congress: to make sure that the president’s
discretionary powers over public policy are used pursuant to relevant information. As
Edward Corwin put it, the president has the unique ability, in the daily course of events
on the job, to endanger the lives of every American. Congress may not favor the President’s policy agenda at any given time, but that notwithstanding Congress has every
incentive to ensure that the President does not knowingly and in a foreseeable way use
his authority to undermine the safety or interests of the US.
In other words, the implication of the theoretical analysis in section 2 is that, taking
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the President’s ability to act as given, Congress has strong incentives to provide the
President with incentives to use that ability wisely. Now, Congress may wish the president
had less authority to act, but it is not entirely and always up to Congress. As long as
the President has a remotely credible Constitutional claim to authority that he wishes to
exercise, he will make that claim and exercise that authority. It does not matter if these
claims — e.g. notions of a “stewardship presidency,” strong forms of “unitary executive”
arguments, invocation of the President’s oath of office as a grant of substantive power,
claims of judicial sanction to act as the “sole organ” of the US in foreign affairs, and the
like — are incontrovertible. Constitutional scholars and political scientists may contest
the legitimacy of these claims, but in the game of politics what matters is that such
claims provide cover to take a desired action.
In view of this, the President’s growing willingness and ability to make claims of
unilateral policy making authority over the course of the 20th century have given Congress
correspondingly greater incentive to structure agents of its creation to be responsive to
the President. The result of this development is the institutional presidency.
While the second section explores the interplay between information and policy making authority deposited in the executive branch, it is fundamentally not a story of delegation of policy making authority by Congress due to the President’s informational
advantage. Rather than justifying the ability of the President to claim authority on the
basis of superior information, we argue that the more fundamental process is that the
ability of the President to claim authority provides the basis for his superior information.
The third and final section of the book considers the problem of an agent that must
elicit information from a private actor outside the government, e.g. a regulated interest.
Specifically, we have in mind a class of situations in which a regulated interest holds
some policy-relevant information in the sense that it would be useful if public policy
were tailored or responsive to it. This is a widespread problem in regulation, e.g. electric
22
CHAPTER 1. INTRODUCTION
utilities are often assumed to know more about their cost function than regulators do. We
explore situations that are more subtle in the sense that the private interest’s information
is “soft,” and the regulator does not have access to sophisticated incentive schemes to
induce revelation of it.
The theoretical logic bears an important similarity to that in the second section: the
agent’s informational role cannot be adequately fulfilled unless it can communicate with
another actor (the private interest) whose policy preferences Congress must take largely
as given. As in section 2, faithful communication with “soft” information requires that
actors on each side of the message see eye to eye on how the information will be used.
This makes it valuable for the agent to be relatively close to the regulated interest in
a spatial, ideological sense. But in section 3 there is an important difference: whereas
the agent in section 2 is modeled as a sender in a sender-receiver “cheap talk” game, in
section 3 the agent is modeled as the receiver. So the agent’s ideology maps not only into
its ability to communicate credibly with the other side of the transaction, but also into
the policy decisions that will be made as a result of whatever information that is communicated. Therefore, unlike the modeling in section 2, the principal’s ideal agent is not
ideologically identical to the other party in the strategic communication. Rather, in this
type of problem the principal’s ideal agent captures a tradeoff between making the agent
close to the informed regulated interest (thus securing more information as a trustworthy
repository of it) and close to the principal itself (thus using the information it gets as
the principal wants it used). In a sense, the ideal agent links up to the regulated interest
to form one side of an “iron triangle” — the agent must share more in common ideologically with the private interest, and must have some degree of stable policy discretion,
for strategic communication to be informative. Despite their well-known “distributive”
problems of tilting policy away from the interests of Congress generally, iron triangles at
least have the potentially compensating value of securing greater information.
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LEARNING WHILE GOVERNING
We use this model to explore the experience and effectiveness of the Securities and
Exchange Commission in the 1930’s. Hailed at that time as one of the most effective
regulatory agencies in government, the early SEC embarked on several programs of financial market reform, particularly to the registration of new securities issues and the
reorganization of stock markets. We show how each of these programs required elicitation of sensitive information, and argue that the measure of success the SEC achieved
depended on its ideological proximity to the interests it regulated.
1.2
Theoretical Foundations and Methodological Considerations
Our theoretical analysis is based entirely on the paradigm of principal-agent theory,
and more generally information economics and contract theory. Political scientists have
become increasingly accustomed to theoretical analysis employing concepts and vocabulary, and sometimes explicit models (e.g. Epstein and O’Halloran [1999], where the
model is closely related to Holmström [1984]), from principal-agent theory. This is especially true in the analysis of bureaucratic accountability and responsiveness, where the
principal-agent language has permeated the literature as a standard mode of analysis
(e.g. McCubbins et al. [1987]) and focal point of debate.
There seems to be widespread understanding in various political science literatures
about the content of principal-agent theory, or what principal-agent models “say” about
the interactions and relationship between a principal and an agent. The presumed content
implies that, if principal-agent models are apt descriptions of a political or institutional
dynamic, we should expect to see principals deploying all available tools to select, monitor, and control their agents, and that those agents should in turn do the bidding of
principals to avoid threatened sanctions.
24
CHAPTER 1. INTRODUCTION
What we arrive at in our theoretical modeling, entirely based though it is on principalagent theory, is quite different from this picture. We argue, in particular, that in the class
of problems we consider — problems that are important to understand the development,
capabilities, and operation of executive branch policy making institutions — principals
are better off with less control over their agents.
While the general thrust of our models is at odds with common perceptions of
principal-agent models in political science, it emerges from a well-developed strand of
analysis in contract theory. Far from being a static canon or corpus of claims about
how principals interact with agents in general, principal-agent theory is a framework for
analyzing relationships between actors when one (an agent) takes action on behalf of
another (the principal). Exactly how the interaction plays out depends on the information asymmetries, incentive problems, and transferrability of decision-making rights in a
particular problem.
The tenor of our argument that lack of full control is actually beneficial for principals
is also related to a well known theme in the public administration literature, particularly the strand on “reinventing government” aimed at practitioners. In their well-known
book, Osborne and Gaebler [1993] advocated delegation of decision making authority to
line agents, instead of “rule-driven” bureaucratic controls on decision making authority,
i.e., red tape. The logic of this argument is that such delegation frees up agents to
discover novel ways to solve problems unforeseen when formal rules are handed down.
At one level, this recommendation is easy to critique on the grounds that delegation
arrangements already reflect the information asymmetry and preference conflict between
agency superiors and line agents. Assuming that the extent of delegated authority exercised by line agents is purposively chosen by principals, it already reflects line agents’
informational advantages and preference conflicts with principals. Simply put, if principals benefitted from line agents having more authority, they’d have given it to them.
25
LEARNING WHILE GOVERNING
But at another level, our analysis provides microfoundations for this recommendation:
delegating greater authority to line agents is useful not so much because it allows them to
take advantage of information they inherently possess, but because it gives them greater
freedom to act on information they discover — and therefore greater incentive to discover
it.
We want to be clear about what our work does and does not attempt to do. We
are aiming for a set of conceptual models that will allow analysts of executive branch
organizations — be they political scientists who study the presidency or the bureaucracy,
legal scholars of executive branch and administrative structure, or scholars of public administration — to understand the effects of organizational structure on organizational
members’ incentives to acquire and share policy-relevant information. Because the acquisition and disposition of information is crucial to the development of executive branch
organizations, we also seek to demonstrate that these conceptual models provide important insights about the historical development of the executive branch in the US. If,
as a result of reading this book, readers better understand the general issues in mapping organizational structures to incentives to acquire and share information, and better
understand the importance of endogenous information in the development of specific
executive branch structures, then we will have accomplished our goals in writing it.
What we are not attempting to do is articulate a positive theory of the creation of
executive branch organizations. The models we provide are intended to help interpret
the effects of organizational structure on incentives to acquire and share information. A
principal or set of principals interested in inducing that acquisition and sharing might
indeed reflect the insights of our models in designing organizations. But organizational
design and evolution might reflect political logics entirely unrelated to the models we
develop. Nevertheless, regardless of whether political principals sought to solve a different set of problems than the ones we identify, or sought to solve no particular coherent
26
CHAPTER 1. INTRODUCTION
problem at all in structuring executive branch organizations, is beside the point. Organizational structures map into incentives to acquire and share information, whether they
are consciously created for that purpose or not. The purpose of our models is to evaluate
the effects of organizational structures on those incentives, not to assert that these effects
had a controlling influence on the conscious design choices of political actors with the
authority to structure the organizations in question.
At first glance this explicit denial of positive claims about the origins of executive
branch organizational structures might seem inconsistent with a theoretical framework
built on principal-agent models. After all, those models are clearly based on the assumption that principals make their choices, including choices about organizational structure,
to maximize their own utility as an analyst defines it. Yet here we are repudiating an
attempt to make a grand theory of agency design.
The inconsistency is only superficial and is easily resolved by recognizing that the
point of the models we develop is to analyze the tradeoffs that agency organizational
structures create for political principals — whether or not they are aware of them, and
responsive to them, at the time the organizational structures are created. The principalagent framework is natural given our focus on what the incentive structures implicitly
created by organizational arrangements actually do from the principal’s point of view. We
are interested in the problems that these structures solve, and in countervailing problems
they create. One could view the analysis as suggesting why a principal interested in
solving problems of agency accountability under endogenous information might want
to design them in the ways we identify. That does not imply a claim that principals
actually recognized these problems or were interested in solving them when making their
structural organizational choices, but that fact has no particular relation to the analysis
of whether a particular structure does in fact solve this sort of problem.
Models in hand, it remains to demonstrate that they are worth adopting as an an27
LEARNING WHILE GOVERNING
alytical lens to interpret the effects of executive branch organization or to understand
the evolution of executive branch institutions as it has actually taken place in the U.S.
As noted in the chapter synopses above, we opt for historically oriented case studies and
narratives to make this argument. In some instances, these analyses are broad in scope
(development of civil service and the institutional presidency); in others, they are quite
focused in space and time (the early SEC). Without being too heavy handed about this
in the historical discussions, we attempt to link the actions, beliefs, utilities, and finally,
the outcomes, to the theoretical models preceding them.
The point of the historical discussions is not necessarily to “test” the models (though
they do have empirical implications, and we attempt when possible to show these are
corroborated by historical experience), but rather to illustrate how they apply to help
interpret specific events. By “interpret” we mean that we can understand why certain
events occurred together, and why certain events that might have occurred did not. In
some cases, we use models to identify counterfactual scenarios that might have occurred
under alternative modes of interaction between Congress and the President or under
alternative agency structures, and therefore illuminate why things that happened did in
fact happen. In other cases, and when available, we rely on “small N” comparative case
approaches to identify counterfactuals, and thereby understand the effects of particular
choices on agency structure or functioning.
Implicit in this is our acceptance, as in recent literature on case study methods, of
an experimental template for evaluating the content of cases (see especially George and
Bennett [2005]; Gerring [2007]). In Gerring’s terms (p. 131), we often take a “most
similar case” approach to case selection, by focusing over a small window of time on the
covariation between a theoretically relevant explanatory factor and a particular dependent variable of interest. This selection strategy limits the variation in other confounding
factors (e.g. partisan conflict across institutions, prevailing ideals about the role of ex28
CHAPTER 1. INTRODUCTION
ecutive power and independence) that could explain the dependent variable in a way
inconsistent with the theory. This is particularly true with respect to the case studies on
handling by Congress of presidential reorganization requests (chapter 6, the linkage of
the president to his inner circle in the foreign vs. domestic policy areas (also chapter 6),
and the pursuit of stock exchange organization authority by the SEC (chapter 8). The
research design within each case utilizes whatever dimension of variation is handy in the
cases that allow some degree of control over confounding factors. At times these designs
focus on dynamic (chapter 6), longitudinal (chapters 4 and 8), and spatial comparison
(chapter 6; see Gerring [2007], p. 155 for a discussion of this typology). We do not
pretend that our case selection achieves experimental levels of control over confounding
factors, and therefore identification of causal effects—but we find it useful to use this
“ideal design” as a reference point.
The primary reason we took this approach is that the genesis of this book is our joint
effort to make sense of the existence and effects of specific arrangements of administrative
instiutions. Our argument is that endogenous information, and the effect of bureaucratic
structure on available information, is the linchpin of bureaucratic development in the
U.S., and therefore plays a crucial role in one of the most conspicuous aspects of American
state development. Therefore, it is important to demonstrate that significant aspects of
this development—both in broad arcs and in specific episodes—are intelligible in terms
of the family of models we put forward.
In addition, for understanding what a particular organizational structure does, or
why a particular developmental path occurred, we did not have much faith in the ability
of statistical models estimated from a cross section of agencies to adequately control for
differences in their operating circumstances. Simply put, given the temporal and cross
sectional scope to our analysis, the idea of a statistical model positing that some agency
behavior is identically distributed across agencies up to some covariates and an intercept
29
LEARNING WHILE GOVERNING
shift seemed too procrustean to demonstrate that one needs the models we provide to
interpret known historical events. As is demonstrated by some of our other published
work (as well as our particular intellectual “tribe” in the discipline), we are anything but
averse to statistical modeling. This approach did not seem as useful in the present case
to demonstrate the substantive payoff or “proof of concept” of the models.
30
Part I
Acquiring Information
31
Chapter 2
Developing Administrative
Expertise
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LEARNING WHILE GOVERNING
A frequently cited justification for bureaucratic policymaking is that bureaucrats possess and utilize policy-relevant expertise above and beyond what one might reasonably
expect of presidents, judges, and members of Congress. Expertise in matters as diverse
and complicated as rail regulation, drug approval, resource management, monetary economics, traffic management on freeways, and flood control is not bestowed at birth;
rather, it must be acquired or developed by individu als. In turn, those who divine the
means to secure desired policy goals must have incentives to acquire that expertise. Especially in realms such as regulatory policymaking, developing a cadre of administrative
experts is obviously more complicated than simply declaring that it should exist. Simply
put, expert administration does not necessarily flow from legislative fiat: individually or
collectively, bureaucrats can not be compelled by statute to develop policy expertise.1
We argue that incentives for administrative actors to acquire policy expertise result
from the organizational structure and political position they occupy as created by political
principals, in particular Congress.2 In this chapter, we develop a theoretical logic to
demonstrate this argument.
A natural “lever” to create the requisite incentives to acquire information takes the
form of monetary rewards for doing so. This is well understood theoretically and often
observed in for-profit enterprises, either explicitly or implicitly (e.g., commission pay
for sales people to discover new sales opportunities). Yet monetary incentives for the
acquisition of expertise are typically not offered by the federal government to agents in
1
Formal education or passage of a civil service exam may be necessary to obtain employment in the
bureaucracy, but these devices do not screen particularly well for expertise and information related to
the particular policy making tasks bureaucrats often execute.
2
As we will note later in the book, the President and the courts can play important roles in the design
and sustenance of institutions that promote the acquisition and retention of administrative expertise.
However, since we focus on the abstract theory of expertise acquisition in this chapter, we refer to the
agent(s) who are responsible for the design of administrative institutions simply as “Congress.”
34
CHAPTER 2. DEVELOPING ADMINISTRATIVE EXPERTISE
bureaucratic policy making.3
, 4
Under certain conditions, another lever to induce expertise development in the bureaucracy is policy discretion. If agents care about the content of policy, they will value
the opportunity to influence it. That opportunity is simply policy discretion. If policy
discretion is available to agents who demonstrate some degree of policy expertise (e.g.,
Epstein and O’Halloran [1999]), then policy discretion can operate as an incentive to
acquire expertise.
The starting point of this logic is that the bureaucratic agent is a political actor in the
sense of having preferences over the content of public policy like any other political actor.
That is, we set aside the fiction that bureaucratic agents are politically neutral vessels
who check their ideology at the door when they punch in for work. This accords with
well documented findings in Political Science and Public Administration that bureaucrats
have important non-pecuniary motivations related to the content of public policy in their
purview.5 This point is closely related to the concept of “public service motivation”
in the Public Administration literature (Perry and Wise [1990]; Perry [1997]; LeGrand
[2003]; Koehler and Rainey [2008]). Essentially, we assume that public service motivation
depends in part on the congruence between individual policy goals and organizational
mission, and the ability of individuals to work on policy tasks they value (Moynihan and
Pandey [2007]; Paarlberg and Perry [2007]; see also Gailmard [2010]).
Because expertise development takes time, and because the “reward” of discretionary
authority is conditioned on the agent’s demonstration of expertise, the security and sta3
One can think of qui tam provisions or False Claims Acts as providing incentives for agents to
acquire specific pieces of information, as in “whistleblowing” (Ting [2008]). This sort of information
about specific events or actions of federal employees is more targeted than the policy-relevant expertise
we consider in this chapter and book.
4
Various forms of merit pay have been and are employed in the federal government, especially since
the 1978 Civil Service Reform Act (cf. chapter 4). However, these approaches are relatively recent, and
as discussed later, their implementation and effects has been, for the most part, lackluster.
5
Aberbach et al. [1981], Aberbach and Rockman [2000], Brehm and Gates [1997], and Golden [2000]
consider the motivations and ideological bent of executive branch personnel.
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LEARNING WHILE GOVERNING
bility of a public servant’s position in the bureaucracy is a central factor in determining
the strength of incentives to invest in policymaking expertise. This logic elevates civil
service job protections to a central role in the analysis of bureaucratic incentives. Such
protections, which encompass a variety of restrictions on external & partisan attempts to
sway individual bureaucrats’ policy decisions (culminating in the mythical “life tenure”
for bureaucrats), magnify the value of future policy discretion by increasing that confidence of today’s public servants that they will indeed be able to actually utilize expanded
authority won through their development of expertise. Thus, despite the limits they create on extrinsic incentives for bureaucratic responsiveness, civil service job protections
benefit Congress because and when such protections induce policy-motivated bureaucrats
to pursue careers in public service and develop policy-relevant expertise.6
While policy discretion and civil service protections combine to provide incentives for
individuals motivated by policy to invest in expertise, they do not generate beneficial
incentives “for free.” Since these incentives only “work” for individuals with policy or
ideological commitments, they create an inherent tension with the ideal of neutral competence. The classic ideal of “neutral competence” presumes that bureaucratic expertise
is exogenous to politics and the place of the bureaucracy in it. In the eyes of Progressive
era progenitors of regulatory agencies, for example, able and fair-minded administrators
stood by ready to apply scientific principles to policy (Nelson [1982]; Skowronek [1982];
Bertelli and Lynn [2006]). But if agents in the bureaucracy do not obtain some chance
to bend policy toward their preferred goals, they have no particular incentive to acquire
policy expertise. But when public servants bend policy toward their vision of “the good,”
they bend it away from some other vision. If incentives are required to induce expertise
development, and policy discretion serves this role, then expert administration cannot be
6
This also suggests an informational benefit of “bureaucratic drift,” in which administrative policy
decisions promote policy outcomes that differ from those that Congress would pursue, if it possessed the
time, expertise, inclination, and (in many cases) constitutional authority to do so.
36
CHAPTER 2. DEVELOPING ADMINISTRATIVE EXPERTISE
neutral administration, available equally and without prejudice to fulfill whatever policy
goals political principals might lay down.
2.1
A Model of Delegation, Expertise, and Career
Choices
We focus on a simple situation that nevertheless captures the issues we address clearly: a
(unitary) legislative principal must choose how much discretionary policy making authority to grant to a bureaucrat (e.g. through a statute delegating policy choices) whose policy
preferences generally differ from those of the legislator.7 After receiving this statutory
authority, the bureaucrat then decides whether or not acquire policymaking expertise.
Following this, the bureaucrat uses the expertise she obtained from the legislature (if
any) to make a policy decision. Then the bureaucrat may decide to leave public service.
If she decides to leave, she is replaced by a new bureaucrat. If she does not decide to
leave, she may be forced to do so anyway, if civil service job protections are less than
perfect (as we discuss in more detail below), and again is replaced by a new bureaucrat.
The legislative principal then observes whether the bureaucrat has remained in office and
acquired expertise, and then the policy making process repeats.8
The bureaucrat’s decisions in our theory are simple: whether to remain in public
service and whether to invest in policymaking expertise. As we will argue below, there
are two possible outcomes. The first is a “regime of clerkship” (Carpenter [2001]) in which
bureaucrats neither acquire expertise nor seek prolonged employment in public service—
similar to patterns under patronage job rotation or “spoils” systems. The second possible
7
The “unitary actor” assumption for both the bureaucrat and the legislature not only simplifies the
analysis, it focuses attention on the conflict between these actors and forces the internal conflicts within
each collective body into the background. We certainly do not deny that internal conflicts exist within
Congress or agencies; we are simply not focusing on them here.
8
This verbal description hews closely to the formal model in Gailmard and Patty [2007].
37
LEARNING WHILE GOVERNING
outcome is a regime of “politicized competence” in which some bureaucrats — those who
care strongly about policy outcomes — invest in acquiring policymaking expertise and
pursue a career in the civil service. This regime occurs when Congress can credibly
commit itself to offering increased policy making discretion in the future to bureaucrats
who acquire expertise. This type of inducement leads to a selection effect in which only
policy-motivated individuals pursue careers in public service, but (at least appear to) do
so for the right reason: they acquire expertise in policymaking in pursuit of the ability
to, at a later stage in their careers, affect public policy.
A key conclusion of the theory is that regimes of “politicized competence” require
merit system protections against dismissal for purely partisan reasons. Without a sufficiently high level of assurance that one’s job in the civil service is secure into the future
(conditional on good performance, and not political cycles as in patronage regimes), the
“offer” of discretion by the legislature to provide a “payment” for expertise development and self-selection into bureaucratic careers loses value. Merit system protection
of job tenure removes some of a bureaucrat’s risk from developing relationship-specific
expertise, because it increases the horizon over which this investment can pay off.
The “politicized competence” regime is interesting precisely because it describes a
situation in which the bureaucrat obtains expertise, and hence is able to make “better”
policy decisions than Congress. Accordingly, the theory provides a strategic foundation
for the bureaucratic informational advantage assumed in formal models on bureaucratic
expertise and capacity.9 More importantly, we address a tension in the principal-agent
tradition of the relationship between legislative and bureaucratic branches of government.
Specifically, if an agency problem exists, it must be understood as an agency problem that
the legislature itself chose in the first place. By focusing on the endogenous development
9
A non-exhaustive list of such works includes Calvert et al. [1989], Epstein and O’Halloran [1994],
Epstein and O’Halloran [1999], Gailmard [2002], Huber and Shipan [2002], and Huber and McCarty
[2004].
38
CHAPTER 2. DEVELOPING ADMINISTRATIVE EXPERTISE
of agency policy preferences by self-selection into bureaucratic careers, we explore the
value to a principal of effectively creating its own agency problem.
However, this alone is not enough to induce bureaucracies to invest in policy expertise, because it does not offer any positive benefit. The grant of policy discretion from
the legislature, rationally chosen in response to expertise investment, fills this role. By
allowing agents to bend policy to their liking, it offers “policy rents” for expertise development and a career in public service that only zealots value. A generalization of this
argument is that the effects of personnel management administration and the politics
of bureaucratic discretion are mutually dependent, and in this case, reinforcing. They
are jointly sufficient and individually necessary to provide the bureaucrat an incentive to
acquire task-specific expertise.
With this sketch of the logic in hand, we describe the core elements of our model.
Policy Choices and Policy Outcomes. Throughout this book, we adopt a standard
theoretical stylization and represent the notion of a public policy choice as a number,
p. This abstraction is convenient because the similarity of two policies, p1 and p2 , is
represented by the absolute value of their difference (i.e., the distance between p1 and
p2 ), ∣p1 − p2 ∣. As this distance grows larger, the two policies are thought of as being
less similar to each other. This simplification of policy making — through legislation,
executive orders, or rulemaking & adjudication — allows us to speak unambiguously
about the “direction” of policy change as well as the proximity of two policies to each
other.
Policy choices, regardless of whether they take the form of a statute, agency rule,
or regulatory adjudication, are only part of the story in our understanding of the intersection of politics and administration. Most citizens and, hence, political actors care
predominantly about policy outcomes, which are partly but not entirely a function of
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LEARNING WHILE GOVERNING
policy choices p. In our theory, such an outcome is also represented by a real number,
x. When we speak of individual policy “preferences” or “ideologies,” we are referring to
policy outcomes x that an individual most prefers.
We assume each actor has a unique “ideal policy outcome,” one that they prefer to all
others; and that they prefer alternative outcomes less as they diverge further from this
ideal point. Different political actors have different ideal points; e.g. opinions differ on the
proper balance between consumer welfare and producer profits. An actor’s most preferred
policy outcome may stem from many sources — a vision of good public policy, a desire for
reelection by constituents who predominantly desire a particular type of outcome, etc. —
and we are agnostic about the sources of these preferences. The important thing is that
preferences differ and cannot all be satisfied perfectly. We assume that individuals know
their own policy preferences, and due to their frequent interaction with other political
actors, they generally know the most preferred policy outcomes of other actors as well.
The policy outcome x is determined by the interaction of policy choice p and the
prevailing economic, social, physical, and technological factors in the real world. For
example, a regulator might impose a barrier to entry in an industry. This is a policy
choice; a policy maker can choose to implement this policy or not. But political actors,
we assume, do not care about this choice per se. They care about its effects on outcomes
such as consumer welfare and producer profits. Depending on market conditions, e.g.
if an industry is a “natural monpoly,” imposing a barrier to entry in an industry may
actually enhance consumer welfare. The relationship between policy choices and policy
outcomes is mediated by background conditions such as the cost structure of firms in the
marketplace.
These latter factors, which mediate the effects of policy choices on policy outcomes,
are summarized as the “state of the world” or “state of nature,” sometimes just the
“state.” We will often summarize the state with the label ω. We assume that these
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CHAPTER 2. DEVELOPING ADMINISTRATIVE EXPERTISE
variables are linked by the relation x = p + ω.
Of course, once ω is known, it is easy to choose the right policy p to achieve a
desired outcome x. In this sense, for a given ω, preferences over outcomes x induce
preferences over policy choices p. But some political actors might know ω better than
others. This is, in a sense, what administrative policy making is supposed to “bring to
the table” for the legislature. A version of the classic principal-agent problem between
bureaucrats and legislators emerges naturally in this framework: bureaucrats may have
superior information about ω, but they also have different policy goals and preferences.
Therefore, a legislative principal cannot simply grant plenary discretion to choose any
policy at all to the bureaucrat without fear that the bureaucrat will pursue its own
ideological goals at the expense of the legislator’s.
While simple (see Callander [2008] for a more elaborate framework that captures
additional insights), this stylization links states, actions, and outcomes in a clear fashion. It formalizes ideological conflict between actors, e.g. legislators and bureaucrats, in
terms of policy outcomes, and formalizes information asymmetries in terms of ω. This
“state-action-outcome” framework dates back to the seminal work of Crawford and Sobel
[1982] and has been leveraged often in models of information and policy making (e.g.,
Holmström [1984]; Gilligan and Krehbiel [1987]; Epstein and O’Halloran [1999]).
The state-action-outcome framework as as applied to bureaucratic policy making has
assumed that the bureaucratic agent knows ω exogenously.10 Our focus is on situations
in which bureaucrats must acquire information about ω, and their incentives to do so are
determined endogenously.
Discretionary Authority. We represent discretionary authority for the agent as a
single number that reflects a range of possible policies p that the bureaucrat may choose.
10
See e.g. Epstein and O’Halloran [1994]; Epstein and O’Halloran [1999]; Gailmard [2002]; the informational gloss on Huber and Shipan [2002]; and Volden [2002].
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This number, which we denote by D ≥ 0, is chosen by Congress and represents an increasing measure of the statutory discretion of the bureaucrat.11 At one extreme, D = 0
represents the canonical ideal of a “clerk,” in which Congress has delegated no discretion about what should be chosen. The other extreme, D = ∞, represents a world of
unfettered discretion: in this case, the bureaucrat has been given permission to choose
any policy he or she sees fit to promulgate. Given the presumption that the bureaucrat
is left to his or her own devices constrained only by D after the Congressional grant of
authority to him or her, the bureaucrat always prefers higher values of D to lower ones.
The Bureaucrat’s Policy Preferences. A bureaucrat is conceived in our theory
as having two dimensions of policy preferences. First, he or she may have strong or
weak preferences about policy outcomes. We refer to agents with strong preferences over
policy outcomes as “zealots,”12 and agents with weak policy preferences as “slackers.”
“Strong preferences over policy” are relative to the cost to an agent of investing in
expertise. A zealot would be willing to incur nontrivial personal costs to make informed
policy decisions because she cares enough about getting policy “right,” in her own value
system, to do so. A slacker would not be willing, even with unfettered authority, to incur
personal cost to acquire policymaking expertise, because she her utility difference from
alternative policies is not large. This dimensions reflects our interpretation of public
service motivation: zealots have it, slackers do not. Furthermore, zealots care about
policy whether they are public servants or not. For instance, individuals who care about
rights of labor unions to organize care about them whether they work to secure these
rights at the National Labor Relations Board, or whether they work in some unrelated
11
Our approach here is essentially identical to now-canonical models of delegated discretion following
Holmström [1984]. See Alonso and Matouschek [2008] and Gailmard [2009] for conditions under which
restriction to an interval range of policies is without loss of generality.
12
This terminology is reminiscent of Downs [1967], who refers to bureaucrats loyal to specific policies
as zealots.
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CHAPTER 2. DEVELOPING ADMINISTRATIVE EXPERTISE
private sector occupation.
The second dimension of our representation of a bureaucrat’s policy preferences describes the bureaucrat’s ideal point—the policy outcome that he would choose given the
authority and information to do so. This outcome is represented by a number, b, and
reflects an ordinary political ideology. The bureaucrat is presumed to prefer outcomes
that are closer to b: that is, he or she is happier with smaller values of ∣x − b∣. We identify
the value b, which we assume is nonnegative, with the divergence of preference between
Congress and the bureaucrat by presuming (i.e., “normalizing”) the measure of policy
outcomes so that Congress’s most-preferred policy outcome is 0. Thus, when b is large,
the goals of the bureaucrat and Congress are less similar than when b is small.
For simplicity, we assume that this degree of preference divergence, b, is known by
everyone. This assumption makes the presentation of the results more straight-forward as
well as being in accord with the fact that, in the real world, the policy preferences of most
high-level bureaucrats are discernible from their actions, statements, and backgrounds.13
The heterogeneity of public service motivation among bureaucrats is an important
feature of our theory and, we believe, descriptively realistic. Some people in the population of potential public servants care about public policy per se, while others do not (c.f.,
common intuition, Downs [1967], and Brehm and Gates [1997]). Simply put, we do not
expect bureaucrats in an occupational safety or environmental protection office (etc.) to
be a random cross section of the population in terms of their concern for these matters;
that is part of why they work in these bureaucracies at all.
13
While this assumption might make the problem for Congress seem “easier” than it would be in a
world where b is not observed, in some ways, the reverse is actually true. For example, some of the
conclusions of the theory provide an understanding of why Congress may prefer moderate preference
divergence to perfect agreement (i.e., b = 0), as this preference divergence serves as both an intrinsic
and extrinsic motivation for the bureaucrat to acquire expertise. Furthermore, the endogenous expertise
approach to administrative policymaking provides an understanding as to why Congress sometimes
grants significant discretionary authority to agencies with policy goals that do not completely agree with
those of the legislature.
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LEARNING WHILE GOVERNING
Furthermore, the difference in policy goals between elected officials and civil servants
is well-supported empirically. For example, Aberbach and Rockman [2000] document
notable changes over time in the ideologies of senior bureaucrats. Yet even in the late
Reagan administration, the apex of bureaucratic conservatism in their data, career bureaucrats were much more liberal and Democratic than Congress is today, for example.14
Expertise. The notion of expertise we adopt rests on the presumption that most individuals’ preferences about policy decisions are induced by the “state of the world”
prevailing in society at the time (and, perhaps, those expected to prevail in the future).
The simplest examples of this are provided by the question of the proper penalty to hand
down for a crime such as theft. Was the accused armed? How old is the accused? What
would have happened to the accused in lieu of committing the crime? Did the accused
have reason to believe that he or she was not committing a robbery? Most administrative
decisions have the same flavor, in the sense that one’s belief about the proper maximum
allowable level of a pollutant depends on the level of toxicity associated with the pollutant, the proper number of oil wells in the Alaskan National Wildlife Refuge depends on
the price of oil and the expected impact of currently prevailing drilling technology on the
environment, and so forth. This assumption reflects the relation x = p + ω noted above;
given an ideal outcome x∗ , any actor’s ideal policy choice p∗ is pinned down by the state
ω.
We define policymaking expertise as the knowledge of facts of this type. In other
words, expertise is the ability to choose the government policy that best suits the prevailing conditions in the real world to achieve a particular policy outcome. In our theory,
bureaucrats “acquire expertise” only if they invest individual effort in obtaining it, and
this investment gives them knowledge of the facts whenever they are asked to make policy
14
See, in addition, see Feldman [1989] and Golden [2000] for evidence of goal conflict between principals
and bureaucratic agents.
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CHAPTER 2. DEVELOPING ADMINISTRATIVE EXPERTISE
decisions in the future.
While we wish to consider incentives for expertise investment, the process of that
investment itself is not particularly important at this degree of abstraction. Thus we
presume that acquiring expertise is a one-step procedure — a bureaucrat either invests in
expertise and acquires the relevant knowledge, or not. Furthermore, expertise is durable
— once expertise is acquired by a bureaucrat, she retains that expertise in any subsequent
policy decisions.
While we take a decidedly information-centered approach to our discussion of expertise, it is also true that the theory presented here can just as easily apply to any
trait that is costly for bureaucrats to develop and potentially useful for obtaining specific
policy outcomes. Accordingly, the theory may not be faithful in a descriptive sense to
notions such as “capacity,” “efficiency,” or “mission,” but to the degree that development of these characteristics require voluntary effort by members of the public service,
the strategic incentives of bureaucrats regarding, and the potential for Congress to use
grants of discretionary authority to induce, such development are analogous to those
discussed in this chapter.
Relationship-Specificity of Expertise. A key presumption of the theory is that
the expertise under consideration in this setting is relationship-specific. That is, it is
most valuable when used in public service for a particular bureaucratic agency for which
it is specifically tailored. If expertise in a specific policy area is most valuable to the
bureaucrat provided that employment in public service persists, it is relationship-specific.
For example, mastery of the fine points of the policy process, an agency’s accounting and
records system, and substantive policy details are each much less valuable in alternative
employment than it is in public service.
Because expertise is both costly and relationship-specific, early investments in it create
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LEARNING WHILE GOVERNING
a possible hold up problem for the bureaucrat (see Williamson [1975], Klein et al. [1978],
and Hart [1995] for classic expositions on capital investment in the private sector) . If
the investment is made, but the relationship does not continue or the expertise is used
in support of policies the agent does not prefer, the agent may not reap gains exceeding
the cost of investment—the agent is “held up” or exploited. This becomes a problem if it
causes bureaucrats to hold back on expertise investment in the first place, because they
foresee the hold-up problem and wish to guard themselves against it. Because of this,
incentives to invest in costly policy expertise are a crucial facet of personnel management
institutions.
We must stress at this point that our argument pertains to relationship-specific expertise, not necessarily to every kind of skill or capability that individuals might possess.
In the case of skills that are general and portable, incentives to invest in them are provided by their returns in the broader labor market. However, many important skills and
points of expertise that make public bureaucracies function well are relationship-specific
(see DiPrete [1989]), in that they are most valuable in specific public service applications.
Importantly, our arguments do not require that expertise be entirely relationship-specific,
only that it be at least partially relationship-specific (i.e., a positive proportion of the
expertise is forfeited upon leaving public service).
Civil Service Job Protections and Voluntary Employment. The theory’s most
interesting results are predicated on the presumption that private employment is more
remunerative than public sector employment. For reasons of parsimony, we do not explore
the legislature’s choice of wages and benefits for civil servants, in spite of the importance
of this question. We also do not allow the legislature to institute compulsory public
service. In short, the government is simply one of many possible employers competing
for individuals’ time and efforts; albeit one with a decidedly distinctive set of job offerings.
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CHAPTER 2. DEVELOPING ADMINISTRATIVE EXPERTISE
With respect to the wage offered by the government to potential bureaucrats, we focus
on the most interesting case for our purposes and presume that government wage level,
which we denote by r, is less than the wage that a bureaucrat can receive from private
employment, which we denote by w.
In addition to a wider variety of potential tasks that one might undertake as a government employee, those who pursue careers in public service are employed (or at least
paid) by an institution that, in many ways, is less bound by traditional contracts than
private employers. While Congress is constitutionally bound to pay an employee what
he or she has earned, it is well-established that Congress can fire any ordinary Federal
employee.15 Furthermore, up until the turn of the twentieth century, most governmental
employees that were removable by Congress were also removable by the President. As we
discuss in Chapter 4, the President frequently and most widely used this removal power
for ordinary government employees as a means by which public employment was offered
to the supporters, friends, and families of members of Congress and party officials (i.e.,
for the purpose of “patronage”).
As discussed in some detail in Chapter 4, patronage within the federal government
was — and is — a complicated institution.16 However, given the focus of this chapter
and the book more generally, the key element of a patronage system was the fact that
any government employee’s future employment in the public service was significantly
influenced by events beyond his or her control and substantially unrelated to his or
15
In particular, Congress can fire any employee not subject to confirmation by the Senate. Some of
these employees may be fired by the President (e.g., the Secretaries of Executive Agencies), while others
are removable only through expiration of term of office, death, resignation, or by the constitutional
process of impeachment.
16
Classical presentations of the history of patronage practices in the federal government include Fish
[1963], Van Riper [1958], and Hoogenboom [1961]. From a modern perspective Lewis [2008, 2009]
provides an illuminating examination of personnel management and political patronage in the federal
government from the 1960s through the beginning of the 21st century. Lewis’s data and arguments,
by demonstrating that the personnel management in the contemporary federal government involves a
combination of politics and merit, highlights the importance of the effect of civil service systems on the
policymaking process.
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LEARNING WHILE GOVERNING
her job performance. At any given time, it is useful and appropriate to represent the
relevance of patronage-based job insecurity as a probability of not being fired for reasons
other than job performance. For simplicity, we denote this probability by ρ.
2.2
Expertise Development by Public Servants
The first set of questions we must tackle deal with expertise acquisition and career choices
by bureaucrats. The theory offers a set of conclusions about these decisions, relating
several of the parameters of the model with the emergence of expert and experienced
bureaucrats. We present these in a sequential fashion, focusing on the trade-offs between
parameters that are of most interest.
Cost, Motivations, and Expertise
Expertise acquisition is more costly (in terms of time and personal effort) in some policy
areas than others. The theory’s logic with respect to this dimension of policymaking
is summarized in Table 2.1. The fact that only zealots may acquire expertise is not
surprising, of course: by assumption, such individuals simply do not care enough about
the policy outcomes in question to take the time to become experts in managing them.
The key feature of the theory’s predictions in this setting is the role of discretionary
authority, D, in the decision-making of zealots. Beginning a theme that runs through the
chapter, the possibility of offering discretionary authority to the bureaucrat in pursuit of
expertise acquisition is indicated by comparing cells 3 and 4 of Table 2.1. When expertise
about a given policymaking realm is difficult or costly to acquire, a bureaucrat will choose
to make this investment only if his or her discretionary authority is large.
To understand this comparative static, consider the following analogy. You are considering which of four candidates to vote for in your state’s upcoming Presidential primary.
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CHAPTER 2. DEVELOPING ADMINISTRATIVE EXPERTISE
In order to make a reasoned choice, it would require some effort to research their platform
positions, qualifications, etc. Now suppose you are told that three of the candidates have
dropped out of the race, leaving you only one to vote for, should you choose to show
up. Would this affect your decision about whether to research the candidates’ positions
and qualifications? Presumably it would, and rightly so, unless you enjoy reading about
candidates’ positions and qualifications for its own sake.
Slacker
Zealot
Cost of Acquiring Expertise
Low
High
Expertise Not Acquired.
Expertise Not Acquired.
Expertise Acquired
Expertise Acquired
if D is Moderate or Large.
if D is Large
Figure 2.1: Expertise Emergence: Bureaucratic Motivations & Cost
The structure of Table 2.1 can be summarized as follows.
Conclusion 1 Expertise will be acquired only by zealots interested in affecting public
policy outcomes. Furthermore, when the relevant policymaking expertise is more costly
to acquire, such expertise will emerge only if the agency is given commensurately more
policymaking discretion.
The first-order effect of Conclusion 1 is very intuitive: more costly actions (such as acquiring expertise) will be pursued only if the benefits are larger as well. The important aspect
of Conclusion 1 is the use of discretionary policymaking authority as the inducement for
becoming an expert. Conclusion 1 is central to the discussion in Chapter 4, where we examine the relationship between discretionary authority and expertise development within
different agencies.
Conclusion 1 is derived from the bureaucrat’s decision calculus, which means that a
fixed positive level of discretionary authority serves at least partially as the proverbial
“carrot,” a positive reward that is garnered from expertise acquisition. Put another
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LEARNING WHILE GOVERNING
way, according to the logic underlying Conclusion 1, the ability to more effectively use
discretionary authority is a part of a zealot’s motivation to acquire expertise. Later in
the chapter, we will discuss complementary conclusions (Conclusions 4 & 5) based on
the incentives of Congress in which the threat of loss of discretionary authority in the
future upon failing to acquire expertise amplifies the bureaucrat’s incentives underlying
Conclusion 1.
Discretion and Career Choice
Conclusion 1 partially indicates the central role played by discretion in bureaucrats’
behaviors. While individual decisions to acquire expertise are clearly relevant for the
question of under what conditions expertise will develop within an agency, it is just as
important to understand under what conditions those who acquire expertise will remain
in the agency. High rates of employee turnover have been chronic and endemic to many,
but by no means all, government agencies.
The theory’s principal conclusion with respect to individual bureaucrats’ choices
about career paths (i.e., whether to pursue a career in public service or obtain private employment) is that relationship-specific expertise acquisition is a sine qua non for
pursuit of a career in the public service. This is based on our assumption that the private
labor market offers a higher wage than government employment. If that is what drives an
individual’s human capital development, they should develop general (not relationshipspecific) expertise and take private employment that compensates them for it as soon as
possible. Accordingly, the principal motivation for pursuing a career in a government position is to affect public policy outcomes. It turns out that such a motivation determines
an individual’s career path in exactly those cases in which it also induces that individual
to acquire relationship-specific expertise in making policy.
The following conclusion provides a summary of the types of bureaucrats that will
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CHAPTER 2. DEVELOPING ADMINISTRATIVE EXPERTISE
staff agencies with low rates of turnover and the discretionary authority of such agencies.
Conclusion 2 So long as public employment is less remunerative than private employment, agencies with low rates of turnover will be populated by policy-interested bureaucrats. Furthermore, in such situations, an agency will experience low rates of turnover
only when Congress grants its staff positive discretionary authority over policy choices.
The presumption that the remuneration from private employment exceeds that received
by public servants (which maintained throughout unless stated otherwise) is important.
If public remuneration is sufficiently high, then bureaucratic turnover will tend to be low
regardless of the discretionary authority possessed by administrators. Such a conclusion
hardly violates common sense, of course, but interestingly implies a positive effect of
relatively low rates of pay for experts within the public service. Namely, when a career
in public service necessitates a sacrifice of non-policy-related rewards, one can be more
confident that those who choose to pursue such a career are doing so for policy-related
reasons. As discussed later (p. 53), this is a “double-edged sword” from Congress’s
standpoint: successfully reducing turnover through the granting of discretionary authority correspondingly produces expertise development, but occurs only by the actions
of bureaucrats who may seek to implement policy outcomes distinct from those that
Congress would most prefer.
Tenure Protections and Expertise Acquisition
Table 2.2 displays the theory’s logic about the interaction of the cost of acquisition and
tenure protections on the acquisition of expertise by zealots. (Recall that an implication
of Conclusion 1 is that slackers never acquire expertise.) The key aspect of the interaction
is that some civil service protections are necessary for acquisition of expertise to occur,
and the amount of discretionary authority that must be offered to the bureaucrat to
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LEARNING WHILE GOVERNING
induce expertise acquisition decreased as the security of the bureaucrat’s job increases.
Cost
Low
High
Civil Service Job Protections
Strong
Intermediate
Weak
Acquired, if
Acquired, if
Not Acquired.
D is Moderate or Large
D is Large
Acquired, if
Not Acquired.
D is Large
Figure 2.2: Effects of Cost and Tenure Protections on Expertise Acquisition
The key implications of Table 2.1 can be restated as follows.
Conclusion 3 Expertise will be developed in agencies only when bureaucrats are confident about the security of their employment into the future. Furthermore, the level of job
security required for expertise development is higher for agencies where the expertise is
more costly to acquire.
Conclusion 3 summarizes one of the principal implications of the hold-up problem for
expertise development. Congress must be able to commit itself to retaining (and granting
discretionary authority to) expert bureaucrats in order to provide sufficient incentive for
acquisition of expertise. The difficulties faced by Congress in pursuit of this are myriad,
as discussed in Chapter 4. From a theoretical standpoint, the principal difficulty that we
are interested in is that of preference divergence between the bureaucrats and Congress.
When professional and reelection motives come into significant conflict, for example, the
ability of Congress to commit itself to maintaining an agency’s discretionary authority
is hindered – perhaps so much that expertise acquisition can never occur in equilibrium.
This is the central dynamic discussed in the next section.
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CHAPTER 2. DEVELOPING ADMINISTRATIVE EXPERTISE
2.3
Using Discretion to Induce Expertise
With the decision calculus of expertise acquisition in hand, we now turn to the incentive
effects of Congress’s grant of discretion to the bureaucrat. Key to the theory’s conclusions
is the fact that, according to the discussion above, only zealots will acquire expertise —
but such acquisition can not be taken as given. When expertise acquisition can be
induced by Congress, the means by which it is accomplished always takes a particular
form, which we refer to as the promotion model.
The promotion model involves an intermediate level of discretion (i.e., an intermediate
value of D) for new bureaucrats, followed by (1) increased discretion for those who remain
in the public service and have acquired expertise or (2) zero discretion for those who
remain but have not acquired expertise. Regardless of how long a bureaucrat can remain
in the public service, sequential rationality dictates that if one will ever obtain expertise,
this should occur as early as possible. As this type of behavior will be undertaken only
by zealots, this point makes clear the double-edged sword faced by Congress when it
considers whether to induce expertise acquisition by bureaucrats. Informed policymaking
comes at the expense of policy “drift,” as expertise is acquired only by those bureaucrats
with policy motivations.
When Congress uses the promotion model, the dynamics of agency development are
substantively interesting. In this case agencies will initially be granted a limited amount
of discretion, an amount that will grow once the agency demonstrates policymaking
expertise. Following the logic of agency discretion models (Holmström [1984], Epstein
and O’Halloran [1999]), Congress is able to commit to rewarding expertise acquisition
with enhanced discretion, because it is sequentially optimal to grant extra discretion to
an agent with more expertise.17 Furthermore, this expertise will occur only once the
17
This point also illustrates the difference between our logic and that of Aghion and Tirole [1997],
though there is a resemblance. In Aghion and Tirole’s model, discretion is granted first, and serves as
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LEARNING WHILE GOVERNING
agency is populated by policy-motivated bureaucrats (i.e., zealots). Finally, personnel
turnover at such agencies will tend to be high until expertise is acquired, after which
voluntary turnover will fall and remain low until, perhaps, involuntary turnover (e.g.,
patronage, retirements, etc.) within the agency reduces Congress’s perception of the
level of expertise remaining in the agency, at which point it may “restart” the process
by curtailing the agency’s discretion.
If the policy drift imposed by active policymaking by zealots is too large, then
Congress can choose a second approach to discretion: simply grant none of it to any
bureaucrat, regardless of his or her expertise. We refer to this as the clerkship model,
and involves granting zero discretion (i.e., D = 0) in each period, regardless of who the
bureaucrat is or what he or she has done in the past. While the policy dynamics of the
clerkship model are not very interesting, the personnel dynamics — stubbornly high rates
of turnover and low levels of demonstrated expertise — are interesting if only because
they have been observed in numerous government agencies throughout American history.
The descriptive features of the promotion and clerkship models are summarized in Table
2.3. These characteristics are central to our analysis of the historical development of the
federal bureaucracy presented in Chapter 4.
Characteristic
Discretionary Authority
Rewards for Expertise
Personnel Turnover
Expertise Developed?
Promotion Model
Positive
More Authority
Low
Yes, By Careerists
Clerkship Model
Negligible
None
High
No
Figure 2.3: Descriptive Features of the Promotion and Clerkship Models
an inducement to acquire expertise. In our model, expertise is acquired because the agent knows that in
equilibrium, it will be met with increased discretion. Our model closely tracks the logic that Carpenter
[2001] refers to as “reputation-conditioned autonomy,” though we are focusing on discretion rather than
autonomy per se.
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CHAPTER 2. DEVELOPING ADMINISTRATIVE EXPERTISE
The Interaction of Expertise Cost and Drift
The cost of expertise and preference divergence between the agency and Congress interact
to determine Congress’s choice of discretionary regime. The substantively interesting
conclusions from this interaction are summarized below.
Conclusion 4 Congress will grant discretionary authority in a manner that induces expertise development only when the expertise is not prohibitively costly and the bureaucrat’s
preferences are not too dissimilar from those of Congress.
Conclusion 4 leads to the following conclusion about the substitutability of preference
convergence and the cost of expertise acquisition: lowering the cost of acquiring expertise
commensurately lowers the amount of discretion that Congress must offer as a reward to
induce expertise development. This means that the expected cost of bureaucratic “drift”
is smaller from the optimally designed Promotion Model, which implies that Congress is
willing to pursue such an organizational strategy in the face of greater levels of preference
divergence between it and the bureaucrat as the cost of expertise acquisition goes down.
Conclusion 5 Congress should be more amenable to inducing expertise development in
areas where the expertise is more costly to acquire when the bureaucrat’s preferences are
less divergent from its own. Conversely, Congress should be more amenable to inducing
expertise development in areas where the bureaucrat’s preferences are more divergent from
its own when the expertise is less costly to acquire.
The Effect of Tenure Protections
Civil service job security affects Congress’s choice of whether to pursue the Promotion
Model through its effect on the amount of discretionary authority that Congress must
grant to induce expertise acquisition. When tenure protections are weak, the amount of
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LEARNING WHILE GOVERNING
discretionary authority that must be granted in order to induce expertise development is
large, meaning that Congress will do so only when the policy preferences of the bureaucrat
are not too divergent from Congress’s own policy goals. This dynamic is summarized in
Table 2.4 and Conclusion 6.
Civil Service Job Protections
Preference
Divergence
Small
Moderate
Large
Strong
Intermediate
Weak
Promotion
Model
Promotion
Model
Clerkship
Model
Promotion
Model
Clerkship
Model
Clerkship
Model
Clerkship
Model
Clerkship
Model
Clerkship
Model
Figure 2.4: Effects of Cost and Tenure Protections on Expertise Acquisition
Conclusion 6 Congress will grant discretionary authority in a manner that induces expertise development only when it has instituted relatively strong civil service protections.
The required strength of the protections is increasing in the preference divergence between
Congress and the bureaucrats covered by those protections.
Table 2.4 and Conclusion 6 yield a somewhat surprising corollary about Congress’s incentives to extend civil service protections. Namely, to the degree that these protections
are costly to institute18 and are instituted for the purpose of inducing or maintaining
expertise development, the extent of protection extended to an agency will be increasing
in the amount of preference divergence between Congress and the staff of the agency in
question.
18
As argued by, for example, Johnson and Libecap [1994], Horn [1995], and Huber and Shipan [2002].
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CHAPTER 2. DEVELOPING ADMINISTRATIVE EXPERTISE
2.4
Taking the Theory into the Field
Bureaucratic policy expertise is endogenous: policy-making requires skills that must be
acquired and can only be acquired through a series of voluntary choices by individual
public servants. Such expertise and other related individual investments in other policymaking skills are often relationship-specific in the sense that their value is significantly
higher in public service than it is in private employment. Accordingly, individuals considering make costly investments in acquiring such skills and expertise are (or at least
should be) aware of the potential hold up problem they face: Congress, for example, is
not necessarily under any obligation to reward any bureaucrat for becoming an expert
administrator. Rather, the “return on expertise” that Congress can credibly offer to
public servants depends broadly on two key dimensions of the interface between politics
and administration. The first of these dimensions is the divergence of policy preferences
between professional policymakers and elected officials: significant disagreement between
political and administrative ideals of “good policy” make it harder for Congress to credibly grant significant discretion to unelected and professionalized bureaucrats. The second
dimension of interest encompasses the personnel management practices and institutions
in government. In particular, the ease of expertise acquisition and the degree of job security (i.e., civil service protections) within an agency have strong, first-order effects on the
willingness of bureaucrats to make costly investments in expertise, capacity, and other
policy-making capabilities. When expertise is difficult to acquire or civil service protections are weak, the amount of discretionary authority that must be granted Congress
to induce expertise development may exceed the maximum that Congress is willingness
and/or able to credibly commit as a reward to expert bureaucrats. In such situations,
expertise will tend to not be acquired and, if public wages are lower than private ones,
high rates of personnel turnover will tend to be observed.
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A central conclusion of this chapter is that Congress can induce expertise acquisition
within an agency by, first, instituting relatively common civil service practices — notably,
protection of job tenure and lower material rewards than an available outside option –
and, second, granting bureaucrats some measure of control over policy issues they care
about. Such a solution comes with an extra requirement: the bureaucrats who acquire
expertise and make careers in public service are exactly those who have unusually strong
policy preferences.
A corollary of the chapter’s conclusions about expertise acquisiton is that neutral
competence within administration is impossible in many situations. This failure, however, is not because “neutrality” itself is impossible, but because only those with a stake
in policy can be induced (by the limited instruments available) to become experts. In
other words, those public servants who would be neutral have no incentive to remain
public servants. Furthermore, the approach to personnel management that would retain
such individuals (e.g., direct remuneration for expertise) will not achieve neutral competence either – use of such incentives does not filter non-neutral servants out of the
public service.19 Another way to view this implication of the chapter’s conclusions is
that “politicized competence” (as is produced in the Promotion Model) is the best kind
available in the long-run (i.e., in equilibrium). In this respect expert bureaucratic policymaking is achieved through the creation – by Congress and for Congress – of an agency
problem: significant discretion granted to agents with divergent policy goals. Congress
creates (or at least should create) this agency problem precisely when the divergence of
preferences serves the useful purpose of making expertise development possible.
19
Well, perhaps it would if one presumed that policy-motivated individuals disliked high wages. This
seems implausible and presumes that individuals can not freely dispose of undesired wages and benefits.
58
Chapter 3
Expertise and Deference
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A foundational presumption throughout the book is that expertise is something that
is valued by political principals. In this chapter, we discuss the historical evolution
of deference to administrative expertise by both Congress and federal courts. Some of
the episodes demonstrate clearly that expertise was valued insofar as deference followed
recognition of an agency’s policymaking expertise. Other episodes demonstrate the point
in a more perverse fashion: one political principal, aware of the potential for demonstrated
expertise to secure deference from other political principal(s), instituted structural change
so as to remove the incentive for the agency in question to acquire and demonstrate such
expertise.
The chapter consists of three components. We focus first on Congressional “notices”
of bureaucratic expertise. By this we mean simply cases in which an agency’s capabilities
were explicitly observed and evaluated. Such accounts demonstrate that bureaucratic expertise is not simply an academic notion. Rather, the temporal expanse and variety of
issues encompassed suggests that successful development and deployment of expertise
has served as one of the central normative and instrumental justifications for the growth
in the administrative state during the 20th century. In the second part of the chapter we
argue that the sustenance of administrative expertise has been a principal determinant
of both Congressional and presidential reforms of administrative structure and process
since the Civil War, beginning during Reconstruction with the first steps toward a federal civil service. Finally, we visit the question of judicial deference and the degree to
which bureaucratic expertise has played a role in the courts’ treatment of administrative
determinations.
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CHAPTER 3. EXPERTISE AND DEFERENCE
3.1
Congress and Administration
Since the Republic’s founding, Congress has delegated policymaking authority to the executive branch for various reasons. As we discuss in Chapter 6, the separation of powers
inherent in the structure of the U.S. Constitution provides a certain inherent degree of discretionary authority to the executive when carrying out its statutory and constitutional
duties. However, Congress has deliberately and consistently granted greater flexibility
to the President and his officials than the residual latitude inherent in the constitutional
framework.
The theory presented in Chapter 2 provides one possible motivation for such behavior:
Congress might bequeath increased policy making berth to officials within the executive
branch as an implicit reward for the acquisition and demonstration of expertise with
respect to policy execution. We explicitly do not adopt the position that expertise was the
sole, or even necessarily a primary, motivational determinant in all grants of policymaking
latitude to the executive branch. Instead, we set for ourselves in this chapter the far
humbler task of illuminating that expertise has played a role in the design of some
important delegations of policymaking authority.
3.1.1
The First Hundred Years: 1787-1887
Legislative concern about and involvement in matters of administration dates back to the
Confederation Congress, which — in the absence of a separately elected executive or any
separation of powers — was itself directly involved in administration (Sanders [1935]).
Furthermore, administration in the 18th century was closely tied to the distribution of
direct benefits. Administrative line officers were frequently compensated by commissions
on customs and bounties they succeeded in collecting. The principal task at hand for
most, if not all, federal officials in the field was the collection of revenues in some form or
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another. Accordingly, while agency costs — which in this realm essentially boil down to
straightforward graft — could not be completely eliminated, proper administrative structures in these situations were fairly well understood: a combination of commission and
bond, combined with juxtaposition of limited liability for a well-defined set of sanctioned
official actions and the potential for personal liability for all other (i.e., unauthorized)
official actions.
An early and important decision for the new Congress, then, was the nature of the relationship between legislative and administrative authority under the new Constitution.
While President Washington had a clear and broad base of support that arguably could
have provided a buffer against Congressional usurpation of his office’s powers, it is important to note that in many ways the first Congresses grappled with providing a useful
definition of what those powers were, exactly. The decisions made in the early Congresses
illustrate, roughly, a triad of policy areas distinguished by the degree to which authority
was presumed by Congress to reside with the legislature, the executive, or some sort of
uncomfortable combination of the two.1 For example, decisions about what, how, and
how much to tax were clearly a legislative prerogative. Similarly, diplomatic strategy lay
almost entirely within the President’s purview.2 The third policy area in the triad are
most easily described as the intersection of administration and appropriations.3
Federal policy decisions regarding personnel, public buildings, and private claims were
frequently and consistently acknowledged by members of Congress as being beneath the
national legislature’s dignity. Of course, this principle was often honored in the breach
1
It is particularly important to note that, for a variety of reasons, the judiciary was not considered
within Congress to possess any significant discretionary authority as a branch of the federal government.
Obviously, this presumption would be challenged when the Supreme Court rendered the landmark Marbury v. Madison ruling in 1803.
2
We say “almost” because a non-negligible fraction of the memberships of the early Senates pointed
to the Constitutional requirement that treaties be ratified by a two-thirds majority of the Senate as
suggesting that Senators should be consulted on an ongoing basis regarding diplomatic decisions.
3
We consider these issues in further detail in Chapter ??.
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more than the observance; these acknowledgements were frequently made during floor
debate on matters directing the minutiae of federal policy in exactly these areas.4 We
defer detailed discussion of the first and second types of policy areas to Chapter 6, which
focuses much more on the implication of separated powers for expertise acquisition. In
what follows, we accordingly consider the development of Congressional attention to
matters of adminstration and expertise as it periodically revisited and oversaw policy
making in areas that were not clearly contained within one or the other of the branches’
bailiwicks.
The Federalist Congresses. Congressional concerns about the provision of expert
administration can be observed as early as the First Congress (1789-1791). The First
Congress was faced with several administrative tasks, several of which we discuss elsewhere (Chapter 6). While expertise was an important consideration in all of these tasks,
it played a central role in one of the most fundamental tasks of governance, revenue collection. One of the first statutes passed by Congress, “An Act to regulate the Collection
of the Duties imposed by law on the tonnage of ships or vessels, and on goods, wares and
merchandises imported into the United States,”5 described in detail the staffing of, and
procedures to be used by, customs operations in U.S. ports. As Mashaw [2006] describes,
the exacting of additional duties on a ship’s cargo required the agreement of “two reputable merchants” regarding the value of the disputed goods. Similarly, when an invoice
was unavailable or the condition of the goods had changed in transit, two merchants
were required (one appointed by the collector and one appointed by the owner of the
shipment) to establish the value of the goods.6
4
For example, the use of private bills for matters like pensions and citizenship determinations were
commonplace from the First Congress on through the mid-20th century.
5
Ch. 5, 1 Stat. 29 (1789).
6
These are also an early example of Congress calling for participation by non-governmental actors
within the administrative process and, accordingly, consistent with the arguments of Chapter 7.
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LEARNING WHILE GOVERNING
Acknowledging the practical reality that the federal administrative apparatus was
initially almost nonexistent, Congress also leveraged preexisting state and local governments’ administrative expertise as well.7 For example, early statutes required the consent
of the warden of the port (or two appropriately knowledgeable citizens) for a decision
about whether to allow a ship to unload goods at a port other than that listed in the
ship’s papers.8 Similarly, the initial Federal laws regarding public health and export inspections deferred to state laws (and, accordingly, the determinations of state officials).9
The management of the federal government under the Washington administration was –
in modern terms – highly centralized and free of corruption.10
Congressional requests for information from the Washington administration were the
source of early and frequent dissent within Congress. Republicans such as James Madison
were resolute in their opposition to the reference of bills to heads of executive branch departments.11 At some level, this dimension of conflict was one of policy, rather than pure
administration, however, as there was much less opposition to referring more mundane
matters of administration (such as claims) to the executive departments. The divide
between the Federalists and Republicans on the proper influence of the executive branch
within Congress was clear from the First Congress on.12
However, the Congressional debates during the early Congresses focused less on the
details of how policy was to be administered and more on whether Congress had the
power make policy at all. Congressional interest in the operations of an executive department was confined to the efforts of Albert Gallatin regarding the proper operation of
7
Practical concerns presumably suggest that using currently extant expertise is preferable to growing
one’s own. However, constitutional concerns also suggest a value in deferring to the determinations of
local and state officials.
8
Ch. 5, § 12, 1 Stat. 29 (1789).
9
For public health matters, see ch. 31, 1 Stat. 474 (1796). Inspection of exports is the focus of ch.
5, 1 Stat. 106 (1790). Both of these are discussed in Mashaw [2006], p. 1278.
10
For example, White [1948], 257-66 and Van Riper [1958], pp. 18-20.
11
White [1948], pp. 67-78.
12
White [1948], pp. 71-4.
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the Treasury.13 Between 1792 and 1800, Congressional efforts were driven more by the
constitutional-cum-partisan struggles between the Federalists and Republicans: it was
not until the Jefferson administration that the details of administration began to be seen
by large numbers of the members of Congress as having significant policy implications.14
The Early Republican Congresses. Following the inauguration of Thomas Jefferson in 1800, Congress — bereft of any significant staff or standing committees of its own
— directly and repeatedly relied upon the executive branch for expertise prior to the
War of 1812. For example, a wide variety of matters of implementation (e.g., postal
operations, internal improvements, organization of the military, technical standards, and
revenue collection), Congress sought reports from various executive departments.15 During this time period, Congress began requiring more extensive reporting from executive
departments. Many of these reports dealt with straightforward clerical, accounting, and
statistical matters: compared with the first few Congresses, the Republican majorities
in Congress of the early 19th century were – unsurprsingly – less active in their solicitation of legislative proposals, per se, from the executive branch than their Federalist
counterparts had been during the first, second, fifth, and sixth Congresses.
During this time period, as a result of the experiences of the War of 1812,16 skill
and expertise acquisition in the military services was rewarded with promotion in terms
of both influence and remuneration. Specifically, the military began developing explicit
tests and rewards for expertise acquisition as early as 1814, when the Department of
War instituted an exam for Army surgeon applicants not possessing a medical diploma.
This requirement was extended by the Secretary of War to all applicants for surgeon
13
Furthermore, even these efforts were driven more by competing constitutional theories about the
relationship between the Treasury Department and the House of Representatives.
14
The discussion of this period by Harlow [1917], Ch.9, is particularly on point in this regard.
15
White [1951], pp. 93-4.
16
For example, at the beginning of the war the United States’ military academy, West Point, was
sitting empty (White [1954], pp. 251-64).
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LEARNING WHILE GOVERNING
applicants in 1823. The Secretary’s extension was statutorily ratified and strengthened
by Congress in 1824. The Army instituted examinations for entrance into West Point
and appointment and promotion of sailors in the Navy in 1818 and 1819, respectively.17
In our theory, expertise is a characteristic that leads to unambiguously better policy
outcomes. In the military context, the analogy between our notion and the characteristics
commonly described as expertise seems particularly apt. Finally, while medical training
clearly represents a transferable skill, the same is less true of the knowledge about matters
relating to successful execution of military operations.
Following the conclusion of the War of 1812, Congressional interest in the affairs of the
executive branch became markedly more aggressive. Until this time period, Congress’s
use of its investigatory powers was relatively limited. In particular, the House of Representatives, led by Speaker Henry Clay, established a relatively modern standing committee system by 1816.18 The new committee system included six standing committees
on expenditures. Five of these committees were assigned direct oversight responsibilities
for a specific executive department.19 Between 1815 and 1826, Congress conducted 19
significant investigations of administration within the executive branch. Leonard White
describes this decade as the one in which “the power to investigate became well fixed as
an important means by which Congress discharged its duty of supervising the conduct
of administration.”20
In contrast with the Republican congresses through John Quincy Adams’s administration, the antebellum Whig and Democrat-dominated Congresses from 1830-1860 solicited
significant input from the executive branch in both informational and policy realms. Part
of this change can be explained by the increased volume of constituent requests for as17
See White [1954], pp. 362-3.
Harlow [1917], p. 210.
19
These were the Post Office, State, Treasury, War, and Navy Departments. The sixth committee was
responsible for expenditures on public buildings (White [1951], p. 101).
20
White [1951], p. 100.
18
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CHAPTER 3. EXPERTISE AND DEFERENCE
sistance from their representatives, which was due to both the growth of the nation’s
population and technological and economic progress, as the impacts of inventions such
as telegraph and steam engine began to be felt around the nation.21
The Civil War. During the Civil War, Congress adopted a relatively subservient
stance and generally supported Lincoln’s war efforts. However, the extent of Congressional subservience was not absolute. Two notable examples of Congressional resistance
against the efforts of the executive branch include sustained and high-profile Congressional investigations of the war efforts (the Joint Committee on the Conduct of the
War) and the Wade-Davis bill — supported by Radical Republicans and pocket-vetoed
by Lincoln. The Joint Committee represented an early and visible instantiation of the
distinction between legislative and executive powers in a modern state: Congress could
second-guess the military’s performance, but it could not actually lead troops into the
fray. Both the Joint Committee and the Wade-Davis bill are indicative of the struggles
within the Republican party, struggles that would only grow in importance and visibility
over the following decade.
Though rooted in divisions over grand policy questions, the Republicans’ intra-party
struggles (exacerbated by the growing numbers of Democratic members in Congress) grew
increasingly focused on matters of administration. Following the Civil War, Congress
passed many statutes that authorized individual administrative acts. Consider Leonard
White’s description of the administrative management efforts of the Forty-first Congress
(1869-71):
“Both legislation and appropriation language contained instruction concerning the internal methods of agency operation. Thus Congress required all
purchases of wood and coal to be inspected, weighed, and certified by some
21
White [1954], pp. 143-48.
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employee appointed in each department or division thereof. Departments had
only limited authority over real property and were obliged to go to the legislature for permission to make even modest changes. In 1869 Congress passed a
resolution authorizing removal of the public stables from the Capitol grounds,
and another disapproving a contract for leasing the customhouse block in San
Francisco.”22
Of course, the Forty-first Congress was not the first Congress to indulge in micromanagement. However, due in part to the advent and rapid expansion of the telegraph and
the railroad, both the depth and scope of details that Congress could micromanage were
growing at increasing rates during this time period. For example, members of Congress
during the 1870s were frequently and actively engaged both in securing positions and
promotions within the executive agencies for their supporters and constituents and reviewing administrative determinations in areas such as pensions. As White describes the
era, “members of Congress and congressional committees were . . . participating directly
in the administrative process.”23
The extent of Congressional involvement in administration during this time period
is particularly notable when one takes note of the areas in which Congress actively and
explicitly deferred to the executive and judicial branches. For example, the tradition of
Congressional deference to the executive branch with respect to the administration of
the military was maintained in the late 19th century and was justified on the grounds
that to second-guess administrative decisions in the military services might undermine
“good discipline.”24 During this time period Congress also consistently deferred to the
Commissioner of Patents due at least in part to the technical complexity of patent law.25
22
White [1958], p. 70 (notes omitted).
White [1958], p. 84.
24
See White [1958], p. 74, fn. 24.
25
White [1958], p. 81.
23
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CHAPTER 3. EXPERTISE AND DEFERENCE
The growth of the nation and the concomitant increase in both frequency and breadth
of constituency demands upon Congress necessitated serious debate about the proper design and operation of the executive branch in its pursuit of satisfying some or all of these
demand. However, while the initial efforts of the post-war Congresses were substantial,
beginning with the Joint Select Committee on Retrenchment in the forty-first Congress
(1869-1871). While members of the Reconstruction Congresses were interested in matters of administration from both partisan and economic standpoints — practical details
of administration were simultaneously at the center of debates about how to readmit
the southern states and how to reduce the size (and cost) of the military — general
Congressional concern with the details of administrative structure in the 1870s was most
frequently motivated by some combination of the desire to reduce expenditures and the
desire to reduce its own workload. Simply put, aside from the military administration
of the south, the federal government’s actions directly impacted very few of the nation’s
citizens with any frequency. The simple combination of great distances and primitive
modes of both transportation and communication served as an effective bulwark against
an activist national government.
Economy in the Face of Impotence. The federal government’s inability to directly
and reliably deliver services of any substance to the vast majority of the citizens naturally reinforced a focus on economy within Congress. Prior the 1880s, Congressional
concern with administration was principally reflected in detailed specifications of how
money should and should not be spent by officers of the executive branch. To the degree that these controlled the execution of policymaking, it is indisputable that Congress
controlled peacetime administration throughout the 19th century. As Schick describes
the situation, “it was the triumph of itemized appropriations which assured legislative
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supremacy during the 19th century.”26
Through much of the 19th century, these efforts were generally viewed by members
of Congress simply as an effective way to minimize expenditures. Congressional debates
about proposed federal projects during this time period centered on matters such as either
the proper budget for the project or the proper justification for federal support of the
project rather than on how the project in question should be administered. Furthermore,
to the degree that Congress did take an active interest in issues of administration, these
efforts were frequently better described as politically-driven than as policy-motivated in
the sense that they were motivated by a desire to directly reward or punish the officials in
question. This tendency began to ameliorate as technological and economic developments
created demands by various interests for government intervention in both economic and
social spheres.27
3.1.2
The Birth of Modern Regulation: 1887-1900
The portrait of the development of bureaucratic autonomy in the late 19th and early 20th
centuries provided by Carpenter [2001] is a useful benchmark for comparison with our approach to Congressional motivations regarding bureaucratic structure in the latter 19th
and early 20th centuries. Carpenter’s analysis indicates that nascent government agencies became effective policymakers by virtue of securing Congressional deference to their
determinations and, most importantly, this deference tended to flow from the construction of electorally relevant coalitions. Though not packaged as a study of bureaucratic
expertise per se, the consistent appearance of concepts such as “policy innovation” by
successful agencies clearly comports with our analysis. As Skowronek points out, the
leading advocates of Federal regulation of the railroads in the mid-1880s (e.g. Charles
26
27
Schick [1976], p. 517.
Wiebe [1967], Skowronek [1982], Libecap [1992], and Eisner [2000].
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Adams, Henry Carter Adams, and Arthur Hadley) were explicit in their support for civil
service and organizational reforms within the various regulatory forms being considered
in Congress.28 In addition to the efforts expended redirecting and refining the ICC’s regulation of railroads discussed earlier, Congress involved itself in matters of bureaucratic
structure when considering topics such as food and drug regulation.29
The policy areas that Congress ventured into in the late 19th and early 20th centuries were varied, to be sure, but they were nearly universally complex in the sense
that they involved a combination of regulation of private behavior (e.g., it is easier to
build and operate one’s own railroad than it is to regulate the building and operation of
railroads by other actors) and rapidly developing areas of knowledge (e.g., chemistry, economics, statistics, accounting, to name four). This complexity quickly began outstripped
Congress’s ability to make policy in a way that efficiently served the voters’ needs.30 As
a result, individuals both within and outside Congress began to argue that expert, politically neutral individuals should be granted the authority to administer public policy
in rational ways.31
During this time, a relatively strong committee system emerged within Congress.32
Many of these committees developed quasi-monopolistic control over a heavily itemized
appropriations process. This structure, combined with the prevalence of partisan assessments, supported a governance process that favored the targeted delivery of federal funds
and positions, as opposed to constituent services, per se. This system was undergirded
by the indirect election of the Senate and the fact that, for many years, there were few
credible alternatives: there were few areas in which domestic federal policy could credibly
28
Skowronek [1982], p. 136.
See, for example, Attorney General’s Committee on Administrative Procedure [1941], p. 103 and
Carpenter [2001], pp. 262-270.
30
See, for example, Eastman [1928], Kernell and MacDonald [1999], Carpenter [2001], Kernell [2001],
and Johnson [2007].
31
See, for example, Wiebe [1967].
32
Among others, see Cooper [1970], Galloway and Wise [1976], and Schickler [2002].
29
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consist of much more than delivering the mail, defending & distributing the frontier, and
collecting revenues.
This portrait changed quickly and fundamentally as the 19th century came to a close.
Administration and implementation of public policy quickly became central to the pursuit
of both partisan and personal gain by members of Congress. The electoral importance of
government services and, by direct implication, the efficiency with which these services
were delivered was transformed within the space of 25 years from what was almost a
theoretical matter of limited geographic and demographic effect to one of broad-based
salience.33 A central determinant of this change was the emerging realization of Manifest Destiny: as the populations of the younger states in the midwest and west grew,
the resulting reapportionments of the House combined with the complementary effects
of geographical dispersion and technological progress to produce a much larger potential
role for the federal government in the everyday lives of the typical member of Congress’s
constituents. As the nation grew, the importance of transportation was amplified, and
exponentially so for a the members of a legislature who were elected from geographically
delineated and, at least by the standards of the time, relatively evenly populated constituencies.34 The technical and financial developments that occurred during the late 19th
century similarly exacerbated the pressure for regularization and policing of interstate
commerce.35
These developments were at the heart of the emergence of the Progressive movement
during the late 19th century.36 While the Progressive movement was essentially statecentered in terms of its first-order impact – there was never a viable national Progressive
party – but its second-order effects on the federal government were very real and relevant
33
Schickler [2002].
Hoogenboom and Hoogenboom [1976] and Eisner [2000].
35
See Sanders [1986], Sklar [1988], and Eisner [1991].
36
Skowronek [1982].
34
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to Congressional concerns about administration. In particular, the state-level reforms
championed by progressives realigned the agency relationship between voters and state
legislatures in several midwestern and western states. This realignment had immediate
implications for the Senate – arguably including the ratification of the 17th Amendment
in 1913. Furthermore, the political economy of interstate commerce was altered in important ways. As state legislatures attempted to assuage voter demands for stabilization of
their commodity-based economies, railroad rates and practices quickly became the focus
of state government action.37 However, as the Wabash decision highlighted, state-level
regulation of interstate transportation was untenable as a long-run redress to voters’
economic grievances. In both constitutional and practical terms, effective regulation of
railroads required Congressional action.
Railroad Policy. The various state governments’ experiences provided clear demonstration that direct legislative regulation of railroads was infeasible for several reasons.
Furthermore, the not-so-distant experiences of Reconstruction had already provided ample evidence of the difficulties of transforming Congressional intentions into real-world
policy outcomes. First and foremost, the politics of administration during Reconstruction
clearly demonstrated the complications of attempting to sustain what was essentially an
18th century understanding of proper interbranch relations while pursuing the tasks of
everyday governance in an economy growing simultaneously and quickly both in size and
complexity. Thus, the “Congressional comeback” of the 1870s and 80s,38 spurred in large
part by both Lincoln’s and Johnson’s broad exercises of previously unexercised executive
prerogative, was soon stymied by the very domestic concerns that emerged during the
37
In other words, it was no coincidence that the states in which corporate influence influence over
interstate commerce was most highly concentrated were also those in which the Progressive movement
had its greatest and most long-lasting impact.
38
The term comes from Schlesinger [1973].
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era described by Wilson as one of Congressional government.39
Specifically, as technological and economic progress marched in lock step to open up
the opportunities for national policy making, the ability of Congress to answer these
demands failed to advance commensurately. For example, while railroad mileage was
growing exponentially in both absolute value and breadth of geographical penetration,
Congress’s organizational capacity for answering the concomitant growth in constituent
demands for regulation of the railroads’ pricing strategies and anticompetitive behaviors
remained unchanged. The Congressional politics of railroad regulation during the 1870s
and early 1880s was essentially populist and, accordingly, represented an important stage
for the partisan and ideological battles of the time.40 As the inevitability of federal
legislation became apparent, regional and intra-party factions became more important.41
The ultimate product of this debate, the Interstate Commerce Act of 1887, was accordingly the result of cross-cutting coalitional politics driven by economic interests.42
Perhaps most importantly, both the Act itself the politics leading to its passage were
self-conscious of Congress’s lack of expertise in this new policy area. There were several dimensions under serious discussion during the intermittent Congressional debates
about federal railroad regulations that occurred in the late 1870s and 1880s, particularly following the Supreme Court’s explicit countenancing of Congressional authority
to regulate railroads in Munn v. Illinois.43 For our purposes in this chapter, the key
dimension of interest was that of the proposed form of regulatory authority. Congress
ultimately adopted a “strong commission” model after a disagreement between the House
of Representatives and the Senate over whether to create a commission to administer the
Act. The House’s original version of the bill, due to Rep. John H. Reagan (D-TX), left
39
Wilson [1885].
Poole and Rosenthal [1994].
41
Poole and Rosenthal [1993].
42
Gilligan et al. [1989].
43
94 U.S. 113 (1877).
40
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enforcement of the Act up to federal courts.
The Senate’s version, reported by a committee chaired by Sen. Shelby M. Cullom (RIL), called for the creation of a strong commission.44 While the motivations of Reagan
have been debated, the Senate’s deliberations about the Act referred to the experiences
of state governments that had previously been on the front lines of railroad policy. Specifically, the strong commission model, most famously associated with Illinois, was seen as
at least an approximation of the structure required for effective regulation of both fares
and quality of service.45 Simply put, there was significant skepticism about the ability of
generalist judges to efficiently and cogently regulate the behavior of railroad firms.46 The
creation of a new specialized regulatory authority was in this sense explicitly motivated
by concerns about expertise.47
3.1.3
The Early 20th Century
From 1900 to the beginning of the Great Depression, Congress’s acknowledgement of the
value and presence of administrative expertise is displayed by the rapid growth of the
federal bureaucracy in terms of both number of agencies/commissions and the breadth
of policy authority and effect during this time.48 During this time, Congress focused
sustained attention on several areas where policymaking expertise was relevant, including
food and drug policy, interstate commerce, transportation, and conservation. For the sake
of brevity, we restrict our attention to the early history of federal railroad regulation and
44
There were other differences between the chambers’ versions. Among many others, see Sharfman
[1931], Aitchison [1936], Skowronek [1982], and Stone [1991].
45
Mortimer [1936].
46
Glaeser and Shleifer [2003].
47
It is important to note that the independence of the commission — arguably the most novel aspect
of the Commission from a constitutional standpoint arguably due to the worries of some members about
the implications of vesting regulatory authority in the President or an officer directly removable by him
— was not established until 1889. Initially, the Commission was, for certain purposes, underneath the
Secretary of the Interior (Cushman [1941]).
48
See, for example, Skowronek [1982] and Rabin [1986].
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consider the Congressional efforts to backstop the ICC’s investigative and enforcement
powers.
The Hepburn Act. The debates in Congress leading up to the passage of the Hepburn
Act were broad and touched upon several themes. Opponents of railroad rate regulation
questioned whether either the delegation of rate-setting authority or the independent
regulatory commission structure itself were constitutional. While both of these concerns
were theoretically sound, practically speaking, the treatment of the Commission by the
Supreme Court since its inception indicated little reason to suspect that either of these
concerns would gain much traction in the judiciary.49
More important for our purposes was the lively debate about whether the Commission’s rate orders ought to be binding upon issuance, as provided for in the final form
of the Hepburn Act. Under the original 1887 Act, the Commission had to seek judicial enforcement of its orders.50 While the power to prescribe future maximum rates is
widely focused upon as the defining characteristic of the Act’s strengthening of the ICC,
this provision was arguably the most important statutory provision within the Hepburn
Act.51 This is because giving the Commission’s orders immediate effect reduced the railroads’ incentive to withhold information from the Commission. However, granting the
ICC this power immediately raised the question of the proper scope of judicial review of
the ICC’s decisions. While the Hepburn Act offered little new guidance on the general
issue of judicial review, the Act reaffirmed that the Commission’s findings should be
accepted by courts as prima facie evidence.52 This provision acknowledged the ICC’s
49
Certainly Congress did not hold a blank check with regard to its delegation of regulatory power to
the ICC, but the Court had explicitly recognized for over twenty years that Congressional regulation
of interstate railroad rates was constitutionally sound. Consider, for example, the Maximum Rate Case
(167 U.S. 479 (1897)).
50
Cushman [1941], pp. 74-76.
51
Sharfman [1931], p. 45.
52
Sharfman [1931], pp. 47-48 and Skowronek [1982], pp. 257-258. Specifically, while the Hepburn Act
left open the scope of review (i.e., it did not formally restrict the judiciary to review only questions of
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expertise within its domain: de novo judicial review was considered inefficient – the gains
that could be achieved through acknowledgment of the ICC’s expertise outweighed the
potential reinforcement of the railroads’ due process rights provided by the provision of
a separate judicial hearing on the facts of the case.
In addition to the powers granted to the Commission, the discussion of the ICC itself
was telling. Specifically, the ICC was nearly universally described as an administrative
agency. Such a conception of the Commission contrasts with the Court’s description of the
ICC as “legislative” in the Maximum Rate Case.53 Furthermore, the ubiquitous use of the
term during the Congressional debate indicates a broadly accepted understanding of the
Commission as exercising an authority distinct in nature from that which Congress would
bring to bear on similar questions. This language was presumably relevant in the Court’s
understanding of the Hepburn Act when it upheld the Commission’s regulatory powers
in subsequent decisions such as Interstate Commerce Commission v. Illinois Central
Railway Company.54
Finally, Congress debated whether to create a specialized court to review the ICC’s
decisions. This topic attracted interest from various factions due to the uncertainty about
the effect the ICC’s increased powers under the Act would have on both the volume of
judicial business and the judiciary’s reception of the ICC’s subsequent decisions. While
such a tribunal was not included in the Hepburn Act, this discussion would continue up
through the passage of the Mann-Elkins Act, to which we now turn.55
The Mann-Elkins Act. The Mann-Elkins Act completed Congress’s rejuvenation of
the ICC. Most interesting about the consideration of the Act for our purposes is that
law) but it also directed the judiciary to enforce any order of the Commission that was “regularly made
and duly served.” (34 Stat. 584, 590 (1906)).
53
167 U.S. 479 (1897).
54
215 U.S. 452 (1910).
55
Cushman [1941], pp. 85-6.
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the Congressional debates prior to its passage largely centered on the creation of the
Commerce Court, as opposed to the substance of the increased powers granted to the
Commission by the Act.56 The creation of the Court was contentious and secured only
by a very close vote in the House. The Commerce Court was short-lived, being abolished
by Congress in 1913. During its short life, the Commerce Court was generally antagonistic toward the ICC, typically ruling in favor of the railroads. Few of the Commerce
Court’s rulings that were challenged were upheld by the Supreme Court, however, and
members of Congress were actively pursuing the Commerce Court’s abolition as soon as
the Mann-Elkins Act was enacted.57 The opponents of the Commerce Court raised multiple objections to it both prior to and following its creation. Several of these – that the
Commerce Court would at best duplicate the expertise of the Commission and at worst
unnecessarily second-guess the Commission’s decisions and that the Commerce Court,
the members of which were (1) circuit court judges and (2) given short terms, would
not in practice possess as much expertise as the Commission – highlighted the role of
expertise in the Congressional debates about the ICC in this period.58
World War I & Administrative Competence. During World War I, the nation’s
rail system was nationalized and operated by the Railroad Administration, an independent agency created by President Wilson in 1917.59 Between the beginning of the United
States’ involvement in World War I and the creation of the Railroad Administration (a
period of about 9 months), the railroads had coordinated their operations through the
voluntary Railroads’ War Board. This coordination was ultimately deemed insufficient
by President Wilson, but this period represented an important period for the ICC, as
56
Cushman [1941], pp. 87-102.
Frankfurter [1926], pp. 594-615.
58
Cushman [1941], pp. 89-91.
59
Presidential Proclamation 1419, December 26, 1917. Wilson’s nationalization of the railroads, which
became effective on January 1, 1918, was authorized by Congress in the Army Appropriation Act of 1916
(39 Stat. 645).
57
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the Commission played a central role in the coordination, particularly given its antitrust
responsibilities under the Clayton Act. After nationalization, the ICC’s regulatory role
in railroad policy was predictably curtailed, but it continued to serve an important informational and advisory role, particularly as the return of the railroads to private control
was never seriously in doubt.
After the war, Congress passed the Transportation Act of 1920 (also known as the
Esch-Cummins Act), which allowed the ICC to set minimum rates so as to compensate
railroads for the capital investments required to restore their capital after the war. Perhaps in line with both the increased authority delegated to the ICC by Congress and
the Commission’s performance in the war effort, the Court began to explicitly and regularly offer expertise as a justification for deference to administrative determinations. The
Transportation Act delegated several expertise-based responsibilities to the Commission,
including the management of a revolving fund of $300 million dollars for loans to railroads, and the expedited consideration of applications by the railroads for rate hikes to
restore the railroads to profitability.60
Summary and Conclusions. The breadth of Congressional involvement in regulatory
policymaking expanded rapidly following World War I – any reasonable treatment of the
evolution of Congressional interest in expertise would require far more space than we
can dedicate here. We believe the evolution of Congressional support for the ICC, while
by no means uncontroversial or a matter of straightforward political incentives, provides
a useful demonstration of the degree to which members of Congress are aware of–and
generally desire–bureaucratic expertise. However, it is also illustrative of the general
truism that there are few areas in which members of Congress agree about whether
the federal government ought to be involved to a greater or lesser degree. For this
60
Splawn [1939], p. 157.
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reason (among others), we do not believe that Congressional action is best viewed as a
consistent pursuit of bureaucratic expertise. Rather, if such a rubric was to be applied
to the evolution of federal policy, we believe it would be perform best in a conditional
sense: conditional on members of Congress acknowledging that federal officials will be
making policy choices in a given realm, the statutory authority of these officials will in
general promote the development of policy-specific expertise by those officials.
We now turn to a brief consideration of the degree to which the federal courts have
acknowledged the importance of bureaucratic expertise.
3.2
Judicial Notice of Expertise
Judicial deference to administrative determinations of fact, policy, and often statutory
construction was prevalent at the beginning of the twenty-first century. A signal example
of such deference is provided by the Chevron decision.61 Considering the implementation
of the now-famous “bubble” concept by the Environmental Protection Administration
(EPA), the Court deferred to the EPA’s interpretation of the statutory language of the
Clean Air Act, stating that
“. . .the Administrator’s interpretation represents a reasonable accommodation of manifestly competing interests and is entitled to deference: the regulatory scheme is technical and complex, the agency considered the matter
in a detailed and reasoned fashion, and the decision involves reconciling conflicting policies. . . .Perhaps [Congress] consciously desired the Administrator
to strike the balance at this level, thinking that those with great expertise and
charged with responsibility for administering the provision would be in a better
position to do so. . .”62
61
62
Chevron U.S.A. v. Natural Res. Def. Council, 467 U.S. 837 (1984).
467 U.S. 837, 865, emphasis added.
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The Chevron decision immediately jumped to the head of the line in discussions of
administrative law and, more broadly, the proper repository of discretionary authority
within the federal government.63 For our purposes, the reasoning of Chevron is illustrative of the fact that demonstrated expertise was presented as a reasonable justification
for judicial deference to administrative determinations with potentially far-reaching policy consequences. What is particularly interesting about the Chevron reasoning is its
juxtaposition with the nondelegation doctrine. In practical terms, the power to interpret
statutes is no different from the power to legislate. Furthermore, the majority opinion above states that “perhaps” Congress had a conscious desire for the Administrator
to strike a balance. That is quite far afield from the Court’s famous opinion in J.W.
Hampton, and Co. v. United States (1928), where the delegation of legislative power was
supported in instances in which the guiding principle(s), as laid down (in statute) by
Congress were “intelligible” and the agent to whom power was delegated was merely
“filling in the details” when making policy decisions.
The Nondelegation Doctrine. The Court rejected a strict application of the nondelegation doctrine as early as 1825,64 and it is generally accepted that the doctrine is an
unlikely source of judicial relief in the modern era (e.g., Alexander and Prakash [2007]).
The Court famously utilized the doctrine in two cases, Panama Refining Co. v. Ryan 65
63
The formalist implications of Chevron were, generally speaking, at odds with the policy implications
of the decision, per se. For example, Cohen and Spitzer [1994] have argued that Chevron was at least
partially a signal from a newly more-conservative Supreme Court calling for deference by lower Federal
courts to the de-regulatory initiatives of President Reagan’s appointees – many of which rested upon
interpretations of statutes passed by Democratic majorities of the past.
64
Wayman v. Southard, 23 U.S. 1, 42 (1825), with Chief Justice Marshall famously writing, “It will
not be contended that Congress can delegate to the courts, or to any other tribunals, powers which are
strictly and exclusively legislative. But Congress may certainly delegate to others, powers which the
legislature may rightfully exercise itself. . . . The line has not been exactly drawn which separates those
important subjects, which must be entirely regulated by the legislature itself, from those of less interest,
in which a general provision may be made, and power given to those who are to act under such general
provisions to fill up the details.”
65
293 U.S. 388 (1935)
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and A.L.A. Schechter Poultry Corp. v. United States,66 to overturn the National Industrial Recovery Act of 1933 (NIRA). It must be noted that the NIRA, passed in 1933, was
unwieldy and unpopular by 1935.67 More importantly, the decision in Panama makes
clear that the Court was overturning the NIRA because it amounted to an especially
extreme delegation of authority. In essence, a direct reading of NIRA suggests that there
is no principle of law under which a plaintiff might seek judicial redress of state action
or inaction. Given the breadth of the statute’s economic reach, to defer to the statute
would have been an application of the political questions doctrine with sweeping policy
impact.
In spite of statements in Marbury v. Madison 68 and Kendall v. United States ex rel.
Stokes,69 asserting the judiciary’s power to review executive decisions insofar as they
are commanded by law (i.e., “ministerial” determinations and actions as opposed to
“executive” decisions), it is important to note that, prior to the passage of the Interstate
Commerce Act in 1887, the avenues to securing review of administrative decisions in
federal courts were tightly circumscribed.70 This circumscription was voluntarily chosen
by the courts for an obvious reason: the judiciary’s power to compel the executive branch
was tenuous, particularly without some statement from Congress in support of the court’s
position. Prior to 1887, explicit statutory statements of an affirmative judicial power
to review executive determinations were few and far between.71 Furthermore, under the
reasoning of Kendall, courts were to restrict their attention to executive actions that were
ministerial and involved no discretionary scope. The review of such actions necessarily
does not involve the quality of the responsible agent’s decision making. Simply put,
66
295 U.S. 495 (1935).
Best [1991].
68
1 Cranch 137 (U. S. 1803).
69
12 Pet. 524 (U. S. 1838).
70
Lee [1948], pp. 287-297.
71
Somewhat ironically, it was exactly one of these statements (providing that the Supreme Court held
original jurisdiction for mandamus relief) that lay at the heart of Marbury v. Madison.
67
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federal courts prior to 1887 did not involve themselves in the review of executive actions
in which expertise was relevant.
Furthermore, it was not constitutionally unambiguous that federal courts could be directed by Congress to review the determinations of administrators.72 More to the point,
to the degree that the courts would review such determinations, it was unclear whether
Congress had the power to prescribe the scope and nature of such reviews. Initially,
the Supreme Court established that judicial review of administrative determinations was
available, but that such review was necessarily de novo: both issues of fact and law relevant to the administrative decision would be determined by the reviewing court.73 This
approach represented, in essence, a compromise position that avoided directly touching
upon the constitutional issue of to what degree Congress could mandate judicial review of
the decisions of Congress’s agents.74 However, under this understanding, the position of
the Court vis a vis the implementation of statutorily enacted policy goals was ultimately
at odds with the principle, dating back to Hayburn’s Case,75 which implicitly ruled out
the assignment of non-judicial duties to Article III courts. This conflict would not become readily apparent in policy terms until the passage of the Interstate Commerce Act,
however.
Regulation and Review. As the 20th century began, the Court’s struggle with
Congress regarding the proper role of the ICC took an important turn as Congress reiterated, refined, and expanded its delegation of policy making and enforcement powers
72
Lee [1948], pp. 299-300.
United States v. Ritchie, 17 How. 525 (U. S. 1855) & Grisar v. McDowell, 6 Wall. 363 (U. S. 1868).
74
This question may seem somewhat arcane today, but the origin of the disagreement is the degree
of exclusivity of the powers of Article III judges. Clearly, if Congress could establish inferior courts
whose powers were no different from those exercised by Article III courts, then there would be little
need for Article III courts. Thus, in a way, the struggle to restrict judicial review may be viewed in a
counterintuitive fashion as a judicial attempt to maintain the power of the judiciary by making its power
scarce.
75
2 U.S. 409 (1792).
73
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to the Commission. Specifically, the ICC’s powers were expanded in various ways by the
Hepburn Act of 1906 and the Mann-Elkins Act of 1910,76 and the Valuation Act of 1913.
The Hepburn Act was an explicit response to the Interstate Commerce Commission v. Cincinnati, New Orleans and Texas Pacific Railway Co., 167 U.S. 479 (1897)
(the “Maximum Freight Rate Case”), in which the Court ruled that, absent an explicit
delegation of such authority, the ICC could not prescribe maximum rates for railroads,
and empowered the ICC to adjust rates so as to be “just and reasonable.” In addition,
the Act authorized the creation of a Bureau of Statistics and Accounts and empowered
the Commission to prescribe uniform accounting methods for the railroads. As a result,
the Commission promulgated new standards and created a group of examiners with to
investigate the railroads’ accounts.77 Under the Roosevelt and Taft administrations, the
ICC in essence became an important venue through which populist economic policies
could (appear to be) be promulgated. It is not unreasonable to state that, with the
benefit of hindsight, the passage of the Hepburn Act represented the point at which the
railroads began to focus less on undermining the ICC’s powers and more on leveraging
these powers for their own benefit.78
The Mann-Elkins Act extended the powers granted in the Hepburn Act in two important ways. First, the ICC was granted the authority to initiate prosecutions, rather than
requiring that it prosecute only upon complaint. Second, the Commission was explicitly
granted the authority to regulate long-haul/short-haul price discrimination. In addition, it expanded the ICC’s jurisdiction to include the interstate telegraph and telephone
industries and created a specialized Commerce Court.
76
36 Stat. 539 (1910).
Miranti [1989], pp. 487-8.
78
Kolko [1965] famously argues that such motivations were more important – though perhaps less obvious – much earlier. Indeed, the predecessor to the Hepburn Act, the Elkins Act of 1903, made it illegal
both for railroads to give rebates to favored (i.e., large) customers and also shippers to receive them.
Thus, by empowering the ICC, Congress indirectly raised the effective rate of railroad transportation
(Sharfman [1931], p. 36).
77
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The Valuation Act of 1913 required the ICC to assess the value of the railroads’
assets. This enterprise – which was essentially required for effective rate regulation by
the Supreme Court’s “fair value” requirement as enunciated in Smyth v. Ames (1898)79
– was a massive undertaking for the Commission, spanning nearly twenty years and
more than doubling the number of individuals employed by the ICC.80 The ICC’s efforts,
pursued by the newly created Bureau of Valuation, under the Valuation Act raised a
variety of technical accounting and economic considerations.
Of course, enhancing the ICC’s powers and (greatly) expanding its authority represented a clear signal to the Court that Congress was uninterested in abandoning the
independent regulatory commission model. Similarly, it was clear that Congress was
not going to sit idly by and allow railroad rates to remain effectively unregulated. Indeed, Dixon [1910] argued at the time of the Mann-Elkins Act’s passage that the debate
during consideration of the Hepburn Act – which involved high profile and ultimately
unsuccessful lobbying efforts by the railroads – had settled several “fundamental principles,” including the ratemaking power of the Commission, and the Mann-Elkins Act
was essentially a securing of “the positions occupied in 1906.” Nevertheless, the combination of the three Acts represented a potent increase in the Commission’s regulatory
authority: the Hepburn Act provided the authority to develop accounting standards, the
Mann-Elkins Act provided the legal authority to delay an increase in a railroad’s rates to
determine their necessity, and the Valuation Act provided the authority to establish the
value of each railroad’s capital stock so as to determine a fair return. The Commission’s
activities under these Acts played a role in demonstrating that the Commission, as an
administrator of railroad policy, possessed an expertise not also possessed by the courts.
79
169 U.S. 466. Specifically, the Court required that the “basis of all calculations as to the reasonableness of rates to be charged by a corporation maintaining a highway under legislative sanction must
be the fair value of the property being used by it for the convenience of the public. . .” (169 U. S. 468).
80
Stone [1991], p. 16.
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During this time, the Court backtracked from its skeptical regard of the breadth
and propriety of the Commission’s regulatory power rather quickly. In 1907, the Court
likened the Commission to “a tribunal appointed by law and informed by experience”81
and declined to review the ICC’s determinations of fact. Soon thereafter, the Court
confirmed this finding and the general authority of the Commission. The Court referenced
the Hepburn Act in stating that the proper scope of judicial review of the Commission’s
decisions extended only to the Commission’s authority “to make the order, and not the
mere expediency or wisdom of having made it.”82 Shortly thereafter, the ICC’s authority
to regulate intrastate rates that affected interstate commerce was upheld in the Shreveport
Rate Cases (1914).83 With this series of decisions, the judiciary’s understanding of the
ICC’s authority had completed an about-face within a decade. During the same period,
the Court was developing a complementary doctrine, known as primary jurisdiction,
which would ultimately reduce the judiciary’s workload, which had increased significantly
since the mid 1890s.
Primary Jurisdiction. For reasons both practical and constitutional in nature, judicial deference to administrative decisions can bring additional uniformity and certainty to
the application and implementation of public policy. As the judiciary came to acknowledge the realities of national economic regulatory policy making, the Court’s encounters
with administrative decision-making in the early 20th century frequently dealt with what
came to be known as the doctrine of primary jurisdiction. In a nutshell, when an agency
holds primary jurisdiction in a matter, judicial involvement will not be forthcoming prior
to the rendering of an initial determination by the agency.
The doctrine was described first in a case decided shortly after the passage of the
81
Illinois Central Railroad Company v. Interstate Commerce Commission, 206 U.S. 441 (1907) at 454.
Interstate Commerce Commission v. Illinois Central Railway Company, 215 U.S. 452 (1910) at 470.
83
234 U.S. 342.
82
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Hepburn Act (Texas & Pacific Railway Co. v. Abilene Cotton Oil Co. (1907), 204 U.S.
426). As Jaffe [1964] describes, the doctrine of primary jurisdiction “does much more
than merely prescribe the timetable of the lawsuit. It is a doctrine allocating the lawmaking power over certain aspects of the carrier-shipper relation. It transfers from court
to agency the power to determine the incidents of this relation at least where cost-ofservice factors are involved.”84 While the opinion in Abilene does not explicitly ground
the rectitude of the doctrine on the expertise of the ICC, the stated reasoning – the
pursuit of “uniformity” – is inherently dependent upon something akin to expertise on
the part of the administrators to whom primary jurisdiction is granted.
The Court’s first explicit linkage between expertise and the doctrine of primary jurisdiction was set forth in Great Northern Ry. v. Merchants Elevator Co.85 In this case, the
Court ruled that the ICC did not have primary jurisdiction over questions of law. Justice
Brandeis’s opinion in this case based the distinction between questions of fact and those
of law on specialized administrative expertise, writing that administrative determinations
regarding questions of fact were often
“reached ordinarily upon voluminous and conflicting evidence, for the adequate appreciation of which acquaintance with many intricate facts of transportation is indispensable; and such acquaintance is commonly to be found
only in a body of experts.”86
The opinion in Great Northern is an important qualification of the primary jurisdiction
doctrine. In essence, the ruling established that an agency possesses primary jurisdiction
when two conditions are met. First, uniformity of application is important for the policy
in question and, second, the agency has a relative advantage over the judiciary in achiev84
Jaffe [1964], p. 1042.
259 U.S. 285 (1922). This case is discussed in some detail by Jaffe [1964], p. 1043.
86
259 U.S. at 291, quoted in Jaffe [1964], p. 1043.
85
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ing uniformity. Specifically, the doctrine applies only in cases where the issue at hand
does not “fall outside the ambit of the agency’s special expertise or unique authority.”87
In practice, primary jurisdiction is a highly flexible concept. After all, the agency’s
relative competence is determined by the court. Indeed, the 1920s were by no means a
decade of uniform deference to administrative determinations: courts upheld the reasonings of both Abilene and Great Northern by construing its review of agency decisions
as dealing with matters of law – with respect to which the judiciary possessed sufficient
competence to ensure uniformity of interpretation, rather than determinations of fact.
The flexibility of application that follows from the reasoning of Great Northern is valuable
because it made “. . .more valuable the jurisdiction of the courts without impairing the
coherence of the administrative program”88 it also made explicit the Court’s recognition
that expertise is a matter of degree.
The New Deal. No time in American history is as replete with frequent, high profile
confrontations between the Court and its coequal political counterparts as the first two
terms of President Franklin Roosevelt’s administration. The notion of specialized administrative expertise, especially relative to that possessed by judges, emerged as the basis
of an at first uneven but ultimately nearly complete retreat by the judiciary from the
conflict between the 19th century suspicion of delegated authority and the 20th century
progressive push for a more active national government. For reasons of space, we will not
retread the well-worn ground of the struggles between Roosevelt and the Court during
Roosevelt’s first term.89 It is worth noting that the primary arguments of the Court in
rejecting several of the key components of the “first” New Deal were based on the breadth
and depth of the delegated authority, rather than the expertise or efficiency with which
87
Gellhorn and Levin [2006], p. 402.
Jaffe [1964], p. 1045.
89
Among many others, Leuchtenburg [1996] and Shesol [2010] offer thorough treatments of this era.
88
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that authority was applied.
In the latter half of the New Deal, the Court’s appeals to administrative expertise as
grounds for judicial deference became both regular and broad. For example, the Court
explicitly noted several times that the ideal of hearing appeals of adjudicative decisions
de novo was both infeasible and quite likely unwise. For example, Justice Brandeis, concurring in St. Joseph Stock Yards Co. v. U.S.,90 stated that legislative power to regulate
rates would be effectively overturned “if the correctness of findings by the regulating
body of the facts as to value and income were made subject to judicial review.”91 During
this time, the Court also made clear the special nature of bureaucratic expertise in policy
matters.92 An important question is whether this was simply reaction following from the
“switch in time” or a notion with a longer lineage. That the desirability of presuming
deference on matters of fact and policy had existed prior to the New Deal is apparent
in a number of decisions.93 The Court had, since the 1880s, generally not questioned
whether the evidence collected by or policy analyses of administrative agencies were to
be accorded significant weight in judicial proceedings. Rather, the Court had narrowly
construed Congressional delegations of authority.94 Of course, there is a significant difference between a claim that an authority does not hold a certain power and that the
authority can not hold that power. Furthermore, the Court’s opinions were consistent
with the canons of narrowly construing a statute in pursuit of sustaining it. While the
ICC stated in 1897 that it had ceased to be a regulatory body as a result of the Court’s
90
298 U.S. 38 (1936).
298 U.S. 38, 93 (1936).
92
For example, Justice Brandeis, concurring in Driscoll v. Edison Light & Power Co., 307 U. S. 104, 122
(1939), stated that “[t]he only relevant function of law in dealing with this inter- section of government
and enterprise is to secure observance of those procedural safeguards in the exercise of legislative powers
which are the historic foundations of due process.”
93
Consider Railroad Commission Cases, 116 U.S. 307 (1886) and Chicago, Milwaukee & St. Paul Ry.
Co. v. Minnesota, 134 U.S. 418 (1890) (J. Bradley, dissenting).
94
Rabin [1986], p. 1215.
91
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decisions over the preceding decade,95 this was due to the Court’s lack of deference to the
ICC’s construction of its own statutory authority rather than due to any serious doubts
on the part of the Court about the ability of Congress to grant such authorities to the
ICC. Finally, immediately prior to the passage in 1946 of the Administrative Procedure
Act (APA), the Court stated that an administrative decision was to be given weight in
accordance to “. . .the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which
give it power to persuade, if lacking power to control.”96
The Court’s explicit inclusion of a consideration of the agency’s ensuing decisions
and interpretation is notable, as is the fact that the bill that would eventually become
the APA was introduced in Congress in 1944 as well.97 The Court’s opinion in Skidmore v. Swift & Co. set the stage for the ensuing 40 years, as the Court moved toward
an understanding that deference received was to be deference earned. The ultimate conclusion – “Chevron deference” – was essentially a recognition that, insofar as an agency
followed the procedural requirements laid out by Congress, a jurist would be hard pressed
to find a fatal inconsistency within the agency’s decision. Culling language directly from
the APA, the majority opinion in Chevron, authored by Justice Stevens, stated that
“[i]f Congress has explicitly left a gap for the agency to fill, there is an
express delegation of authority to the agency to elucidate a specific provision
of the statute by regulation. Such legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to
the statute. Sometimes the legislative delegation to an agency on a particular question is implicit rather than explicit. In such a case, a court may not
substitute its own construction of a statutory provision for a reasonable inter95
Interstate Commerce Commission, Eleventh Annual Report.
Skidmore v. Swift & Co. 323 U.S. 134 (1944), emphasis added.
97
Shepherd [1996].
96
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pretation made by the administrator of an agency. We have long recognized
that considerable weight should be accorded to an executive department’s
construction of a statutory scheme it is entrusted to administer, and the
principle of deference to administrative interpretations has been consistently
followed by this Court whenever decision as to the meaning or reach of a
statute has involved reconciling conflicting policies, and a full understanding
of the force of the statutory policy in the given situation has depended upon
more than ordinary knowledge respecting the matters subjected to agency
regulations.”98
It should be noted that, in general, courts have an unambiguous incentive to defer to
administrative determinations of fact. This is for three reasons. First, deference requires
less effort from the court than does active review and, by requiring more effort of parties
seeking review, tends to limit the judiciary’s workload more closely to those cases that are
truly important.99 Second, to the degree that administrators are appropriately utilizing
statutorily granted authority, deference is more consonant with the judicial principle
of stare decisis. In practical terms, endowing administrative decisions with a significant
degree of certitude somewhat paradoxically makes judicial review more effective. Finally,
of course, judges rarely if ever possess greater policy expertise than the administrators
whose judgements they are reviewing. Comparing these three reasons, it is unsurprising
that administrative expertise is the justification of judicial deference most frequently
cited in court opinions.100
98
467 U.S. 837, 843 (1984), emphasis added.
Rourke [1992], p. 543.
100
This is also one of the more surprising aspects of the Chevron decision, which called forth the legislative delegation of discretionary authority as an apparently co-equal justification of judicial deference.
This logic is surprising because it clearly implies that judicial deference is not only in matters of fact,
but also in matters of law.
99
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92
Chapter 4
The Federal Civil Service
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In this chapter, we use the historical development of the federal civil service to illustrate the incentives discussed in Chapter 2. The goal of this chapter is not to “prove” the
theory presented in that chapter. Similarly, we do not generally presume that the design
and alteration of civil service regulations and procedures was the product of purposive
behavior directed even proximately by a concern about the creation and sustenance of
an expert bureaucracy. Rather, we use the incentives and equilibria revealed in the
model to interpret and make sense of the historical record in this area. To clarify this
interpretation, we briefly operationalize the key concepts from Chapter 2.
The Bureaucrat and the Agency. The theory in Chapter 2 utilizes a stylized, dichotomous representation distinguishing the Congress and a unilateral, policy-making
bureaucrat. Of course, in reality, administrative policy is typically “set” through an
amalgamation of the decisions of multiple individuals. This reality complicates any attempt to leverage the insights from Chapter 2 in understanding the evolution of the
federal bureaucracy. However, the complication is not fatal: empirical instantiations of
incentives are typically explicitly micro-level (aimed at individual bureaucrats) or macrolevel (aimed at one or more bureau/agency/commission viewed as a collective). In what
follows, we focus more on micro-level incentives, though we address instances of macrolevel incentives in a few places. The focus on the micro-level is jointly driven by the fact
that these incentives play a larger role (at least in terms of the frequency with which
Congress has considered such details of administrative structure) and the fact that, in
most situations, the enforcement of macro-level incentives is both contestable and likely
to be contested. Simply put, an executive agency (or independent commission) does not
have any independent rights vis-a-vis its sovereign principal (i.e., Congress). On the other
hand, federal courts have repeatedly upheld the idea that government employees may be
granted some rights by Congress that may not be later abrogated. Thus, at least within
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the current Constitutional order, micro-level incentives may represent a more credible
mechanism through which Congress might pursue the acquisition of collective expertise
within an agency.
Discretion. Direct measurement of an agency’s discretionary authority is generally a
difficult and highly contestable matter. In particular, measurement across different time
periods and different issue areas represents a significant methodological challenge that
we do not tackle here. Instead, we adopt an indirect approach — promotion mechanisms
— when considering whether discretionary authority was used as a reward for expertise
acquisition. In what follows, we repeatedly encounter the issue of how agencies promoted
within their own ranks. As the narrative illustrates the consideration of promotion and
advancement occupied multiple Presidents and Congresses in various time periods. For
our purposes, we presume that, while acknowledging that it is not the case that every
promotion brings with it significantly increased policymaking discretion, promotion and
advancement does tend to bring the authority to make a wider set of policy determinations – to have a potentially larger impact on policy choices and outcomes.1
Expertise and Specialization. The theory in Chapter 2 focuses attention on the
acquisition of expertise within the bureaucracy. We do not utilized detailed measures
of policy-relevant information or skill. For several reasons, unambiguous forms of such
a measure are unavailable. The narrative extends back in time to the 18th century, the
realm of potential candidates for notions of either skill or information is very large, and
— a fortiore — the match between any given notion and the relevant policy areas for
which the notion in question is appropriate is inherently contestable.
1
While in most time periods promotion typically brought the employee a higher wage, too, the increase
in wage was typically not commensurate with the corresponding wage differential in the private sector.
See Johnson and Libecap [1994], pp. 108-113.
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Accordingly, we accept the relevant actors’ interpretations and measurements of expertise acquisition. In other words, we adopt as our definition of expertise and skill
whatever measures Congress, the executive, agency heads, or their contemporaries declared to be policy relevant at the time in question. In most situations, the measures
were education-based: technical training, advanced study, and professional certifications.
For our purposes, the degree to which such measures correlate with one’s potential to
make more informed policy decisions is not very relevant: the subjective component of
the measure is appropriate, given the focus on the principal’s attempts to engender the
development of “expertise” within the bureaucracy, however the principal construes that
concept.2
Retaining Policy-Motivated Bureaucrats. Even more clearly than with the discussion of expertise, difficulties immediately emerge for those interested in empirically
measuring the motivations of bureaucrats. In approaching this issue, we take as given
that bureaucrats are no different than the typical worker in that they care about the
substance and process of their work. Intrinsic motivations matter to most, if not all,
individuals, and we presume that an employee’s intrinsic motivation does not decrease
as that employee is promoted within an agency.
While we do not take on the task of estimating the degree to which federal bureaucrats
have been motivated by policy considerations above and beyond simple remuneration,
we are aware of no scientific arguments that more long-tenured bureaucrats are not more
likely to be policy-motivated than less long-tenured ones. For example, Aberbach et al.
[1981], Brehm and Gates [1997], and Aberbach and Rockman [2000] present results that
are broadly consistent with Conclusions 1 and 2.
2
Put another way, our analysis is not intended to provide the basis of a welfare analysis – whether
the goal of the principal actually comports with some objective notion of the principal’s welfare is, for
both theoretical and methodological reasons, beyond the scope of our project.
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Tying It All Together. The central focus in our historical narrative is leveraging
the conclusions of Chapter 2 in order to provide a fuller understanding of the potential
motivations behind, and effects of, the evolution of the structure and procedures of the
federal civil service. A key aspect of this is noticing links between the demand for
competent staff, lower turnover, and the joint provision of selective inducements and
tenure protections. Of particular interest in the historical evolution is the degree to
which calls for the selection and retention of skilled employees preceded reforms of hiring,
promotion, and tenure protections. Similarly, the virtual absence of selective monetary
rewards (until the 1978 reforms) is more fully understood with the arguments of Chapter
2 in hand.
4.1
Growth and Administration: 1789-1829
Federal administration in the early Republic was relatively unique in the sense that the
new national government had few positions that needed to be staffed and, perhaps more
importantly, even fewer that had previously been held by anyone.
The Federalist Administrations. President Washington and his cabinet made fewer
than a thousand appointments during his eight years in office.3 Furthermore, and in clear
contrast to what would emerge over the next 40 years, President Washington’s administration worked in what was effectively a single party system, as though the members
of Congress who could clearly be labeled as “in the opposition,” there was no formal
partisan organization and effectively no truly national electoral presence.4
Washington’s policy on appointment has been widely described as being based upon a
mix of character and loyalty.5 While the details of Washington’s thinking are difficult to
3
American State Papers, Miscellaneous, I, pp. 57-68.
Van Riper [1958], pp. 18-20.
5
Rosenbloom [1971], p. 35, Van Riper [1958], p. 18.
4
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identify in a very precise way, a candidate’s support of a strong interpretation of federal
authority under the Constitution was a key consideration of his fitness for service. Given
the political debates of the day, this focus is arguably analogous to a partisan litmus
test in late 18th century America. Regardless, outside of notable exceptions within the
Cabinet such as Hamilton and Jefferson, there were no administrators-cum-policymakers
in the Federalist era.
Like his predecessor, John Adams also did little to direct executive appointments
in an explicitly partisan direction, per se. Adams’s approach to such decisions was
more temperate than that counseled by some of his advisors. However, he did publicly
express reservations about his predecessor’s willingness to appoint individuals with less
than fervent attachment to the Federalists’ principles.6 At the end of his term, through
statutes such as the Judiciary Act of 1801,7 Adams and the Federalists made a strong
push for partisan-motivated judicial appointments as his term came to a close.8
The Federalist administrations of Washington and Adams are notable for the fact that,
in many ways, there was little collective desire for many, if any, unelected non-judicial
officials to hold discretionary authority. The provisions of early statutes that did vest
powers in executive branch officials other than the President are generally more properly
understood as attempts by Congress to exert legislative authority. The Department of the
Treasury is a prime example of this: Treasury officials were granted significant autonomy
from the President relative to their peers in the Departments of State and War,9 but this
autonomy was tempered by the explicit assertion of greater Congressional oversight of
Treasury decision-making.10 The struggles between Hamilton and the early Congresses
6
Rosenbloom [1971], pp. 36-37.
2 Stat. 89 (February 13, 1801).
8
Van Riper [1958], p. 22.
9
White [1948], p. 116-119.
10
Harlow [1917], p. 130.
7
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exemplify the fact that this assertion was at least initially more than window-dressing.11
As the first Secretary of the Treasury, Hamilton not only played an active role in
policy formulation,12 he also had relatively secure tenure, given the combination of his
close relationship with President Washington. Furthermore, the match between the interests and expertise of Hamilton and Washington afforded Hamilton great discretion in
speaking with Congress in the name of the administration.13 Accordingly, the efforts of
Hamilton during his six years in office are illustrative of the arguments in Chapter 2 –
particularly Conclusions 1, 3. Congressional support for Hamilton’s proposals, many of
which were quite controversial (e.g., the National Bank and Assumption Bills) due to
their distributive effects, also can be interpreted within our theory. Hamilton’s expertise
on matters relating to finance and commerce was widely acknowledged. Accordingly,
even in the face of significant policy disagreement Congress affirmed his proposals in a
manner consistent with Conclusions 4, 5, and 6. The usefulness of the theory is amplified
when one considers the process by which Congress began withdrawing its deference to
Hamilton’s proposals in the third and fourth Congresses, which collectively had larger
policy disagreements with Hamilton than did the first two Congresses.
The Republican Administrations
President Jefferson’s inauguration represented the first transfer of partisan control of the
executive in American history. His administration brought the first significant wave of
dismissals within the civil service, as Jefferson simultaneously struggled to bring about
greater partisan balance within, and (relative) reduction in the size of the growing federal
bureaucracy. By the beginning of Jefferson’s first administration in 1801, there were
11
Dunbar [1888], Harlow [1917], pp. 148-154.
Morgan [1956].
13
White [1948], pp. 32-37.
12
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approximately 3,000 persons in the executive civil service.14 Over the next 24 years, the
growth of both the citizenry and territorial expanse of the nation led to the number of
high level administrative positions nearly tripling to over 8,000.15
Following Jefferson’s inauguration, there was an initial purge and rotation that was
concluded by 1803,16 but for the most part the tenure of non-Cabinet officials was secure.
Indeed, removals were so rare that superannuation emerged during this time period as
a serious problem for many departments.17 Meaningful minimal qualifications were not
applied to appointments to the civilian agencies during the nation’s first 50 years. During this time period, rotation in service was formally required for portions of the civilian
agencies in 1820.18 The “Four Years Law” imposed four year terms on most non-Postal
civilian positions responsible for handling public monies. The law, championed by Treasury Secretary William H. Crawford, essentially required that the President reappoint a
large segment of the civilian bureaucracy on a regular basis. In spite of the law, however,
continuance in service during good behavior was the de facto norm under James Monroe’s and John Quincy Adams’s administrations.19 The details of the Four Years Law
are relevant enough to our theory to warrant a short description of the statute and its
origins.
The Four Years Law. The Four Years Law established four year terms for executive
branch officials outside of the Post Office who handled public monies. The true reasons
for Secretary Crawford’s support of the law are unclear. However, concern about “superannuation” within the federal government – popular mistrust of lengthy tenure for
appointees to public office – was widespread during this time. In addition, there was sup14
American State Papers, Miscellaneous, I, pp. 260-319.
Historical Statistics of the United States, 1789-1945, p. 294.
16
White [1951], pp. 352-353.
17
White [1951], pp. 369-385.
18
The Tenure of Office Act (Ch. 102, 3 Stat. 582 (1820)).
19
Rosenbloom [1971], pp. 41-44.
15
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port among members of Congress for rotation in executive branch offices for two related
reasons. Patronage was growing in importance as members attempted to secure support
from their constituents and state legislators. Indeed, somewhat ironically, the exclusion
of the Post Office from the statute is interesting in this regard. Many of the positions covered by the statute (e.g., customs collectors) were disproportionately located in eastern
states. The growth of the Post Office implied that enforced rotation in office was not necessary to guarantee that a nontrivial number of local postal positions would be available
as rewards for one’s supporters back home and, perhaps just as importantly, the nature
and number of low-level postal appointments provided members with an important de
facto role in appointments in any case.
The Four Years Law was far more important for politicians from those northeastern
and mid-Atlantic states where party machines would soon emerge (e.g., New York) than
for the politicians in southern and midwestern states. In some ways, this focus is not
surprising – the Federalist party had collapsed as a result of its opposition to the War of
1812, leading to a vacuum in terms of both power and hierarchy in several of the Northeast
and Mid-Atlantic states from which the at-this-point-nascent Whig party would draw
much its electoral strength (and assessments) in the coming decades.
Specific Cases of Administration. Our theory is useful in understanding the experiences during this time period of two parts of the executive branch – the Post Office,
the General Land Office, and the military services. Both of these was clearly recognized
by contemporaries as serving an important role for the new nation and, similarly, both
faced significant challenges in the early 19th century.
The Post Office. Postmaster appointments were handled within the Post Office until
1836 and – formally, at least – postmasters served at the Postmaster General’s plea101
LEARNING WHILE GOVERNING
sure. Practically speaking, aside from Postmaster General Gideon Granger’s removals
between 1801 and 1803, tenure for postmasters was generally secure in the early 19th
century.20 Initially, the Post Office was seen as primarily a source of revenue for the new
national government. Early Postmasters General served for long terms and were largely
autonomous – with respect to appointments, the operation of political considerations
was implicit or coincidental if present at all during most of this time. Early Postmasters
General focused their efforts on maintaining a profitable service.21
The Post Office was initially located within the Treasury Department and the Postmaster General formally reported to the Secretary of the Treasury, though this hierarchical relation was in reality a formality and the Postmaster General served at the pleasure of
the President. However, the formal autonomy of the Post Office – though never absolute,
as Congress retained the sole authority to designate postal routes – was strengthened at
regular intervals during this time period.22 A key period of the Post Office’s development
occurred under the Postmasters General Granger, Return Jonathan Meigs, Jr., and John
McLean.23 The three Republican-era Postmasters jointly presided over a rapid expansion
of both the volume and geographical extent of the postal service: between 1800 and 1830
the number of post offices grew over 800% while the volume of mail and newspapers
carried grew over 600%.24 Most importantly, all three Postmasters, with Congressional
assent, held strong discretionary authority within broad bailiwicks. While they did not
hold the formal authority to designate postal routes, their administrative autonomy over
the methods and operations of the service was otherwise significant. All three Postmasters actively pursued the service’s growth. Congress sanctioned these efforts explicitly on
20
White [1951], pp. 322-327; John [1995], pp. 72-73, 144.
Cullinan [1968], pp. 24-30, John [1995], pp. 25-26, 47-48.
22
Short [1923], pp. 177-179.
23
Granger served from 1801 to 1814, Meigs from 1814 to 1823, and McLean held the office from 1823
until 1829, when he joined the United States Supreme Court.
24
Both numbers obtained from John [1995]. Mail volume: Table 1.2, p. 4. Post offices: Table 2.1,
p. 51.
21
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numerous occasions, as members of Congress valued the constituency service provided
by expanded and more frequent service to outweigh the loss in revenue.25 As we return
to below, the end of McLean’s tenure represented a turning point in the Post Office’s
administration and performance. While the postal system continued to grow, it would
not return a surplus to the Treasury between 1837 and 1914.26 Once President Jackson
elevated McLean to the Supreme Court and asserted Presidential control of patronage
within the Post Office, the effects were felt nearly immediately.27
The combinations of relative autonomy, administrative expertise, and policy motivations28 possessed by Granger, Meigs, and McLean is consistent with Conclusions 1
and 3. It also notable that the two of these Postmasters General who were removed
were removed for reasons related to the internal personnel/patronage practices (or, more
specifically, lack thereof) within the Post Office. Granger was removed by Madison in
1814 in response to Grenger’s refusal to appoint Madison’s candidate to the Philadelphia
postmaster,29 and McLean was appointed by President Jackson to the Supreme Court
so as to neutralize the independent political base that rested upon McLean’s personal
control of the postal patronage.30 Entering the 1830s, the postal system was too large for
Presidents to credibly commit themselves to preserving its head’s autonomy. Until that
point, though, the only real limits on the Postmaster General’s discretionary authority
were derived from Congressional interest in the expansion of the service – a constraint
that did not bind in a significant fashion on the men who led the Post Office in the early
19th century.31
25
Cullinan [1968], pp. 32-43.
Historical Statistics of the United States, 1789-1945: pp. 309-310.
27
Cullinan [1968], pp. 44-45.
28
All three believed in some combination of the complementary views expressed by Washington and
Madison regarding the virtue of an extensive, regular postal service (John [1995], pp. 59-63).
29
Cullinan [1968], p. 35.
30
John [1995], p. 214-218.
31
For a detailed discussion of the autonomy and flexibility over internal affairs possessed by Postmasters
General through the 1830s, see Short [1923], pp. 177-184.
26
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The General Land Office. A product of the rapid expansion of land business following the
Louisiana Purchase, the General Land Office was created in 1812 and inherited responsibilities that had previously been shared by the Departments of Treasury, State, and War.
The land office was similar to the Post Office in its geographic scope and relatively direct
effect on the interests of many Members of Congress. A key feature that distinguished
the two agencies in the early 19th century was their relative levels of expertise. While the
Post Office was faced the need for expansion and direct Congressional involvement in its
affairs, its administrative machinery had been in existence for much longer and, more to
the point, many of its chief administrators had significant task-specific experience. The
early Postmasters and their upper-level subordinates all tended to serve for long periods.
The early leadership of the land office had little experience specific to the tasks at hand
and, indeed, operated largely in a clerical fashion.32 Particularly at the beginning, the
Commissioner of the General Land Office and his clerks held little discretionary authority. The larger points of land policy were governed directly and in detail by statute.33
The finer points of land policy were very difficult to manipulate from Washington for
administrative and logistical reasons. For various reasons, some of them quite obvious,
communications between the central and field offices were less regular in frequency and
more unreliable in quality in the land office than within the Post Office.34
Perhaps even more important in the early days of the General Land Office was the
autonomy enjoyed by the Surveyors General. The first Commissioner of the Office,
Edward Tiffin, swapped posts with the then-Surveyor General of the Northwest Territory,
Josiah Meigs in 1814.35 During its first two years, due to the chaos of the War of 1812,
32
White [1951], pp. 519-523.
Specifically, the Organic Land Act of 1796 (1 Stat. 464, May 18, 1796) and the Land Act of 1800
(2 Stat. 73, May 10, 1800).
34
Clawson [1971], pp. 29-31.
35
Return Jonathan Meigs, Jr. was Josiah Meigs’s newphew.
33
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essentially no surveys of the public lands were performed.36 The divide between the
General Land Office and the Surveyors General became an increasingly relevant weakness
in the administrative design of land policy as the 19th century progressed. Ultimately,
there were serious disputes about both the proper methods of surveying and matters
of record-keeping.37 The Surveyors General were autonomous until 1836, during which
time the number of claims made increased rapidly. Most surveys were conducted by
subcontractors until the early 20th century. This arrangement was problematic in two
ways: it was arguably illegal and prone to at least the appearance of corruption and
nepotism.38
Adding to the land office’s difficulties was the unique confluence of land and frontier policy. Numerous settlers staked claims without establishing clear title, but neither
Congress nor the surveyors had an incentive to remove them. Indeed, the illegal settlement of lands “ahead” of the surveyors provided a buffer between the surveyors and the
Native American tribes and, once surveys were established, there was an incentive for
Congress to enact statutes granting official sanction to the original claims.39
Personnel turnover significantly affected the land office’s operations during this period.
Josiah Meigs, who had pursued significant reforms as the Commissioner of the General
Land Office in his eight years in the office, died in 1822. His replacement, John McLean,
served for less than a year before leaving to become Postmaster General in 1823. Treasury
Secretary William Crawford — both formally and effectively the principal supervisor of
the General Land Office from 1816 until 1825 — suffered a stroke in 1823 and was
incapable of carrying out his duties for the next two years. George Graham, McLean’s
successor as Commissioner of the General Land Office, was an experienced civil servant
36
Rohrbough [1968], pp. 57-58.
White [1951], p. 522.
38
Rohrbough [1968], pp. 185-193.
39
Rohrbough [1968], pp. 60-61, 103-106, 205-212, 213-219.
37
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and held the office for 7 years until his death in 1830.
Upon Graham’s assumption of the post of Commissioner, the operations of the field
offices had emerged as a significant problem. In addition to the challenges presented by
the Tenure of Office Act of 1820, which affected a wide swath of positions within the field
offices, many of these field offices – particularly in the South – were headed by less than
competent administrators.40 In addition, the demand for land was relatively weak during
most of the 1820s, leading Congress to question the expense of the office. Appropriations
for clerical support for both surveyors and in the field offices were generally considered
insufficient by Graham. Somewhat ironically, while Graham’s appeals to Congress along
these lines were rebuffed, he did recommend (and achieve) a significant reduction in his
own clerical staff in Washington, D.C.41
Graham attempted to exercise discretion in a number of important ways, including
asserting an interpretive role for the Commissioner in land policy. In response to the difficulties in implementing a common land policy in areas as disparate as Florida, Louisiana,
Missouri, and Michigan, Graham interpreted statutes in various ways, while also establishing the presumption that further interpretations by field officers were expected.42
However, on the whole, the General Land Office was broadly speaking ineffective during the Republican Administrations. The office was headed by able Commissioners, but
these individuals were, for both practical and political reasons, institutionally incapable
of making effective use of this ability in terms of affecting policy. Politically, members of
Congress frequently hamstrung attempts to effect rational administration of land policy
by micromanagement43 and the prolonged sustenance, in the name of “retrenchment,”
of an unduly penurious approach to appropriations for the office. Partly as a result of
40
Rohrbough [1968], pp. 157-170.
Rohrbough [1968], pp. 173-178.
42
Rohrbough [1968], pp. 178-179.
43
Consider the case of the Tiffin, Ohio field office discussed in Rohrbough [1968], pp. 196-197.
41
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this lack of effective discretionary authority and the attending difficulty securing expert
administrators, the performance of the General Land Office declined further throughout
the remainder of 19th century.44 The sustained difficulties of the land office can be understood within the theory presented in Chapter 2 in a number ways. First, the cost of
expert administration in land policy – particularly before the advent of the telegraph –
was quite high relative to the analogous costs in, say, postal policy, so that Conclusion 1
provides an understanding of why it was difficult to cultivate and sustain expert administration, particularly within the district field offices. A second, complementary point,
rests upon the potential profits available through “private employment” for those employed in the district field offices: corruption was frequently very profitable. Conclusion
2 implies that the retention of administrators interested in faithfully developing and utilizing administrative expertise will be challenging in such an environment: filing accurate
reports and keeping faithful records is necessarily a substitute for corrupt activities that
potentially offer huge profits. Finally, Conclusion 3 highlights the potential importance of
details of the employment relationship, including the use of short-term private contracts
for surveying and the requirements of the Four Years Law, for the quality of land policy
implementation on the frontier.
4.2
The Spoils System: 1829-1865
Jackson’s Administration. The dawn of a new partisan alignment in the nation,
Andrew Jackson’s election to the Presidency in 1828 delivered an explicit supporter
of rotation in office to the White House. While his opposition to superannuation was
derived in part from basic political principles, President Jackson also explicitly rejected
44
Clawson [1971], pp. 31-32.
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arguments that expertise development justified what was at that point a de facto norm
of continuance in office, asserting that
“[t]he duties of all public officers are, or at least admit of being made, so plain
and simple that men of intelligence may readily qualify themselves for their
performance; and I cannot but believe that more is lost by the long continuance of men in office than is generally to be gained by their experience.”45
As occurred at the beginning of Jefferson’s presidency, Jackson’s implementation of the
spoils system can be viewed as at least partially flowing from the fact that his inauguration represented a transfer of partisan control of the executive branch. After all,
according to a popular understanding of the event of the election of 1824, which was decided by the House of Representatives, Jackson had been denied victory in the previous
election only by virtue of John Quincy Adams’s promise to nominate then-Speaker of
the House Henry Clay of Kentucky to be the Secretary of State. The animosity between
Adams and Jackson provided an immediate justification for removal by Jackson of many
of Adams’s appointees upon Jackson’s ascent to the presidency. Accordingly, once one
takes into account the political realities of the times, the degree to which Jackson’s policy
truly represented a shift in institutional norms is unclear. As Van Riper describes the
proscription practices of Jackson, “There was no clean sweep. Both Jackson and Jefferson found themselves obligated to cleanse the political stables and to readjust the civil
service in accord with the election returns, but the efforts of Jackson were at most only
a fraction more strenuous than those of his predecessor.”46
The exact motivations of Jackson regarding his management of federal administration
and the public service are relatively unimportant for purposes. Rather, the fact that
Jackson’s inauguration was perceived to, and did, represent a reduction in the security
45
46
Richardson [1896], p.449, quoted in Rosenbloom [1971], p. 49.
Van Riper [1958], p. 35.
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of tenure is of central importance.47 According to the theory presented in Chapter
2, one would expect that both the frequency of expertise acquisition and performance
would decline during Jackson’s administration. While the evidence is admittedly coarse,
there were during this period measurable declines in some measures of federal efficiency.
For example, there were increases in both the expense of customs collection and revenue
shortfalls in the land office, and the financial performance of the Post Office was dismal.48
Congress made explicit note of the failings of the Post Office during investigations by
the House of Representatives and the Senate in 1834.49 However, Congress’s failure to
implement tenure protections in this time period is consistent with the patronage aims of
its members: namely, if such a limitation had been enacted, one likely effect of this would
be a shrinkage in the number of positions available for what was widely understood to
be Congressional patronage.50
Congressional Investigations & Expansion of Examinations. While Congress
did not move to limit rotation in office prior to the Civil War, it nonetheless did busy itself
with considerations of the executive branch’s operation during this time. For example,
beginning in the Jackson Administration and continuing through the 1840s and 50s,
Congress conducted multiple investigations of the executive branch. The first salvo was
aimed directly at the executive branch’s control of patronage and followed President
Jackson’s dismissal of Treasury Secretary Duane during the Bank War. Senator John
47
In addition to a marked partisan purge of multiple layers of the Post Office (John [1995], pp. 206-240;
Van Riper [1958], p. 46), the tenure of Postmasters General during and following Jackson’s administration
were dramatically shorter than those prior.
48
Regarding the customs and land offices, see Fish [1963], pp. 138-40. The Post Office experience is
discussed in detail by John [1995], pp. 241-256.
49
White [1954], pp. 251-269.
50
In addition, a significant Congressional effort to impose tenure protections would have been at odds
with the Decision of 1789 and, equally importantly, were acknowledged by contemporaries as such.
Second, following the 1828 elections, it would have been electorally risky for Congress to take action to
oppose rotation in office. These institutional and political realities suggest reasons why Congress might
have been collectively willing to remain inactive in the face of efficiency losses following from Jackson’s
support for rotation within the civilian branches of the executive branch.
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C. Calhoun of South Carolina headed a Senate committee that recommended that the
Four Years Law be repealed and the President be required to justify the removal of any
Senate-confirmed official.51
While at least the initial investigations may be accurately described as arising from
the conflict between the legislative and executive branches for control of the affairs of the
Treasury in particular and patronage in general, Congressional concerns during the time
were typically presented as being focused on questions of efficiency. For most government
functions of the era, high administrative performance was synonymous with low public
expenditures. The sincerity of Congressional interest in minimal cost provision of government services was sometimes questionable, however. For example, Congress failed to
act on multiple recommendations for cost reducing reforms from executive departments
during this era.52 While inaction on these recommendations was arguably driven by the
tension between the desire for administrative parsimony and the partisan pursuit of spoils
and the commensurate assessments, it is also true that “Congress had no means of intelligent inquiry into procedures, the organization of bureaus, the location of field offices,
or the due responsibility of subordinate officers. . .”53 From Jackson’s presidency through
the Civil War, these tensions sustained a federal personnel system that was, in White’s
words, “dual” in that it contained both a political branch, subject to patronage and
rotation, and a career system in which tenure was by norm held in good behavior.54 This
duality also reflected the fact that, between 1829 and 1860, Congress was simultaneously
faced with the emerging need for a positive (and growing) administrative apparatus to
govern the nation and a fresh awareness of its own administrative naı̈veté.
In spite of the fact that these investigations were frequently transparently partisan
51
Van Riper [1958], pp. 38-41. The committee’s suggestion foreshadowed the Tenure of Office Act of
1867.
52
White [1954], p. 152-53.
53
White [1954], p. 154.
54
White [1954], p. 362.
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affairs, Congress’s investigations of the executive branch did generate real information
about the administrative goings-on within the executive departments. Indeed, attention
was paid to the value of expertise within the agencies, particularly the use of examinations for both hiring and promotion within both the military and civilian agencies. For
example, the Gilmer Committee (formally the House Select Committee on Retrenchment)
reported several proposals to the House in 1842. Among these was a recommendation
that Congress direct the civilian bureaucracy to adopt examination procedures similar
to those already in use in several of the military bureaus. These recommendations were
not acted upon.55
The report supporting this reform, requested from the Cabinet in 1851 by the Senate
and rendered in 1852.56 The recommendations were both broader and deeper than the
reforms ultimately enacted by Congress. Most telling from this report is the sentiment
of Postmaster General Nathan K. Hall about the importance of tenure in the civilian
bureaucracy:
“I take leave to suggest, in conclusion, that probably no observing or thoughtful man has ever been long in charge of an Executive Department or Bureau,
without becoming satisfied that the proper standard of clerical qualification
and performance will not be established in them, and the public business
performed in the best manner until the clear can reasonably entertain a confident expectation of continued employment. If his continuance in office and
his promotion be made to depend on his good behaviour and assiduity in the
performance of his duties, a motive is offered him which uniformly produces
improvement and excellence in all the other employments of life, and could
55
White [1954], pp. 365-66.
This “Plan of the Five Secretaries” and the ensuing reforms are discussed at length in White [1954],
pp. 366-375.
56
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not fail to do so in this.”57
Following upon the recommendations of this report Congress in 1853 passed a statute –
the Classification and Pay Act – implementing “pass examinations” for over 700 clerical
positions in Washington.58 The pass examination tested applicants only for the possession
of the most basic skills. The statute also established four classes of clerical positions and
fixed pay for clerical employees according to the class of their position.59
These examinations were used continuously – most prominently by the Treasury Department – until the passage of the Pendleton Act in 1883.60 However, the Classification
and Pay Act of 1853 was at best a partial step toward a modern civil service. Specifically,
the Act failed to provide anything like permanent tenure for the average civil servant and,
perhaps even more importantly, did not apply to officers serving outside of Washington.
The nation’s experiences during the Civil War would bring into full relief the potential
costs of the “spoils” approach to allocating federal offices. As the war came to a conclusion, the national policy discussion at this point understandably turned to retrenchment,
thereby opening up a window for proposals about civil service reform.
What is important to note about the early federal bureaucracy is that efforts to
modernize the bureaucratic corps – generally implemented through the “front door”
by implementing minimal expertise requirements for appointees – relied on preexisting
knowledge in many ways. Particularly outside the military services, little that the federal
government did relied upon the development of specific knowledge or skills. This is
illustrated particularly well by the dual system described by White.61 The spoils system
in particular, and rotation in office in general, was more relevant for clerical positions,
57
Senate Ex. Doc. 69, 32nd Congress, 1st Sess., p. 17 (March 3, 1852). Quoted in White [1954],
pp. 368-69.
58
10 Stat. 189.
59
White [1954], p. 371, and Van Riper [1958], pp. 52-4.
60
White [1954], pp. 373-75.
61
White [1954], p. 362.
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especially those in the field offices.62 Senior clerical positions in Washington and scientific
offices during this time were governed by career systems, though the tenure protections
in scientific positions, as in the military services, were more explicit. As the Civil War
approached, it became increasingly difficult to sustain the career system for even highlevel clerical positions precisely because of the disappearance of any sort of protections
or minimal qualifications for the lower clerical ranks.63
4.3
The Need for Administration: 1865-1883
As the Civil War concluded and Reconstruction began, Congress quickly reemerged as
the center of national governance. The absence of both external threat and effective
executive policy making institutions implied that Congressional assent as the sine qua
non of national policy change.64 Congressional control of appropriations was a significant
basis for its relative superiority over the executive. However, to focus attention solely on
tangible resources risks oversimplifying the electoral and policy environments confronted
by the Congresses of this era. As railroad mileage grew – and transportation costs fell
– exponentially, members of Congress were increasingly concerned (for motivations both
patriotic and self-interested) with the development of a national economic regulatory
policy.65
In spite of the executive branch’s control of the military administration in the South,
Congress asserted a claim to control of Reconstruction as early as 1864 through the passage of the Wade-Davis bill (Burgess [1902], pp. 15-18). The Wade-Davis bill established
62
White [1954], pp. 354-55.
White [1954], pp. 366-68.
64
In spite of the failure of Congress’s attempt to remove President Andrew Johnson from office, both
the Tenure of Office Act and the impeachment itself demonstrate the relative power of Congress during
Reconstruction.
65
Dobbin [1994].
63
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procedures for reconstruction in those states that had passed secession measures,66 President Lincoln pocket vetoed the bill, as Congress adjourned less than ten days after sending
him the bill, and Lincoln had already expressed a reconstruction plan in a proclamation
in December of 1863.67 The differences between the reconstruction plans were minor in
all respects except the implication of which branch of the federal government was fit to
pass upon the question of whether a state had indeed been “reconstructed.” Congress
forced an important concession from Lincoln in 1865 when both chambers passed a joint
resolution refusing to count the electoral votes of Louisiana and Tennessee for the 1864
presidential election.68
The election of Grant and departure of Johnson tempered the intensity of the institutional tensions between Congress and the executive. This was in part due to the fact that
Grant publicly supported civil service reform and, most importantly, his public position
was that any such reforms must be dictated by Congress. Grant’s position was no doubt
in part due to the unique situation he confronted as the first to succeed an impeached
President.69 But it is important to note that Grant was not alone among Presidents of
this period in endorsing the notion that the use of patronage should be curtailed within
the federal government. At various points, Presidents Hayes, Garfield, Cleveland, and
Arthur each argued in favor of civil service reform.70 One reason for this support was
relatively straight-forward: the power of patronage put the President in the cross-hairs
not only of office-seekers, but also Senators who answered to state party bosses and state
66
Reconstruction “policy” was complicated by the fact that the areas in rebellion did not neatly fit
within state lines. The legisatures of eleven states had formally passed secession measures: Alabama,
Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Texas,
and Virginia.
67
Burgess [1902], pp. 9-11.
68
Burgess [1902], pp. 21-23. This decision was unusual in several respects, not the least of which was
the fact that the Republican candidate for Vice-President, Andrew Johnson, was not only a resident of
Tennessee – he was, at the time of the election, Tennessee’s military governor.
69
Furthermore, Grant had all but explicitly sided with Congress during the constitutional crisis following the removal of Secretary Stanton.
70
For a discussion of this, see White [1958], pp. 20-44.
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legislatures who sought both assessments from, and influence with, those who held federal positions in their states. Even if one considers only the time required to fulfill the
logistical responsibilities of the office in a patronage system, the first-order incentive of
any president – regardless of his partisan affiliation – to reduce the size of this system is
clear.
The Grant Commission. The Grant Commission, appointed by Ulysses S. Grant in
1871 and headed by George William Curtis, represents the beginnings of the modern
federal civil service system. Creation of the Commission was authorized by Congress
in a short rider to the sundry civil appropriations bill, which authorized the president
to promulgate regulations about the “admission of persons into” and “the conduct of
persons who receive appointments in” the civil service.71 The Commission drew a set
of civil service rules that went into effect in 1872. These originally rules are remarkably close in form to what ultimately emerged after the passage of the Pendleton Act in
1883: appointment was to the lowest ranks and required satisfactory demonstration of
citizenship, character, health, and basic competence. Successful application did not require nomination by any political appointee, and political assessments were forbidden.72
Unsurprisingly, these reforms were opposed by “stalwart” Republicans in Congress – the
new rules clearly had the potential to quiet a major source of state-level party machines’
revenue – and the rules were repealed by Grant in 1875 after the House refused to appropriate any funds for the Commission in 1874. The rules also required that promotions
within the civil service be awarded by competitive examination.
One aspect of this early experience is particularly relevant for our purposes. The
Commission found that, while opinions about the reforms within the executive branch
were varied on most aspects, agency officials’ evaluations of the use of competitive ex71
72
16 Stat. 514 (1871). See Van Riper [1958], pp. 68-74.
White [1958] pp. 281-87.
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LEARNING WHILE GOVERNING
aminations for promotion were overwhelmingly negative.73 Reasons for this were telling
and consistent with the relationship between career prospects and expertise development
stated in Conclusion 3: the examinations for promotion were not tailored to the skills
required for the position under consideration. Illustrative is the following remark by the
second comptroller:
“a clerk may become master of the business upon which he is engaged by
devoting his entire energies to it for a series of years, and by reason of his
experience and fidelity [come] to be almost invaluable to an office, and yet
when examined on general subjects not be able to pass as good an examination
as when he entered the service.”74
Further recognition of the incentive effects identified by Conclusion 3 led to moves by
some agency heads to reintroduce reforms in their own departments, as authorized by
the acts of 1853 and 1871.75
The Pendleton Act. While Grant and Rutherford Hayes both expressed support
for civil service reform as the 1870s progressed, Congressional interest in altering the
spoils system was limited: between 1861 and the passage of the Pendleton Act in 1883,
64 civil service bills were introduced and rejected by Congress.76 However, reform of
the federal civil service quickly returned to prominence following the assassination of
President Garfield in 1881. As a member of the half-breed faction of the Republican
Party, Garfield supported civil service reform and called for Congress to enact such
reforms in his inaugural address. Following significant losses by the Republican party in
the 1882 midterm House election that many observers tied to the perception that the
73
White [1958], pp. 284-85.
Senate Ex. Doc. 53, 43rd Congress, 1st session, Appendix F, p. 118 (April 15, 1874). Quoted in
White [1958], p. 284.
75
White [1958], pp. 288-89.
76
Theriault [2003], p. 55.
74
116
CHAPTER 4. THE FEDERAL CIVIL SERVICE
Republicans were opposed to civil service reform, Congress acted quickly, passing the
Pendleton Act,77 which was signed by Chester Arthur in January 1883.
Congressional debate of the Pendleton Act was largely confined to the Senate.78 There
were several motivations behind the Act. In addition to the potent image of a broken
system provided by the assassination of President Arthur by an office-seeker, the winds
of reform were amplified by the public reaction against the Republican party in the 1882
midterm election. To the degree that the winds of electoral support revealed in the 1882
midterm election were indicative of those that would guide the 1884 elections, reform was
more attractive to Republican members of Congress for two reasons. While championing
reform might mitigate or even negate the Democrats’ presumed advantage on the issue of
reform, the imposition of significant civil service reform might also “lock in” and protect
the Republican administration’s appointees in the succeeding administration.79
The Pendleton Act implemented several important changes that would form the foundations of future civil service reforms. First, the Act created a Civil Service Commission,
consisting of three commissioners, who would be appointed by the President with the
advice and consent of the Senate. Second, the Commission was to aid the President
in drawing up and implementing rules regarding the classification of positions and the
use of open and competitive examinations for appointments to these “classified” positions. Third, and most importantly, the Act did not provide tenure protections to any
federal employees. The initial coverage of the statute extended to only 11% of federal
employees.80 In particular, it required classification of positions within departments in
Washington and post offices and customs houses with more than 50 employees.81 Fourth,
77
22 Stat. 403 (January 16, 1883).
Van Riper [1958], p. 97-98.
79
Hoogenboom [1961], p. 237, though see Theriault [2003] and Johnson and Libecap [1994] for skeptical
evaluations of this motivation.
80
Hoogenboom [1959], p. 303.
81
Fish [1963], p. 221.
78
117
LEARNING WHILE GOVERNING
the President was authorized to extend the classifications to positions not designated by
the Act.
In a sense, the Pendleton Act simply reiterated the powers granted to the President
by Congress in 1871.82 In so doing, it more firmly entrenched the notion of the President as Administrator in Chief while representing a compromise between civil service
reform, the established system of patronage and the principle of rotation in office. The
President’s removal authority following enactment of the Act was essentially unchanged
in degree and scope, but elucidated in terms of form. On the one hand, the President’s
removal authority vis-a-vis individual officers was unchanged, but the Act created an implicit power to declassify swaths of the federal government. This power was particularly
important when viewed through an electoral lens: the Act did little to abrogate direct
responsiveness of federal employment to presidential election outcomes.
Holding constant for a moment the classification of any given position, the fact that
the Act required competitive examination for appointment – a dictate soon interpreted
as a “rule of three” that required the President to choose from among the top three
scorers when making an appointment to a given position – greatly reduced the President’s
incentive to remove the holder of any classified position as well as the incentive of a
member of Congress to request such a removal in pursuit of the appointment of a favored
constituent or benefactor. Insofar as a President was unwilling to face the potential
electoral and policy costs of declassifying the office, the Act did increase the de facto
level of tenure security for holders of classified positions.
82
83
Van Riper [1958], pp. 69-71.
That Congress was aware of this is indicated both by the debates surrounding, and rejection of,
a proposed amendment to the Act that would have included large internal revenue offices, which were
plum patronage appointments (Hoogenboom [1961], pp. 243-44), and the fact that the Act called for
appointments to federal positions to be apportioned according to states’ populations.(Van Riper [1958],
p. 101).
83
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CHAPTER 4. THE FEDERAL CIVIL SERVICE
Summarizing Pendleton. All things considered, the beginnings of civil service reform
in the federal government were not principally motivated by concerns about expertise.
Reconstruction-era politics are more correctly summarized as revolving around the struggle between Congress and the President for control of patronage. The motivations in this
struggle were asymmetric by virtue of the fact that the President’s removal power, while
challenged by Congress by the passage of the Tenure of Office Act of 1867, was never
truly in jeopardy. Given the time consumed with filling positions, Presidents and their
appointees generally had a significant incentive to sustain a system of de facto tenure:
removing an official simply created another position to fill. Congressional motivations
favored a classical patronage system, albeit one under at least implicit Congressional direction. The passage of the Pendleton Act was, in the end, better understood as the result
of electoral and partisan pressures than as a positive move to foster the development of
administrative expertise (neutral or otherwise) in the federal workforce.84
While Congress and Presidents during the Reconstruction era were focused on the
grander battle over control of the federal government, various administrators repeatedly
argued in favor of reforms in terms more closely tied to the development of policymaking expertise. These efforts would grow significantly over the next thirty years, as the
federal government continued to grow in both size and scope.85 The importance of the
Reconstruction era initial forays into implementation of civil service reform is two-fold:
it established the framework within which civil service tenure protections would emerge
over the ensuing years and, just as importantly, demarcated day-to-day control of the
administrative realm as falling principally within the President’s purview. This second
point emerges as an important factor in the 20th century as Presidents asserted greater
control over the collection and utilization of information within the executive branch, a
84
85
Theriault [2003], pp. 57-65.
Skowronek [1982], Carpenter [2001].
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theme that we return to in Chapters 5 and 6.
4.4
Growing A Civil Service: 1883-1910
Regardless of whether one is interested in the de facto or de jure sense of the term, there
is no single date on which “tenure security” was established in the United States federal
government. As discussed above, de facto security flowing from the general absence of
an incentive for the President or his appointees remove a federal office-holder existed
even at the height of the spoils system.86 On the other hand, in de jure terms, tenure
security was not part of the reforms enacted in 1883 by the Pendleton Act. Rather, tenure
security for rank and file civil servants emerged slowly as the product of a sequence of
executive orders in the late 19th and early 20th centuries, ultimately achieving statutory
recognition in the Lloyd-LaFollette Act of 1912.87
The Pendleton Act created a framework for the development of civil service and
placed some mild constraints on hiring bureaucrats in “classified” positions, but did
not itself classify them or “create” the civil service generally.88 Accordingly, the new
Civil Service Commission quickly drew up rules based upon those developed by the
Grant Commission.89 The initial examinations for clerical positions tested only whether
the applicant possessed an elementary education. In this regard, the Commission was
essentially replicating the “pass examinations” already in use in several of the executive
departments such as Treasury. The principal extensions of the system at this point were
the application of these tests for all clerical positions in Washington, the administration
86
Furthermore, following the enactment of the Pendleton Act, the incentive for a marginally interested
President or member of Congress to pursue the removal of an employee in a classified position was further
reduced by the restriction on who might be appointed as a replacement.
87
37 Stat. 539 (August 24, 1912).
88
The initial framework provided by Congress in the Pendleton Act prevailed until the passage of the
Classification Act of 1923 (Van Riper [1958], pp. 286-89).
89
Van Riper [1958], p. 117.
120
CHAPTER 4. THE FEDERAL CIVIL SERVICE
of field examinations in the cities in which the customs houses and post offices were large
enough to fall under the Pendleton Act’s initial coverage, and the use of supplementary
examinations for positions either above entry level or requiring specialized knowledge.90
The Expansion of the Classified Civil Service. The Pendleton Act granted the
President the authority to extend the classified service to clerical positions not originally
covered by the Act. This power was utilized by successive Presidents through the ensuing
30 years.
The performance of Cleveland’s first administration with respect to extending and
strengthening the classified service was mixed.91 In particular, though the classified service nearly doubled in size, this growth was due to the change in the composition and
size of the federal workforce rather than any conscious attempts by President Cleveland.92 Cleveland was the first Democratic President in 24 years, and was accordingly
(and successfully) pressured by his partisans for extensive removals in the unclassified
service. However, he did classify over five thousand employees in the Railway Mail Service
following his defeat in the election of 1888.93
President Benjamin Harrison, following a wave of removals in the early months of his
administration, appointed Theodore Roosevelt to the Civil Service Commission in May
of 1889. During Harrison’s administration, over 85% of the fourth-class postmasters were
removed.94 While Harrison’s administration was widely viewed as favoring spoils at the
expense of merit, it is important to note that the Civil Service Commission was seen
as having sustained “generally excellent standards in its administration of the classified
service” during this time.95
90
White [1958], p. 348.
Hoogenboom [1959], p. 305.
92
Van Riper [1958], pp. 119-20.
93
Ingraham [1995], p. 33.
94
Hoogenboom [1959], p. 305.
95
Van Riper [1958], pp. 125-6.
91
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LEARNING WHILE GOVERNING
Due to Roosevelt’s high profile, his perceived efficiency as a commissioner, and the
convenient fact that he was from the other party (so that agreeing with him would not
be seen as the result of partisan scheming), Grover Cleveland reappointed Roosevelt to
the commission and treated him as the de facto chief commissioner.96 In spite of this, the
progress of civil service reform under Cleveland was decidedly mixed. While Cleveland
presided over the largest extension of the classified system to date during his second
administration,97 he also utilized patronage extensively in pursuit of the repeal of the
Sherman Silver Purchase Act.98
The classified service expanded rapidly, with nearly half of the civil service covered
in 1900. This expansion was at least partially driven by traditional partisan and spoils
motivations of Presidents as they were leaving office.99 The unclassified positions increasingly consisted mostly of poorly paid fourth-class postmasters, whose salaries were
a principal pool from which machines in both parties drew their assessments.
The Decline of Removals and Rise of Efficiency. Soon after the enactment of the
Pendleton Act, arbitrary removals within the classified service were significantly lower
than in the unclassified service – a rate of less than 7% in the classified service compared
to rates between 25% and 70% in the unclassified agencies.100 The Commission began
to promote procedures to reduce or eliminate political removals in 1890. Though President Cleveland refused to impose any limitations on the removal power, the Post Office
imposed a rule prohibiting arbitrary removal of letter carriers in 1894, and President
McKinley applied the principle to the classified service in 1897.101 McKinley’s successor, Theodore Roosevelt, went a step further in 1901 when he required the Treasury
96
Van Riper [1958], pp. 124-5.
Executive Order 89, May 6, 1896.
98
Van Riper [1958], pp. 128-30.
99
Hoogenboom [1959], pp. 304-5.
100
White [1958], pp. 340-41.
101
White [1958], pp. 343-44.
97
122
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Department to withhold the salaries of federal employees in the classified service whose
appointments had violated civil service rules.102 The Lloyd-LaFollette Act of 1912 gave
McKinley’s order statutory force.103
Benjamin Harrison supported early efforts to measure performance by efficiency records.
These efforts were uncoordinated, however, with each agency designing its own system.
Thus, while the early efforts furthered the cause of merit within several agencies, including the Department of Interior, the Weather Bureau, and the Pension Office,104 they
did little to establish uniformity of merit procedures – especially respecting promotion –
across agencies. The Civil Service Commission made an early attempt to impose such
uniformity in at the end of Cleveland’s second administration in 1896 by requiring that
agencies submit to it all materials submitted by applicants for promotions within the
classified service. However, this requirement was not subsequently enforced. This was at
least partially due to both the heterogeneity of the agencies’ evaluation systems and the
Commission’s general lack of resources.105
Theodore Roosevelt. As mentioned above, Roosevelt was appointed to the Civil Service Commission by President Harrison in 1889. While this appointment signaled at least
a partial commitment to the cause of reform by the new President, it was accompanied
by a broad sweep of the Railway Mail Service. In spite of this inauspicious beginning,
Roosevelt’s tenure as a Commissioner, which lasted until 1895, witnessed the first steps
toward reforms of the structure and processes that ultimately undergirded the modern
federal civil service.106 Roosevelt’s greatest achievements with respect to civil service
102
Johnson and Libecap [1994], p. 67.
Somewhat ironically, passage of the Lloyd-LaFollette Act was spurred in part by the “gag orders” of
Presidents Roosevelt and Taft, both of whom sought to limit disclosure of executive branch information
by rank-and-file employees of the executive branch.
104
White [1958], p. 357.
105
White [1958], p. 358.
106
White [1958], pp. 323-324.
103
123
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reform would not occur until he ascended to the Presidency with the assassination of
President McKinley in 1901.
Theodore Roosevelt’s administration represented a key turning point in the struggle
between patronage and merit in the operation of the civil service.107 Roosevelt actively
asserted authority to both study and, to a greater degree than his predecessors, control
the procedures and structure of the federal civil service. He made several reforms early
in his first term at the request of the Commission, including subjecting waivers of civil
service requirements to the approval of the Civil Service Commission,108 , inclusion of
rural postal carriers in the classified service,109 establishment of procedures to remove
individuals holding their positions in violation of the civil service rules,110 clarification
and restatement of prohibitions against political activity by officials in the classified
service,111 institution of a “gag order” prohibiting federal employees – both classified and
unclassified – from seeking to solicit increases in pay from or influence legislation before
Congress,112 and a more precise definition of just causes for dismissal.113 His reform
efforts in his first term culminated with a broad revision of the Civil Service rules.114
This framework was substantially unchanged until 1938.115
In his second term, Roosevelt’s efforts became more focused on the foundation’s of
his office’s powers relative to those of Congress. Perhaps the most high profile instantiation of the confluence of these efforts with concerns over the structure and operation
of the civil service was provided by the Keep Commission, appointed in 1905. President
Roosevelt assigned multiple tasks to the Commission upon their appointment, but two
107
Skowronek [1982], pp. 178-186; Van Riper [1958], pp. 205-207.
Executive Order 146, November 26, 1901.
109
Executive Order 147, November 27, 1901.
110
Executive Order 148, December 11, 1901.
111
White [1958], pp. 330-331.
112
Executive Order 163, January 31, 1902.
113
Executive Order 173, May 29, 1902.
114
Executive Order 209, March 20, 1903.
115
Van Riper [1958], p. 195.
108
124
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were of particular note in their illustration of the increased awareness of the role of policymaking expertise within the executive branch. Specifically, Roosevelt requested that
the Commission consider how best achieve the following goals.
“In the preparation of decision for ministerial approval, expert knowledge
of actual conditions affecting or affected by such decisions should govern,
as distinguished from knowledge of the record alone. . . . There should be
systematic inter-departmental co-operation in the use of expert or technical
knowledge. The business methods of the different departments should be
substantially uniform.”116
The Keep Commission’s efforts were both broad and seminal, providing for several facets
of federal administration the first systematic investigation and recommendations for reform.
117
The congruence of the Commission’s focus on personnel practices with the
theory presented in Chapter 2 is illustrated by the following quote from Commissioner
Gifford Pinchot, then-Chief of the Forest Service.
“I have reached the conclusion, very definitely, that in general the efficiency of an organization, as well as of the men in it, depends on the salaries
and promotions, and on the way the salaries and promotions are handled,
more than on any other single factor and therefore I have given a great deal
of attention to that question.”118
In general, the Keep Commission’s proposals that required Congressional approval did
not receive a warm reception while many of those that did not require Congressional assent were at least attempted within the executive branch during Roosevelt’s second term
116
New York Times, June 17, 1905, p. 4. Cited in Kraines [1970], pp. 6-7.
See, for example, Arnold [1998], pp. 22-26, Pinkett [1965], and Kraines [1970].
118
“Expenditures in the Department of Agriculture,” House of Representatives Report No. 8147, 59th
Congress, 2nd Session, March 1, 1907, Vol. 2, Serial No. 5065, p. 22. Cited in Kraines [1970], p. 31.
117
125
LEARNING WHILE GOVERNING
of office.119 While causality is difficult to gauge, the Keep Commission’s recommendations foreshadowed many of those proposed in subsequent civil service reform initiatives,
including the Commission’s immediate successor, the Commission on Economy and Efficiency.
However, while the Keep Commission concerned itself with matters of process and
incentives in the civil service, it is important to note that Roosevelt’s attempts to reorganize and, to some degree, rationalize the federal government’s personnel systems were
part of a much larger struggle for control of the executive branch. This is demonstrated
particularly clearly by the events leading up to and following from Roosevelt’s strengthened gag order of 1906, which extended the provisions of the 1902 order to all federal
employees, not just those in executive departments.120 During this time, the American
Federation of Labor (AFL) increasingly focused on organizing the post office and, to a
degree, other federal employees more generally.121 These efforts would ultimately culminate in the passage of the Lloyd-LaFollette Act of 1912,122 which we discuss in more
detail later in this chapter. Prior to that, the end of President Roosevelt’s administration
provides a useful point at which to consider the impact of the Pendleton Act.
Evaluating Pendleton. Not only did the passage of the Pendleton Act not induce a
cataclysmic overturning of the ways of patronage in favor of those of merit in the federal
civil service – the Act itself was arguably not seen as an attempt to cause such a shift.
As Bishop describes the perception: “The law of 1883 . . . would serve as a sop for a few
‘long-haired cranks,’ and would amount to nothing in practice.”123 The central interests
of both Presidents and members of Congress during this era were relatively far removed
119
Skowronek [1982], p. 184.
Executive Order 402, January 25, 1906.
121
Carpenter [2001], pp. 168-176.
122
Skowronek [1982], pp. 192-193.
123
Bishop [1920], p. 45.
120
126
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from direct concerns about the efficiency of the civil service, though the pressures were
mounting as constituents spread westward and the provision of federal services such as
the post became more central to more voters’ daily existences.124 Nevertheless, the Act
established the framework – principally as instantiated in the form and authority of the
Civil Service Commission and its direct relations with the President – for the emergence
of modern civil service procedures and practices. Essentially every President who served
following the passage of the Act enlarged the classified service – such extensions simultaneously lightened the burdens of the President in terms of Congressional demands for
patronage and enlarged the direct scope of presidential control of the federal service.
However, it was not until Theodore Roosevelt’s sustained interest in and efforts with
respect to the details of the procedural details of the civil service that the protections
enabled by the Pendleton Act garnered practical force.125
4.5
Classification, Efficiency, and Unions: 1910-1933
President Taft’s Commission on Economy and Efficiency was appointed in 1910 to consider the organization and operation of the executive departments and make recommendations for reforms. The Commission was initially authorized by Congress, but many
of its recommendations – particularly those that would have centralized the generation
and submission to Congress of executive branch estimates for annual appropriations –
faced significant opposition. The majority of the Commission’s work was not directly
relevant to the civil service system, per se, and we discuss the Commission’s role in the
development of legislative-executive relations later in the book.126 The Commission’s
recommendations regarding classification had both immediate and lasting impact and,
124
Skowronek [1982], Kernell and MacDonald [1999], and Theriault [2003].
Carpenter [2001], pp. 45-46, Skowronek [1982], pp. 179-186.
126
Page 222.
125
127
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indeed, represented one of the few recommendations of the Commissions that was given
serious attention by Congress in the years immediately after the Commission’s disbandment.127
For most of his administration, Taft was caught in the middle of the struggles between
the conservative and “insurgent” wings of the Republican party. Patronage played an
important role in these struggles. During and following his unsuccessful 1912 election
campaign against Wilson and Roosevelt, Taft extended the classified service to include
all fourth-class postmasters, on its face a significant extension, covering approximately
35,000 positions. However, this extension was not particularly effective for another 20
years. Also in 1912, he vetoed an attempt by Congress to impose seven year tenures of
office for all classified positions.128
Commission Efforts. The most important developments during Taft’s administration
were not presidentially directed. Rather, the Civil Service Commission’s continued efforts
to forward both classification and examination began to bear fruit during these years. Of
particular interest are the Commission’s statements that examinations for general clerical
positions should be designed to measure general intelligence, rather than specialized
knowledge. For example, in 1910 the Commission directly addressed the importance of
attaining merit in appointment due to the value for later promotion within the service:
“It had become apparent that some eligibles from the clerical examination
did not possess general intelligence to a sufficiently high degree for appointment to the clerical grades. It may be pointed out in this connection that
eligibles for clerical positions should not alone possess intelligence of a char127
The other main recommendations of the Commission that received similarly early approval by
Congress was the creation of the Division of Efficiency within the Civil Service Commission in 1913
(later elevated to Bureau status in 1916) and the Bureau of the Budget in the Budget and Accounting
Act of 1921. In addition to Section 6.2.3, see, for example, Arnold [1998], pp. 48-51.
128
Van Riper [1958], pp. 214.
128
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acter to enable them satisfactorily to perform the duties to which they may
be assigned upon appointment, but must have acquired before appointment
sufficient breadth of mental attainment and development to enable them to
advance to the higher positions and more responsible duties in the clerical
grade, it being clearly in the interests of the service to fill these higher positions by the promotion of those in the service after demonstrated ability.”129
During this time, the Commission was similarly active in its development and refinement
of examinations for skilled non-clerical positions. During this time, particularly for the
most skilled positions, the Commission began to actively consider the difficulties inherent in recruiting qualified individuals with valuable outside employment opportunities,
reporting that “in the cases of some of the most important scientific and professional
positions that men of attainments and standing in their profession hesitate to make formal application in response to announcements of examinations.”130 This concern was
considered pressing by the Commission, as both the number of positions, and variety, of
skills required by the federal government was rapidly growing:
“The extent and variety of scientific investigation conducted by various
departments have so increased during the past decade as to multiply many
times the number of different kinds of scientific examinations. Not only have
new bureaus been established for the purpose of carrying on scientific research,
but Congress has authorized bureaus already established to broaden the scope
of their respective investigations.
Newly created bureaus are required, in their organization, to employ specialists already trained and capable of initiating and planning investigation
in more or less narrowly specialized branches of science.”131
129
Twenty-Seventh Annual Report of the Civil Service Commission, 1910, p. 44.
Twenty-Eighth Annual Report of the Civil Service Commission, 1911, p. 32.
131
Twenty-Eighth Annual Report of the Civil Service Commission, 1911, p. 36.
130
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The growth of the federal government’s need for capable individuals with specialized
knowledge of their fields was mirrored in the broader economy and, perhaps more importantly, generally outstripped the available skill sets of many applicants for federal
positions. Accordingly, the acquisition of these skills needed to be facilitated after employment through, for example, selective promotion practices. Thus, the Commission
favored a policy of preference for applicants with general scientific knowledge rather than
those with more specific factual knowledge.
“With the broad groundwork thus acquired in school, college, and graduate course, or from equivalent sources, along the general lines of a bureau’s
endeavor, appointees can then acquire in the service special knowledge and
training, and, other conditions being equal, such appointees should attain
greater strength and higher proficiency in their specialties than can men who
are without the same basic breadth of education and training.
As a general policy, and with due recognition of the wisdom and desirability of exception in unforeseen and emergency cases, the suggestion is offered
that for almost any part of the Government’s work best results may be obtained by appointing men selected because of their broad basic training in the
fundamentals, thus laying a sound foundation for specializing such appointees
in the service after appointment, according to the bent and inclination manifested or developed.”132
In support of this conclusion the Commission approvingly cited the experiences of some
of the agencies with more advanced procedures and specialized positions, such as the
Patent Office, the Bureau of Standards, and the Forest Service. The description of the
practices of the Forest Service are particularly on point within our framework:
132
Twenty-Eighth Annual Report of the Civil Service Commission, 1911, p. 37.
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“In the Forest Service the scientific corps is recruited through the forest
assistant examination, covering the subjects commonly embraced in a firstclass course of training in forestry. The particular bent of each appointee is
then developed through experience and investigation in the work of the bureau. Advancement in the service results from development and specialization
in the various branches of scientific forestry.”133
These efforts by the Commission are consistent with the incentives captured in Conclusions 1 and 3: increasing the level of knowledge among those selected for federal
positions reduced the costs of individual on-the-job acquisition of task-specific skills and,
correspondingly, reduced the requisite level of certainty of tenure protections to motivate
bureaucrats to invest in such acquisition. Figure 2.2 illustrates the landscape facing the
Commission. While the Commission was striving to increase the de jure level of tenure
protections for employees in both classified and unclassified positions, this decision was
largely out of its hands. Accordingly, the most direct lever the Commission had at its
disposal to increase the expertise and efficiency of those holding federal positions was
through a refinement of the selection procedures (i.e., the criteria utilized in generating
the lists of individuals eligible for appointment within the classified service) so as to increase the levels of both general and specific knowledge among those appointed to the
service.
President Wilson: Patronage and Mobilization. Wilson’s approach prior to the
First World War is best understood as an explicit choice to prioritize his legislative agenda
(and accordingly, the pursuit of congenial relations with his co-partisans in Congress)
over the cause of civil service reform. The Democratic party was coming out of the
wilderness – the Republican party had held the White House since 1897 – and while
133
Twenty-Eighth Annual Report of the Civil Service Commission, 1911, pp. 37-38, emphasis added.
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Wilson had been a vice-president of the National Civil Service Reform League,134 he
would use the patronage for both political and policy purposes during his two terms
in office. For example, by simultaneously requiring examinations of current fourth-class
postmasters prior to their entering the classified service and applying the rule of three
separately to each fourth-class postmastership, Wilson effectively declassified these historically patronage positions while maintaining the appearance of upholding the merit
system.135 This was politically expedient for the progressive, Democratic President because Taft’s classification of these positions would have granted civil service protections
to some 36,000 Republican-appointed postmasters in the solidly Democratic South.136
Additionally, Wilson’s Secretary of State, William Jennings Bryan, was an unapologetic
defender of patronage and effectively reversed 15 years of merit reform and protection
from arbitrary removal in the upper levels of the Foreign Service.137
In his second term, Wilson extended the merit system to first, second, and third-class
postmasterships by executive order by requiring that the applicant scoring highest on
the civil service examination be nominated. However, this order was largely reversed by
President Harding, who relaxed the highest-scoring applicant requirement to the “rule of
three” upon his inauguration in 1921.138 The postmasterships would remain effectively
patronage positions until 1936 when, as discussed in more detail below, President Roosevelt issued an executive order reestablishing the highest scorer requirement applied by
Wilson.
In ways that are relevant for our analysis in Chapter 6, Wilson’s ability to shape the
civil service was limited by two significant external forces: Congressional intervention
and the mobilization for World War I. During Wilson’s first term, the explicit deal be134
Van Riper [1958], p. 230.
Van Riper [1958], p. 236.
136
Skowronek [1982], p. 195.
137
Van Riper [1958], p. 238.
138
Harris [1953], pp. 344-345.
135
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tween Wilson and his Democratic counterparts in Congress was straightforward: Wilson
swapped patronage for policy as represented by his New Freedom legislation.139 Specifically, the legislative branch involved itself in administrative affairs in an explicit, albeit
indirect fashion through the elevation of the Division of Efficiency to Bureau status in
1916.140 As described by Van Riper, the Bureau’s hybrid nature as a legislative agency
directed by Congress to create and deploy a standardized efficiency rating system within
the executive branch “caused many dificulties” and hindered the development of a “true
central personnel agency.”141 On a more practical level, Congress exempted parts of the
executive branch from civil service requirements on several occasions.142 Congressional
attempts to control administration reached their height during the winter of 1917-18.
Senator Chamberlain, a Democrat, joined forces with Theodore Roosevelt in proposing
a War Council to handle the administration of the war effort. Wilson ultimately won the
struggle twice over, as not only was Chamberlain’s proposal defeated, Wilson was given
wide unilateral reorganization authority with the passage of the Overman Act in May of
1918.143
During the First World War, the Civil Service Commission continued to play its
central role in staffing the civilian positions within the federal government. It was understandably forced to provide a number of agencies exemptions from the merit system
during the mobilization, as it was simultaneously faced with greatly increased demand
for employees from the agencies, competition with more appealing private sector employment options, and the induction of men into the armed services. All of these combined to
increase both turnover within the civilian positions and declination of offers of employ139
Skowronek [1982], pp. 194-198.
See Section 6.2.3.
141
Van Riper [1958], p. 240.
142
Examples include the Federal Reserve Board, Federal Trade Commission, Federal Farm Loan Board,
the Shipping Commission, and the Tariff Commission, each of which was created by Congress during
Wilson’s first term (Van Riper [1958], pp. 235-236).
143
Skowronek [1982], p. 199, Livermore [1968].
140
133
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ment.144 The rise of these challenges coincided, unsurprisingly, with the deployment of
some much-needed innovations, however, including both promotion schemes less heavily
dependent on seniority in position and more independent, proactive recruitment practices.145 While procedural reforms moved forward during this time in some ways, the
Commission’s efforts were hindered in practice by the increased rate of turnover and
heightened labor activism both in the federal service specifically and across the economy
more generally.146
Unions and Civil Service Reform. The first modern interactions between organized
labor and the federal government centered almost exclusively, and unsurprisingly, on the
post office. The early efforts at organization of postal employees were instrumental in
Roosevelt’s issuance of his gag order of 1902.147 as well as both his promulgation of a
stronger version of the order in 1906 and President Taft’s order in 1909.148 Though it did
not establish collective bargaining rights for federal employees (such rights would first
be established on a limited basis by President Kennedy in 1962149 the Lloyd-La Follette
Act in 1912 did roll back the gag orders and established a statutory right for federal
employees to unionize.
It was Wilson’s presidency, however, that witnessed the emergence of a significant
push for general federal employee unions.150 For example, the National Federation of
Federal Employees (NFFE) was founded as a chartered organization under the American
Federation of Labor (AFL) on September 17, 1917. As President Wilson began to negotiate both the shifting sands of an increasingly discordant relationship with Congress and
144
Van Riper [1958], pp. 253-262, Johnson and Libecap [1994], pp. 83-84.
Van Riper [1958], pp. 251-252.
146
Skowronek [1982], pp. 200-202.
147
Skowronek [1982], pp. 180-182.
148
Executive Order 1142, November 26, 1909.
149
Executive Order 10988, January 17, 1962.
150
As Carpenter describes, the organization of postal workers evolved along occupational lines in a way
that did not hold true for non-postal employees. (Carpenter [2001], pp. 168-176.)
145
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the economic and logistical challenges of the war mobilization effort, he frequently found
it expeditious to more actively take up the cause of organized labor.151 This coalition
of convenience was instrumental in the direction of the ensuing decades of civil service
reforms. Public sector unions – particularly the NFFE – were pivotal actors in the discussions about and design of classification, pay, and retirement legislation that was enacted
in the 1920s and 1930s.
Classification and Retirement. A primary focus in early twentieth century efforts within the executive branch to reform these positions was a further strengthening of
classification of the positions in terms of both responsibilities and salary. While classification of positions as a basis for salary determination had existed in the federal government
since the Classification and Pay Act of 1853.152 the proposals brought forward between
1905 and 1913 represented a high point of the influence of the principles of scientific
management on the structure and procedures of the federal workforce.153 For example,
the Keep Commission’s efforts in Theodore Roosevelt’s administration included a proposal for reclassification of positions in order to not only better align responsibilities and
pay, but also to bring the methods of compensation and promotion within the service
better in line with the private sector.154 The confluence of promotion and salary was
an important impediment to staffing the executive branch – particularly the lower levels
of the clerical service. As Kraines [1970] described the situation at the turn of the century, in spite of the fact that these positions were in general better compensated than
similar positions in the private sector, the acceptance rate for these positions was less
than 70% because, “while the government clerical service offered higher entrance salaries
than private industry, it offered little chance for advancement as compared with private
151
Skowronek [1982], p. 201.
White [1954], p. 391.
153
Ingraham [1995], pp. 36-40.
154
Skowronek [1982], p. 183.
152
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industry.”155
The Taft Commission recommended that Congress create a bureau of personnel within
the executive branch that would be charged with structuring and administering evaluation and classification systems for federal employees.156 While Congress would not act
on this recommendation for a decade, it represented the continuation of a shift in focus
from the early issues of recruitment, examination, and arbitrary removal to more sophisticated issues of management. Within this realm of civil service policy, increasing focus
was given as the decade unfolded to matters of both retirement and classification.157
Both of these issues were largely ignored by Congress’s agent, the Bureau of Efficiency,
during the First World War. Following the war, however, both issues received renewed
attention from Congress. The Retirement Act of 1920 set up a modern pension system
for civilian federal employees. The Congressional Joint Commission on Reclassification
of Salaries, which had been set up by Congress in 1919, made formal recommendations
in a report in March of 1920. While the Commission’s report included a call for a pension system, most of the report’s recommendations revolved around questions of equity
both within the civil service and between positions in the civil service and comparable
employment in the private sector. The Commission’s recommendations in this area –
which would have essentially amounted to a normalization of jobs and pay within the
civil service and an increase in overall average pay – were controversial. On the one
hand, the recommendations were at odds with the general pursuit of “economy” within
the federal government. On the other hand, the direction of how reforms along these
lines would be implemented was clearly understood to be important. Finally, the very
notion that a general system – the Commission recommended that a new board be estab155
Kraines [1970], p. 16.
Van Riper [1958], p. 222. In addition, the Commission recommended that the proposed bureau serve
as a mediator for labor disputes between officials and their subordinates to the degree that the President
felt the dispute was pertinent to the service as a whole.
157
See, for example, Van Riper [1958], p. 276-279.
156
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lished to implement and administer the reclassification – should cross departmental lines
of authority and established hierarchies of rank and seniority was clearly threatening to
multiple constituencies within both Congress and the executive branch.
In institutional terms, the compromise embodied in the initial Congressional countenance of the brunt of the Commission’s recommendations – the Classification Act of
1923 – consisted of a tripartite direction of the implementation of classification: the Civil
Service Commission, the recently created Bureau of Budget, and the Bureau of Efficiency
nominated one representative to the newly created Personnel Classification Board, whose
determinations were final. In policy terms, the new board’s immediate control was limited to approximately 10% of the civil service: all positions in field offices and most
non-custodial blue collar positions were excluded from the Act’s immediate coverage.
Finally, to finish the compromise nature of the legislation, the Board was tasked with
submitting a report to Congress on how best to extend the Act to the field offices in time
for its application to be utilized in the estimates for the federal budget for the 1925 fiscal
year.158
The Classification Act of 1923 established a fundamentally modern classification system for the classified service in Washington. It followed the report of the Joint Commission on Reclassification, which described the federal civil service system at that time as
follows.
“There is a serious discontent accompanied by an excessive turnover and
loss among the best trained and most efficient employees, the morale of the
personnel has been impaired, the national service has become unattractive to
a desirable type of technical employee . . .”159
Echoing the tone of the scientific management movement, a key recognition of the Com158
Van Riper [1958], pp. 298-300.
U.S. Congressional Joint Commission on the Reclassification of Salaries, House Document 686, 66th
Cong., 2nd Session (1920), pp. 18-19. Cited in White [1926], pp. 277-278.
159
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mission in its report was “that personnel problems can not be successfully handled as a
side issue by a number of minor and major administrators.”160 Furthermore, the Joint
Commission called for promotion to be based exclusively on examinations, stating the
belief that “every employee in the Government service should be given an opportunity,
through industry and increasing efficiency, to secure a position of increased responsibility
and, of course, of increased compensation.”161
Implementation of the Act by the Personnel Classification Board was immediately
contentious. In particular, the Bureau of Efficiency and Civil Service Commission disagreed on the desirability of promulgating a strong central structure for the classification
of positions across agencies. The Civil Service Commission’s position was that the proper
sequence was to first implement a schedule of job descriptions and pay grades similar to
that presented in the Joint Commission’s 1920 report. The Bureau of Efficiency, on the
other hand, argued that it would be more expeditious to give the agencies autonomy in
the assignment of positions to the pay schedule, an approach that at least initially would
do little to further the pursuit of similar pay for similar jobs across (or, for that matter,
even within) agencies. The ensuing decade witnessed a few Congressional refinements
(and, by extension, affirmations) of the basic principles underlying the Joint Commission’s recommendations. Specifically, while the civil service was arguably generous, in
relation to the private sector, to lower grades of its employees in terms of both remuneration and benefits, the reality was that more highly positioned employees in terms
of both expertise and rank within the civil service were under-compensated and, just
as importantly, the disparity between public and private employment was increasing in
one’s skill and advancement within the civil service. The Welch Act of 1928 reiterated
the 1923 Act’s call for a report regarding the state of classification and remuneration
160
Mosher [1920], p. 21.
U.S. Congressional Joint Commission on the Reclassification of Salaries, House Document 686, 66th
Cong., 2nd Session (1920), p. 12.
161
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within the civil service as a whole. The resulting report, presented in 1931, offered a
sobering picture of the state of affairs – particularly among skilled employees and those
holding advanced positions – in the federal civilian service. In addition to documenting
disparities between public service compensation at the top end of the civil service and
that offered to individual qualified for comparable positions in the private sector, the Personnel Classification Board argued in the 1931 report that there was “no uniform plan for
plan in the field service” for compensating employees who had “gained in experience and
usefulness in a given class of work” and that the requirements for federal employment
were “more exacting and thorough” than comparable standards in the private sector.162
External events were all too pressing for the evolution of civil service management
to successfully secure sustained attention from either the executive branch or Congress,
of course. When the Personnel Classification Board tendered its report to Congress,
the nation was in the grips of the beginnings of the Great Depression and facing the
quickly approaching 1932 presidential election. As part of President Hoover’s attempts
to increase efficiency within a quickly tightening federal budget environment, authority
over federal personnel administration was rapidly centralized within the Civil Service
Commission: the Personnel Classification Board was dissolved – and its responsibilities
transferred to the Civil Service Commission – by the Economy Act of June 20, 1932.
Federal employment would maintain a central position in policy debates, but classical
public administration questions would take a distinct back seat to the pursuit of a solution
to the nation’s economic woes. Just as importantly, the end of 12 years of Republican
control of the presidency and the concomitant incentive to solidify the bonds of party
between northern and southern Democrats would combine to amplify the political value
of patronage within the executive branch. Consistent with the shift in focus on public
employment as stimulus, the Bureau of Efficiency was abolished shortly after Franklin
162
Van Riper [1958], pp. 305-306.
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Roosevelt’s inauguration in 1933.
4.6
Patronage as Stimulus: 1933-1945
Franklin Roosevelt’s administration represents a clear turning point in the practical understanding of the relationship between politics and administration. While it is too much
to claim that the Wilsonian ideal of neutral competence – that the selection and direction of public policy should be clearly delineated from the implementation of the policy
duly selected – lost its appeal, the recognition that administration in a modern polity
was inherently political became commonplace. Somewhat ironically, this recognition was
at least coincident with the emergence of political incentives to make this recognition
explicit: President Roosevelt’s first term was unique in many ways: the presence of an
economic crisis unprecedented in both depth and scope precipitated huge – though far
from ideologically cohesive – Congressional majorities for the Democratic Party that collectively held a clear mandate for a rapid expansion of both the federal government’s
size and the depth of its involvement in both the national economy and society at large.
The ubiquitous urgency of turning political will into public policy ruled out apolitical
administration.
Of course, Roosevelt was Chief Executive for 13 years. Accordingly, it is useful to
separate his presidency into three administrative regimes, corresponding roughly to each
of his three full terms.
The First Term: 1933-1936. With a Democratic Congress hungry for patronage ,
the proportion of federal positions covered by the merit system shrank rapidly during
Franklin Roosevelt’s first term. While 80% of federal civilian positions were classified
within the merit system at the end of President Hoover’s term in 1932, by 1936 this
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proportion was only 60%. While clearly prompted by the prompt expansion of federal
employment, the increase in patronage positions was the result of both Presidential and
Congressional aims. By the end of 1934, Congress had created almost sixty new agencies
(representing approximately 100,000 new positions) had been created outside the merit
system, whereas only five agencies had been placed under the Civil Service Commission’s
purview.163 President Roosevelt, while publicly expressing both support for the principle
of merit and a desire to protect and strengthen the civil service system, had ample
incentive to acquiesce to the growth of patronage, of course, as he planned to leverage his
control of these appointments to maintain support for this policy agenda in Congress.164
As he mounted his campaign for the Presidency, Roosevelt separated policy and
patronage in a manner so as to simplify the use of patronage to secure policy goals (as
opposed to explicitly making patronage a policy, per se, as had been promoted by earlier
Democrats such as William Jennings Bryan). This separation not only accorded with
Roosevelt’s claims that he supported the principle of merit – it also afforded his advisors
and lieutenants, such as Raymond Moley and James A. Farley, bargaining strength in
shaping, and assembling Congressional coalitions for, Roosevelt’s agenda. In addition, the
sustained Republican control of the federal government for over a decade left Roosevelt
and his confidantes with a set of potential administrators that were either quite old
or lacking in experience. Accordingly, the recruitment of individuals for high-ranking
(formal and informal) positions ended up being focused on a combination of university
professors and relatively young lawyers. Van Riper’s description of these recruits is
particularly apt, given its resemblance of the “zealots” described in Chapter 2:
“Delighted to find themselves called to the center of political power for the
first time in our history, they in turn encouraged their friends and those who
163
164
Van Riper [1958], p. 320.
See, for example, Van Riper [1958], pp. 316-320.
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thought as they did. With unprecedented opportunities for action and for
contribution to the affairs of the nation, the lure was irresistible to many of
these highly intelligent and well educated but, in the old-time partisan sense,
politically detached individuals.”165
Many of the most successful policy efforts of Roosevelt’s administration represented
– by necessity – the result of deploying policymaking expertise in the design and implementation of federal initiatives. As Van Riper succinctly describes it, “[t]he advent of
the New Dealers was an implicit recognition of the importance of research in modern
decision-making.”166 While Roosevelt and Congress allowed much of the expansion of
federal civilian employment to occur at least initially outside of the merit system, the
Civil Service Commission was nonetheless planning for how best to pursue further extensions and refinements of the system. In spite of reduced funding and greatly increased
demands on its time, the Commission was publicizing its program. In addition to recognizing the need to streamline and modernize the maintenance of the existing examination
system, the Commission proposed that expanded recruitment of skilled individuals, improved promotion systems, and the provision of in-service training for those employed
within the civil service. The degree to which these plans were borne out in practice –
particularly during Roosevelt’s first term – were limited, but the efforts can – with the
benefit of hindsight – be seen as providing the foundations for the reforms that were
eventually implemented.167
The Second Term: 1937-1940. A combination of executive initiative, partisan infighting within the Democratic party, and resurgent Congressional interest in administrative procedure generated several developments following the 1936 election. Civil service
165
Van Riper [1958], p. 325.
Van Riper [1958], p. 326.
167
Van Riper [1958], pp. 330-332.
166
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reform as an electoral issue rose to a prominence it had not experienced since Wilson’s
reelection in 1916. The Republican presidential candidate, Alfred Landon, raised the
issue during his campaign – prompting Roosevelt to issue two executive orders in July
of 1936 that effectively returned many positions, including postmasters, to the system as
operated by Wilson.168 These measures were tempered, of course, by Roosevelt’s efforts
to overturn the backlash against the first wave of New Deal legislation (most famously
illustrated by the Supreme Court’s rejection of Panama Refining Co. v. Ryan 169 and
A.L.A. Schechter Poultry Corp. v. United States,170 ). While these efforts, and the debate
about both the proper scope of federal powers in general and the proper limits on the
discretionary powers of the executive branch in particular, took pride of place within the
national political scene in 1937, the foundation for further debate about the proper structure of the merit system was being laid by the President’s Committee on Administrative
Management (or the Brownlow Committee, as it was more commonly known).
The Brownlow Committee was appointed by President Roosevelt in March of 1936 to
study the executive branch and make recommendations regarding its organization. The
committee offered its recommendation in a report published in 1937. This report provided
the central framework for the ensuing decade’s debates about administrative structure
within the federal government.171 The committee’s recommendations were broad and
many of them are discussed in more detail later in the book.172 Those of most interest
to us in this chapter discussed desirability of a centralized and empowered civil service
agency within the executive branch. While sweeping, the committee’s recommendations
regarding the operation of the civil service had, for the most part, been discussed before.
The principal recommendation in this regard called for the Civil Service Commission to be
168
Van Riper [1958], pp. 334-335.
293 U.S. 388 (1935)
170
295 U.S. 495 (1935).
171
Van Riper [1958], pp. 336-337.
172
See Section 6.2.5.
169
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given responsibility for all federal personnel matters. The committee also recommended
that the Commission, per se, be replaced by a single director.173
As one might expect given the Committee’s composition and the fact that it reported
to President Roosevelt, the Committee’s report was received somewhat differently by
the president and Congress, respectively. The proposals served as a focal point in the
unfolding struggle between the two elected branches for control of administration amidst
the greatly altered federal governance structure that was emerging from the New Deal.
On one side, Roosevelt and his advisors were focusing their efforts on solidifying control
of the federal government. As the 1938 elections approached, Roosevelt’s potential gains
from doling out patronage were arguably outweighed by the general disorganization and
management costs inherent to a government in which vast swathes of the bureaucracy
were essentially short-term positions. On the other side, the typical member of Congress
had little to gain – at least at an individual level – from ceding putative control over
the awarding of government positions. Furthermore, the emergence of the Conservative
Coalition in response to Roosevelt’s court-packing plan in 1937 had clearly delineated
the electoral battle lines.
Roosevelt’s efforts to deny to incumbent Democrats who were not ardent supporters
of his legislative program renomination in the 1938 primary elections, in addition to solidifying the burgeoning alliance between conservative Democrats and the Republican party
within Congress, led to charges that federal employees – particularly within the Works
Progress Administration – had been an instrument in Roosevelt’s strategy. Coupled with
the hardening of the ideological divide within Congress, these suspicions contributed to
the passage of the Hatch Acts of 1939 and 1940, to which we turn shortly. The months
leading up to the election of 1938 witnessed several moves by both Roosevelt and Congress
in response to the Brownlow Committee’s report that deserve separate mention, to which
173
Van Riper [1958], p. 337.
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we now turn. Following that, we return to consider the 76th Congress, which was involved in what Van Riper terms an “almost convulsive movement to renovate the civil
service system.”
Congressional response. While the 75th Congress for the most part declined to
enact the Brownlow Committee’s recommendations, it did take a significant action with
respect to the extent of the classified service. The Ramspeck-O’Mahoney Act placed
presidentially-appointed postmasters within the classified service and and repealed their
four-year terms.174 However, as the Act did not remove requirement of advice and consent
from the Senate, the positions inhabited a middle ground between “merit” and “patronage.”175 The passage of the Ramspeck-O’Mahoney Act presaged the battle between
Congress and Roosevelt in the 76th Congress.
Presidential initiatives. Roosevelt responded to the recommendations contained
in the Brownlow Committee’s report through a series of executive orders. The first two
of these were promulgated the day before the enactment of the Ramspeck-O’Mahoney
Act. The first, executive order 7915, revised the civil service regulations for the first
time since 1903.176 Executive Order 7915 prohibited “blanketing in” those who had been
appointed in a noncompetitive fashion. In addition, of particular interest with respect
to our focus on task-specific expertise, the Order further required that
“All examinations for professional or technical positions or positions which
under existing executive practice are filled only by persons having professional
or technical training shall be formulated by the Civil Service Commission in
174
Fowler [1945], p. 56.
As discussed in more detail below, this would remain true until the passage of the Postal Reorganization Act of 1970, which transformed the Post Office Department into an independent agency and
renamed it the United States Postal Service.
176
Van Riper [1958], p. 338.
175
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collaboration with the head of the affected department, independent establishment, or corporation, or his designated representative, and shall make
due allowance for the particular training, experience, and skill regarded as
requisite under existing administrative practice.”177
Roosevelt’s second order, Executive Order 7916, extended the classified service to the
maximum extent possible – including all positions that were initially unclassified at the
time of their creation but over which the President had, by statute, been granted the
discretion to bring within the classified system. In addition, it preempted attempts by
subordinate executive branch officials to circumvent the Order – which contained exemptions for “policy-determining positions” and “other positions which special circumstances
require should be exempted”178 – by requiring that such determinations be made through
Executive Order.
Executive Orders 7915 and 7916 firmly asserted central Presidential control of the
classified service. As discussed earlier, moves toward this point had occurred in fits and
starts since the terse, but broad, Congressional grant of personnel management authority
to the President in 1871. What differentiates Roosevelt’s strategy in 1938 is context: in
addition to being surrounded by a much broader and deeper governing apparatus than
any of his predecessors, Roosevelt was – at the time of the promulgation of the Orders
– engaged in a struggle where the stakes, in terms of both policy and electoral success,
were historically and unambiguously high.
The Battle Before the War: 1939-1940. The Hatch Act of 1939 prohibited
political activities by federal employees179 This outcome is to some degree ironic, as it
contributed to the insulation of the civil service. Put another way – the Hatch Acts went
177
Executive Order 7915 (June 24, 1938), Rule III (4).
Executive Order 7916 (June 24, 1938, § 1.
179
The amendments enacted in the Hatch Act of 1940 extended the provisions to state and local
employees whose salaries were funded by the federal government.
178
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a large way towards insulating the federal bureaucracy from charges of political (i.e.,
partisan) bias.180
While passage of the Hatch Act of 1939 was at least partly a response to the widespread
suspicion that federal employees had attempted to exert partisan influence in the 1938
midterm elections, it is important to recognize the degree to which the Act actually furthered the centralization of the executive branch. For example, an important element of
the Hatch Acts – which in terms of the activities they prohibited were in essence statutory ratification of prohibitions that had been in the Civil Service Rules since 1896181
– was the structure of the Act’s enforcement mechanism. The Act created a uniform
punishment system that required that all violators of the Act – as judged by the Civil
Service Commission – have their pay withheld and, at least initially, termination was
automatic upon determination of guilt.
While the Hatch Act of 1939 is arguably the most prominent instantiation of the
battle between the 76th Congress and President Roosevelt for control of the federal bureaucracy, they were part of a very quick sequence of statutes that effectively modernized
the civil service – and, somewhat ironically, did so by granting Congressional imprimatur
to the pith of the Brownlow Committee’s recommendations. Specifically, the Committee’s recommendation that the classified system be extended “upward, outward, and
downward” was borne out by two important statutes enacted during the 76th Congress:
the Social Security Amendments of 1939 and the Ramspeck Act of 1940. The Social
Security Amendments of 1939 required states seeking to receive federal welfare funding
180
We intend this statement to be viewed as being focused on the perception of the bureaucracy both
within the elected branches and the electorate as a whole. Whether the Hatch Acts actually affected the
true political biases of the bureaucracy – however one wishes to measure that concept – is a separate
question, of course.
181
Rule II(2) of Executive Order 89 (May 6, 1896) states “No person in the executive civil service shall
use his official authority or official influence for the purpose of interfering with an election or controlling
the result thereof.” The Act of 1940 clarified that the purpose of the Hatch Act was to extend this
prohibition to non-policy, unclassified positions, which in 1939 comprised approximately 40% of the
federal public service (Van Riper [1958], p. 341.).
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to institute merit systems for all employees whose salaries were in any amount paid from
those funds. This Act was simultaneously narrow and broad: it applied to a limited set
of employees in any given state, but it applied to all states.
For our purposes, the Ramspeck Act of 1940 represented in some the coup de théâtre
of the awkward eight-year relationship between the policies and processes of the New Deal
and the principles of merit and stability embodied by the civil service. Most notably,
it authorized the President to classify nearly all positions not already within a merit
system (some of which, like those employed within the Tennessee Valley Authority and
the Foreign Service, were separate from the classified system administered by the Civil
Service Commission). For the first time, Congress allowed the classification of unskilled
laborers. Equally important in terms of discerning part of Congressional motivations in
enacting the Act is the requirement that any employee who had been appointed outside
of the merit system to pass a (noncompetitive) examination prior to attaining permanent
status within the classified service. Thus, Congress was not simply “blanketing in” the
vast legions of presumably loyal Democrats who had joined the public service over the
previous 7 years. Rather, obtaining tenure required at least a modicum of expertise.
The Act empowered the President, with the advice of the Civil Service Commission,
to modernize the classification system. Specifically, the Act authorized the President to
extend the provisions of the Classification Act of 1923 to the field offices. In addition,
the Civil Service Commission was authorized to systematize the efficiency rating systems.
Prior to the Act’s passage, the Commission’s was unable to enforce any uniformity within
or across agencies’ metrics. This power was expanded in 1941, when Congress required
that each agency apply its own efficiency rating system to its field offices. The demands of
World War II, followed by the difficulties of retrenchment, prevented wide implementation
of either of these modernizations for several years after the Act’s passage.
Viewed only from a policy perspective, there is no simultaneously succinct and ac148
CHAPTER 4. THE FEDERAL CIVIL SERVICE
curate way to explain Roosevelt’s relationship with the civil service. However, once one
considers the importance of reducing costs and increasing output through the encouragement of talented individuals to pursue careers in the civil service, the dynamics are
more easily reconciled. Patronage during Roosevelt’s first term was central to obtaining
Congressional sanction of his policy goals. Once statutory authority had been granted to
much of his program, Roosevelt’s potential gains from doling out patronage to members
of Congress was outweighed by the increasing importance of securing both the reality
and perception of skilled and reliable policy implementation by agents within the array
of New Deal agencies. Obtaining skilled employees was partially aided by tenure security,
which was revitalized in 1936 and then rapidly expanded between 1938 and 1940. Noting
that Van Riper conceived of “political neutrality” as synonymous with “non-partisan,”
the following description of the state of the civil service immediately prior to World War
II captures well the conditions for expertise development described in Chapter 2:
“The basic criteria of the merit system – (1) selection by examination,
(2) tenure for good behavior, and (3) political neutrality – had been met for
most of the federal service.”182
World War II: 1941-1945. The war mobilization was understandably taxing for the
Civil Service Commission. Roosevelt’s executive orders of 1938 and 1939 had tightened
the Commission’s connection to the President and the Hatch Acts and Ramspeck Act
of 1940 had granted statutory enhancement and affirmation of the Commission’s implementation and enforcement powers. Furthermore, the Commission’s experiences in 1917
during the mobilization for World War I created a common ground for acceptance of the
need to centralize the Commission’s internal operations. Accordingly, the Commissioners delegated their collective authority to Commissioner Arthur S. Flemming in matters
182
Van Riper [1958], p. 360.
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relating to the unfolding emergency.183
The Commission, and the conception of a merit-based civil service in general, faced
a number of challenges during the mobilization and war effort that are rarely encountered during peacetime. While the federal government had experienced a similarly rapid
expansion of employment during the first years of the New Deal, the Commission’s experience during that time was one of relative deprivation in terms of both resources and
responsibilities, as few of the new positions were in the classified service. Indeed, this
experience – and the difficulties encountered as a result of the haphazard amalgamation of patronage and merit systems that quickly emerged in the mid-1930s – led the
Commission to confront the question of exemptions headfirst. In 1940, the Military Affairs Committee of the House of Representatives considered a blanket exemption for the
War Department. Commissioner Flemming testified before the committee and promised
that the Commission would not only not stand in the way of recruitment by the War
Department but, to the contrary, would help facilitate the development of methods and
relationships that would enhance the Department’s ability in “obtaining qualified personnel.”184 While it is unclear whether this promise preserved the Commission’s authority,
Congress did not exempt the War Department from the classified system. At least as
important for a variety of reasons was President Roosevelt’s support for the Commission’s efforts with respect to the mobilization. Overt examples of this support are offered
in Executive Orders 8257185 & 8564186 which granted to the Commission the unilateral
power to make exceptions to civil service rules for positions related to national defense.
These orders were necessary due to the provisions of Executive Order 7916, as discussed
earlier. These Executive Orders also implicitly reinforce Roosevelt’s efforts to maintain
183
Van Riper [1958], p. 365.
Van Riper [1958], p. 367.
185
September 21, 1939.
186
October 8, 1940.
184
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centralized authority over the operations of an increasingly sprawling executive branch.
With its authority at least initially confirmed by both of the elected branches of
the federal government, the Commission faced a relatively novel problem. Over fifty
years old, the members of the Commission understandably paid some attention to longrun implications of its wartime procedures. Foremost among these was the question of
how to treat those who were appointed outside of the civil service rules. What type
of tenure protections should they be granted? The main issue from our perspective is
that the need for expertise and competence in the civilian bureaucracy was, if anything,
exacerbated by the national emergency. However, the Commission could not monitor
the exemptions in any detail. First, the rapidity with which federal employment grew
made the prosecution of constant and reliable monitoring infeasible and, second, the
typical rationale for the exemption was that the Commission’s traditional procedures
were unsuitable for the position in question. Accordingly, the Commission’s compromise,
supported by President Roosevelt, was to extend tenure protections to such employees
until, ultimately, six months after the conclusion of the emergency.
Post-war retention policy was complicated by the draft. The Selective Training and
Service Act of 1940187 established a right to one’s job after returning from military service.
The Commission was faced, then, with the need to satisfy requests to not only replace
federal employees who had been drafted, but to do so with the expectation that the
individual being replaced might indeed return for his job. By early 1942, the Commission
had essentially closed the door to the classified system; nearly all hiring by the federal
government during the war was on a temporary basis. In addition to clarifying the status
of the mass of rapidly hired new employees, the Commission’s approach rationalized its
near-complete relaxation of merit examinations during the war. After all, if the new hires
would not be entering the classified system, there was arguably less need to require that
187
54 Stat. 885.
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the entrants were qualified.
4.7
Sustaining Expertise: 1946-2000
After World War II, the United States faced highly uncertain prospects in both economic
and foreign affairs. Would the Great Depression return? What would happen in Europe?
What would the United States do with Japan and the Pacific territories? These were
just a few of the uncertainties that made the retrenchment following the war’s conclusion
differ in a wholesale fashion from all of the nation’s prior retrenchments. For example,
while both economy and efficiency always represent potent rallying cries when addressing
the nature (particularly the size) of the federal bureaucracy, the vast administrative
apparatus erected during the New Deal was for the most part still viable both in terms
of statutory authorization and reasonableness of first principles. The combined pursuit
of economic stability and military preparedness in the late 1940s provided sufficient
justification for the continuation, consolidation, and amplification of federal intervention
in industrial, scientific, and social affairs.
The Truman Administration. From the perspective of managing the public service,
Harry Truman presided over one of the most tumultuous environments in American history, managing the end of a world war, dealing with the practical difficulties of retrenchment, confronting the bipolar realities of the post-war world, and ultimately encountering
an essentially new dimension of the tensions between his role as Commander in Chief and
Chief Executive of a civilian government during the mobilization for, and prosecution of,
the Korean War. Indeed, against this backdrop, the importance of the civil service – and
the expectation of its sustenance – was demonstrated by the report of the first Hoover
Commission in 1949. Somewhat ironically, given Truman’s lukewarm reception of it, the
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commission focused on questions close to those considered by the Brownlow committee, and gave considerable thought to how best to organize the executive branch so as
to simultaneously lessen the President’s ever-growing management burdens and provide
him with policymaking and administrative expertise.188 To this end, the commission
supported practical management reforms – including matters related to pay, classification, recruitment, and promotion – that would further the development of a career civil
service.189
The report’s recommendations led to the passage of both the Classification and Reorganization Acts of 1949. For our purposes in this chapter, the Classification Act figures
prominently. It amended the classification framework established in 1923 by creating the
General Schedule, which collapsed the five categories established in the Classification Act
of 1923 into two.190 In addition, the Act significantly decentralized classification authority, allowing agencies more flexibility in matters of internal personnel management. In
Patricia Wallace Ingraham’s words, the Act recognized “that the top levels of the career
civil service were characterized by special policy and management expertise.”191 The
Act also authorized a study of efficiency ratings. The product of this study prompted
the passage of the Performance Ratings Act of 1950, which simplified and partially decentralized control of efficiency ratings, but also weakened the incentivizing power of the
ratings by emphasizing considerations of factors such as veteran status and seniority.192
Labor was a prominent issue during Truman’s Administration for a variety of reasons.
188
Truman’s reception of the commission is more easily understood, of course, once one recalls that (the
Republican-controlled) Congress’s support for its creation was at least partially due to the presumption
that the Republican party would retake the White House following the 1948 presidential election (Arnold
[1976, 1998], Pemberton [1986]).
189
Van Riper [1958], p. 459.
190
in addition to streamlining the 1923 Act’s system, the 1949 Act provided for a class of “supergrades”
at the top of the public service. Appointments and promotions to the top twenty-five of these positions
required Presidential approval.
191
Ingraham [1995], p. 40.
192
Van Riper [1958], p. 435.
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In particular, the Taft-Hartley Act of 1947 represented a broadly anti-union reform of
labor law.193 Amending the Wagner Act,194 the Taft-Hartley Act prohibited strikes
against the Federal government. In addition, it prohibited corporations and unions from
contributing to candidates in, or spending on, Federal elections.
The Eisenhower Administration. The inauguration of President Eisenhower in 1953
represented the first change in partisan control of the White House in two decades. In
addition to inheriting a talent pool containing few (trusted) Republicans with any significant federal experience, Eisenhower was presented with a federal government that
was qualitatively different in sheer size as well as breadth and depth of reach into the
American economy and society at large. Not since the Wilson administration had the
realities of politics and administration combined to focus such attention on the downsides
of tenure protections – principally, the strictures imposed on subsequent Presidents and,
more broadly, the reduction in the electoral responsiveness of the bureaucracy. Eisenhower’s first initiative in response to these realities was the creation of “Schedule C,” a
list of positions exempted from the classified system. These positions were essentially
policy-determining and confidential in nature.195 Part of the intent of Schedule C was
to create a class of federal employee, directly responsible to the President, between the
positions subject to advice and consent and the career public service.196 The second
Hoover Commission, created by Congress in 1953, issued a report in 1955 that recommended that the civil service be more explicitly structured in a fashion that recognized
the classical ideal of a division between politics and administration while also cognizant
of the impossibility of a clear and uniform distinction. Along these lines, the Commission
proposed the creation of a senior level within the career service, the Senior Civil Service,
193
61 Stat. 136. The Act was passed over Truman’s veto.
The National Labor Relations Act, 49 Stat. 449.
195
Mosher [1982], p. 91.
196
Ingraham [1995], p. 52.
194
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which was to be staffed by politically neutral individuals with exceptional administrative expertise. The members of this service would ideally be more easily transferred to
where they were needed by the President. In line with the role of tenure protections in
Conclusion 3, the Commission proposed that rank, salary, and status should be vested
in the individuals within the Senior Civil Service, as opposed to being attached to the
offices they might variously hold within the federal government.
The Commission’s description of its proposed Senior Civil Service is particularly illustrative of the dynamic incentives explored in the theory presented in Chapter 2:
“Within the Senior Civil Service two ranks or groups may be needed eventually to provide recognition for advancement and, also, in the upper group,
to mark men who are qualified for the more responsible posts. At the outset
they should be constituted as a single group.”197
Furthermore, and foreshadowing developments over the next two decades, the Commission promoted employee development and executive training within the federal service.
Specifically, the Commission argued that the goals of efficiency and economy would be
best served by reducing turnover.198
The commission’s recommendations were partially translated into statute with the
enactment of the Government Employees Training Act of 1958.199 The Act focused
attention on the burgeoning difficulties the federal government was encountering in the
recruitment and retention of talented employees. Section 2 of the Act states
“it is necessary and desirable in the public interest that self-education, selfimprovement, and self-training be supplemented and extended by Governmentsponsored programs for the training of such employees in the performance of
197
Stillman [1982], p. 84.
Van Riper [1958], pp. 517-519.
199
72 Stat. 327.
198
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official duties and for the development of skills, knowledge, and abilities which
will best qualify them for performance of official duties. . .”
While the Act was at best a limited success,200 its passage symbolized the growing awareness within both Congress and the executive branch of the need to offer positive incentives for the development – and retention – of expertise within the public service. This
awareness was awakened largely by the combination of two external forces – the emerging demand for technical expertise (e.g., the space race) and the retirement of the New
Deal generation of public servants – and these forces would not subside in the coming
decades.201
The Kennedy and Johnson Administrations. Civil service reform during the
Kennedy and Johnson administrations focused more closely than their predecessors on
the voluntary nature of federal employment. President Kennedy established limited collective bargaining rights in 1962 with Executive Order 10988. This was closely followed
by the passage of the Federal Salary Reform Act of 1962,202 which recognized that the
federal government was competing with the private sector for talented employees. The
Act authorized the President to propose pay scales and charged him with maintaining
comparability with the private sector.203 The Act also required performance review for
within-grade pay increases and provided for accelerated within-grade salary increases for
exceptional performance.
Unsurprisingly, public sector unions played a role in passage of this, and other, legislation dealing with compensation. It is important to note, however, that while federal200
Ingraham [1995], p. 69.
In addition to the Government Employees Training Act of 1958, Congressional notice of the problems
of retention and recruitment of skilled employees was provided by amendments to the Classification Act
of 1949 allowing more flexibility in pay for the purposes of recruiting and retaining employees and the
Government Employees’ Incentive Awards Act of 1954 (Titles II and III, respectively, of 68 Stat. 1105).
202
76 Stat. 843.
203
Ingraham [1995], p. 95.
201
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employees-as-a-constituency motivations clearly form part of the explanation for the reforms in 1962 and, perhaps as a result, the federal government taken as a whole is arguably
more generous in its average level of compensation than the private sector, the federal
government was (and is) nonetheless less generous to higher-ranking employees than the
private sector.204 For our purposes, this is enough, as we do not seek to understand the
redistributional role of government compensation and higher-ranking positions subsume
those holding policy authority requiring significant specialized expertise. Furthermore,
in the theory presented in Chapter 2, the relevant consideration is the dynamic wage
profile. Specifically, as long as the government wage in the second period (later in one’s
career) is less than the prevailing private sector wage for an individual with expertise,
the conclusions of our analysis follow.205
Aside from the 1962 Act, the majority of policy change with respect to the federal public service in the 1960s was related to the social and economic programs of the
decade: issues relating to the racial and gender composition of the federal service took
center stage in both statutory and executive actions with respect to the management
of the public service. Also, the ever-intensifying war effort in Vietnam to some degree
diverted attention from the civilian agencies. In addition, growing public sector unionization was fairly rapidly altering the political environment in which discussions of civil
service matters took place. Finally, as the decade progressed, the baby boomers began
entering the workforce at an increasing rate, alleviating one of the first-order causes of
the recruitment and retention difficulties of the 1950s. Accordingly, the next significant
reform would not occur until midway through Nixon’s first term.
204
For example, see Johnson and Libecap [1994], pp. 108-113.
Indeed, Johnson & Libecap’s results with respect to the returns to tenure (pp. 113-116), while hard
to interpret due to the lack of accounting for survivorship bias, bear out this presumption: salary growth
in their estimation is largely determined only by time in service. Taken at face value, as Johnson &
Libecap argue one should, these estimates suggest that continued employment in the federal service (by
those that chose to do so) led to under -compensation in relation to private sector wages.
205
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The Nixon Administration. From the outset, President Nixon adopted an aggressive
stance toward the federal bureaucracy. A confluence of President Nixon’s ideological
goals and external events led to a a paroxysmal shift in the structure and operation of
the historical anchor of federal patronage: the post office. The failure of the Chicago Post
Office in the fall of 1966 had initiated a very public discussion of fundamental reform
of the Post Office Department, which was at that time utilizing outdated and onerous
procedures.206 President Johnson had appointed the President’s Commission on Postal
Organization, better known as the Kappel Commission, in 1967 in response to the crisis.
In 1969, Nixon, along with his Postmaster General, Winton M. Blount, declared that
political considerations would no longer be taken into account in postmaster appointments.207 Blount had been appointed by Nixon specifically with the goals of shepherding
the Kappel Commission’s proposal through Congress and managing the transition of the
Post Office from a Cabinet-level department to a quasi-government corporation. The
commission’s report led to the passage of the Postal Reorganization Act of 1970, which
restructured the Post Office Department as a quasi-independent entity, an independent
executive agency that, for all intents and purposes, was (and is) a government-owned corporation. In several ways, this reform is entirely congruous with the analysis in Chapter
2 On the one hand, the Postal Service was arguably created precisely because patronage
was not sufficiently important to warrant continuance of the clearly tedious effort required
to sustain Congressional overseeing of its staffing and operations.208 On the other, the
Post Office was one of the primary interfaces between the citizenry and the federal government – accordingly, its performance was important to the members of Congress. In the
intervening 40 years, the resulting organ, the United States Postal Service, has increased
efficiency (measured both in terms of service and cost) by several orders of magnitude.
206
Biggart [1977], p. 413.
Mosher [1982].
208
Biggart [1977], p. 415.
207
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To the degree that autonomy brought greater security for postal employees, the evolution
of the modern Postal Service – especially in contrast with the dysfunctional Post Office
it supplanted – is consistent with Conclusion 3.
The Federal Pay Comparability Act of 1970 established a more explicit seat at the
table for public service unions in the determination of federal salaries, as well as both
broadening the President’s discretion to set pay schedules and streamlining the procedures by which he could do so.209 The Act was expected to “enable the federal government to compete fairly with private firms in attracting and retaining a well-qualified
work force.”210 The Act reflects the widespread understanding at the time that federal
employment was seen as unattractive by highly skilled members of the workforce and
that this difficulty was largely due to personnel policies, such as wages and opportunities
for advancement.211
The Nixon Administration’s most enduring impact on the federal civil service resulted
from the Watergate scandal and ensuing disclosures of the Administration’s sustained and
pointed efforts to circumvent the civil service system. Specifically, President Nixon was
distrustful of many of the career bureaucrats who were responsible for implementing
his administration’s priorities and initiatives.212 In addition, Nixon initially reorganized
the executive office so as to streamline the channels through which he would receive
information and advice. These efforts were partially prompted by the recommendations
of the Ash Council,213 as well as partially by the relatively small number of individuals
trusted by Nixon with administrative expertise.214
209
Johnson and Libecap [1994], pp. 104-106, Ingraham [1995], p. 59.
Congressional Budget office [1976], p. 3.
211
Stanley [1964], Davis [1970], pp. 52-66.
212
Knott and Miller [1987], pp. 241-242.
213
Knott and Miller [1987], pp. 160-162.
214
Hess and Pfiffner [2002], pp. 107-113.
210
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The Carter Administration. Civil service reform featured prominently in Jimmy
Carter’s presidential campaign.215 In early 1978, President Carter submitted to Congress
Reorganization Plan #2, which proposed abolishing of the Civil Service Commission and
replacing it with a singly-headed Office of Personnel Management. These efforts led to
passage of the Civil Service Reform Act of 1978 (CSRA), which made several fundamental
changes to the structure and management of the public service. Mirroring the Senior Civil
Service proposed by the second Hoover Commission, the CSRA replaced the supergrades
of the General Schedule (GS 16, 17, & 18) with the Senior Executive Service (SES), which
offered increased pay and benefits to the highest ranking bureaucrats while also altering
tenure protections – while the members of the SES were still removable with cause, tenure
within the SES was in the employee, rather than the position.216 Officials within the SES
can be transferred much more easily by their politically appointed superiors than was
the case prior to 1978.
The CSRA also created a merit pay scheme for career bureaucrats in supervisory
positions (Grades GS 13, 14, & 15). The Act, while representing a fundamental change
in several important elements of the federal government’s structure, was underfunded
from the outset in several key areas (for example, the Office of Special Counsel and the
Merit System Protection Board) and many of the Act’s intended beneficiaries, as well as
some of its guiding principles, soon faced a lack of support within the executive branch
once President Reagan took office in 1981.217 Nevertheless, much of the CSRA remains
in force, and the Act’s themes of performance-based incentives, targeted resources for
recruitment and retention of talented employees, and career development through training
and education still play important roles in policy debates about the public service in the
early 21st century.
215
Ingraham [1984].
Ingraham [1984].
217
Ban [1984].
216
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4.8
Conclusion
If Congress institutes a strict notion of accountability by requiring that expert bureaucrats use all policymaking information as Congress would use it, Congress would simultaneously undermine the value of expertise to the bureaucrats in the first place.218 A
bureaucrat deciding to acquire expertise knows in this case that Congress will direct its
application, and given any ideological conflict between the bureaucrat and Congress, this
is equivalent to expropriation by Congress of some of the value of the bureaucrat’s investment. This is a standard hold up problem: if the agent can sink a costly investment and
the principal can direct its use away from the agent’s preferences, it lowers the benefit
to the agent of making the investment at all. The result can be that the bureaucrat is
less informed when this hold up problem binds than when it does not. For instance, a
social service agency may find it less worthwhile to develop new administrative capacities
because it foresees that the legislature will force it to use those capacities to screen out
benefit recipients that bureaucrats consider deserving. Alternatively, competent agents
may decline to seek employment in the civil service because they do not share the values
of political principals, and believe that those principals would direct the agents’ expertise
to ends and policies they do not prefer.
These possibilities highlight that instituting merit selection of civil service employees
is not alone enough to ensure expertise in bureaucracy. Selecting the most meritorious
members of a group who voluntary apply for the civil service will not induce potential
agents to self-select into it, if they believe their efforts and expertise will be applied to
pursue goals they do not share. Nor will it induce those agents already in the civil service
to continue to invest their time and energy in maintaining and expanding their expertise.
In short, expertise in bureaucracy is not simply a matter of selecting agents with the
218
This point can be seen in the work of several scholars. Two notable examples are Gilligan and
Krehbiel [1990] and Bendor and Meirowitz [2004].
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right “type,” in the language of information economics. It is also a matter of inducing
agents of any given type to take particular actions that expand their expertise. If the
problem is not simply one of exogenous merit, then selecting on that basis alone will not
build a high capacity bureaucracy, and merit selection by itself is inherently limited as a
path to building capacity.
Congress is obviously not forced to accept this hold up problem and accept a persistently inexpert, low capacity bureaucracy. But solving this problem requires a fundamental change in the steps taken to ensure accountability in bureaucracy. What Congress
must do is offer some incentive to bureaucrats for investing in expertise and inducing
agents who possess it to work in public service. As we show in a recent paper these
incentives can be offered by a civil service system that protects job tenure in conjunction
with grants of policy discretion creating a window in which agents can apply their expertise. This discretion acts as a “payment” for acquiring expertise because it allows agents
to tilt public policy in a direction which they prefer. This logic applies only to agents
who have a preference about the policy in question in the first place; it would do nothing
to induce expertise investment by agents who are disinterested about the actual content
of policy. This provides a sense in which it is useful for Congress for organizations like the
Occupational Safety and Health Administration, the Environmental Protection Agency,
the Department of Health and Human Services, etc., to be staffed by career bureaucrats
who take a personal stake in the policy areas in which they are involved. In the public
administration literature such agents are said to have high “public service motivation,”
and public administration scholars have argued, based on survey evidence, that public
service motivation tends to be high and important in the sustenance of efficiency and
effectiveness within bureaucratic agencies. In line with the results in Chapter 2, the empirical study of public administration supports the conention that discretionary authority
is a valuable currency that can induce expertise investment, but only by public servants
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who bring their own values to bear on the policy area in question (i.e., “zealots”).
Tenure protection offers two valuable assurances to bureaucrats investing in expertise
to be applied in public service. First, it ensures that agents have a long horizon over
which to reap benefits to compensate for their costly investment in expertise. If expertise
requires years of formal education and/or on the job training to acquire, this is obviously
important. Second, tenure ensures that agents who instill their administrative capacity
and policy expertise in their organizations will not be replaced by others who can then
redirect this expertise to competing policy ends. Interestingly, then, the merit system
does play a crucial role in underpinning expertise and capacity in bureaucracy, but a
more subtle one than is often realized. In terms of incentives to acquire endogenous
expertise, it is the merit system’s regulation of the “back door” of removal from the civil
service, not the “front door” of merit selection, that plays the leading role.
This theoretical sketch helps explain why the transformation of the federal bureaucracy from a system of Jacksonian spoils to a cadre of experts involved in policymaking
took almost half a century. Though the Pendleton Act of 1883 instituted one of the
incentive conditions for expertise development it did not by itself effect the change. Most
obviously of course this is because the Pendleton Act did not actually encompass the
federal civil service under the merit system; rather it enabled the President to expand
(or contract) merit protections defined by the Act. More fundamentally as of 1883 the
federal government was involved in few areas of regulation and policymaking. However,
as the demands on the federal government grew in the Progressive and New Deal eras,
both the informational complexities of public policy and the need to rely on bureaucrats
grew as well. By creating a policy infrastructure in which bureaucrats could effect and
pursue good public policy as they understood it, Congress created an environment in
which bureaucratic agents could invest in and apply their expertise. The culmination of
this process occurred under FDR when a new class of bureaucrat trained in economics
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and social science descended on Washington. These were not simply grants of discretion to agencies that had proven their expertise; rather the regulatory statutes offered a
discretionary environment in which expertise could be applied. This acted as a powerful incentive for highly trained agents to select into the federal service and develop the
specific expertise to take advantage of this discretion.
164
Part II
Sharing Information
165
Chapter 5
Agents for Policy Advice under
Separation of Powers
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The separate institutions sharing power in the federal government of the United States
constantly battle for influence over policy and protection of institutional prerogatives. In
some respects the munitions available to the president in this battle seem paltry and
overmatched.1 For instance, the Constitution empowers Congress as a formal agenda
setter in lawmaking, and the president holds only a qualified veto power. It also tightly
cordons the president’s power over spending, in that the president can neither spend
money without congressional appropriation nor withhold expenditures Congress has appropriated. And yet, abstracting from dramatic punctuations (e.g., Presidents Jackson,
Lincoln, and Roosevelt) and occasional retrenchment (e.g., Presidents Andrew Johnson
and Gerald Ford), the broad sweep of power relations between the legislative and executive branches favors the latter to an increasing extent. Indeed, it is not unreasonable to
describe the president’s modern role as chief policymaker as being inconceivable in 1789.
A key source of the president’s modern power is information. Scholars have recently noted that information underpins the president’s relative advantage with respect
to Congress in foreign and defense policy,2 because in these areas the president’s informational advantage with respect to Congress is particularly acute.3 More generally presidents enjoy power advantages relative to Congress in domestic as well as foreign policy
when they effectively coordinate their formidable informational resources.4 Abstracting from issue- and domain-specific characteristics, the power to persuade is generally
bolstered by information.5
The president’s informational resources, and informational advantages over Congress,
are the result of institutional choices. The Constitution does not specifically allocate
1
Neustadt [1960].
Lewis [2003], Canes-Wrone et al. [2007].
3
Dahl [1950], Schlesinger [1973].
4
Dickinson [1996], Rudalevige [2002].
5
Neustadt [1960], Schlesinger [1973].
2
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information to any institution.6 Instead it allocates other powers (e.g. the necessary and
proper clause in Article I) which in turn have been used to expand the informational
capacity of the federal government, particularly the executive branch. But useful informational capacity requires more than a group of experts. It requires experts that the
recipient of expert information, in this case the president and his executive agents, will
trust and heed. Of course, an expert of one’s choosing is more trustworthy and reliable
than an expert of one’s rival’s choosing because the expert and decision maker share the
same goals. When an expert and decision maker share the same goals, the decision maker
need not discount the expert’s advice on the grounds that the expert is trying to guide
the decision maker to a less-than-ideal result (from the decision maker’s point of view).
Scholars have stressed unilateral action by the president to develop the institutions
supporting this informational capacity (Nathan [1983], Dickinson [1996], Rudalevige
[2002], Krause [2002], Howell [2003], Lewis [2003]). Yet Congress has been an active
participant in designing institutions in the executive branch that support its informational capacity by giving the president access to high quality, trusted advisors. This is
accomplished by linking the policy preferences of the advisor with those of the president,
e.g. by conceding control over the institutions to the president. Congress’s participation
is necessary because these information gathering and processing institutions are usually
either created by acts of Congress, or pursuant to acts of Congress granting the president
limited authority to create administrative institutions (Lewis [2003]). Moreover, except
on a temporary and short-term basis, these institutions must be funded (or not) by acts
of Congress. Thus, we cannot consider the development of the informational resources
6
The Constitution does entitle the president to seek written opinions from principal officers of executive departments, and obligates the president to share information annually with Congress on the state
of the union. But these provisions mean that some actor must the information it has; they do not mean
that said actors will be well informed. The Constitution also empowers only the president to receive
foreign ambassadors, which arguably confers privileged access to information, but can also be construed
as a ceremonial matter.
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of the executive branch without considering the active role of Congress.
These facts present, we believe, a puzzle. Presidential power over policymaking has
grown vis-à-vis Congress. This changing power balance coincides with and partly results
from the president’s informational advantages vis-à-vis Congress. Yet Congress is a
willing partner and principal architect in the design of institutions that confer these very
advantages. Therefore, Congress is actively complicit with the president in creating the
institutions that have shifted power, at least in relative terms, to the president.7
In this chapter we present a theory that explains when members of Congress will
have an incentive to concede information, and therefore ultimately power, to the president in this way. In brief, the starting point is that either by dint of constitutional
grant or practical evolution, the president possesses discretion to act authoritatively in
specific areas. The discretion we refer to is unremovable and irreducible by statute; it
is a discretion to make policy-relevant choices that does not result from Congressional
delegations of power.8 Facing this fact, Congress faces a simple choice: does it prefer
that these policy-relevant choices are informed or not informed? We present a model in
which Congress prefers these choice to be informed; thus, it has an incentive to create the
powerful informational institutions attached to the chief executive. In our model, this
requires effective communication between the president and his agents, on one hand, and
information providers, on the other. Effective communication, in turn, requires a close
link between the policy preferences of these actors.
Put differently we argue that legislative provision of information for the executive
7
Silverstein [1996] notes a very similar dilemma, based on Congress ratcheting the president’s powers
in foreign and national security policy to ever-rising heights. Like Silverstein, we focus on congressional
participation in and support for the growth of presidential power. In our case, Congress’s incentives
stem from a desire for informed policymaking, taking as given executive authority it must live with and
cannot eliminate.
8
Congress may, of course, wish to increase the President’s discretion over substantive decisions, e.g.
over preparation of a national budget, and the logic of our model applies straightforwardly to such cases
as well. We will return to this in the next chapter.
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follows from executive discretion to act that Congress cannot fully eliminate. The institutions to provide this information are readily supplied by the legislature, given that
it cannot remove executive discretion and prefers that it be exercised in an informed
way.9 The contribution of our theory is to provide microfoundations for Congress’s role
in developing the institutional presidency.
Our argument is the reverse of a common one in the literature on bureaucratic discretion, which holds that discretion expands when executive (or bureaucratic) informational
advantages expand (e.g. Epstein and O’Halloran [1999]). Our theory is not a critique of
this standard result; it simply highlights a different, and previously underexplored, dynamic. In our theory executive discretion is relatively exogenous, rather than the choice
to be explained, and we seek to explain the development of informational institutions.
Though the model and much of the historical evidence in the next chapter is designated with the President as the final actor to determine policy, the logic is more general.
It suggests that Congress should link policy advisors and policy makers because this
maximizes effective communication between the two. Constitutional practice and text
sometimes define a role for the President in making policy, but not always. If so, Congress
should link policy advising bodies to the President or willingly capitulate when the President links them. If not, and allocation of policymaking roles is up to Congress, it may
have reasons not to invest those roles in the President. Congress may then instead invest
these functions in, e.g., independent regulatory commissions, or it may make all policy
decisions itself and leave the executive with purely ministerial (non-discretionary) duties.
Therefore, independent regulatory commissions or other restrictions on Presidential au9
In this sense our argument is related to the “unitary executive” debate. Calabresi and Yoo [2008]
contend that essentially every president in U.S. history has asserted his Constitutional right to control
the entire executive branch and to treat it as unitary. Our argument addresses the ostensibly more
puzzling incentive for Congress to arrange parts of the executive branch in a relatively unitary fashion.
That is, the unitary executive has not only a “demand side” from the president, but also a “supply side”
from Congress.
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thority cannot legitimately be interpreted as an challenge to this theory. Instead they
are a response by Congress to a situation in which it has (or Courts are willing to let
it take) Constitutional authority to restrict the President’s role in policy execution. It
is not at odds with our model that Congress may respond differently to such situations
than to situations where it does not have this authority.
Our formalization is based on the sender-receiver model of costless signaling; formally,
we leverage recent contributions in the theory of sender-receiver games to develop a model
of “delegated cheap talk” or cheap talk through agents. In the next section we present
the model and its motivation in greater depth, following which we present equilibrium
analysis. We then discuss implications for executive branch structure in a separation of
powers system.
5.1
Cheap Talk with Agents
Our argument extends the “cheap talk” or sender-receiver game to cover specifics of the
present application. This game was introduced in a seminal paper by Crawford and Sobel
[1982]; we sometimes refer to it as the “C-S game,” “sender-receiver game,” or “cheap
talk signaling game.” We focus primarily on intuition and motivation with some notation
added for clarity, though the verbal discussion is fairly true to the model.
The context in which we apply this model requires an agent who must implement
a policy. We consider this agent to be an agent of the President, and assume that implementation confers a measure of authority that Congress cannot reduce over what the
policy actually is. It is simplest to model the President as having complete authority
to select the implementing agent’s ideal policy outcome. Obviously this departs from
an advice-and-consent arrangement in which the Senate has a say in the implementing
agent’s policy goals. We make this departure in recognition of the fact that the President
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(i) is an agenda setter with respect to the Senate in the appointment process, which confers some bargaining power with respect to the Senate in nominations and (ii) has very
broad authority, almost unbroken since the Decision of 1789 (discussed further in the
next chapter), to remove executive officials for any reason, including political or policy
disagreements. Note that we are not assuming that the president has complete, instantaneous control over the preferences of every actor involved in policy implementation,
from the director of the Office of Information and Regulatory Affairs to the chairman
of the Federal Reserve Board. Rather we are exploring the implications of such control,
in those cases where it exists, for congressional support for the president’s informational
capacity.
Our context also requires policy-making to present informational demands on actors
in the process. We use the same simple structure ubiquitous in the sender-receiver game
literature: a commonly known mapping from a combination of policy choice (which the
policy process determines) and random shock (observable by only a subset of actors) into
policy outcomes (which actors ultimately care about).
The key issue we are exploring is how policy expertise/information is linked with
the executive’s preferences, given executive authority to make policy. We assume that
an expert agent exists, the expert has policy preferences qualitatively like any other
actor, and that Congress determines the content of those policy preferences. The last
assumption is equivalent to letting Congress determine the degree of presidential control
over the expert’s preferences. This is a special case of the control McCubbins et al. [1987]
noted that Congress exerts over agency preferences. For instance, Congress can require
the expert to be a plural body with party balancing requirements; can locate the expert
in the Executive Office of the President, a cabinet department, or independent agency
(thereby limiting presidential removal authority); can require Senate confirmation of the
expert; can require findings by the expert to be put on public record, subject to input
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from private actors (and can fund the participation of particular actors of its choosing);
and so forth. In all of these ways and more, Congress can determine the extent of its
own control, and of presidential control, over the preferences of bureaucratic experts.
At one limit, if Congress wishes to pin the preferences of policy advisors to those of the
president and executive officers, it can simply allocate complete control over the structure
of advisory and informational institutions to the president. At the other extreme, the
“ally principle” (Bendor and Meirowitz [2004]) implies that Congress would pin the
preferences of informational institutions to Congress itself.
For simplicity, our theory assumes that policy is ultimately implemented (i.e., chosen),
by an agent, referred to as r, who will receive policy advice in the form of a “message,”
denoted by m, from a policy advisor, who is denoted by s. In line with the fact that
agent r receives the message, we will refer to this player as “the receiver,” and similarly
refer to agent s as “the sender.” The receiver is assumed to be chosen unilaterally by
the President, whom we denote by P . The selection of the receiver is modeled simply as
allowing the President to dictate the receiver’s preference with respect to public policy
outcomes.
The message m contains information about the “state of the world” – a notion that is
intended to capture all facts that determine how the receiver’s ultimate policy choice will
be translated into a policy outcome. The state of nature is denoted by ω and is assumed
to be perfectly observed by the policy advisor s. After observing ω, the advisor chooses
his or her message, m, and conveys this to the receiver r. After observing m, the receiver
then chooses a policy, denoted by x.
Players in this game send or receive messages and/or make policy choices, but care
directly about neither of these things. Instead, they care about policy consequences or
outcomes.10 Following standard usage in the literature (but see Callander [2008]), we
10
That is why s’s message is “cheap talk”: the message itself does not directly matter for anyone’s
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assume that the policy choice x and the state of nature ω are both real numbers and
that the policy outcome, z, is determined as follows:
z = x − ω.
(5.1)
Utility functions for all players — s, r, C, P — are defined with respect to z. Each actor
has an “ideal policy outcome,” also a real number. Utility for each player declines in
the squared distance between the actual and the ideal policy outcomes. The further
the actual outcome is from the ideal outcome for any player, the worse off that player
is. This formulation, standard in sender-receiver games following Crawford and Sobel
[1982], implies that actors are risk averse with respect to policy outcomes. This “stateaction-outcome” framework is the same as used in the other theoretical chapters in this
book (chapters 2 and 7).
This analysis presumes that the policy advisor s is – and is known to be – a policy
expert in the same way that we represent expertise in Chapter 2: the advisor knows the
state of nature ω perfectly, while r only knows the probability distribution from which
ω is drawn. In a sense, this analysis presumes that the sender has been provided sufficient incentive to acquire policy expertise (in the sense of chapter 2) and has responded
accordingly.
The principal incentive of interest in this chapter, motivated by the substantive question posed earlier, concerns Congressional selection of the policy preferences of the policy
advisor s. In other words, when and why would Congress want the expert agent’s preferences to track those of the President rather than Congress itself? If Congress (1) cannot
directly select the policy preferences of the receiver and (2) prefers that the sender’s preferences be more similar to those of the receiver, then this model presents a clear argument
utility, including the sender’s; it matters inasmuch as it affects policy choices, and therefore policy
outcomes.
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in favor of Congressional support for jointly locating informational and implementation
functions within the executive branch – even though such a strategy may entail losing
control over (or, in some cases, access to) the policy information itself. We approach
this question formally by considering situations in which a unitary Congress, which we
denote by C, is allowed to directly determine the preferences of the policy expert s.
The presumption that Congress is a unitary actor (and hence can be thought of
as having “preferences” in the traditional sense) does more than greatly simplify the
model (though it certainly does this). It also by assumption rules out a competing
explanation for Congressional provision of informational supports for the executive: that
collective action or gridlock problems in Congress prevent it from guarding its collective
institutional interests. In our modeling strategy these types of arguments are immediately
void, and yet we still find Congressional support for informational institutions in the
executive branch. Therefore, the model shows that Congressional support for these
institutions is deeper than a simple inability to “get its collective act together.”
Summing up our model, the process begins by the President and Congress each sequentially choosing the policy preferences of the implementing agent r and the policy
advisor s, respectively. We represent these preferences as the agents’ most-preferred, or
“ideal” policies, which we denote by vr and vs , each of which is a real number. For
each agent, he or she is presumed to seek to minimize the distance between his or her
ideal policy and the realized policy outcome, z.11 As alluded to earlier, we allow each
of these ideal policies to be any real number: there are no exogenous constraints on the
preferences of those who the President and Congress may choose as their agents.
11
While we speak in terms of the institutional actors choosing the “preferences” of the administrative
agents, one can interpret the model equivalently if one assumes that the institutional actors instead
choose the administrative agents’ strategies. Similarly, vs and vr might be interpreted in looser terms
such as encapsulating such concepts as the “goal” or “mission” of s and r, respectively. Viewed in this
light, the theory highlights the incentives of institutional actors to achieve a shared purpose (or, perhaps,
a common “culture”) within administrative agencies.
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5.2
Sequential Choice of Agents: Three Versions
We analyze three sequential versions of the interaction between the players. Note that
in all three game forms, the preference of the receiver, vr , is always chosen by the President. This is designed to reflect situations, such as those considered in this chapter and
the next, in which the President or his agents determine policy implementation which
in turn has an important effect on the substantive content of policy. Thus, while the
relationship between the President and Congress differs across the three game forms we
describe below, the final choice of policy is always dictated by an agent whose preferences
were chosen by the President, P . We compare three structural arrangements—that is,
extensive form games—in this chapter.
Unified Control Form. The first of these represents a simple baseline: Congress is
completely removed from the administrative process. It has no decisions to make, while
the President chooses the preferences of both the implementing agent r and the policy
advisor s. We refer to this structure as the unified control form. This is not interesting
because of its empirical verisimilitude, so much as because of the comparison it presents
to the payoffs players obtain in more realistic cases. If utilities of C and P in a “more
realistic” game coincide exactly with utilities in the Unified Control game, that is a strong
statement about the primacy of the President in that “more realistic” game.
President-first Form (PF). The second form of interaction we analyze involves the
President choosing the preferences of the receiver r first and Congress then choosing
the preferences of the sender s after observing the President’s choice of the receiver’s
preferences,vr . We refer to this as the President-first form. This form represents situations in which the President has committed himself or herself to pursuing a particular
policy outcome (represented by vr ) prior to Congress having its final chance to revisit
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the proper goals of the informational apparatus.
Congress-first Form (CF). The third and final structure that we analyze in this
chapter reverses the order of the President-first form: Congress chooses the preferences
of the sender vs first and, after this choice is observed by the President, the President
then chooses the preferences of the receiver, vr . We refer to this final game form as the
Congress-first form. Analogous to the President-first form described above, this form
grants commitment power to Congress: the policy goals of the informational agent are
fixed and known at the time the President makes his or her choice of the preferences of
the implementation agent.
Though we name and can interpret these game forms in terms of the timing of choices,
the real issue that distinguishes them is not timing of but commitment to choices. If the
President turns over selection of top brass to a transition team that is sure to select
the president’s ideological clones, the equilibrium will follow that in the PF game even
though Congress might “move first” chronologically.
Superficially, it may seem strange that we consider sequential games, even though
we lack a clear substantive rationale to select one sequence over the other, rather than
a strategic form game in which Congress and the President make their selections simultaneously (more precisely, without either player observing the other’s selection). There
are two reasons for this. First, analytically: compared to the equilibria of the sequential
game forms, a “simultaneous” version would add a mixed strategy equilibrium that is
inefficient — worse for both C and P than some other equilibrium — because it entails
some chance that P and C fail to coordinate their selections to achieve effective communication. But as is standard in sender-receiver games, we are already focusing on the
most efficient equilibria,12 and applying the same selection criterion would eliminate the
12
The reason for this is that the most efficient equilibria reveal the upper limit of the degree of
informative communication that is consistent with players’ incentives. All cheap talk games involve
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additional mixed equilibrium of the strategic form game. Second, substantively: indeterminacy about whether P or C can commit to a selection first is not resolved by the
artificial assumption of simultaneity. Simply put, though we are agnostic about “who
goes first,” the interaction clearly is not simultaneous.
5.3
Political Goals: Information as a Public Good
Throughout this chapter, we assume that, ceteris paribus, all players – the President,
Congress, the receiver, and the sender – seek to minimize uncertainty about policy outcomes. (The ceteris paribus qualification of this statement is important, as we discuss
in more detail below.) In particular, we assume that each player’s preference over policy
outcomes is represented by the classical mean-variance payoff function.13 In less technical terms, the players’ preferences represent a desire for policy outcomes to be closer
to one’s most-preferred policy outcome and, furthermore, that the marginal disutility
from a policy outcome z (i.e., the amount one would pay to move the policy “one unit
closer” to one’s most-preferred) is increasing in the distance between z and the player’s
most-preferred policy outcome. This assumption implies that players dislike uncertainty
about the policy outcome, regardless of the expected policy outcome. To use a monetary
policy example, we assume that if the expected value of inflation is 4%, then players
would strictly prefer that inflation be certain to be exactly 4% than for there to be a
50% chance that the inflation rate will be 2% and a 50% chance that it will be 6%.
This assumption implies that all players prefer, ceteris paribus (in particular, fixing
equilibria in which the sender babbles nonsense and the receiver ignores it; what is interesting in these
games is when and to what extent informative communication is possible.
13
Formally, we assume that each player i’s payoff function is given by a quadratic loss function:
ui = −(x − ω − vi )2 ,
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the expected policy outcome), that the receiver r perfectly understands the state of nature ω following any message m that r receives from the sender s. In other words, this
assumption guarantees that players “like” informed policymaking, where “informed policymaking” in this framework is synonymous with perfectly transparent communication
between the policy expert s and the implementing agent r.
The agreement between players about the desirability of informed policymaking goes
only so far in an important respect, however. Specifically, the ceteris paribus qualifier the
sender would be willing to accept some noise in the messaging – i.e., some uncertainty
about policy outcomes – if the messaging strategy could alter the expected location of
policy outcomes by adopting a less transparent messaging strategy when communicating
the state of nature to the receiver. As we discuss throughout the analysis of the three institutional forms below, this willingness is never realized in equilibrium precisely because
the receiver is aware of it. In a nutshell, the sender can deceive the receiver only in a
limited fashion: in equilibrium, the sender is never able to fool the receiver into believing
that the expected value of the state of nature ω (conditional upon any message m that
the sender may send) is anything other than its true value, given the sender’s strategy.14
In any equilibrium, the receiver knows the sender’s “strategy” — the messages m that s
sends in any state of the world ω. What r does not know is ω itself. But r can “back out”
a (correct) probability distribution of ω based on the message m that s sends, because r
knows which ω’s lead to which m’s and the probability of each.
In cheap talk games, sender’s claim about ω embodied in the message m cannot be
14
A side note is in order at this point. We assume, for both analytical simplicity and comparability
with previous work in this literature, that the preferences of all four players are common knowledge
between the players. This assumption is obviously strong. However, it is also consistent with the tenor
of our assumptions in at least a limited sense, given that we are leveraging the assumption that players
dislike uncertainty, per se. This is a limited argument in the sense that the predictions that would follow
from a similar framework in which we allowed for mutual uncertainty about the actual preferences of the
sender and receiver, but common knowledge of those of the President and Congress, might differ from
the results presented here. We have not explored this direction.
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verified by the receiver, and for any state of nature, all messages are identically costly to
send. Crawford and Sobel [1982] showed that, in spite of the absence of any verifiability,
there can be equilibria in which the messages sent by the sender do carry some degree
of information. This possibility depends on the degree to which s and r share the same
preferences over policy outcomes. Messages will necessarily be less informative than the
sender’s actual knowledge of the state of nature — i.e., the receiver will ultimately be
less certain about the state of nature than the sender — unless the sender and receiver
have identical policy preferences.
This second conclusion is central to our analysis. The political principals in our
theory, Congress and the President, are constrained in their ability to directly make
policy. However, they share a desire for informed policymaking, which here corresponds
to the receiver being equally as informed as the sender. The reason is that if the receiver is
not informed by the sender, she will nevertheless not be “fooled” in equilibrium — she will
merely be uncertain, and policy outcomes will reflect this uncertainty, to the detriment
of C and P . This is so regardless of the difference in policy preferences between C and P .
Our analysis below explores how this incentive bears itself out in the political principals’
equilibrium behaviors in the three different structures of interaction described above.
Analysis: Dissonance, Advice, and Policy. Our analysis describes the outcome
of equilibrium behavior within the three interaction structures (i.e., game forms) described earlier in terms of three substantively relevant characteristics. The first of these
is dissonance, which denotes the distance between the sender’s most-preferred policy and
that of the receiver (i.e., ∣vs − vr ∣). This characterization of the behaviors of the President and Congress represents the divergence in policy goals of the politically appointed
decision-maker within the agency and those of agents that offer policy advice to him or
her.
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As discussed above, the results of Crawford and Sobel imply that, within our framework, Congress and the President have a common interest in establishing a system exhibiting zero dissonance, as this results in the most informative signaling between the
advisor and the agent responsible for promulgating the final policy. The informativeness
of this policy advice represents the second characteristic of equilibrium outcomes that
we are interested in. Succinctly, this informativeness is represented by the receiver’s (expected level of) uncertainty about the state of nature after observing the sender’s message
in equilibrium. In other words, how much has the receiver “learned” from the sender’s
message, on average? As the receiver’s level of uncertainty decreases, the informativeness
of the policy advice increases. As described above, the key result of Crawford and Sobel
[1982] for our purposes is that messages will be perfectly informative in equilibrium only
if the sender and receiver share the same preferences (i.e., dissonance is zero).
The final characteristic of equilibrium behavior upon which we focus in this chapter is
the expected location of and uncertainty around policy outcomes. It turns out that once
one knows the preferences of the political principals (i.e., vP and vC ), the equilibrium
policy outcome exhibits zero variance — there is no uncertainty in the outcome z. This
feature of the equilibrium is achievable only when President and Congress appoint agents
with zero dissonance; when this happens, the sender perfectly reveals its information to
the receiver, who can then perfectly tailor its policy choice to the state of nature. This
fact drives the political principals’ incentives to appoint agents exhibiting zero dissonance
in equilibrium, as the principals are presumed to care only about the policy outcomes,
not the preferences of their agents per se.
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5.4
Equilibrium Analysis
Unified Control Form. The following proposition characterizes equilibrium behavior
when the President possesses the power to choose both the sender and the receiver.
Proposition 1 In any equilibrium of the unified control game form, the President’s appointments to the positions of sender and receiver both share the President’s preferences.
Accordingly, there is zero dissonance and the policy outcome is always equal to the President’s most-preferred policy.
President-first Form. Analysis of the President-first interaction is driven by the fact
that, in all equilibria of the cheap talk game between the sender and the receiver, the
receiver’s subjective beliefs about the state ω are correct for any message the sender
sends in equiibrium. This implies that the receiver can (and will) always set the policy
x equal to the true conditional expected value of the state of nature ω, plus vr — thus
the expected policy outcome will always equal the receiver’s ideal policy outcome in
equilibrium.
Thus, the only effect that Congress can have on the equilibrium distribution of policy
outcomes is to make it more uncertain (i.e., increase its variance). Substantively, if the
President has already chosen the receiver’s most-preferred policy, vr , then Congress cannot affect the ideological bent of administrative policy through its choice of the sender’s
most-preferred policy vs in any way that benefits Congress. Given this fact, it follows
that the President should choose an agent with preferences identical to his or her own
(i.e., vr = vP ), secure in the knowledge that Congress will subsequently defer to this
choice when selecting the sender’s most-preferred policy.
Proposition 2 In any equilibrium of the President-first game form, the President’s appointment of the receiver shares the President’s preferences, and Congress’s optimal ap183
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pointment of the sender has preferences equal to those of the (already appointed) receiver.
Accordingly, there is zero dissonance and the policy outcome is always equal to the President’s most-preferred policy.
Proposition 2 claims that the President should choose a perfectly faithful agent as the
implementing authority, and that whatever authority the President chooses, Congress
should choose a policy advisor whose policy preferences perfectly match those of the
President’s appointee. This second conclusion is interesting in that it predicts that
Congress should always minimize dissonance within the President-first game form – even
if some external factor forces the President to deviate from his equilibrium behavior and
appoint an agent with preferences not identical to those of the President.
To understand this proposition, consider what would happen if Congress instead attempted to force a sender matching Congress’s policy preferences onto the President and
the President’s agent. This may seem like a tempting strategy for Congress to use access
to information to control the President’s use of her authority: If the President’s agent, the
receiver, thought the sender was always truthful about the state of the world, it would
follow the sender’s advice exactly. The sender, given its divergent policy preferences,
would then be able to mislead the receiver in some states, leading to a policy the sender
preferred but the receiver did not.
But the receiver, rational and therefore aware of this problem, would not give credence
to advice from this sender. It would expect that a sender with divergent policy preferences
expecting the receiver always to follow its advice would not be truthful about the state. In
equilibrium, if the sender’s and receiver’s policy preferences were close enough, the sender
would communicate some, but not all, of its information about the state of the world,
and the receiver would heed the partial information that was (truthfully) communicated.
The expected value of the policy outcome would equal the receiver’s ideal outcome, and
the policy outcome would have some variance due to the receiver’s partial information
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about the state.
Compare this to the arrangement specified in the proposition: Congress pins the
sender’s ideal point precisely to the receiver’s. The sender is therefore willing to reveal the
state of nature fully and accurately to the receiver, and the receiver knows this revelation
is trustworthy because it knows the sender’s incentives when they have identical policy
preferences. The expected policy outcome would remain at the receiver’s (and now also
the sender’s) ideal policy outcome. But now, since the receiver is fully informed about
the state, the policy outcome would exhibit zero variance around this expectation. That
this is not Congress’s ideal outcome is irrelevant: the expected outcome is the same in
equilibrium, and the variance is lower.
In the President-first game form, even though Congress would rather not face an implementing authority with preferences distinct from its own, Congress has no choice in
that matter. Accordingly, Congress’s preference for the executive to act on good information rather than strategically garbled, partial information, induces Congress to choose
an expert with preferences that match those of the Presidentially-appointed authority.15
Congress-first Form. While thePresident-first game form gives a decisive first-mover
advantage to the President, the corresponding advantage does not exist for Congress in
the Congress-first game form. Instead, it turns out that, in this game form, Congress has
mixed incentives. Specifically, Congress can pull the expected policy outcomes toward
its ideal point up to an extent. It does so by appointing a sender whose most-preferred
policy is not identical to the President’s. Congress’s optimal choice for the sender’s mostpreferred policy is a policy that is either equal to Congress’s most-preferred policy, vC ,
15
Though the PF game implies that Congress wants to “give it all away” to the President, no advisory
body has infinite capacity or perfect information. Congress clearly trades off the President’s access to
information on some margin. The point of the PF model is that this margin is not a strategic one of
withholding available information; instead it must be something along the lines of the cost of discovery
or the limits to what can be known by advisors ex ante.
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or a policy that is a fixed distance from the President’s most preferred-policy, vP . The
maximal extent that Congress can sway policy outcomes away from the President’s mostpreferred policy outcome is fixed and exogenous. Accordingly, Congress will get its ideal
policy outcome, vC , in the Congress-first game form only if the preference divergence (i.e.,
∣vP − vC ∣) is not too large.16 When the preference divergence is too great, then Congress’s
optimal choice (conditional on the President optimally responding after Congress reveals
its choice) is to choose the sender’s most-preferred policy to be equal to that of the
Congress possessing the maximal level of preference divergence with the President that
can appoint itself and obtain deference from the President.
Proposition 3 In any equilibrium of the Congress-first game form, there are two relevant cases.
• If the most-preferred policies of Congress and the President are close to one another
then, in equilibrium, Congress should appoint a sender with a most-preferred policy
equal to Congress’s.
• If the most-preferred policies of Congress and the President are not close to one another then, in equilibrium, Congress should appoint a sender with a most-preferred
policy a fixed distance away from that of the President.
In all cases, the President appoints a receiver whose most-preferred policy is equal to that
of the sender appointed by Congress. Accordingly, there is zero dissonance and the policy
outcome is always equal to the most-preferred policy of Congress’s appointee.
Note that, even in the Congress-first game form — where Congress’s strategic position
is at its strongest — Congress’s incentive is to condition the sender’s most-preferred
policy vs on the preferences of the President, vP , rather than its own preference vC . In
16
Specifically, in the leading example of Crawford and Sobel, this occurs if and only if vP − vC ≤ 16 .
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particular, whenever the President and Congress are not too closely aligned in ideological
terms, Congress’s agent’s preference will perfectly track the President’s, with a small
wedge separating them. Thus, paradoxically, it is only when Congress and the President
have similar policy goals that Congress can afford to select an agent that is its ideological
clone.
When the preference divergence between Congress and the President is large, the
preferences of Congress’s ideal expert differ from Congress’s own preferences and, furthermore, are completely determined by the President’s preferences. The most-preferred
policy of Congress’s ideal agent essentially “chases” those of the President as the preference divergence between the two political principals grows. This comparative static
emerges from Congress’s desire to maintain informative communication within the administrative hierarchy. Separation of powers — specifically the President’s authority to
choose the most-preferred policy of the implementing authority, vr — implies that the
President always retains some cards in interactions with Congress in the policy process.
An example of Congress’s equilibrium payoff function in an instance of the Congressfirst game is displayed in Figure 5.1.17 Congress’s equilibrium choice, vs∗ , is marked by the
vertical dotted line. Also marked in the figure is the type of signaling game that would be
played by the sender and receiver following each possible choice of most-preferred policy
for the sender, vs .18 As Congress concedes more to the President’s policy preferences,
the President becomes more willing to delegate to an authority with preferences closer
to Congress’s – capturing (along branches of the game tree that are never observed in
equilibrium) a type of “give-and-take” between the two institutional actors. Eventually,
if Congress concedes enough to the President, he or she is essentially willing to delegate
complete authority to the policy advisor in the sense of choosing appointing a receiver
The figure represents the case of vC = 0 and vP = 0.5.
That is, for each vs′ ∈ [0, 0.5] the figure describes the type of signaling behavior that would be played
in the most informative equilibrium of the vs′ , vr∗ (vs′ ) cheap-talk game.
17
18
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who shares the sender’s most-preferred policy (i.e., vr = vs ). Figure 5.1 illustrates that
the closest point at which this occurs maximizes Congress’s expected payoff. This is
the case even though Congress can obtain somewhat informed policy-making with less
extreme choices of the sender’s most-preferred policy, vs .19
E uC ( vs )
Uninformative
Equilibrium
Partially Pooling Equilibria
Separating Equilibria
v*s
vC
vP
vs
1/6
Figure 5.1: Congress’s Equilibrium Expected Utility in the Congress-first Game Form.
19
To understand why this is the case, simply consider the analysis of the President-first game form
and the following fact: for vs < vP − 16 , vr∗ (vs ) > vP − 16 . C’s choice of vs affects the expected policy
outcome solely through its effect on vr : thus, moving vs to a location further from vC results in both
expected policy outcomes that are closer to vC and less variance in the policy outcomes.
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5.5
Congress’s Agent and the President’s Preferences
Despite our agnosticism about the “correct” extensive form from a substantive standpoint, the (most efficient) equilibria of each game share some common properties that
are useful for understanding executive branch structure. Strikingly, across game forms
and for all levels of ideological conflict between Congress and the President, the sender’s
policy preferences are always close to the president’s policy preferences.
This is obvious in the President-first game form, where the sender’s and receiver’s
ideal point both coincide with the President’s. But it is also true in the Congress-first
game form. In this game, the sender’s ideal point is identical to Congress’s in some cases
— namely, when the president and Congress are ideologically close. So if vs = vC in these
cases, and vC is close to vP in these cases, then vs must be close to vP . If the President
and Congress are not ideologically close in the CF game, then vs is equal to vP minus a
small “cushion.” So vs is again close to vP , and is also perfectly correlated with changes
in vP .
The interesting aspect of this common feature across game forms is that the sender
is, by assumption in each game, the agent of Congress. The result means that Congress
cannot do better than ensure that an advising agent, chosen to serve Congress’s own
rational interest, is an ideological ally of the President. The reason is that if Congress
makes any other choice, the President and the President’s agents will simply ignore the
advice, because the advisor is not trustworthy. This in turn leads to executive policy
chosen with the benefit of even less advice and information than it already is. This finally
increases the uncertainty over policy outcomes and the chance of something disastrous,
to the detriment of Congress itself. Congress may prefer the president to heed the advice
of Congress’s ideological clone, or even to hem in the President’s ability to choose—but
both options are foreclosed to Congress in this model. To reduce uncertainty in policy
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outcomes, Congress needs to give the President advisory institutions that are trustworthy
from the President’s point of view, and that facilitated by a close ideological connection
between the advisors and the President.
While the model directly yields a connection between the ideology of the President
and the ideology of advisory institutions designed by Congress, it is a short step from
this result to the institutional arrangements one would expect to see based on this logic.
It is easy for Congress to ensure a close connection between the President’s ideology
and that of its advisory institutions: turn over the choice to the President. Congress
can provide in law and appropriations for the President’s advisory institutions, and let
the President choose their top personnel. Requiring Senate confirmation (e.g. as for the
heads of the Office of Management and Budget and Office of Information and Regulatory
Affairs in OMB) may insert a small cushion between the ideology of the President and the
advisor, but allowing Presidential nomination and location within the Executive Office of
the President ensures a tight linkage. Thus we see from this model a strategic incentive
for Congress to create robust advisory institutions under the President—even though
these institutions give the President an oft-noted bargaining advantage with respect to
Congress (e.g., Neustadt [1960]; Canes-Wrone et al. [2007]).
It is worth noting that the model does not imply that Congress wishes to deprive itself
of information useful in determining other policy choices (e.g. as might come from a robust
committee system (Krehbiel [1991]), informational lobbying (Austen-Smith [1993]), or
legislative support institutions such as the Congressional Budget Office or Government
Accountability Office). Rather, it implies that if the President has some initiative in
setting policy, Congress has an incentive to ensure the President is informed about the
consequences of policy choice.
The model also crystallizes the differences between our argument and that of Sundquist
[1982], one of the few in depth treatments of Congressional creation of the institutional
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presidency (and one of which we discuss further in the following chapter). For Sundquist,
Congress’s role in this creation reflects collective action problems and short-sightedness
that make it difficult for Congress to guard its own institutional interests. But here
we have made Congress unitary, rational, and forward-looking. Regardless of what one
makes of the verisimilitude of these assumptions, they represent the limiting conceivable case in which Congress can look after itself in inter-institutional bargaining. The
argument shows that even if the problems Sundquist highlights were “solved,” Congress
would have a deeper strategic rationale for ceding institutional control to an activist
Presidency.
5.6
Extensions and Limitations
The model above entails one “period” of policy making, and just enough structure to
show an incentive for Congress to link the preferences of its agent to those of the President. But multi-period and multi-issue dynamics allow for interesting extensions. One
could imagine that information about the state of the world on one issue has spillovers
or externalities relevant for other issues. First, one could imagine that the state of the
world on two or more different issues might be correlated, so that learning about one
provides information about the other. Information about industrial conditions in other
countries relevant for trade negotiations might also be relevant for treaties to mitigate
climate change or environmental degradation. Second, analytic capacity can only be
targeted so well to specific policy issues at the time it is created (Ting [2009]). The
President and his top staff might be able to divert analytic capacity created for one issue to analyze others, as the budgetary analysis capability of the Bureau of the Budget
grew into a quite general policy analysis and program evaluation capacity. In either
case, following the logic of standard models of delegation (e.g. Epstein and O’Halloran
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[1999]), this could result in a dynamic ratcheting-up of executive discretion and information: informational capacity granted to inform policy choice on one issue can lead to
greater executive branch information on other issues, which can lead to greater legislative
delegation of policy making authority over that issue. In this way, a multi-period model
can provide foundations for the dynamic, self-reinforcing co-development of Presidential
policy authority and informational capacity.
A model whose implications are logically valid for any possible combination of preferences and arrangement of decision rights is necessarily trivial; there are reasonable
assumptions about actors’ preferences in the policy process that mitigate or nullify the
implications identified above. Two important ones are (i) the President’s willingness to
act regardless of the quality of advice he receives; (ii) the common interest in Congress
and the President to reduce variance in policy outcomes.
On the first point, the assumption in standard sender-receiver games is that the
receiver must make a policy choice. One can interpret this to mean either that there is
no “status quo” policy, or that if their is, the utility from it is affected by the state of
the world just as much as the utility from any other policy. (The status quo policy may
be not to invade Iraq, but if the state of the world is whether Iraq has weapons of mass
destruction and willingness to use them offensively, and there is some uncertainty about
this, the future utility of the status quo is uncertain.) Either way, the sender cannot
prevent the receiver from making a non-trivial choice by withholding information. But it
is possible that a status quo policy provides a safe option of relatively known utility, while
any other choice entails a gamble (or an even more uncertain gamble) over outcomes. In
this case, rather than providing informational capacity that lines up with the President
ideologically, Congress may have a stronger incentive not to provide any informational
capacity at all. If Congress prefers the certain status quo utility, and the President will
not blindly change the status quo without information on alternative courses of action,
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then Congress can ensure the status quo remains in place by depriving the President
of information. This amounts to a de facto restriction on the President’s authority to
act, because Congress can take steps to ensure that the President does not use whatever
authority he has.
However, in addition to arguing that cases of certain status quo utility in the face of
uncertain states of the world are rare, one has to consider that the President is unlikely
to consign himself to ignorance if Congress declines to provide for informational capacity.
Instead, Presidents in such a situation might rely on “kitchen cabinets,” “stovepipes,” or
other unofficial or unsanctioned sources of information. Under at least some conditions—
for instance, the President has free access to informal advisors are more likely to provide
badly wrong advice that leads to a disastrous outcome (e.g., stovepiped information in
the George W. Bush administration on yellowcake uranium and aluminum tubes supposedly smuggled into Iraq (Hersh [2003]))—a more status-quo oriented Congress will
nevertheless want the President to have reliable information from officially sanctioned
channels (Gailmard and Patty [2010]).
On the second point, the potential problem is that the set of policy options in the
model is not rich enough to capture the conflict between Congress and the President.
The assumption in the model is that they prefer different policy outcomes, and therefore
prefer different policies for any given state of the world. This captures (at least one sense
of) ideological conflict, and we do not restrict the “magnitude” or “degree” of this conflict.
But both Congress and the President are worse off if policy outcomes are more uncertain;
this is a key preference that they have in common, and it drives the results above. One
way to envision this happening is this: the President’s party will be defeated in the next
presidential election if the result of the President’s policy choice is bad enough, and the
President reckons the utility of policy outcomes as we have described them above, but
Congress simply wants the President’s party to lose in the next election. In this case, the
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President would still want to minimize uncertainty over policy outcomes, but Congress
would not; more uncertainty could well mean a greater chance that the policy outcome
is bad enough to get the President’s party kicked out in the next election, which is all
Congress cares about in this scenario.
While such a scenario is not inconceivable, two attributes limit its plausibility. First,
it assumes an extreme indifference on the part of Congress to policy itself. Arguably, the
President (or his party) bears more electoral cost for bad policy results than Congress,
but it goes too far to assume that members of Congress bear no electoral cost for failed
national policies. Second, it assumes an asymmetry in utilities that is ad hoc (i.e.,
constructed simply to overturn a result) and not well motivated. It is entirely possible
that institutional positions affect the arguments of a utility function, but a plausible
scenario should build on a principled justification for this asymmetry (e.g. based on
electoral incentives or career concerns).
This is just one scenario, of course; others are doubtless possible. The key point is
that it is not enough for ideological conflict between P and C, partisan polarization, etc.
to be extreme; those concepts map naturally into the ideal points in the model. Rather,
what is required is a difference in risk preference, so that C wants more uncertainty over
policy outcomes while P wants less. In that case, the logic of our model does not apply,
because C is happy with a President that selects policy in ignorance of the state of the
world.
5.7
Conclusion
While the model presented in this chapter is a static one, it nevertheless has clear implications for the dynamic interaction between Congress and the executive branch. Thinking
of a “policy area” as a set of policy problems such that the best decision on each one
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depends on a common state of the world relevant to each, the logic in our model shows
that Congress has an incentive to create informational capacity about these policy problems in the executive branch whenever the individual responsible for policy decisions is
responsible to the President. Though Congress has full authority to structure the ideological orientations of such advisory institutions, it wants to ensure that their advice is
heeded by their executive branch recipients, and that requires advisors who are not just
expert but trustworthy from the advisee’s point of view.
Once Congress has endorsed the creation of an institutional apparatus within the
executive branch to learn about the state of nature, and this knowledge in turn increases
the value to Congress of delegating authority over related problems in which Congress
could, in theory, create policymaking authority independent of the President. Thus the
logic in our formal model is the crucial building block to establish that provision of
informational capacity to the president can lead to increasing the informational capacity
of the executive branch in general, and the President in particular. The logic therefore
brings us back to a claim made in the introduction, that the scope of the president’s
endogenously determined authority can grow because of the informational incentives of
Congress to institutionalize informational capacity in the executive branch.
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196
Chapter 6
Congressional Development of the
Institutional Presidency
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The fundamental logic of the models of the previous chapter is that if one actor has
the authority and incentive to act unilaterally in a way that affects another, the second
actor has an incentive to ensure that the first has the information necessary to make a
desirable choice from the first actor’s point of view. In the present chapter we argue that
this logic has decisive consequences for the institutional development of the executive
branch, and in particular the “institutional presidency.”
The institutional presidency is the label scholars have given to the congeries of organizational resources, attached to the presidency through multiple administrations and
operating in stable behavioral patterns over time, to help the holder of that office formulate policy strategies, evaluate policy alternatives, and oversee the implementation of
chosen policies. As of Theodore Roosevelt’s inauguration, the institutional presidency
as we think of it today was non-existent. The president’s staff, such as it was, consisted
of a couple secretaries and a small number of clerks. From such humble beginnings
has emerged the centerpiece of the institutional presidency, the Executive Office of the
President: a dense locus of policy advisors tightly linked to the sitting president, with expertise spanning national security, international trade, domestic policy, economic policy,
implementation of federal programs, and much more.
Scholars have rightfully focused on the role of presidents themselves in carving these
organizational supports out of a rough landscape. Analysis of the development of the
institutional presidency typically focuses on the “demand side,” the incentives of presidents to fashion this organizational support to meet the political and policy challenges
they face. In a pathbreaking account, Terry Moe argues that all modern presidents face
an “incongruence” between the demands of the job and the resources available. Institutional innovation by presidents is understood as the result of presidents’ drive to establish
congruence. In this way, for instance, we can understand why presidents seek immediate,
direct control over, say, a foreign policy staff attached to the presidency itself rather than
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seeking to redirect the massive bureaucracy of the modern State Department to their
own ends.
However, this “demand side” perspective is only part of the story. None of the organizations that comprise the institutional presidency can exist for long without at least
implicit support from Congress for their existence. In some cases, of course, critical
bulwarks of the institutional presidency were directly created by presidents themselves
via executive order. In other cases, Congress proactively supplied the institutional machinery. In addition, key executive orders enhancing the institutional presidency were
issued based on statutory authority granted to the president by Congress to issue these
orders. Ultimately, in all cases Congress must provide for and continually fund the physical and human resources of the institutional presidency through law. The institutional
presidency exists in its sweeping scope and deep expertise in part because Congress
chooses to support it, implicitly or explicitly. As Sundquist [1982] (p. 35) put it, “The
modern aggrandizement of the Presidency was the product of considered legislative decisions...[M]uch of the transfer of power was initiated by the legislative branch itself.”
There is, in other words, a “supply side” of the institutional presidency as well as
the widely-recognized demand side. The supply side concerns Congress’s support for the
organizations that comprise the institutional Presidency.1 This supply side has received
much less focus from scholars.2 In the institutional presidency lie the organizational re1
Taking the distinction between institutions (“rules of the game”) and organizations (collections of
individuals acting in concert) from North [1990], it is more precise to say that we focus on the supply
side of the “organizational presidency.” However, it has historically been a short step from there to the
“institutional presidency,” and the latter label encompasses analysis of the organizations we consider
here. Thus we adopt “institutional presidency” throughout.
2
Seligman [1956] and Sundquist [1982] are rare exceptions. To be sure, scholars have considered “environmental” influences on the institutionalization of the presidency (Walcott and Hult [1995], Ragsdale
and Theis [1997], Dickinson and Lebo [2007]), including Congress, and found that these influences have
indeed been influential. However, this literature does not probe the strategic dilemmas of this influence
from Congress’s perspective. Corwin [1957] notes that presidential support organizations exist because
Congress has chosen to provide for them. However, he does not analyze this decision from the standpoint
of Congress’s incentives to provide it.
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sources that support the modern president as a national agenda setter and “policymakerin-chief” (Burke [2000]). This is a role that belonged to Congress collectively, and its
most powerful leaders in particular, until the early 20th century. It is a role that Congress
jealously guarded; for instance, President Andrew Johnson was impeached essentially in
defense of it.
In this light the supply side of the institutional presidency presents a paradox: why
did Congress, an institution capable of pugilisticly defending its turf, accede in planting
the seeds of a forest that would grow so tall as to overshadow, or even threaten to
eclipse, Congress itself in the national policymaking landscape? It might have instead
attempted to undermine the President’s support organizations, or weaken their link to
the President by forcing the President in general to take advice from either independent
or Congressionally-controlled organizations.3
In this chapter we argue that the theoretical logic of the preceding chapter resolves
this paradox of the supply side of the institutional presidency. The starting point for
the logic is presidential authority to act with policy consequences. In different areas and
at different times this authority has arisen from different sources. The analysis in this
chapter reviews historical development depending on these sources.
In general the analysis below shows that executive branch discretion to act precedes
the information necessary to use the discretion intelligently. Thus it shows that prevailing
accounts of delegation, which argue that information and expertise precedes authority,
cannot explain the development of executive branch institutions. Delegation theory (in
the political science articulation of Holmström [1984]) supposes that Congressional delegations of authority to the executive branch follow from the executive’s superior information. From a developmental standpoint this logic is inadequate because the executive’s
3
This paradox is not a variant of the now-standard question of why Congress delegates to the executive
branch. It is not about granting authority to act. It is about creating and supporting organizations that
inform and enable action, pursuant to some pre-existing authority to act.
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ability to acquire and marshal information is the dependent variable, not a given condition. In other words, delegation and information are certainly correlated, as delegation
theory would suggest, but the temporal links are wrong.
A Note on Case Selection and Interface with the Theory.
The general thrust of this chapter is to identify important cases in which Congress
granted the President close control over informational or advisory institutions, which
in turn support the President’s role, even primacy, relative to Congress in the policy
process. Consistent with the model in the previous chapter, we will argue, these grants
tend to follow a reasonable interpretation of the President’s policy authority.
To make this argument it is helpful to juxtapose cases where the President’s policy
authority is relatively high compared to ones where it is not as high. The historical
episodes considered are ones where (A) there is substantial executive branch development
in multiple areas at roughly the same time, and it is possible to make a principled
argument about the degree of presidential authority in these areas that is beyond the
reach of Congress; or (B) there are multiple proposed institutional changes at roughly the
same time, and it is possible to make a principled argument about the degree to which
they entail new substantive authority for the president vs. new informational capacity
to use existing authority. The first category covers our analysis of executive branch
institutions in the areas of foreign policy and defense vs. domestic policy. The second
category covers our analysis of Congressional treatment of Presidential reorganization
requests in the early 20th century.
This approach allows some measure of “control” over our model’s explanatory factors
behind institutional development, based on case comparisons in which much background
matter (e.g. prevailing attitudes about the proper role of executive authority, which vary
considerably over time; party polarization; etc.) is implicitly constant. This reflects a
“most similar cases” approach in the sense of Gerring [2007] (see also George and Bennett
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[2005]). There are many examples of executive branch institutional development that we
do not consider, not because they are unimportant or uninteresting, but because lack of
suitable comparison cases makes control and inference more problematic.
Finally, we add one point about the interpretation of the historical cases in light of the
model. One occasionally finds tropes about “which principal” a particular department
“belonged to” in some of the periods we consider, e.g. “Treasury was Congress’s agent”
through the mid-19th century at least; “State was the President’s department” over the
same period; “the National Security Advisor is an agent of the President, not Congress,”
etc. Yet our model considers them all, at the moment of creation (and continually as long
as they are funded), as agents of Congress. In terms of the model, these agents function
as “senders” in a game with agents chosen by the President, and they are provided for
by Congress. The phenomenon to explain is precisely why Congress would ever want to
make some of these bodies into “the President’s agents,” and the extent to which it did
so. The occasional tropes are not counterarguments to our model; they are (simplified
versions of) findings to be explained by it.
6.1
The Institutional Presidency in the Federalist
Era
Though the institutional presidency is generally understood to be a 20th century creation, the legislature’s role in creating institutions to supply the president with high
quality policy information dates to the first Congress in 1789. In creating the four executive departments of Foreign Affairs (later State), War, Navy, and Treasury4 between
4
The position of Attorney General was created as a cabinet official in the Judiciary Act of 1789,
but the Department of Justice was not created until 1870. The General Post Office was provisionally
created in 1789, to continue its form and operations under the Confederation Congress, and permanently
established on the same lines in 1792. However, it did not achieve status of a “cabinet department” until
the Jackson administration, and its elevated status was primarily due to its patronage functions (Short
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1789 and 1798, Congress was creating a rudimentary form of what we now recognize as
the “institutional presidency.” These departments were capable of serving many of the
advisory functions we now ascribe to the institutional presidency, and had a much more
intimate relationship with the President than is now typical of cabinet secretaries.
Scholars studying the modern presidency do not regard cabinet departments as contributing to its institutionalization. Instead they focus on institutions such as the Executive Office of the President that are attached to the presidency as such, not charged
with line duties of program implementation. Thus surveys of the institutional presidency
beginning with, say, President Theordore Roosevelt indicate that there was none. There
are good reasons for this. Even before the federal government assumed undisputed primacy in domestic policy making, executive departments were charged with implementing
hundreds of programs and making administrative decisions as applications of established
criteria. Line implementation of these programs assumed its own bureaucratic logic and
a ground-level orientation distinct from any that might support presidential policy leadership.
However, this situation evolved over the 19th century rather than springing from a
conscious design. In this section we will argue that the executive establishment created
by statute and by practice in the Federalist era (1789-1801) constituted an institutional
presidency — rudimentary by modern standards, perhaps, but still serving many functions we ascribe to the institutional presidency today. We will further argue that the
form of these institutional designs was not a foregone conclusion, but that it ultimately
reflects the incentives for empowering the President that the Constitution presents to
Congress. Consistent with the model in the previous chapter, these incentives stem from
a Federalist conception of the Constitutional authority of the President in the policy
process.
[1923]).
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The structure of cabinet departments in the Federalist era is particularly interesting to
examine from the standpoint of our model: the separation of powers issues in these cases
were likely to be relatively prominent; there were no organized interests or entrenched
bureaucracies whose preferences might have been be a factor in structural choices for new
agencies, and national politics was not in a period of either weak Presidents or compliant
Congresses unable to fully defend the interests of the respective branches. Moreover,
the administrative slate was relatively blank at this point; there was no standing cadre
of agencies with entrenched functions guarding their turf or levels of independence that
might influence structural aspects of new agencies. Perhaps most obviously for purposes
of comparing these cases, these departments were all created roughly contemporaneously
with each other by the same or overlapping groups of legislators; thus, they were created
against a common background of perceived constitutional propriety and perceived conflict
across branches of government.
Since our theoretical argument pertains to the importance of information in these
policy areas, to questions about its trustworthiness by the ultimate decision makers who
draw on it, and to the effects of institutional structure on that trustworthiness, it is important to establish that these issues did indeed draw the attention of statesmen at the time.
As early as 1781 pamphleteers envisioned uniting the ministers of the Confederation-era
departments into a council of state to provide and aggregate the best available policy
information in their respective areas (Learned [1912], Short [1923]). The Constitution
itself provides one important linchpin of a tight linkage between the President and senior
executive officers in the mode of their appointment, by the President with the advice
and consent of the Senate.5 This provision is in marked contrast to the Articles of
5
Of course the Constitution also provides for Presidential appointment of Supreme Court Justices,
and this facet occupied most Convention debate on appointment power (Michaelsen [1987]). It cannot
be argued that this power was provided to ensure a linkage between the President and the Court.
Inconclusive debate over the summer in the Convention about legislative vs. executive appointment of
judges focused on the capabilities and incentives of each institution to make good appointments. The
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Confederation, which reserved appointment power for Congress (Article IX).6
In ratification debates proponents of the Constitution contended that senior executive
(i.e., cabinet) ministers would provide the president with high-quality advice whenever
their advice might be useful, i.e. when the president would seek it. James Wilson, a
delegate to the Philadelphia convention and future Supreme Court Justice, noted that
appointment power ensured that the president “will have before him the fullest information...He will have the advice of the executive officers in the different departments.”
Similarly, James Iredell, also a future Supreme Court Justice, argued that the president
“can at no time want advice, if he desires it, as the principal officers will always be on
the spot.”
Importantly, framers recognized that the quality of advice was a function of arrangements by which advisors were selected: Philadelphia delegate and future Senator and
Supreme Court Chief Justice Oliver Ellsworth of Connecticut argued that “if any information is wanted [by the President], the heads of the departments who are always at
hand can best give it, and from the manner of their appointment will be trustworthy”
(cited in Learned [1912]). Thus framers of the constitution recognized the president’s
need for useful advice and providing for it required particular institutional arrangements
to secure the linkage between advisors and the president.7
issue was decided when the Committee on Remaining Matters forwarded a proposal initially made by
James Madison for Presidential appointment subject to Senate consent, and the Convention approved
it.
6
The Articles of Confederation of course did not implement a separation of legislative and executive
power, so there was no independent executive in which to invest appointment authority. The Articles
themselves did not delegate appointment authority to any of the executive agents which would be chosen
by Congress, but in the 1780s some executive agents did secure the right to appoint their own clerks as
a condition of accepting office (e.g., John Jay in Foreign Affairs).
7
Also in the vein of presidential advisory institutions, the Convention considered on several occasions
whether to provide an executive or privy council to assist or advise the president in some way, as was
common practice in both the states and other governments abroad. Oliver Ellsworth initially proposed
an executive advisory council with members only partly chosen by the President. John Dickinson of
Delaware went so far as to propose that department secretaries should be disqualified from a council
because they were appointed to their posts by the President (Madison’s notes, August 18). The Convention ultimately rejected an executive council, preferring instead to provide for presidential access to
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Many scholars have noted that administrative institutions are, from the first creation, at least partly agents of Congress. “The American Constitution,” White [1948]
(50) notes, “requires both branches of the legislative body and the Chief Executive to
come to an agreement not only on major questions of policy but also on major matters
of administration.” He continues (p. 116), “In organizing the administrative system,
Congress had a free hand.” Willoughby [1927] is even more generous to Congress: “The
administrative function, that is, the function of direction, supervision, and control of the
administrative activities of the government, resides in the legislative branch...Congress is
the source of all administrative authority” (p. 11). Administrative institutions were from
the first creatures of Congress, and as such we can interpret their structure as a reflection
of Congress’s best efforts to pursue its interests as it understood them (cf. McCubbins
et al. [1987]).8 Therefore, at a fundamental level, administrative actors were agents of
Congress, arranged structurally to achieve Congress’s objectives in the policy process.
In structuring its agents, Congress had a number of possible models of administrative
structure to use as a starting point, from the British cabinet system of “strong” ministers,
to several variants pursued in the Continental and Confederation Congresses before 1789,
to the various models used under state constitutions. In the Confederation Congress, a
common approach up to 1781 relied on ad hoc administrative boards that mixed members
of Congress and outside advisors (Short [1923], Sanders [1935]). These boards had little
or no delegated authority; generally they presented recommendations to Congress for
advice from department secretaries (Article II, Section 2). Some Antifederalists considered the lack of an
executive council a serious problem. However, the objections had more to do with limiting intermingling
of executive and legislative powers (since the President would be relying on Senate-confirmed ministers
as advisors) than with ensuring high-quality advice for the President (Wood [1998]).
8
We are obviously anthropomorphizing a collective body here, but the historical record reveals no
important design choices which were plagued by cycling problems that would lead one to reject that the
body did in fact have and act on a collective interest on these matters. This is not particularly surprising
in light of the very small dimensionality of the policy space under consideration when Congress designed
administrative institutions that, most importantly, map into a degree of executive authority over and
linkage to administrative officers.
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specific purchases or decisions to be codified in law at Congress’s discretion. As such
they appear more like congressional proto-committees than administrative agencies to a
present-day observer.
In 1781 the poor performance of this arrangement led Congress to favor “departments”
headed by a single minister, not necessarily chosen from the legislature. The ministers
collectively did not form any kind of executive council and operated only with such
discretionary authority as they negotiated with Congress on an ad hoc basis (Sanders
[1935]). This mode became the standard operating procedure for the areas of foreign
affairs and war. It was also tried briefly in the area of finance and treasury with Robert
Morris as an able and qualified Secretary, but internal suspicion within Congress showed
the system unworkable in that area, and Congress reverted to a system of plural ministers
until 1789 (Short [1923]).
State constitutions, which granted executive powers somewhere between those under
the Articles of Confederation and the Constitution of 1787, declined to unify administrative structures under their chief executives (Wood [1998]). Most state constitutions
in the 1780s provided for a weak chief executive whose exercise of the meager powers
he had9 (e.g. a qualified veto) was conditioned by an executive council (Connecticut,
New York, and Rhode Island excepted). Membership on this council was not determined
by the state chief executive himself. In addition, appointment power for administrative
officers was generally vested in executive councils, of which the governor was at best one
member, or in the legislature itself;10 Georgia required their election to office (Michaelsen
[1987]). Thus, state-level administrative and advisory structures were intended to control
and restrict, not enable or support, the state executive.11
9
However, many state legislatures conferred some degree of emergency powers on their chief executive,
depending on the intensity of the war effort (Michaelsen [1987]).
10
The Massachusetts Constitution of 1780 is an exception; it vested sole appointment authority in the
governor, conditioned only by advice from the executive council (Wood [1998])
11
As noted, state chief executives also possessed few substantive powers which would have militated
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Thus, when it took up the problem of framing administrative structure, the first
Congress in 1789 had a variety of models to draw on. Many of those closest at hand
explicitly provided for weak institutional linkages between the chief executive and administrative officers. Nor did Congress did perceive that its interests were necessarily
in harmony with those of the president. Quite apart from partisan conflicts between
Federalists and Democratic-Republicans, and indeed before these conflicts crystallized,
institutional conflicts between the legislative and executive branch were manifest. “There
existed...a sense of competition and an urge for dominance between the two branches as
such, separate and distinct from party conflict” (White [1948], 51). Congress’s choices,
viewed from the perspective at the time, were not foregone conclusions to link advisors
to the President. How did Congress respond to the problem of designing administrative
institutions, given its institutional conflicts with the executive branch, and given its free
hand over institutional structure?
In designing administrative institutions in the Federalist period, Congress consciously
provided the president with a group of expert advisors and sought to make them trustworthy to him. Moreover, Congress and the president understood this to be the intent
at the time. Short [1923] notes that “Congress clearly recognized, in setting up three
departments [under] secretaries responsible to the president, that they were surrounding
the Chief Executive with a group of competent and experienced assistants” (pp. 105106). In correspondence with the Minister from France, President Washington expressed
his belief that the “great departments and officers therein” existed “to assist the supreme
magistrate in discharging the duties of his trust” (Ford ed. writings of GW, XI, 397, cited
in short 106, white 27). Consistent with the logic highlighted in our model, Congress perin favor of high-quality advisory bodies tightly linked to the executive. This is important in terms of
our argument, which does not hold that the legislative branch has an unconditional incentive to provide
strong links between the chief executive and informational supports. Rather, it contends that if the chief
executive has independent rights of action that the legislature cannot eliminate, then the legislature has
no conflict with the executive over the latter’s access to decision-relevant information.
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ceived the President to have some policy discretion, and provided informational support
for him to use it as wisely as available information would allow.
One of the clearest indications of Congress’s wish that administrative officers would
be tightly linked to the president, and therefore trustworthy to him, is revealed in the
debate over authority to remove sitting department secretaries. As soon as Congress
debated the structure of the Departments of Foreign Affairs, War, and Treasury in the
spring of 1789, it debated provisions for removal of these senior officers. Indeed, this
issue was the primary point of conflict in the legislative record; other aspects of these
departments, which will be covered and contrasted further below, aroused widespread
agreement (not to say indifference). The first draft of the organic act creating the Department of Foreign Affairs, Congress explicitly granted the president to remove the
Secretary without requiring the advice and consent of the Senate. This proposal raised
a constitutional issue because, while the constitution (article II, section 2) requires the
advice and consent of the Senate in appointing such a senior officer, it makes no mention
of procedures for removal aside from impeachment by Congress.
Much legislative debate focused on the constitutional issue of whether removal authority was an inherently executive power, hence the president’s alone; whether procedures
for removal must follow procedures for appointment, hence involving the Senate; whether
the constitution’s silence on the issue left it to Congress to decide at its discretion; or
whether the constitution was not really silent on the matter at all, specifying impeachment as the sole procedure for removals. However, White [1948] (21) emphasizes that the
problem was not only constitutional, but administrative; and the administrative aspect
could in part determine the constitutional interpretation: “The fundamental administrative problem was whether the responsibility for the interpretation and execution of the
laws and the supervision of administration should lie in the President alone or be divided
between the President and Congress” (italics original).
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On the administrative dimension, proponents of presidential freedom to remove made
two principal arguments: first, that presidential removal would promote unity in, and
therefore accountability of, the executive branch. Rep. James Madison argued that
if “the heads of the Executive departments are subjected to removal by the President
alone, we have in him security for the good behavior of the officer...This makes [the
officer] responsible to the great Executive power, and makes the President responsible to
the public...” (Annals of Congress, May 19, 1789).
Second, proponents argued that presidential removal would ensure a stronger linkage
between the president and executive officers, therefore making advice of the latter more
trustworthy to the president. Rep. Elias Boudinot considered the effects of requiring
Senate concurrence in removals: “[S]uppose that they shall decide in favor of the officer:
What a situation the president is then in, surrounded by officers with whom, by his
situation, he is compelled to act, but in whom he can have no confidence” (Annals of
Congress, June 16, 1789). Rep. John Laurance asserted that “every president ought to
have those about him in whom he can place the most confidence, provided the Senate
approve his choice” (Annals of Congress, June 17, 1789). Clearly, if an advisor has lost
the trust of his advisee, he cannot be a useful advisor; this is an application of the “zero
dissonance” concept from the previous chapter. Conditioning that advisor’s removal and
replacement on the consent of another body cannot solve the problem of getting trusted
information in the hands of decision makers.
The ultimate outcome of these deliberations was the “Decision of 1789.” Congress
recognized the President’s authority to remove secretaries unilaterally, not by including
specific language to this effect in statute, but rather implicitly by referencing events that
would occur in the event of a presidential removal. Removal provisions for department
secretaries thus were designed in part to maximize presidential trust in their advice.
For his part, the President was sensitive to the trustworthiness so ensured in choos210
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ing his principal advisors in various policy areas. Hinsdale [1911] notes that in choosing
where to seek advice on legal affairs when creating the informal institution of the cabinet, President Washington “hesitated between the Chief Justice and the much humbler
Attorney General, who had not been named in the convention. As for the rule by which
the line was drawn—there can be no doubt that it was removability by the president.”
That the Supreme Court did not oblige President Washington’s requests for advice — it
declined to advise President Washington on legalities of treaties under consideration — is
beside the point. The president perceived a difference in the linkage of possible advisors
to himself, and chose to place his trust accordingly. As Alexander Hamilton would remark in the late 1790’s (ironically, in the context of internal Federalist Party squabbling
related to the Adams Administration), “As the president nominates his ministers, and
may displace them when he pleases, it must be his own fault if he be not surrounded by
men who, for ability and integrity, deserve his confidence. And if his ministers are of this
character, the consulting of them will always be likely to be useful to himself and to the
state” (Lodge ed. writings of AH, VI, 419, cited in Short 109).
Removal authority at the secretary level was first put to use in the Adams administration. President Adams kept on President Washington’s cabinet as it existed in
1796, several members of which maintained strong connections with Alexander Hamilton. Hamilton was at that point a private citizen but also the informal leader of a
Federalist faction that rivaled the Adams faction for primacy within the party. After
several open policy disputes between the president and his cabinet, including advocacy
in the Senate by Secretary of State Timothy Pickering to defeat an Adams nomination
of an Army officer (who also happened to be Adams’s son-in-law), Adams dismissed
Pickering from office and secured the resignation of Secretary of War James McHenry.
Naturally, a partisan dust-up ensued in Congress as partisan factions sought to embarrass
their opponents. Representative Robert Goodloe Harper observed (Annals of Congress,
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Jan. 19, 1798).
...[T]he executive, in conducting those concerns of the government wherewith
it is exclusively charged, and for the management of which it is solely responsible, should employ such persons as subordinate agents, we were known to
agree with him in opinion about the right mode of conducting them....The
executive is charged with the foreign relations of the country, and with the
whole execution of all its laws...The whole question is, whether the subordinate agents, who are to execute this system under the orders of the president,
shall be chosen from among those who like it, or those who think it radically
wrong, and have never omitted any opportunity of attempting to change
it?...If the Executive, therefore, has a system in the conduct of those affairs
wherewith it is charged,...it is its duty to use the most effectual means for
carrying it into effect. One of the most efficacious of those means is, to make
use of men who, otherwise qualified, believe the system to be right.
Harper was a Federalist congressman speaking in defense of a Federalist president who
sought ideological fidelity from senior executive officers during a contentious period.
Harper was not only defending the maxim known to “every man of common understanding” that advisors must be trustworthy to their principals to be useful. He specifically
linked his support, as a congressman, for presidential control over administrative officers
to the President’s rights of action in the policy process carved out by the Constitution.
Our theoretical argument echoes Harper’s: given this allocation of policy authority,
the conflict between the branches over the president’s connection to his agents vanishes.
Partisan disputes between Democratic-Republicans in Congress and the Federalist President Adams led the former to toy with the idea of disapproving of the latter’s efforts
to establish select only agents sharing his views. Though the principle that the presi212
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dent should have access to like-minded advisors was therefore not a foregone conclusion,
Congress stood down and the practice of allowing the president to select agents conforming to his own views was reinforced.
Congress’s position on Presidential removal authority over senior officers changed
markedly in the nineteenth century (White [1954]). After President Jackson removed
Treasury Secretary William Duane in 1833 over his refusal to remove federal deposits
from the Bank of the United States at Jackson’s direction, Whigs in Congress sought to
revisit removal power and contended that the Decision of 1789 was an error. President
Johnson’s removal of Secretary of War Edwin Stanton, in violation of the Tenure of Office
Act of 1867 restricting the President’s power to remove without Congressional assent,
was the proximate cause of the President’s impeachment.
The reason for this change is that Congress increasingly invested executive officers
with specific duties in carrying out acts of Congress. Officers were not just advisory
agents, in the role contemplated by our model; they also had policy implementation
duties, which necessarily confers some discretion to determine what policy actually is.
This dual role of Presidential advisor and policy implementer was always inherent in
the job of a department secretary, but shifted gradually toward the latter as Congress layered functions directly on Presidential appointees (White [1954]). Given this, unlimited
Presidential removal power threatened to transform these statutory duties of executive
officers into substantive grants of discretion to the President to decide whether and how
to carry out the duty. In this context, complete Presidential authority over all decisions
made by subordinates appeared as much more than a guarantee of close Presidential
linkage with senior advisors; it was tantamount to increased Presidential authority over
policy. As the Supreme Court held in Kendall v. United State ex rel. Stokes (1838), such
complete authority “would be vesting in the President a dispensing power, which has no
countenance for its support, in any part of the Constitution; and...would be clothing the
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President with a power entirely to control the legislation of Congress...”
In other words, executive officers began take on de facto policy making duties in
their own right — regardless of the constitutional propriety of this, and regardless of
whether the President is obligated to tolerate it by constitutional writ more than simple
expediency. In this situation, the logic of the model in the previous chapter is attenuated.
While Congress has clear incentives to help organize the executive branch to provide
the President with information relevant to decisions the President has the authority to
make, this does not mean Congress has any particular incentive to grant the President
authority to make more decisions. If the President and courts will allow Congress to
break up executive authority within the executive branch, Congress has every reason to
make use of that allowance to vest authority in like-minded officers.
To summarize this section, Congress’s creation of an institutional presidency in the
Federalist period, and organization of executive officers in a way conducive to presidential
trust in their advice, is itself significant. Congress was perfectly capable of perceiving
interbranch conflicts with the executive in this era, and did not always see eye to eye
with President Washington, let alone his successors. How should Congress facing such
conflicts design policy advisory institutions to achieve the best possible policy outcomes
from its own point of view? Alternative institutional choices available to Congress surely
could have impoverished the president’s informational capacity, concentrating informational resources in the legislature and forcing the president to rely on information that
Congress chose to provide. The logic of the model in the preceding chapter demonstrates
that ideological conflicts do not make this approach any more appealing for Congress
because such information would likely not be useful to the president, to echo Hamilton’s
words, and therefore not likely to be heeded. It was not a sense of systemic weakness
in Congressional institutions, nor some patriotic feeling of unity and interbranch trust
that induced Congress to support the president with expert advisors in this way. It was
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a recognition that doing so was the best way to achieve desirable policy outcomes under
a constitution that gave an undeniable role to the president in policy decision making.
Despite all we have argued about a “tight structural linkage” between the President
and his advisors and so forth, President Washington is sometimes supposed not to have
turned it into much of a policy making advisory machine. As a policy maker he is sometimes presented as a “figurehead chief executive” (Sundquist [1982]: 21) and exceedingly
deferential to the programs of Alexander Hamilton in particular. For instance, after
some experimentation Washington settled into a pattern of taking votes of his four cabinet members on major policy issues and cast his own vote only in case of a tie. More
granular analysis reveals that this account is a caricature passing into fiction: White
[1948] presents President Washington as deeply involved in policy decisions, active in directing his agents, and concludes that no subordinate took any significant action without
his explicit blessing. But even this extreme portrait is a useful foil. Even if that was
Washington’s posture, it does not follow that he was less than committed to pursuing
a policy agenda of his own choosing. That is the same posture one would expect of a
principal who is advised by perfectly faithful agents who share the principal’s general
preferences but possess expertise and information the principal does not.
6.2
Re-Institutionalizing the Presidency
The Federalist model of an active President did not hold sway in the nineteenth century. Acting from a belief that executive power ought to be tightly constrained, Thomas
Jefferson sought to establish the formal primacy of Congress in national affairs. While
Jefferson exercised as much influence over national policy as Washington had, in Jefferson’s case it was through work with Congress as leader of his party rather than by
exercising autonomous powers found in the Constitution (White [1951]). Jefferson’s suc215
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cessors did not occupy an obvious party leadership role; initiative shifted to the House
of Representatives as they pledged commitments to Democratic Congressmen to secure
their support (Milkis and Nelson [2008]).
The self-abnegation of most Democratic Presidents from Madison to Buchanan was
outdone by the Whigs (W.H. Harrison, Zachary Taylor, and Millard Fillmore), whose
organizing precepts awkwardly combined an activist national policy agenda with limited Presidential autonomy relative to Congress (White [1954]). Before the Civil War,
Whig and Democratic Presidents alike attempted to influence domestic policy primarily
through advocacy in Congress.
But the words “nadir” and “Presidential power” are most often joined to describe the
Republican Presidents of the late nineteenth century: creatures of their party little will
to forge a policy agenda who held what seemed almost a ceremonial office, responsible
mainly for distributing federal jobs. When Presidents after Grant did claim initiative
relative to Congress, it was primarily to reclaim ground of Presidential prerogative (e.g.
over appointment of cabinet secretaries) previously lost to Congress (Milkis and Nelson
[2008]). Obviously, this depiction obscures that several nineteenth century Presidents,
such as Presidents Jackson, Polk, and Lincoln, found and used impressive powers in
their office, and few Presidents hibernated in the White House without attempting to
influence the direction of public policy. Still, Presidents in either the Federalist tradition
or a “modern” mold were the exception rather than the rule.
Similarly, few new executive branch institutions were created (most notably the Department of the Interior, 1849; Department of Agriculture, 1862; Department of Justice,
1870; Interstate Commerce Commission, 1877; and Civil Service Commission, 1883)
(White [1951]; White [1954]; White [1958]). In terms of domestic policy, Presidential
support institutions were commensurate with Presidential initiative: feeble. The “White
House establishment” consisted of members of the President’s family and, after 1857, a
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private secretary, plate and furniture steward, and messenger (Spragens [1980]).
Presidents of all parties actively continued to manage foreign policy, supported by
the same advisory system created in the 1790s. President Polk deployed this system
effectively in his detailed direction of the Mexican War from the White House. “The
general movements of the war were simple,” according to White [1954], and thus existing
advisory structures were up to the task.12
Growing complexity of American policy problems (and declining amenability to statelevel solutions), combined with changing relations between Presidents and their parties,
created conditions for a fundamentally new Presidency (Milkis and Nelson [2008]; Arnold
[2009]). President Theodore Roosevelt most dramatically catalyzed this change. Based
on an overarching “stewardship” model of the Presidency — he felt enabled (perhaps
obligated) to do anything he believed to be in the national interest that was not expressly
forbidden by law or the Constitution — President Roosevelt pursued an expansive policy
agenda in economic policy, natural resource conservation, and foreign affairs.
Roosevelt demonstrated a willingness to take the initiative on policy, with or without support institutions to aid his decision making. For instance, President Roosevelt
unilaterally decided in 1902 that the Justice Department should sue the Northern Securities Company, a railroad trust, for violation of the Sherman Antitrust Act of 1890. No
Federal Trade Commission or Antitrust Division of the Justice Department yet existed
to advise on this issue; indeed, it was after the Northern Securities case that Congress
created a unit of the Justice Department that would become the Antitrust Division.
The newly awakened President faced a lacuna in the area of support institutions.
During the nineteenth century, the executive branch below the President had evolved from
the departmental system tightly linked to the President in the 1790s, to a decentralized
12
Polk did not trust the commanding field generals Winfield Scott and Zachary Taylor. When Congress
declined to replace them, Polk effected the commission of his former law partner as a Major General to
serve as a reliable conduit of information (White [1954]: 56).
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collection of departments organized in issue networks with Congressional committees
following an internal logic of program maintenance (White [1954]), headed by appointees
chosen by a logic of party coalition maintenance (Sundquist [1982]), and for both reasons
heavily insulated from Presidential control in practical terms (regardless of legal or formal
ones).
Weak administrative structures in the departments themselves also compounded the
problem: department secretaries tolerated devolution of authority down the organizational hierarchy simply to alleviate burdens of excessive span of control (White [1954]:
96). The budgeting system tracked and reinforced this development: departmental estimates were essentially stapled together by the Secretary of the Treasury and sent to
Congress, where they were essentially unstapled and jointly controlled by committees on
appropriations (Skowronek [1982]).13 The departmental system of the 1790s was gone,
never to return; Presidents attempting to assert initiative over policy could not simply
step back into the relations of President Washington’s era.
Thus the early twentieth century presented a mismatch between Presidential initiative
and Presidential support institutions. Congress’s options were either to try to constrain
that initiative (or hope for Presidents who declined to use it), or to support fundamentally
new advisory institutions to support that initiative. Its ultimate support for the latter
option, after ample demonstration that the Presidential initiative genie would not go
back in the bottle, has resulted in a core element of the modern presidency. In this
section we explore the struggle to expand Presidential support institutions, focusing on
presidential reorganization planning and the Budget and Accounting Act of 1921.
13
Fisher [1975] notes that several nineteenth century presidents did revise departmental estimates
before submission to Congress, which suggests others might have if they had wanted to, but this appears
to be the exception rather than the rule.
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6.2.1
Executive Reorganization Requests, Taft to FDR
Presidentially-commissioned panels to recommend changes in executive branch organization have long been a routine part of presidential politics. Between 1912 and 1950, four
of seven presidential administrations (Taft, Harding, Franklin Roosevelt, and Truman)
oversaw major efforts at comprehensive reorganization of the executive branch. Under
Presidents Taft, Franklin Roosevelt, and Truman, these commission recommendations
became highly visible and politically charged loci of institutional struggles between the
President and Congress. In fact inquests and reports on executive branch reorganization and management were common long before this string of presidential commissions
began under Theodore Roosevelt — but they were convened by Congress, not the President up to that time. These congressional commissions on executive branch organization
date to Reconstruction. Between the Civil War and the Spanish American War, the
Committee on Retrenchment, the Cockrell Commission, and the Dockery-Cockrell Commission were formed by Congress with the aim of bringing greater efficiencies to the
executive branch. However, these Congress-led commissions were qualitatively different
from their presidentially-organized counterparts that would become commonplace in the
20th century (Arnold [1998]): they were almost exclusively aimed at finding cost savings
in administrative activities. First in response to the slow pace of retrenchment in government expenditures to pre-Civil War levels, then out of generalized frustration with
the cost of administrative activities in government, Congress organized these commissions primarily to rein in the executive branch bureaucracy. Thus, while at one level
these Congress-led commissions can be seen as a “supply side” push for executive branch
reform, they did not comprehend organizational problems in the executive branch as a
whole, and certainly did not push for an expanded Presidency as such.
The presidential commissions and the disposition of their proposals by Congress are
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interesting from the standpoint of our theory of executive branch organization because
they dealt with changes—some sweeping, some narrow—in the linkage between the president and the whole executive branch, or in the nature and extent of presidential support
institutions. Recommendations of these commissions provide an opportunity to gauge
Congress’s treatment of the President’s support institutions and degree of unified control
of the executive branch. Major parts of the “institutionalized presidency” as it is generally understood today grew out of actions by Congress and various presidents pursuant
to recommendations from these commissions.
Peri Arnold’s (1998) authoritative history of presidential commissions for executive
branch reorganization reveals a bifurcated, seemingly cacophonous treatment of their
recommendations by Congress: placidly accommodating some, vehemently rejecting others, occasionally even embodying in statute proposals it strenuously resisted only a few
years earlier. Our theoretical model reveals a consistent order in congressional treatment
of presidential reorganization proposals. We argue below that these proposals can be
grouped into one of two broad classes: those that would give the president new substantive authority, and those that would give the president support institutions better to use
the President’s inherent or delegated authority.
Our theory implies that grouping recommendations in these classes is useful because
Congress has different incentives in responding to them. Our contention is that Congress
has an incentive to accommodate requests in the latter class, for support institutions
to use inherent or delegated presidential authority. In these cases the President either
has a reasonable claim to authority that Congress cannot reduce (if the authority is in
some sense inherent), or has authority that Congress wants the President to have for
some reason. In such cases the only remaining question from the standpoint of executive
branch organization is whether the President will have the informational and institutional
support to use this authority well and effectively. The logic of our model is then clear:
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partisan and ideological conflicts notwithstanding, if the President has the authority to
act in some area, Congress has the incentive to provide information to use it. This is
true regardless of whether the President’s authority exists by dint of the Constitution,
Congressional delegation in a statute, or the President’s newfound willingness to be
proactive in the gray areas where law and the Constitution are silent.
On the other hand, Congress has no similar incentive to accommodate presidential
requests in the former class, for new substantive authority over executive branch actions.
Though the strongest claims in the literature that “congressional dominance” of the
bureaucracy is a reality in practice may be overstated, Congress has clear incentives
to structure the bureaucracy, to the extent that it determines this structure, to be as
responsive to it as possible in making policy choices (McCubbins et al. [1987]; McCubbins
et al. [1989]; Kiewiet and McCubbins [1991]). Therefore we can interpret Congressional
allocations of authority throughout the executive branch as an attempt by Congress to
maximize the concordance between actual public policy choices and those choices most
preferred by Congress. Congress would make the relevant choices itself if it could, but
either for want of information, inability to respond to contingencies on the ground, or
limits imposed by separation of powers (under which Congress cannot make itself a “street
level” policy implementer), it cannot always do so. The “congressional dominance” and
delegation literature instructs us to see Congressional designs of bureaucratic institutions
as the next best thing. Viewed in this light, Presidential requests for reorganizations that
entail stronger hierarchical control over the executive branch (“clear lines of authority”
and the like) are tantamount to a reallocation of substantive authority over bureaucratic
actions from Congress to the President. Congress may at times have reasons for effecting
such reallocations (Kiewiet and McCubbins [1991]; Epstein and O’Halloran [1999]), but
the President’s desire obtain greater control over public policy is not among them.
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ecutive branch reorganization largely tracks these incentives. In many cases a single
presidential commission made both types of proposals, which is particularly useful for
analyzing Congress’s disposition because a single Congress embedded in a single partisan
and ideological configuration handled both.
We focus on three episodes of reorganization planning: President Taft’s Commission
on Economy and Efficiency, the Joint Committee on Reorganization under Presidents
Harding and Coolidge, and the President’s Committee on Administrative Management
under President Franklin Roosevelt. These commissions defined the issues of Presidential
advisory institutions in an environment of growing Presidential initiative and responsibility. After the expansion of Presidential advisory institutions under President Roosevelt,
most reorganization efforts pushed for continued evolution of an organizational apparatus
that was largely given (the primary exception to this is the creation of the National Security Council, discussed in section 6.3). This is not to say that subsequent commissions
such as the Hoover Commissions (Presidents Truman and Eisenhower) were unimportant, or that their recommendations were minor in scope. Rather, our goal is not a
comprehensive review of executive reorganization planning (see Arnold [1998]).
6.2.2
The Commission on Economy and Efficiency
Initiative for executive branch reorganization studies began to shift from Congress to the
President under Theodore Roosevelt. In 1905 President Roosevelt assembled five executive branch officials into the Committee on Department Methods — subsequently known
as the Keep Commission after its chairman Charles Keep, Assistant Secretary of the Treasury — to analyze administrative practices and identify possible improvements (Kraines
[1970]). However, while the Keep Commission’s mandate came from the President, its
orientation was similar to that of previous congressionally-initiated commissions (Arnold
[1998]): to identify improvements and cost savings in specific administrative practices,
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be they in particular agencies or in central purchasing.
Executive reorganization planning changed more significantly under the auspices of
the President’s Inquiry in re Economy and Efficiency, later the Commission on Economy
and Efficiency, under President Taft. The President’s growing sense of responsibility to
direct national affairs began to interact with the incipient field of public administration
to yield a reconceptualization of the appropriate distribution of authority in the executive branch. Arnold [1998] (p. 33) summarizes the shift: “No longer were these agencies
to be understood as single units tied to Congress by an umbilical cord of statute and
appropriation. Rather, they would be seen as part of a whole that had hierarchy and
ordered authority — a bureaucracy. When seen through this new conception, the traditional picture of the dominant tie of agency to legislature is an intrusive element...”
President Taft tapped Frederick Cleveland of the New York Bureau of Municipal Research, a scholarship-advocacy outfit of Progressive reformers, to direct the Commission,
which also included early public administration scholars Frank Goodnow and William
F. Willoughby (future director of the Brookings Institution). The Commission sought
to adapt Frederick Taylor’s principles of “scientific management” to executive branch
organization, concluding that the primary obstacle was the fragmentation of authority.
The remedy was centralization of authority under the President (Skowronek [1982]).
In addition to a number of specific recommendations about administrative practices
in specific departments and bureaus (Weber [1919]), the Commission on Economy and Efficiency made a sequence of recommendations encompassing the entire executive branch.
“In the category of macro-administration, the Commission urged that the executive
branch should be unified, and once unified, controlled. It rejected the contemporary,
atomized administrative universe dominated by congressional authority. The Commission’s ideal was an executive branch under the authority of the chief executive” (Arnold
[1998]: 43).
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To accomplish these ends the Commission recommended streamlining executive branch
hierarchy and altering the federal budget process to effect a genuinely executive budget.
The streamlining theme was to become a common one in subsequent decades reorganization planning. At first it may appear to reflect an interest in a tidy and rational
organizational chart per se, but was in fact about the allocation of substantive authority (Skowronek [1982]). It has been well established that presidents could legitimately
remove appointed policymaking officials from office over failure to follow policy instructions since at least President Jackson’s dismissal of Treasury Secretary William Duane
in 1833. The massive, byzantine administrative structures that had emerged in the mean
time weakened this presidential right practically if not formally: the president faced far
greater monitoring costs with respect to the bureaucracy in 1911. The expansion of the
bureaucracy (federal civilian employees numbered just under 400,000 in 1911, about a
40-fold increase since Jackson’s age) and its criss-crossing structure made it more difficult
for presidents not only to know simply what decisions had been made, but which of the
several possible agencies with jurisdiction over some policy area had made them. Lowering those monitoring costs would make it easier for the President to use well-known
levers to affect agency policy, and a streamlined executive branch is one that is less
costly for the center to monitor. Therefore such a recommendation is not just a matter
of organizational form; it is a matter of substantive control over policy.
The Commission issued a number of studies of the history and structure of administrative agencies, and proposed numerous consolidations and re-structurings. Congress
declined to act on any of them (Weber [1919]). As the demand for administrative consolidation and clarity under the President was to become a ritual of presidential reorganization planning over the next several decades, so was Congress’s refusal to act on these
proposals. In light of their effect on the President’s substantive authority over policy and
the implications of our model, this is expected.
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The more revolutionary “macro-administrative” recommendation from the Commission on Economy and Efficiency, both at the time and in its effect on subsequent organizational change, was the proposal for an executive budget. Up to this time the President
did not play an important role in planning the federal budget. Individual departments
and independent units in the federal government made reports to the Treasury Secretary
of their expenditures from the current year and estimates of expenditures for the coming
year under congressionally-specified line items, and the Secretary transmitted these reports to Congress directly. The Commission sought to make the annual budget a planning
and managerial device to facilitate information flow from agencies to the President and
from the President to Congress. The Commission’s proposals thus not only changed the
content of the budget estimates but also centrally involved the President. Its proposed
classification of budget items would specify appropriations, expenditures, and estimates
in terms of organizational units, capital outlays, functions, objects purchased, and appropriation bills (Weber [1919]). In his letter transmitting the proposal to Congress,
President Taft noted “that the Government is without an statement of resources and
liabilities; that it is being financed without a prospectus which shows expenditures in
relation to revenues or the effect of past financial policy; that the reports of expenditures
and the estimates required by law are unsystematic, lack uniformity of classification, and
are incapable of being summarized in such a manner as to give to the Congress, to the
President, or to the people a picture what has been done or what is proposed” (quoted in
Weber [1919], p. 88). The executive budget promised to rectify these defects. The Commission proposed not specific items to cut so as to achieve “economy,” but a new system
of planning and analysis to achieve a more abstract idea of administrative efficiency.
Based on the Commission’s recommendation, President Taft benignly proposed to
submit two budgets in 1912, one following the traditional practice, and one following
the new recommended form. As has often been noted (Weber [1919], Corwin [1957],
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Skowronek [1982], Arnold [1998]), Congress strongly objected to this presidential meddling, stipulating in a 1912 Appropriation Bill
That until otherwise provided by law, the regular annual estimates of appropriations for expenses of the Government of the United States shall be
prepared and submitted to Congress by those charged with the duty of such
preparation and submission only in the form and at the time now required
by law, and in no other form and at no other time.
President Taft, arguing that Congress had no authority to restrict the President from
seeking information from executive branch departments, directed them to submit estimates directly to Congress in the customary form, and to submit to the President the
estimates following the new form. These he presented to Congress not as a budget but
as a message. Congress declined to act on it, in preference for the traditional approach.
The extent of new substantive authority conferred on the President by the alternative
budget procedure is not clear. It did not claim agenda setting authority for the President
with respect to Congress in a formal sense. Under the old as well as the new procedure,
Congress still had the prerogative to appropriate as it saw fit to agencies without regard to
the estimates. Quite possibly, Congress simply objected to altering its traditional modes
of operation on any course other than its own. In a less-often noted floor speech explaining
the Appropriations Bill section quoted above, Appropriations Committee Chairman John
Fitzgerald asserted
[U]ntil it could be determined by careful and deliberate study of the scheme
whether it should be accepted and adopted, it was not deemed wise or provident to have the time and energies of large numbers of the most capable
persons in the several branches of the public service diverted to transforming
the entire estimates for the next fiscal year into this new and unauthorized
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plan of a so-called national budget (quoted in Weber [1919], p. 89).
In other words, Congress did not reject the executive budget concept entirely in itself,
but declined to be brought to it on the President’s timetable. We will return below to
the issue of Congress’s (somewhat more gradual) decision to develop a more analytic
approach to budgeting and involve the President.
6.2.3
The Bureau of Efficiency and Bureau of the Budget
The aftermath of Congress’s chilly reception of proposals from President Taft’s Commission on Economy and Efficiency furnishes an institutional curiosity known as the
Bureau of Efficiency (BOE). Organized by Congress as a division of the Civil Service
Commission in 1913 under one Herbert D. Brown (formerly of President Taft’s Commission on Economy and Efficiency),14 Congress created the Bureau of Efficiency as a
free-standing, independent unit in the executive branch in 1916 (Lee [2006]). At that
time Congress expanded BOE’s mission beyond personnel studies to include analysis of
management practices and organizational structure in the executive branch and independent regulatory commissions generally. Appropriations Acts funding the agency in
1916 and 1917 directed it to “establish and maintain a system of efficiency ratings,”
“investigate the administrative needs in the several executive departments and independent establishments,” and to “investigate the duplication and methods of business in the
various branches of government service.” BOE was charged with essentially the same organizational, non-budgetary functions that the Bureau of the Budget would adopt after
its creation (ironically, a managerial agency charged in part with rooting out redundancy
in government was itself redundant).
BOE was predominantly a legislative staff agency housed as an independent unit in
14
The Division of Efficiency in fact was created by Congress to continue the work on personnel classification begun by Taft’s Commission (Weber [1919].
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the executive branch (Van Riper [1958], Skowronek [1982]). As Arnold [1998] depicts
it, “Congress wanted to institutionalize investigative capacity, but was more comfortable
with that operation tucked safely under legislative supervision” (p. 50). Weber [1919]
was more direct: “notwithstanding that its legal status is that of a part of the administrative branch of the government,” BOE was a “direct agent of the legislative branch”
(p. 111). Yet Congress intended BOE to be more than its “eyes and ears” in the executive branch. It was designed to provide informational capacity about executive branch
organization from Congress’s point of view that would be useful to (and used by) the
President and his senior officers. BOE was Congress’s attempt to create a legislativelycontrolled informational support institution jointly serving the President and Congress
(Lee [2006]).
Congress’s direction of BOE extended to specific items for study and specific executive
branch officials to whom BOE should report its findings. For example, in Appropriations
Acts for 1916-1918 Congress directed BOE to investigate organizational processes and
methods of Subtreasuries, and report recommendations to the Secretary of the Treasury
with an eye to transferring some of their functions to the Federal Reserve or Farm Loan
Banks; to analyze methods of the Internal Revenue Service as well as disbursing officers
in the Treasury, and make recommendations for improvement to the Secretary; to investigate “methods of transacting public business” in the Civil Service Commission; to
“investigate the business methods of the Bureau of Pensions” and recommend improvements to the Secretary of the Interior; and to recommend a new accounting system for
the Bureau of Indian Affairs to the Secretary of the Interior (Weber [1919], pp. 107-110).
In other words, Congress directed its own agent to analyze issues of Congress’s choosing and make recommendations to cabinet officials that the latter did not solicit and
could pursue at their discretion. Not surprisingly, BOE’s organizational reform recommendations to the President’s officers languished (Lee [2006]). BOE received a modicum
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of constructive attention from the executive branch during President’s Harding’s foray
into reorganization planning under the auspices of the Joint Committee on Reorganization in 1921: the Joint Committee’s director detailed BOE for “occasional research
support” (Arnold [1998]: 62). The BOE gamely tried to engage the highest levels of
reorganization planners in the Harding Administration (Lee [2006]), but was unable to
match even the part time (though energetic) efforts of officials such as Secretary of Commerce Herbert Hoover. In the assessment of Arnold [1998], “[S]everal factors gave Hoover
the opportunity to advise President Harding in a way that would have been...impossible
for the Bureau of Efficiency, because of its ambivalent situation and its distance from
the President. An advisory-teaching relationship...required a combination of proximity,
trust, and the willingness of a president to grant an adviser independent authority” (pp.
64-65). The “ambivalent situation” to which Arnold refers is BOE’s status as an agent
of Congress trying to advise both Congress and the President, despite their inherent
institutional conflicts.
BOE was officially closed and its records transferred to the Bureau of the Budget in
1933 (Lee [2006]). Arnold [1998] notes that the “merger represents the end of a legislative pretension to a capacity to guide administration.” The BOE saga is interesting from
our standpoint precisely because it was not successful in creating informational capacity
that was useful to the President. From the flourishing success of BOB in the same time
period, we know that BOE’s inability to become a trusted presidential advisor cannot be
attributed to presidential indifference to the issues under its purview. Rather, BOE represents a mismatch between information and incentives. Because of BOE’s organizational
distance from the President and close linkage to Congress, it was in a weak structural
position to gain the President’s trust. Through the BOE Congress attempted to focus
executive branch decision makers on issues of its choosing supported by information procured by its agent. In illustration of the theoretical model from the previous chapter, the
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decision makers declined to pay heed to this information. Therefore, the pluck of BOE’s
staff and Director Herbert D. Brown notwithstanding (Lee [2006]), BOE’s capacity withered on the vine. In terms of our logic of executive branch organization, the BOB-BOE
juxtaposition shows that informational capacity will be useful to executive branch decision makers, and therefore worth maintaining, if and only if it is tightly linked to those
decision makers in its institutional structure. In light of our theory, perhaps the only
puzzle about the BOE episode is that Congress thought this organizationally tenuous
scheme could work in the first place.
While the BOE was struggling for institutional recognition, Congress created a thoroughly Presidential agency that became the first durable edifice of the modern institutional presidency. As was recounted above, President Taft’s attempts to carve out a
formal role in the budget process did not turn out particularly well for him. Yet within
eight years of Taft’s abortive attempt to institute an “executive budget,” Congress had
passed a bill not only bestowing responsibility on the President to organize a budget and
submit it to Congress, but providing an important institutional support for the President
to do so. Within nine years this bill became a law, the Budget and Accounting Act of
1921—a watershed in the development of the institutional presidency.15
It is not our purpose to make a case about the evolution of thought in Congress
on budget reform or the executive budget, which has been taken up elsewhere (e.g.,
Skowronek [1982]; Kiewiet and McCubbins [1991]). Notably, however, the federal debt
had increased over twenty-fold to almost $25 billion between 1916 and 1920, and persis15
The Act signed by President Harding in 1921 was almost identical to one vetoed by President Wilson
in 1920. The principal difference was the provision for removal of the Comptroller General, who was to
direct the General Accounting Office, a congressional counterweight to the Bureau of the Budget in the
executive branch. The 1921 Act provided for removal by joint resolution of Congress, therefore requiring
the President’s approval. The 1920 Act provided for removal by concurrent resolution, therefore not
requiring the President’s approval. President Wilson that this infringed on the President’s removal
power, but given that Congress must initiate either kind of resolution, there is no difference in the
authority of the President if s/he should want the Comptroller General removed.
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tent deficits had correspondingly become normal. Congressional demand for budgetary
retrenchment grew apace, but the existing budget process was not equipped to solve
this problem. Instead, it created both coordination and collective action problems for
Congress in reducing the budget. Individual members willing to sacrifice funding for pet
programs internalized all of the political cost of this contribution to Congress’s collective
good, but relatively small political benefits from overall budgetary restraint (both because the effect of any one program on the overall budget picture was small, and because
responsibility is difficult for observers to parse out in a collective body). Because of these
problems, the relative importance of agency loss for Congress from centrally involving the
President in the budget process receded, and the value of a central coordinating structure
to achieve fiscal economies grew.
The result of this shifting calculus was the Budget and Accounting Act of 1921, a
delegation of authority to the President to coordinate budgetary estimates transmitted
to Congress. The Budget and Accounting Act did not bestow authority on the President
to make take-it-or-leave-it offers to Congress; Congress could revise executive budgetary
proposals up or down at its discretion. Still, the Act gave the President first mover
advantage in a game that was in part about coordination.
The important point for the logic of executive branch organization under our theory
is how Congress responded once it had decided the President should have authority
to organize and transmit a national budget. The logic asserts that given Presidential
authority to act, Congress’s incentive is to provide the information necessary to support
the President’s use of that authority in the way the President deems best. While we may
interpret the Constitution as the source of the President’s authority in many cases (either
because it explicitly grants substantive authority or because it makes the President an
agenda setter in a policy making game), the theory itself is silent on the source of the
authority. In many cases the authority may arise from the incentives of Congress to grant
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it, and the Budget and Accounting Act is such a case.
Unlike the fitful Presidential incursions into budget estimates in the nineteenth century (Fisher [1975]), the President’s new comprehensive role in the budget process required institutional support that existing executive branch agencies were unequipped to
provide. As W.F. Willoughby, one of the chief architects of the Budget and Accounting
Act (Skowronek [1982]), framed the requirements of an executive budget,
[T]he Chief Executive...must be furnished with some organ through which he
may effectively discharge the large responsibilities thrown upon him. There
must be some service...to compile [agency reports] and analyze their contents...and to compile such data for budgetary purposes; and to make such
investigation into the manner in which the several services are organized, the
methods employed by them and their needs as will enable the Chief Executive to assure himself that such services are properly organized and conducted
and to determine for himself the propriety of their demands...” (Willoughby
[1918] in Short 453).
Moreover, though retrospective analyses have noted that the early BOB’s non-budgetary
functions (e.g. policy analysis, legislative clearance) were meager in comparison with
those of the bureau’s future (Kiewiet and McCubbins [1991]), upon its creation BOB
was considered to be more than a neutral conduit for transmitting budget requests from
agencies to the president (Short [1923]).
Congress provided this specifically Presidential support agency in the form of the
Bureau of the Budget (BOB).16 BOB was located in the Treasury Department until the
16
The BAA also created the General Accounting Office (now Government Accountability Office), a
staff agency of Congress for investigation of spending and program management in executive agencies.
Our theory accommodates this inasmuch as it specifies an incentive for Congress to support the President
with information, but not an incentive to give the President a monopoly over it. Since Congress was
not relinquishing its role in budget decisions (Kiewiet and McCubbins [1991]), it naturally sought an
analytic capacity that could support its decisions as well. Notably in light of the Bureau of Efficiency
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Executive Office of the President was created in 1939, but was considered from the first a
Presidential agency: “The Bureau of the Budget, although nominally under the jurisdiction of the Treasury Department, is in reality an independent service directly responsible
and subject to the president. The Director and Assistant Director of the Budget are appointed by the president without Senate confirmation” (Short [1923]: 437). When BOB
was transmuted into the Office of Management and Budget (OMB) in 1970, appointment
of its director was made subject to Senate confirmation. Arguably, this raises the profile
of the director and mitigates his link to the President. Nevertheless, OMB directors have
maintained their direct connection with the President. As Nixon OMB director Roy Ash
asserted to Congress, “The OMB director serves as the personal agent of the President
in the performance of Presidential duties” (House testimony, Kiewiet McCubbins 168).
The inability of the BOE to crack the President’s inner circle explains why the required
support institution had to be attached to the President specifically in order to be useful.
Analytic capacity, even if “neutral,” must be directed to particular purposes. The BOE
experience demonstrated that when such capacity is directed in the interests of one
principal to report to another, its reports should not be expected to make an impact.
They are steered toward the concerns and information that the first principal wants
presented. If the BOB were directed by Congress or by an independent directorate in
the executive branch, the same problem would have arisen.17 Similarly, it is apparent
experience, the BAA did not repeat the attempt to create one informational institution to serve both
Congress and the President.
17
Kiewiet and McCubbins [1991] convincingly argue that the BAA and creation of BOB did not
signify “abdication,” but rather a delegation useful to Congress. However, their argument that BOB
was intended merely to provide the President with “impartial policy analysis and independent judgment”
(p. 168) does not account for the direct linkage between BOB and the President. There are various other
structural choices that would better ensure impartiality and independence with respect to the (sitting)
President’s interests. The BOE itself is one possibility, and the International Trade Commission, a
Presidential advisor independent of both Congress and the President (and therefore not particularly
influential with the President) is another. Our argument squares the design of BOB as a specifically
Presidential rather than “independent” institution with Kiewiet and McCubbins’s broader point that
Congress’s institutional choices can be interpreted as serving its own policy interests.
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that the required support could not be provided by existing executive branch bureaus or
departments responsible for line programs (including the Treasury Department, which in
the Senate version of the BAA was to exercise supervision over the BOB). The individual
units might have a degree of tunnel vision about and belief in the vitality of the programs
within their purview; the President’s interests would encompass particular programs of
special importance to him, but also the overall coordination of departmental programs.
Of course, BOB/OMB is not “neutral” any longer, if it ever was; it is the “poster
child” of politicized agencies in the EOP (Heclo [1999]). Though blame for starting the
deterioration of neutral competence frequently goes to Richard Nixon, recent analysis
has suggested that explicitly political functions were pushed to and accepted by BOB
as early as the Roosevelt and Truman administrations (Dickinson and Rudalevige [20042005]; Dickinson and Rudalevige [2007]). Though many scholars have argued that these
changes are not in Presidents’ interest, Presidents apparently disagree. Scholars can
either try to find a theory or interpretation such that their actions as sensible, or commit
to a particular theory and deduce from it that their actions are not. From our perspective
(the former approach), Presidents are simply responding to the strategic problem of
eliciting good advice in a setting with potentially conflicting values.
6.2.4
The Joint Committee on Reorganization
President Wilson’s focus in office was occupied otherwise than on reorganization planning. Moreover, while the bruising institutional battles over the locus of policymaking
authority begun under Presidents Roosevelt and Taft continued below the presidential
level (Skowronek [1982]), the war effort led to a temporary expansion of presidential powers over executive branch organization that vitiated the demand for reform. As Congress
turned to retrenchment of bureaucratic operations and the federal budget after the Civil
War, it took up the issue again after World War I by initiating the Joint Committee
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on Reorganization shortly after the Republican election victories in 1920. However, the
landscape of reorganization planning had changed from the nineteenth such that legislators recognized they could not direct a successful reorganization effort entirely from
Capitol Hill. Though the initiative was Congress’s, Committee members readily acceded
to the request of the newly inaugurated President Harding not only to have a representative on the Committee, but for this representative, one Walter Brown, to chair
it (Arnold [1998]. The Joint Committee de facto became another presidential reorganization commission when its congressional members found themselves in accord with
President Harding’s stated goals for the project and subdelegated its work entirely to the
President’s representative (Arnold [1998]).
Like President Taft’s Commission on Economy and Efficiency, the Joint Committee on Reorganization made both large-scale, executive branch-wide recommendations,
and small-scale recommendations about practices in particular departments. Also like
Taft’s Commission, the Joint Committee’s large-scale recommendations focused on the
common theme of organizing the entire executive branch to facilitate presidential management, and therefore direction of its activities (Arnold [1998]). One of its general
recommendations, the principle of organizing executive branch bureaus and independent
regulatory commissions by purpose, has a familiar ring from Taft’s Commission. As
W.F. Willoughby, a public administration scholar and strong reorganization advocate,
defended this proposal at the time, it would create “one highly unified and integrated
piece of administrative machinery,” and would ensure “an effective system of overhead
administration and control” (Willoughby [1923]: 10). Willoughby’s early version of what
became the public administrationist’s standard call for “clear lines of authority” in the
executive branch converging on the President at the top of the organizational pyramid of
course fell neatly in line with the newly reinvigorated presidential sense of responsibility
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dation, as in other cases, was that the existing lines of authority were perfectly clear
to Congress and its committees operating in policy networks or “subgovernments” with
bureaus and commissions. That they were not cognizable to the President, and therefore inhibited presidential direction, was from Congress’s point of view not a bug in the
system but a feature.
The Joint Commmittee’s other general recommendations went further. It also proposed, first, that the President should be delegated standing authority to reorganize the
executive branch at will. Effecting a one-time reorganization to facilitate presidential direction of the executive branch along the line’s of the Joint Committee’s proposal would
not solve the long-term problem of presidential control if bureaus and commissions created in the future would again undermine the unity of executive branch operations. In
addition, the Joint Committee proposed transferring the organizational home and control of the newly created General Accounting Office to the Treasury Department (Arnold
[1998]).
The final sense in which the Joint Committee on Reorganization rehearsed the experience of Taft’s Commission on Economy and Efficiency was the treatment of its recommendations by Congress, which declined to enact a single one of the large or small-scale
proposals. Thus, we see again a presidential commission (de facto, in the Joint Committee’s case) recommending organizational changes that would in essence expand the
President’s effective authority over the substance of policy decisions in the executive
branch and independent commissions, and we see again Congress declining to take the
suggestion. The case of the Joint Committee on Reorganization is important from our
standpoint first as another data point consistent with our model’s logic of executive
branch organization, but also from the purposes of evaluating the performance of other
competing explanations. In particular, delegation theory (e.g. Epstein and O’Halloran
[1999], Huber and Shipan [2002]) explains legislative delegation of substantive policy
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authority to the executive branch in partisan terms. While Taft’s Commission issued
its recommendations from a Republican president to a Democratic Congress, the Joint
Committee on Reorganization operated under unified Republican government from start
to finish. Given substantial overlap in the thrust of proposals made by each commission, we can conclude that the delegation in question entailed too great a sacrifice from
Congress’s institutional point of view to justify it, regardless of partisan unity across the
branches.18
6.2.5
The President’s Committee on Administrative Management
Perhaps the most noteworthy, even notorious, presidential reorganization proposals emerged
in 1937 from the President’s Committee on Administrative Management under Franklin
Roosevelt — better known as the Brownlow Committee after its chair, Louis Brownlow.
The Brownlow Committee grew from FDR’s perpetual dissatisfaction with his tools to
manage and coordinate the burgeoning administrative state, as reflected in his numerous
abortive attempts during his first term in office to fashion some type of coordinating
and planning mechanism out of the cabinet and staff resources available to him (Arnold
[1998]). Shortly after his landslide reelection in 1936, Roosevelt identified administration as the chief defect of the programs established in his first term, and he charged the
Brownlow Committee, a “blue ribbon” panel of national experts on public administration
if ever there was one,19 with devising a solution to it.
18
It is also difficult to explain Congress’s handling of these recommendations with delegation models
that are sensitive to the requirement that both Congress and the President must agree to rescind the
delegation (Volden [2002]). When the Joint Committee recommendations were introduced in Congress
in 1924, the Republicans had six years of unified government and eight more years in control of the
presidency ahead of them.
19
In addition to Brownlow, the Committee’s principals were Charles Merriam, a noted political science
professor at the University of Chicago, and Luther Gulick, at the time president of the Institute of
Public Administration. Its research staff of a few dozen included numerous political scientists and
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Brownlow and his colleagues began their 1937 report, formally addressed to the President but intended for a much broader audience, with the now-famous plaint that “the
President needs help.” The report keyed on the immense and increasing demands that
modern society and government place on the president. Its underlying assumption, now
supported by a full-fledged field of public administration, was that sound management of
disparate organizational units required an authoritative decision maker at the “top” who
could coordinate and rationalize the actions of the system as a whole (Arnold [1998]). In
the Committee’s analysis, both the feeble tools of the Presidency as an institution and
the structure of the executive branch undermined the President’s position as this authoritative actor. For instance, it was the Brownlow Committee that originally referred to
independent regulatory commissions as a “headless fourth branch” of government, as if
this were self-evidently an administrative abomination.
The Brownlow Committee’s recommendations therefore were both to strengthen the
Presidency and to reform the executive branch to make it more amenable to presidential
control. As Brownlow communicated the case to the President,
[M]anagerial direction and control of all departments and agencies of the
Executive Branch...should be centered in the President...[W]hile he now has
popular responsibility for this direction, he is not equipped with adequate
legal authority or administrative machinery to enable him to exercise it”
(quoted in Arnold [1998]: 103).
Brownlow was simply articulating what Terry Moe would recognize sixty years later
as the general problem of “incongruence” Presidents face between the responsibilities
and resources of office. The Brownlow Committee’s report essentially asked Congress to
recognize this problem on a grand scale and rectify it.
public administration scholars.
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The Brownlow Committee applied its core assumptions to deduce recommendations
that uniformly sought to centralize control and strengthen the President’s organizational
position in six areas: White House staff, personnel management, fiscal management,
planning management, administrative reorganization of the government, and Executive
accountability to Congress (on Administrative Management [1937]; Polenberg [1966]; Emmerich [1971]; Arnold [1998]). The White House staff segment’s core recommendation
was to establish an Executive Office of the President. The Executive Office would consist
of the Bureau of the Budget, still formally located in the Treasury Department at the
time, and six newly-created presidential assistants without portfolio to be assigned to issues at the President’s discretion. In terms of personnel management the report proposed
replacing the Civil Service Commission with a personnel agency headed by a single director directly responsible to the President (unlike the multi-member, partisan-balanced
CSC). The fiscal management section recommended, akin to the Joint Committee on
Reorganization under Presidents Harding and Coolidge, a significant reduction of the
authority of the General Accounting Office (an accounting agency created in 1921 and
answerable primarily to Congress) to disallow agency expenditures and transfer of this
authority and control of government accounting systems to the Treasury Department.
For planning management the Brownlow Committee recommended strengthening FDR’s
National Resource Planning Board and institutionalizing its place in the President’s management arsenal. The report’s segment on executive branch organization made a number
of sweeping recommendations: for a permanent grant of reorganization authority to the
President; for the creation of cabinet-level Departments of Public Works, Social Welfare,
and Conservation; for all quasi-legislative and executive functions of independent regulatory commissions to be stripped from them and attached to an appropriate cabinet-level
department (leaving only their adjudicative functions pursuant to existing regulations
independent of the President’s immediate authority). Finally, the President’s Commit239
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tee sought to make its recommendations more palatable to Congress by arguing that
a rationally administered executive branch would be more easily held accountable by
Congress.
In essence, the President’s Committee on Administrative Management informed Congress
that the demands of modern government as well as the structure of American institutions
imply that the president should have ample tools for “administrative management” over
cabinet departments from their upper echelons down to the street level, independent
regulatory commissions, public corporations — essentially any government entity other
than Congress or the courts and their staffs. The proposals stemming from the Brownlow
report, complete with touchingly earnest references to the intellectual support for them,
identified the requisite tools and asked Congress to provide them forthwith. But it is
impossible to see this expansive concept of “administrative management” and not see
“substantive policy discretion.” Particularly since the Supreme Court clarified limits on
the President’s authority over independent regulatory commissions in Humphrey’s Executor v. United States (1935), moving the policy making and executing functions of
independent commissions into the cabinet stream would significantly increase the President’s authority over their use of rulemaking power.
The Brownlow Committee report was presented by a Democratic president, recently
reelected by an overwhelming margin, to an overwhelmingly Democratic Congress. If ever
there was a time when partisan leanings in Congress would support expanded presidential
authority, this would seem to be it. Yet events turned out very differently. Released on the
heels of FDR’s ill-fated court packing plan, the Brownlow Committee’s report created
a sensation both in Washington and in newspapers around the country. Though it
seems hard to fathom today, in 1937 a commission’s proposal to reorganize the executive
branch was front page news. Critics labeled the Brownlow Committee’s plan a “dictator
bill” and charged Roosevelt with attempting to aggrandize presidential power beyond
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Constitutional recognition. Alarmed citizens deluged Congress with telegrams objecting
to the proposals (Burke [2000]). Lobbying groups and several think tanks (including the
Brookings Institution) arrayed against the proposals (Polenberg [1966], Arnold [1998]). In
a White House summit for congressional leaders, FDR conducted a several-hour seminar
on the fine points of the plan to stunned silence (Dickinson [1996]).
President Roosevelt’s congressional lieutenants nevertheless dutifully introduced a
sequence of bills that would implement the plan, but its reception in Congress was not
much kinder. The Senate narrowly passed a watered down bill that significantly departed
from the Brownlow recommendations in terms of the President’s authority over bureaus
and commissions, reorganization, and numerous other aspects; the House considered the
bill and voted to recommit. With that, the push for a broad reorganization bill ended
(Emmerich [1971]). The coalition against the proposals in Congress naturally included
most Republicans and anti-New Deal Democrats (Polenberg [1966]). Also crucial, however, was that “many New Dealers...were unwilling to place pet bureaus at the mercy
of the President...It was the desire to retain Congressional prerogatives which united
most factions against the measure” (Polenberg [1966]: 126). Thus, members of Congress
perceived the expanded substantive authority called for in the recommendations, and
members including President Roosevelt’s partisan and ideological allies reacted against
these delegations.20
Altogether, the congressional reception amounted to a rout. A contemporary newspaper account called it “the crisis of President Roosevelt’s political career” (New York
World-Telegram, cited in Polenberg [1966]: 175). A noted public administration scholar
has called the Brownlow debacle the “worst defeat that President Roosevelt would suffer
in three terms as president” (Roberts [1996], Administration and Society). Roosevelt
20
In addition to these overall reactions, members’ policy preferences clearly played a role in defeating
some of the proposals, such as that for a department of public welfare; some members did not want
either the legislative or executive branch focused on this (Polenberg [1966]).
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and his agents on the Brownlow Committee obviously overestimated the degree to which
arguments for new management tools and new authority based on the President’s Constitutional responsibility would resonate with Congress. To put it bluntly, whether the
President felt responsibility for unitary management of policy making and implementation in the executive branch — whether by dint of the demands of modern government,
the Constitution, or some other source — was beside the point. If the tools for that
management are not somehow “inherent” in the president’s office — and they clearly
were not since the Brownlow Committee report recommended Congress provide them
— then provision for them must be made by Congress. But Congress had no political incentive to provide the expansive tools requested by the Brownlow report, because
providing those tools to the president would have upset authority relations between regulatory agencies and Congress with which the latter was presumably satisfied in the first
place.21 If Congress had wanted the President to have greater control over regulations in
independent commissions, it would have written that control into the relevant statutes,
if not initially then in amendments;22 if Congress had wanted independent agencies to
be within the president’s ambit, it would have put them there (Lewis [2003]).23
While the core elements of the Brownlow proposals were routed in 1938, FDR achieved
legislation in 1939 supporting two recommendations from the 53-page report: increased
presidential staff and authority to reorganize the executive branch subject to legislative
21
Note that we are not necessarily assuming that the initial statutory bases of these authority relations
was the optimal product of a grand design from Congress’s point of view. Rather we are making the
more modest point that whatever evolutionary process led to these arrangements, Congress as of 1937
did not desire to upset established relations by transferring substantive authority to the President.
22
It might seem significant from this standpoint that the Interstate Commerce Commission was initially
located in the Interior Department and in 1888 Amendments to the Interstate Commerce Act was made
independent. In fact, however, the ICC was never really subordinate to the Interior Department and
the transfer out of it was made with President Cleveland’s assent (Cushman [1941]).
23
In this respect the argument that Congress expected presidents to exercise such control before
Humphrey’s Executor, and that the case upended well-balanced relations between the branches, does
not hold up. If Humphrey’s executor constrained presidential power in a way detrimental to Congress,
it would have been easily fixed with amendments to the agencies’ organizing statutes.
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veto by concurrent resolution. These components were codified in the Reorganization Act
of 1939 passed by the 76th Congress, with significantly smaller Democratic majorities
than the 75th that had defeated the broader proposal. To underscore the point that
Congress did not want the president to tinker with authority arrangements in the line
bureaucracy, whether cabinet or independent regulatory agencies, the successful bills
listed twenty one agencies that reorganization plans pursuant to the new law could not
touch.
Though severely limited compared to the full scope of the Brownlow Committee’s
proposals, these Congressional grants of staff and limited reorganization authority to the
president led inexorably and directly to “the institutional presidency” (Sander [1989];
Burke [2000]). FDR issued Reorganization Plan I in 1939, creating the Executive Office
of the President to house the newly-authorized presidential assistants in the White House
Office, the Bureau of the Budget (which was formally moved from the Treasury Department), and several other staff and coordinating bodies (Roosevelt [April 25, 1939]). The
plan was uncontroversial in Congress (Polenberg [1966]). The Bureau of the Budget
quickly became the organizational centerpiece of the EOP, vastly expanding its capacity
for review of program management and substantive policy analysis between 1939 and
1942 (Sander [1989]). It also began to assume explicitly political advisory functions
(Dickinson and Rudalevige [2004-2005]; Dickinson and Rudalevige [2007]).
The Executive Office of the President was created as a collection of units with analytic
capacity to support Presidential decision making across a diverse set of decision areas
(Rossiter [1949]; Sander [1989]). In his 1939 Message to Congress accompanying Reorganization Plan 1 (Roosevelt [April 25, 1939]), President Roosevelt declared of his staff
assistants, “Their task will be to help me get information and condense and summarize
it — they are not to become in any sense Assistant Presidents nor are they to have any
authority over anybody in any department or agency.” FDR’s rationale for the EOP was
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to enable the President “to get the information which will permit him the better to advise
the Congress concerning the state of the Union and the program of the Government.”
The newly-created institutions were to provide information and analytic capacity to support the President in making decisions he already had the authority to make (including
coordinating the federal budget); they did not confer new authority on the President. As
FDR’s message to Congress put it, “What I am placing before you is not the request for
more power, but the tools of management and the authority to distribute the work so
that the President can discharge those powers which the Constitution now places upon
him.” The EOP has retained this basic character through its history, though it now
has a greatly expanded capacity in policy formulation, has become much larger in terms
of both the number of employees and the number of units contained in it, and those
units are more functionally specialized (Dickinson [1996]). The EOP now encompasses
the White House Staff, Office of Management and Budget (successor to BOB), National
Security Council, Council of Economic Advisors, National Economic Council, Domestic
Policy Council, White House Office of Legal Counsel, U.S. Trade Representative, and
numerous other Presidential support offices.
In short, the EOP consists of informational support for the President in identifying alternatives and making decisions. Many units of the EOP formulate policy for the
President to pursue essentially unilaterally; others support development of an agenda
to be worked out with Congress. When the President does act unilaterally, it is typically pursuant to information and advice processed by units within the EOP. The EOP
does not have line duties of policy implementation or a portfolio in the sense that cabinet departments and independent commissions do. Congress does not invest its units
with significant regulatory powers. Though some of of the senior personnel are Senateconfirmed Presidential appointees (e.g., Director of OMB, members of the CEA), all
units within the EOP are closely attached to the President and have little or no direct
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contact with Congress.
Congress quickly recognized the value of the EOP and built on it. Given Presidential
initiative in a policy area, members of Congress perceived provision for high-quality
advisors to the President as ultimately in their policy interests. Seligman [1956] reviews
the evolution of this thinking in Congress’s deliberations on the Full Employment Act
of 1946, which created the Council of Economic Advisors as a unit of the EOP. Franklin
Roosevelt had demonstrated the President’s willingness to take initiative in economic
policy, and the Act reflected Congress’s “recognition that, in matters of economic policy,
leadership was to be expected from the President” (418). This leadership expectation,
in turn, directly implies the structure of institutional supports to make it effective. An
early draft of the Full Employment Act placed the CEA as an independent agency in the
executive branch. Testimony pointed out that this structure would have undermined the
linkage between the CEA and the President, and therefore Presidential leadership (Sander
[1989]). As a result the bill instead created the CEA in the EOP, “solely responsible to
the President” (Seligman [1956]: 417). The point of this linkage was to improve policy:
“Proponents of the bill argued that had Roosevelt been equipped with such a group of top
professional economists as advisors, he might have avoided errors of economic prognosis
and policy” (417).24 The significance of this episode from our standpoint is clear. FDR
demonstrated Presidential initiative in economic leadership that Congress was not in a
position to trammel, and in light of that fact, Congress’s best response was to equip the
President with the information to use it.
Thus, what Congress granted President Roosevelt the authority to create in 1939
24
Seligman [1956] also argues that the formal creation of the CEA was in part intended to restrict
the President’s reliance on informal, unseen advisors for economic policy (e.g. FDR’s use of the “brain
trust”), and in this sense it limited the President’s control over support institutions. The requirement
of Senate confirmation for CEA appointees reflects this. Since the CEA had coordinate responsibilities
of reporting to Congress under the Full Employment Act, it would have been contrary to Congress’s
interest in reliable information to delegate to an informal group of anonymous advisors; it is easier to
interpret information provided by a source with known leanings.
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was not a new structure of authority over the entire executive branch and independent
commissions. Such a structure was proposed by the Brownlow Committee and defeated.
What Congress did grant the President was a support institution, closely aligned with
the sitting President, for information processing to aid the President in making decisions which he has the authority to make by some other source. Arguably, and perhaps
ironically, this very informational capacity attached to the President has increased the
President’s role in policy formulation and helped solidify congressional deference to the
President as a policy agenda setter.25 Informational capacity, once placed at the President’s discretion, is not easily confined. The point remains that Congressional treatment of the Brownlow Committee’s proposals can be organized in terms of whether they
granted de facto authority over policy and implementation, on the one hand, and informational capacity, on the other. The former category was uniformly unsuccessful in
Congress; the only successes were in the latter.
The models of the previous chapter provide theoretical underpinnings for this differential treatment. The controversial aspects of the Committee proposal implied a wholesale
reorientation of the relative power of the president and Congress over the executive branch
bureaucracy. Congress emphatically had no interest in giving the president an easier time
controlling independent regulatory commissions. Congress had no interest in making it
easier for the president to shift sub-cabinet agencies into units more amenable to his
direction. For the president to propose such changes is to propose that Congress relinquish its institutional interests in influencing these agencies. The successful components
of the Brownlow reforms are qualitatively different in a way implied by our models. By
expanding the president’s staff and granting a measure of authority to organize his staff,
Congress was not granting new tools of control over agency activities or surrendering
25
Sander [1989] demonstrates that as early as the 1940s, EOP staff discussed ways to increase their
role in policy planning.
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large swaths of the policy landscape to the president’s discretion. Rather, Congress was
granting the president the informational resources to exercise the discretion and use the
authority he already had. This is a distinction that directly tracks the implications of
our logic of executive branch organization. Given Presidential authority to act in some
way, Congress has just as much incentive as the President to ensure the informational
capacity to use that authority wisely.
Discussions of EOP evolution over the twentieth century often note its increasing
politicization—that Presidents (especially Nixon and Reagan) have undermined the original “neutral competence” of the EOP (especially OMB and units outside the White House
Office) in favor of a “politically responsive competence” (Moe [1989]; Heclo [1999]; Dickinson [2005]). In emphasizing the EOP’s structural linkage to the President, our point
is not that Congress sought initially to support a politicized EOP or to deny that it has
become more so over time. Rather, it is that Congress sought to support a structure
that was linked to the President’s interests as the President saw them. Given the strategic problems of communication among actors with different goals, this is the only way
to ensure that EOP provides information and analytic capacity that the President will
actually listen to. When those perceived interests change the orientation of the EOP will
change. If the President believed his interests to lie in “neutral competence,” then EOP
structures would reflect that. If the President believed his interests to lie in “responsive
competence,” then EOP structures would reflect that instead. What seems “neutral” to
agents with thirty years of buy-in to an activist national agenda may not to a principal
bent on retrenchment.26 It is no use creating analytic capacity with an orientation, “neutral” or otherwise, that well-intentioned institutional designers think future Presidents
26
The strategic problem here is not simply that such agents obfuscate due to overt “bias” relative to
the principal (though that would be a problem too). Rather it lies in how the principal interprets advice
that supports a course of action the principal does not initially favor but the agent might. Consider
the inference “hawks” should draw if McGovern goes to China: is that because of the benefits to U.S.
security and economic interests, or because McGovern is “soft on communism”?
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should heed. If they do not find it useful and trustworthy they will not listen to it.
It is also notable from the standpoint of partisan theories of executive branch organization that the Brownlow Committee recommendations were considered by Congresses
with the most lopsided majorities from the President’s party since Reconstruction. Except to say that the extent of the delegations to the President were simply too great for
Congress to bear, partisan theories of delegation do not help to explain the treatment of
the Brownlow Committee recommendations. More importantly, partisan theories cannot
explain the difference in Congress’s treatment of the Brownlow recommendations that entailed expanded substantive authority, on the one hand, and informational support to act
on existing authority, on the other. Simply put these equivalence classes are not distinguished by other theories of Congressional incentives over executive branch organization,
and therefore they cannot account for the experience of the Brownlow Committee. Some
scholars have explained these meager successes of the Brownlow proposals in Congress
by pointing out that it was the relatively modest elements of the report that Congress
ultimately approved (Polenberg [1966]; Dickinson [1996]), and compared to the expansive
scope of the Brownlow Committee’s full set of recommendations this is certainly true. At
the same time these reforms led to creation of the Executive Office of the President with
Congress’s explicit approval, which can only appear minor relative to the breathtaking
scope of what the Brownlow Committee proposed. More to the point, this explanation
does not explain why Congress would have any positive incentive to enact the components that it did, or why it treated different components of the Brownlow Committee
proposal so differently.
6.2.6
Summary
As Presidents acquired and used greater initiative in policy making (especially domestic
policy) in the early to mid twentieth century, a mismatch appeared between Presidential
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authority on the one hand and Presidential support institutions to use that authority
intelligently on the other. This mismatch was the product of executive branch development over the nineteenth century under which department secretaries oversaw larger and
larger staffs of line agents and came increasingly to act as program officers who interacted
directly with Congress. Moreover, under many Presidents executive officers up to the
highest levels were selected according to a logic of party coalition maintenance rather
than fidelity to any specifically Presidential program. These conditions created an “evolutionary drift” away from an advisory system tightly linked to the President established
in the Federalist era. Given weak presidential initiative on domestic policy, this drift
was not particularly costly in policy terms. In foreign policy and defense, Presidents
relied on the same advisory system created in the 1790s. Even when that failed Presidents could credibly “act as their own Secretaries of State” (Milkis and Nelson [2008])
(Monroe, McKinley) or general staff in war time (Polk).
In the early twentieth century Presidents began to acquire or take more room to
act authoritatively on domestic policy. This resulted from a combination of changing
President-party linkages that made Presidential initiative realistic, and changing socioeconomic conditions and policy demands on the federal government that made some sort
of policy initiative necessary. Needless to say, not all early twentieth century Presidents
took the initiative of unilateral action, but the two Roosevelts demonstrated that it was
available to Presidents who could claim it.
Given this development, the evolutionary drift that occurred from the eighteenth to
nineteenth centuries became more threatening to Congress. Congress responded to this
development by ameliorating the mismatch between newfound Presidential policy making authority and Presidential support institutions. In light of the recurrent institutional
and partisan conflicts between the branches, Congress may well have preferred to do this
by restricting Presidential authority. As the above analysis of Presidential reorganiza249
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tion requests has shown, it generally did take this approach when Presidents essentially
requested greater authority over substantive policy making in the executive branch. But
when Presidential authority could not be cabined or when Congress perceived an interest in expanding it, these interbranch conflicts receded in importance and Congress
supported the creation of Presidential support organizations. These organizations were
“Presidential” in the sense that they were closely linked to the President institutionally, and allowed for Presidential informational capacity to use available authority as the
President saw best to use it. To be sure, Congress has at times attempted to create nonPresidential organizations to advise the President (BOE), and at times proposed others
that did not make it into law (Senate version of BOB as answerable to the Treasury Department, early House design of Council of Economic Advisors as independent executive
agency). It is informative for our purposes that the clearest example of such a design
from this period was not successful.
6.3
Presidential Foreign Policy Authority
The models of the previous chapter turn on the extent to which the president has authority irreducible by Congress to affect policy in relevant ways. A natural area for
application of this perspective is foreign policy and national security. Scholars and court
cases have long noted a sharp distinction in inherent presidential authority in foreign and
domestic policy. A common thread interpreting Article II of the Constitution is that it
confers not only general executive power on the president, but also allocates specific enumerated powers that expound on and interpret the general grant (Corwin [1957]: 179).
Hamilton as Pacificus, National Gazette of the United States over Neutrality Proclamation of 1793). These latter pertain most conspicuously to foreign policy and defense. For
instance, under Article II the president negotiates treaties, receives ambassadors, and is
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commander-in-chief of the armed forces when in service of the United States.
The presidential power over foreign affairs and defense conferred by these provisions
is highlighted by the Supreme Court in the case of United States v. Curtiss-Wright
Export Corp (1936). Justice Sutherland’s opinion notes specifically the “plenary and
exclusive power of the President as the sole organ of the federal government in the field
of international relations,” and that this power “does not require as a basis for its exercise
an act of Congress.” Thus, the president possesses constitutionally-based authority to
make discretionary policy decisions in the field of foreign policy (Prakash and Ramsey
[2001]). This is perhaps the strongest possible statement of presidential autonomy over
policy-relevant choices.
To be sure, presidential power to act unilaterally in foreign affairs and national security has not been static since 1789; if anything, it has increased (Corwin [1957]). Some
of these expansions occurred almost immediately after the constitution took effect. For
instance, in making treaties it quickly became established practice that the executive
branch completely and independently conducts the negotiation, and presents a finished
product for approval or rejection by the Senate. This specific meaning of the president’s
constitutional authority to make treaties subject to Senate advice and consent is not
inherent in the constitution. President Washington appeared in the Senate in 1789 to
seek advice on ongoing treaty negotiations in their early stages. The Senate promptly
committed the President’s request for advice to a committee, causing an irritated President Washington to pledge never to approach the Senate in this way again (Hayden
[1920]). Personal consultation gave way to updates by the President of ongoing negotiations, and by 1792 John Jay was sent to Great Britain by the President with no attempt
by the Senate to offer diplomatic instructions. The Jay Treaty was brought back in
1794 and presented to a Senate that had no input on its negotiation. A further important development in unilateral presidential authority in foreign affairs was the Neutrality
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Proclamation of 1793, in which President Washington declared the United States neutral
in the latest conflict between France and Britain. Democratic-Republicans (including
President Washington’s former Secretary of State Thomas Jefferson) contended that the
proclamation infringed on Congress’s constitutional power to declare war (or, implicitly,
not to declare war), but covered by a constitutional counter-argument that the conduct
of foreign affairs was an executive prerogative, the president’s agenda-setting move stood.
In reference to the era of “modern” presidents, Fisher [2004] has argued that the
expansion of presidential prerogative in these areas has evolved from extra-constitutional
actions by presidents since Harry Truman. Silverstein [1996] notes that Congress itself
has accepted expanded claims of presidential prerogative in foreign policy, and implicitly
sanctioned these claims in statutes attempting to structure presidential authority. We
will further incorporate these observations into our argument below; for the time being
we simply note that arguments about the evolving expansion of presidential prerogatives
do not imply that the initial condition from which this evolution occurred was one of
co-equal participation at every point of decision making in these policy areas by Congress
and the president.
Needless to say, plenty of politicians and scholars dispute the degree of the president’s
inherent authority over foreign affairs granted or implied by the Constitution (e.g. Fisher
[2004]). In the National Gazette of the United States, Hamilton and Madison debated this
very issue as “Pacificus” and “Helvidius” in the context of the Neutrality Proclamation
of 1793; each side continues to resonate. However, in a sense the important point is
not that the president’s expansive powers in this area are indisputable or universally
accepted, or that they are explicitly written in the Constitution. It is that a claim
to these powers is at least credible and defensible. As long as that is so, the unity
and dispatch of a singular executive officer noted by John Jay in Federalist 64 allows the
president significant initiative to act unilaterally (Corwin [1957]: 178), which itself confers
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the power that is claimed (Howell [2003]). “These and all other [executive] powers in the
diplomatic field” have as a result come to be “policy-forming powers” (Corwin [1957]:
181, emphasis original). The task then falls to detractors of such action to show that
it is illegitimate on any reasonable reading of the Constitution—a difficult feat on the
assumption that such action is pursuant to a defensible Constitutional interpretation in
the first place. The President does not have to prove an action to be Constitutionally
legitimate and then take it; the President can instead act and challenge opponents to
prove the action Constitutionally illegitimate (or otherwise unsound).
Altogether, as Wildavsky [1966] contends, the President’s “formal powers to commit
resources in foreign affairs and defense are vast. Particularly important is their power as
Commander-in-Chief to move troops...Presidential discretion in foreign affairs also makes
it difficult (though not impossible) for Congress to restrict their actions.” If Congress
recognizes this it has powerful incentives to bolster such inevitable executive action with
informational resources.
The president’s inherent powers under Article II are different in the case of domestic
affairs. For instance, compare the Curtiss-Wright decision to Youngstown Sheet & Tube
Co. v. Sawyer (1952). Following the failure of steel mill management and the United
Steel Workers to agree on a collective bargaining agreement in 1951, the steel workers
union declared its intent to strike. President Truman, worried about the disastrous consequences of drastically reduced domestic steel output for the Korean War effort, ordered
his Secretary of Commerce to seize and operate domestic steel mills. Justice Black noted
that there was no statutory authority for this action, and the president did not claim
any; thus the justification for the seizure, if any, must be constitutional. Justice Black’s
majority opinion went on to unequivocally invalidate the president’s assertion of this domestic policy authority:27 “The President’s order...directs that a presidential policy be
27
The Youngstown decision is all the more informative because the President rationalized the seizure
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executed in a manner prescribed by the President...The power of Congress to adopt such
public policies as those proclaimed by the order is beyond question...The Constitution
does not subject this lawmaking power of Congress to presidential or military supervision
or control.” Of course the Constitution is not silent on enumerated powers in domestic affairs; it simply allocates them differently than foreign policy and national security
powers.
Putting these decisions together, we may discern at least a stylized generalization,
that in foreign affairs, policy must go through the president; in domestic affairs, Congress
has much greater flexibility to parcel out policymaking authority.28 In the case of foreign
affairs, our theory makes a crisp prediction. Since execution, and indeed an important
part of foreign policymaking generally, must be under the president’s influence, Congress
has a strong incentive to support the president’s capacity with institutions to gather,
analyze, and faithfully transmit information to the president. In fact, this point is true
whether we can locate presidential prerogative over foreign affairs in the Constitution, or
whether its most expansive readings are extra-constitutional as Fisher [2004] has argued.
Regardless of the source, if presidential prerogative is generally accepted by all three
branches of government, Congress has powerful incentives to support presidential decision making capacity. This in turn underpins the often-noted presidential informational
advantage over Congress on these issues. In the case of domestic policy, it is easy to see
that Congress can gain by allocating policymaking authority to agents other than the
president. Of course the logic sketched in the previous chapter would then imply that
Congress should prefer these agents, as the source of policy implementation authority,
on the grounds of its effect on the war effort. Even his expansive foreign policy authority could not save
the assumption of unilateral power when exercised domestically.
28
Our argument does not rest on the extreme claim that, given appropriation of funds by Congress,
the President has essentially all available federal power in the areas of foreign policy and defense. The
important point for our purposes is that there is some presidential authority that Congress cannot
remove, not that the president has all authority once Congress has appropriated funding.
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to be as informed as possible. But with implementation authority decoupled from the
president, this preference for information does not translate into congressional support
for the president’s informational capacity, or more generally the institutional presidency.
Edward Corwin [1957] famously notes, “the Constitution is an invitation to struggle
for the privilege of directing American foreign policy.” While it allocates powers to the
president in foreign affairs of a scope that it does not allocate to the president in domestic
affairs, it does not allocate all powers over foreign affairs to the president. Our argument
does not assume or require that it does. The important point for our purposes is not
that the president somehow possesses the only real authority over foreign affairs lodged in
American institutions (as the most expansive reading of the Curtiss-Wright case might
suggest) — though we clearly must assume that the president has some such power,
and hope to have shown that we are justified in doing so. The important point is that
the president’s authority over foreign affairs, explicitly granted by the constitution or
implied by the way its allocation of powers will actually play out, is both nontrivial and
greater than the president’s authority from the same source over domestic affairs. The
comparison is not so much about the foreign policy authority of the president to that
of Congress, but the foreign vs. domestic policy authority of the president. In a less
quoted passage Corwin [1957] goes on to say, “[I]mmensely the most important single
factor in the determination of American foreign policy has been presidential guidance of
it.” It would be inconceivable to replace “foreign” with “domestic” and still capture the
broad sweep of American political history. This is the relevant comparison for analyzing
Congress’s grants of informational and institutional resources to the president across
these fields, such that these grants follow the president’s largely exogenous authority in
these fields.
Obviously, numerous scholars have noted the President’s differential authority in foreign and domestic policy. It is the premise of the large literature on the “two presidencies”
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thesis (Wildavsky [1966]). Our focus in this section is importantly different from this literature. We are not focusing on whether members of Congress are more supportive of the
President’s program in foreign policy than in domestic, as work following Wildavsky’s
has analyzed. Our theory accommodates ideological conflict between the branches in
foreign policy such that the President is not particularly successful, or more successful,
in eliciting favorable roll calls from Congress in this area. Congress may disagree with
the President’s foreign policy agenda such that it does everything in its power to change
the nation’s course,29 though its relative power to do this may be different in the two
areas. Rather, our focus is on the effect of the President’s foreign policy authority on
Congress’s support for analytic capacity linked directly to the President.
6.3.1
Variation in Executive Department Structure in the 1790’s
In addition to the general thrust of executive departments designed by the first Congresses, our theoretical argument illuminates variation in their structure as well. The
departments created in the 1790’s were Foreign Affairs (later State), War, Navy, and
Treasury. As the first three areas pertain to foreign policy and national defense, our
theory predicts that they should have been relatively tightly linked to and unified under
presidential control. On the other hand our theory does not predict that the Department
of the Treasury should be organized to facilitate free communication with the president. The logic of our theory applied to these cases is briefly anticipated by Short [1923]
(p. 452): “Concentration of administrative supervision and control in the hands of the
President is made possible also by the fact that the Constitution grants to him specific
authority over particular branches of administration, such as the control of the foreign
relations and the command of the army and navy.”
29
For evidence of consistent attempts by Congress to do exactly this, see Howell and Pevehouse
[2007]. For evidence of declining Congressional support for the President in legislation on foreign policy,
see Fleisher et al. [2000].
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In all of the defense and foreign policy departments, Congress passed statutes granting
the president relatively unified control over the administrative structures created in them
(Thach [1923]). The 1789 statutes creating the departments of Foreign Affairs and War
contained essentially identical language, stipulating that the departments were “executive
departments” and that the secretaries were the “principal officers.” The Department of
the Navy, created in 1798, followed almost the exact same model and statutory language.
The secretary in each department was, by statute, obliged to execute orders from the
president with respect to the issues within the department’s purview. Congress’s statutory creations thus implicitly acknowledged that the president would have a relatively free
hand in directing them (Lessig and Sunstein [1994]). As White [1948] (p. 130) notes, “In
the act creating the Department of State, Congress placed full control of the Secretary of
State in the President, four times repeating his subordination to the Chief Executive.”
The statutes creating the War, Foreign Affairs, and Navy departments were relatively
sparse, providing no restrictions on administrative procedures and specifying no conduit
for information to Congress. Indeed, from 1789 to the Reconstruction era, Congress
initiated no changes in these departments on its own accord. Instead, it gave sanction
in law to organizational changes initiated or requested by the president or department
secretaries (Short [1923]).30 Moreover, since the Constitution specifically entitles the
president to solicit the opinion of “principal officers” of the “executive departments” on
matters under their department’s purview, the statutory language unambiguously marks
these secretaries as presidential advisors.
The Navy Department provides interesting information about congressional incentives
to empower the executive in areas where the latter’s authority to act runs high. Navy was
30
For instance, at the request of the Secretary of the Navy and based on observations of excessive
span of control for the Secretary in the War of 1812, Congress in 1815 provided for a Board of Naval
Commissioners, consisting of three naval officers appointed by the president with the advice and consent
of the Senate, to assist the Secretary in his ministerial duties. In 1842, Congress responded again to
requests from the Navy to move to a system of bureaus headed by a single person.
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created in the 5th Congress, after the incipient partisan division between Federalists and
Democratic-Republicans had taken hold in Congress. The 5th Congress was majority
Federalist in both chambers, with a large contingent of Democratic-Republicans in the
House of Representatives (the Federalists held a 57-49 majority). The first department
created since 1789 was therefore created in a more divisive partisan atmosphere. If the
opposition perceived an incentive, based on the experience with the first three departments, to weaken the president’s link to the department, this was a prime opportunity
to act on it. Congress had, by this point, accumulated vivid memories of conflict with
the executive branch over access to information pertaining to the military (in the House
of Representatives investigation of the failed expedition by General Arthur St. Clair
in 1791) and diplomacy (in Congress’s call for the papers relating to the Jay Treaty in
1795).
The debate over establishing the Navy Department was indeed contentious, and ran
along party lines. However, it focused on whether to have a Navy Department at all,
or whether to keep Navy functions as part of the War Department (White [1948]).
Democratic-Republicans emphasized the expense of a new department and the commitment problems of holding down future expenses given an entrenched bureaucratic
interest to expand the fleet, arguing that the Secretary of War was capable of overseeing
the navy as well as army. In addition, the Navy Department was debated while hostilities
with France, particularly maritime hostilities, were rising; Democratic-Republicans, generally more sympathetic than Federalists to France, believed that a naval buildup would
make armed conflict with France more likely. The partisan conflict was also overlaid
on sectional and economic ones, with Northern shipping interests presumably standing
to gain more from a more vigorous navy. However, once it became clear that the act
creating the Navy Department would pass the House and Senate, there was no further
conflict about its structure or linkage to the president. Thus the Navy Department was
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established as an “executive department,” and its secretary was charged with “execut[ing]
such orders as he shall receive from the president of the United States” relative to naval
matters. Thus Congress revealed itself capable of internal disputes on whether to have
the department, but given that it would exist and moving to the issue of its structure, the
conflict dissipated. Given the Navy Department’s relation to the president’s relatively
strong powers in national defense, this is easily rationalized by our model.
Both the State and War departments were given charge of functions that were not
closely related to the core functions suggested by their titles. This is especially true of
the State Department, which was made the home of the Patent Office and (after some
turf battles with Treasury) the Mint, and made to receive the decennial census. The War
Department was given responsibility for issuing permits to trade with Indians. These
functions, and other interior functions put in the Treasury Department (e.g., administration of the Lighthouse Service), were distributed in this way primarily because Congress
decided against creating a Home Department to handle such matters, ostensibly to reduce administrative costs (White [1948], p. 132). Given that no Home Department
existed, the War Department was a reasonably natural place to vest administration of
Indian affairs due to its geographic spread and concentration on the nation’s frontiers.31
However, the president’s plenary control over the State and War departments did not
extend to these internal affairs. Instead, the functions administered by these bureaus
were largely ministerial with minimal executive discretion to determine policy. Thus, the
allocation of these domestic functions to the State and War departments does not reflect a congressional policy of vesting the president with expansive control over domestic
policy.
The degree of unity in and direct presidential control over the Treasury Department
31
Issuance of trade permits is related to commerce, which might have suggested Treasury as a natural
home, but the Treasury department’s considerable field officers for internal revenue and customs duties
were concentrated in interior cities and ports.
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in the eighteenth century was more complicated (Short [1923], Thach [1923], White
[1948]). The Treasury Department, like Foreign Affairs and War, was created in 1789
but the statutory language and structure were quite different. From the first legislative debates on the topic it is clear that Congress was creating not just an advisor and
support staff for the president, but an advisor for Congress and guardian of congressionalcontrolled purse strings as well (Casper [1989]). Early proposals in Congress suggested
a multi-member executive board to head the Treasury Department, proposals that were
scrapped on the assumption that a singular executive would be more accountable and
energetic than a plural one. Nevertheless in the final statute creating the Treasury Department, Congress did specify the senior personnel and administrative procedures of
the Treasury Department in relatively clear detail (Mashaw [2006]). The statute created positions of Secretary, Treasurer, Comptroller, Auditor, Register, and Assistant to
the Secretary. It assigned specific duties to each of these officials, namely: for receiving
and examining public accounts (Auditor); receipt, keeping, and disbursements of funds
(Treasurer); keeping accounts of receipts and expenditures (Register); and superintending
public accounts (Comptroller). The statute further specified that disbursement of funds
by the Treasurer required a warrant signed by the Secretary and countersigned by the
Comptroller, so that three officials were required to agree before any funds were expended.
For the Secretary, statutory duties explicitly included making reports to Congress as directed by either chamber. In addition, the Treasury Department was not denominated
an “executive department” upon its creation, and no Treasury official was designated the
“principal officer” (though the Secretary of the Treasury was the “Head of the Department”). Lessig and Sunstein [1994] contend that this offered somewhat less clarity with
respect to the Opinions clause of Article II about the president’s constitutional right to
information from the Treasury Department, while (as noted) Congress explicitly wrote
into the statute that the Secretary would provide advice and analysis to either chamber
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upon request. Thus, although the statute creating the Treasury Department implicitly
acknowledged the president’s authority to remove the Secretary and did not purport that
this authority was Congress’s to grant or withhold (the “Decision of 1789,” first settled
for the previously-created Department of Foreign Affairs, applied to the Treasury and
War departments as well), it did specify administrative structure, limit discretion and
presidential control, and provide for congressional involvement to a significantly greater
extent than the statutes creating the Departments of Foreign Affairs, War, and Navy
(Short [1923], Lessig and Sunstein [1994], Mashaw [2006]). see also white 116, 118.
Legal and administrative scholars have long noted the differences in administrative
structure that we have reviewed here. Short [1923] (p. 472) summarizes: “Congress
did not pursue a uniform policy. No attempt was made by that body to prescribe the
organization for the Department of State or of the Departments of War [or Navy], which,
accordingly, were organized at the instance of their respective secretaries. With respect
to the Treasury Department, however, Congress expressly provided for certain subordinate officers, under the general direction of the Secretary, and also prescribed their duties
in considerable detail.” These structural choices did not emerge automatically and fully
formed from constitutional language. They were creations of Congress. The theory we offer shows how the value of alternative executive branch institutions to Congress is related
to the role of different branches of government as spelled out in the Constitution, and
how the actual structure of the first executive branch institutions tracks the implications
of the theory.
6.3.2
The National Security Council
In the early twentieth century, Presidents found new initiative to act spurred by political
changes, and found new reasons to act spurred by social, economic, and technological
changes. As we have seen, Presidential agencies to support domestic policy action were
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correspondingly subject to extended debate and dramatic change. A similar arc holds for
foreign policy support agencies. The reorganization efforts occurred somewhat later in
this case and were hashed out in a different forum, but the President’s analytic capacity
after World War II changed irrevocably. The signal component of this change was the
development of the National Security Advisor and staff, a strictly Presidential office that
encompasses planning and analysis in all phases of national security and foreign policy.
The role of the National Security Advisor (NSA) grew out of National Security Council,
a statutory creation of the National Security Act of 1947. Since then the NSA’s role has
significantly encroached on the position of the State Department, Defense Department,
and military services as foreign policy and national security advisors to the president. A
few abortive attempts by presidents to revitalize the position of the cabinet departments
only strengthen this point, because these experiments tend not to last long or undermine
the position of the NSA in the long term (e.g., President Reagan’s early pledge to make
his National Security Advisor something more of an administrative clerk in deference to
Secretary of State Alexander Haig).
At a glance the creation and functioning of the National Security Council would seem
to be an easy success for our theory. The NSA owes its influence to its tight institutional
linkage to the president. The National Security Advisor serves at the president’s pleasure
and is not subject to Senate confirmation. As a result, the National Security Advisor is
typically a close confidant of the president who sees the foreign policy world through the
lenses colored by the President’s interest. Moreover, the National Security Advisor and
NSC staff is a locus of estimable analytic capacity foreign policy. The President trusts
and relies heavily on NSA-supplied information because the worldview and preferences
of the National Security Advisor are closely linked with his own. This is in contrast
to the cabinet departments with capacity in these areas. The State Department, for
instance, is “a highly professional organization with a life and momentum of its own”
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(Wildavsky [1966]). Thus a superficial reading of NSA development is that bureaucratic
thickening in the State Department and military services made them less useful at providing informational capacity to the President in foreign and military affairs, Congress
perceived this development, and in view of the President’s exogenous authority in foreign affairs, responded by creating the NSA as “foreign and defense policy advisor 2.0”
directly attached to the President.
The development of the NSA and NSC staff as a Presidential advisory unit is both
more subtle and, from the standpoint of our theoretical argument, more interesting. The
1947 Act’s design of the National Security Council provided a forum for meetings between the secretaries of State and Defense, military chiefs of staff, the President, and
the Vice President, as statutory members of the NSC. This design was the brainchild of
senior Navy officers interested in staving off unification of service branches under a single
Department of Defense, promoting coordination of independent branches instead. President Truman initially renounced this proposal, but ultimately advocated it as a means
to ensure acceptance of unification by individual service branches (Zegart [1999]). The
fact that the President did not previously institute such a coordinating council himself
allows an inference about the degree of trust he placed in it. In view of FDR’s numerous
experiences with executive branch coordinating bodies (not to mention the President’s
Constitutional authority to solicit opinions from executive officers and position as Commander in Chief), the President did not need statutory sanction to create one. That he
did not create one suggests that he did not find it particularly useful. This inference is
consistent with the behavior of Presidents Truman and Eisenhower: while both Presidents did meet with the full National Security Council semi-regularly, its position as a
foreign policy directorate was weak (Zegart [1999]).
In a sense, the original NSC was therefore more like the Bureau of Efficiency than the
modern National Security Advisor and NSC staff. Like the BOE, it reflected external
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attempts to require Presidential reliance on a particular set of analytic capacities. But
such attempts obviously cannot force the President to heed information sources that the
President does not trust. Thus, also like the BOE, the original NSC was ineffective at
changing the President’s actions.
While Presidents Truman and Eisenhower did not run foreign policy through the National Security Council, they also did not ignore the NSC system. Instead they instituted
several developments that put President Kennedy in a position to make particularly innovative use of NSC structures. First, they located the NSC staff close the President,
both institutionally (placing the NSC and its staff in the Executive Office of the President) and physically (locating the NSC staff across the street from the White House).
Similarly, both presidents supported the NSC staff’s development of analytic capacity.
Second, in 1953 President Eisenhower created the position of Special Assistant to the
President for National Security Affairs, now commonly known as the National Security
Advisor, to oversee the staff. The Special Assistant, a Presidential appointee not subject
to Senate confirmation, was able to direct the staff completely in the President’s interests.
President Kennedy thus inherited a group of focused experts intimately attached to the
presidency. Under Kennedy, the Special Assistant and NSC staff became the paramount
institution of foreign policy planning for the President, while the formal NSC itself assumed a background role. Though subsequent Presidents have varied in their reliance
on their Secretaries of State and Defense, every President since Kennedy has used the
National Security Advisor and NSC staff in a similar way.
As a result, ultimately “it is the President and his national security advisor, not the
Secretary of State, who serve as the principal architects of U.S. foreign policy” (Zegart
[1999]: 87). The NSA’s “power” and importance to the president is driven by the combination of its expertise and its linkage to the President’s interests, not any formal authority
vested in or delegated to it. The NSA has no statutory policymaking powers, and the
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President did not need the National Security Act to confer upon him any substantive
authority in foreign policy. Instead, in the face of “the State Department’s reluctance
to offer political solutions with the President’s interests at heart” (Zegart [1999]: 91),
Presidents have developed and relied on this system because of its immediate attachment
to their office. This attachment ensures that information provided by the NSA and NSC
staff is as trustworthy as any can be from the President’s perspective.
The role of Congress in this process has been primarily one of tacit but important
support. Upon passing the National Security Act under President Truman, of course,
the (Republican) Congress “granted statutory legitimacy to the idea of a National Security Council staff” and permitted Presidents to “appoint their own foreign policy staffs
without much fear of Congressional scrutiny or punishment” (Zegart [1999]: 94-95). In
addition, Congress has continued to fund the NSC staff and the position of the National
Security Advisor, has never changed the role of the modern National Security Advisor
or NSC staff in the foreign policy process, and has accepted the modern NSC staff and
National Security Advisor as key parts of the foreign and national security policy process.
Congress obviously has the authority to challenge the budgetary as well as organizational
position of the NSA, but has always declined to do so, even in the wake of significant
problems in the NSA and NSC staff (and therefore opportunities for challenge) uncovered
in the Iran-Contra scandal under President Reagan.32
Since the NSA and NSC staff are so thoroughly identified as “presidential,” but
the theory we are using to inform this discussion turns on Congress’s selection of an
agent, it is worth a moment to consider how the theory matches up with this institution.
We are arguing that the NSA and NSC staff function as the “sender” of information,
in the sense of the previous chapter’s model, and the President or his inner sanctum of
32
Zegart’s interpretation of this support is that Congress in general is not particularly interested in
foreign policy or the President’s staff organization pertaining to it, and we obviously part ways with her
interpretation at this point. We return to this issue below.
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advisors function as the “receiver.” The point to understand is, Why does Congress grant
the President so much control over the sender’s policy and political orientation, when
Congress itself could retain control of this institution to closely guard the information
to which the President has access? The President’s primacy in foreign affairs seems
at least proximately based on his unfettered access to such high quality information
and analysis, yet Congress generated and repeatedly maintains the support institutions
generating it. Unless Congress is indifferent about policy in this area (and more on this
common counterargument below), this institutional arrangement seems paradoxical.
The previous chapter’s model resolves this apparent paradox. The President retains
significant authority over foreign and national security policy that Congress cannot easily
restrain (even if it wants to; cf. the War Powers Resolution). In view of this, the logic of
the model suggests that the next best option for Congress is to ensure that the President’s
policy choices are supported by trustworthy advice that the President will heed. As the
last chapter concluded, a simple institutional structure to accomplish this is to give the
President control over these advisory bodies. Even though Congress had originally and
retains wide authority over these advisory structures, its best option is to pin them
closely to the President so that the President is willing to take heed of their information
rather than ignore it as coming from an ideologically biased (relative to the President)
or politically untrustworthy source.
Our story obscures the many vicissitudes of NSA and NSC influence over its history.
Not every NSA is a foreign policy intellectual witchdoctor-guru in the mold of Kissinger
or Brzezinski. Not every President pushes aside the Secretaries of State and Defense
in favor of the National Security Advisor. While true, these facts are a bit beside the
point. The use to which the President puts these advisors obviously depends on the
relationship and history between them. The point is that Congress chooses to make a
peculiarly Presidential advisor available in the first place.
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Of course, while the National Security Advisor and NSC staff is a linchpin of contemporary foreign policy making, it may be argued that it is only one organization. But
recently amassed quantitative evidence also suggests that Congress systematically and
more generally supports Presidential control of foreign policy analytic capacity. First,
Lewis [2003] finds consistently that new agencies are less likely to be “insulated” from
presidential control if their functions relate to foreign policy. Insulation is indicated by a
number of institutional features that erect barriers between the president and the agency,
such as location outside the cabinet or Executive Office of the President (which, since at
least the Humphrey’s Executor decision in 1935, has implied a limitation on the authority of the president to remove the agency head), party balancing requirements among a
plural agency leadership, etc.
Second, Canes-Wrone et al. [2007] find that foreign policy agency structures contain
significantly fewer attributes that limit presidential control. Interestingly, in fixed effects
models they also find that the effect of foreign affairs on structural insulation is not
significantly different under divided vs. unified government. This result squares with
our theoretical argument that congressional incentives to support informed use of inherent foreign policy discretion by the President are independent of its ideological conflict
between branches. Partisan conflict under divided government is of course a natural
proxy for ideological conflict, and thus the empirical result suggests that the effect of
ideological conflict on congressional support for executive unity is at least statistically
indistinguishable from zero.
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6.3.3
Competing Explanations: Congressional Indifference and
Weakness
We have argued that Congress ties analytic support agencies directly to the President in
the area of foreign policy because of the President’s expansive authority to act unilaterally in this area. This is interesting because, as our logic of executive branch organization
shows, Congress has an incentive to make this structural decision even in the face of ideological conflicts with the President over the substantive policy decisions that should be
made. Those conflicts notwithstanding, our theory asserts, Congress recognizes the great
unilateral authority the President holds. Though Congress may wish the President had
different policy preferences (or less authority), it still prefers the President to exercise his
authority supported by reliable information. That in turn requires providing information
the President will trust and heed, and that is best accomplished by linking the sources
of the information directly to the President’s interest as he sees it.
This congressional support is much less interesting if Congress is essentially indifferent
among alternative policy and institutional choices in this area, or incapable of changing
them. Yet standard accounts of Congressional behavior on foreign policy issues in general,
and on structural choices of foreign policy support agencies in particular, maintain exactly
this. As Zegart [1999] (103) contends, “the electoral interests of individual members, the
initial setup of the National Security Council system, and the collective capabilities of
Congress have made it costly and difficult for Congress to influence the development of
the NSC system.”
Congressional indifference purportedly stems from reelection motives of members of
Congress combined with constituent indifference. What difference does it make to a
representative from rural Indiana how the foreign policy establishment is organized?
Perhaps very little, because the policy issues that resonate in the district and will drive
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reelection may not usually extend deeply into this area. As a result of a weak electoral
connection to this area, some members of Congress show interest and cultivate expertise
in foreign policy, but most members of any given Congress may not be deeply concerned
with it (Carter and Scott [2009]).
Even granting the premise of widespread indifference to foreign policy, it does not
follow that Congress’s best response is support for the President’s direction of analytic
capacity to support unilateral action. In fact, the premise of broad indifference among
the members of Congress arguably describes most policy areas (Weingast and Marshall
[1988]). This is precisely the diversity of member interests that underlies the “gains
from trade” hypothesis about Congressional organization. Why is the best response of
members who are not interested in foreign policy to turn over the field and its supporting
agencies to the President’s superintendence, rather than to turn it over—in exchange for
control over some field they do care about—to those members of Congress who do happen
to be interested for whatever reason? That immediate linkage to the President is not
how Congress disposes of information pertinent to guaranteeing pensions of bankrupt
steel companies, or making insurance available to nuclear power plants, or determining
sorghum price supports, or numerous issues on which most members do not usually have
a direct reelection stake.
Moreover, the premise of this argument seems not to be true inasmuch as Congress is
quite capable of expressing and acting on broad value conflict with the President’s foreign
policy agenda. Excepting perhaps the first Gulf War and the Bosnian peacekeeping
effort, Congress has actively critiqued the President’s direction of each of the many U.S.
military engagements since World War II (Howell and Pevehouse [2007]; Zelizer [2009]).
Ideological conflict is clearly and consistently present across the branches. What is to be
explained is why this conflict does not translate into sustained conflict over the location
and direction of institutions to support Presidential foreign policy actions.
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Congress’s organization is a possible explanation, inasmuch as oversight responsibility
is fragmented among multiple committees. Thus its capability to effect changes in the
president’s advisory system may seem structurally weak. On the other hand, divided
oversight jurisdiction in a policy area is not particularly uncommon in other policy areas.
More importantly, Congress’s internal organization is entirely up to Congress; if members
believe it is ill suited to their policy interests, they can and do change it at will. Simply
put, Congress’s organization on these issues is endogenous to Congress’s posture with
respect to the President; it cannot therefore explain that posture. Similarly, statutory
provisions in the National Security Act, e.g. that Congress cannot compel NSC staff
members to testify, cannot be considered binding constraints on attempts to influence
institutional structure. They are choices of Congress and tacitly reaffirmed in every
session that does not even discuss changing them.
Congress is obviously attuned to the substantive policy implications of decisions about
agency structure (McCubbins et al. [1987]; Moe [1985]). From its attempts to influence
the direction of foreign policy we may infer that Congress cares about those substantive
implications in this area. Our theory comfortably accommodates the coexistence of broad
ideological conflict between the President and (interested subsets of) Congress, on the one
hand, and Congressional support for Presidential attachment to foreign policy analysis
agencies, on the other. This coexistence is not about norms or precedents forged in a
bygone era that have since become costly for Congress in policy terms. Instead, it results
from a continuing incentive to ensure that the President has access to analysis that is
reliable from his own point of view, so that he can effectively use the unilateral authority
that Congress realizes it cannot completely restrain. Thus, it not because Congress is
meek and feckless that so much important analytic capacity in foreign policy is attached
and responsive to the President. It is because Congress is actively, assertively deferential
about linking this capacity to the President.
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6.3.4
Summary
Among the many memorable turns of phrase in Corwin [1957] is his remark that the
President has the ability “simply by his day to day conduct of our foreign relations to
create situations from which escape except by route of war is difficult or impossible.”
The President has this authority in part due to cumulative delegations from Congress,
to be sure, but also in no small measure because of (a credible reading of) Constitutional
powers. Given this ability and myriad other ways to effect foreign policy initiatives from
the White House, Congress has strong incentives to support presidential action with
informational institutions. This is so notwithstanding congressional disagreements with
presidential policy directions: the consequence of an ill-informed president is not inaction
or action tilted in Congress’s preferred direction, but misguided, potentially disastrous
action. These durable, exogenous presidential powers are less prominent in domestic
policy, and thus Congress has no corresponding general incentive to bolster presidential
informational resources across the board in these fields. Thus, at a broad level, the logic
of organizational structure in the executive branch can be traced to incentives of agents
who gather information to share it with decision makers, and of those decision makers
to trust and use it.
Presidential institutions to support foreign policy making are far from perfect. They
have given us the Bay of Pigs invasion, escalation in Vietnam, the Iran-Contra scandal,
and the faulty informational basis for the Iraq war, to name a few lowlights. Many analysts have diagnosed problems such as groupthink in these organizations that undermine
the quality of decisions. Yet even these problems and our persistent inability to design
institutions to solve them can be seen as a corollary of the paramount problem of ensuring faithful information transmission from intelligence agents to the president, and
trust in that information by its recipient. Overcoming groupthink, in a sense, requires
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divergent perspectives to acquire and share information that is then willingly used by
actual decision makers. But before a decision is made it is difficult to know whether
those who argue against it, if their goals diverge from their principal’s, do so out of a
desire to better pursue their principal’s goals, or their own. The problem, obviously, is
that it is difficult to make that decision maker trust and heed the perspective of agents
who are known to have contrary goals and worldviews. This problem is eliminated only
when the agent offering and the principal receiving the information share the same goals
in general. The strategic logic of ensuring that information is reported and trusted requires a link in goals and worldviews of sender and receiver, and that is at odds with the
social-psychological logic of overcoming group biases such as groupthink.
6.4
Conclusion
The central message of this chapter contains two points, an empirical one and a theoretical
one to interpret the empirical. First, based on episodes of Congressional development of
the institutional Presidency — most prominently, the Federalist era after the ratification
of the Constitution, and the early 20th century under the “modern Presidency” — we
can distill a consistent pattern of Congressional support: When the President has some
given authority to act and shows a willingness to use it, Congress supports organizations
closely attached and responsible to the President (and only the President) to inform
the use of that authority. That authority may come from executive powers vested by
the Constitution, or from the President’s strategic advantage as a unitary actor capable
of unilateral action, or from Congress’s conclusion that it is Congress’s interest that
the President be delegated the authority in question. On the other hand, when the
President suggests that the chief executive should be given some additional authority to
act, Congressional support is less forthcoming.
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Second, our theoretical argument provides a logic for this pattern of executive branch
organization. As our model clarifies, when one actor has authority to make decisions that
effects an organizational designer, the designer has an incentive to ensure that the first
actor is as informed as possible, regardless of ideological conflicts between the two. The
core problem of information transmission from advisors to that actor, in turn, requires
a close linkage between the two. The designer may wish the actor would heed advice
from the designer’s ideological clone, make different decisions, or use less authority, but
cannot make it do so. Advisors that are useful must be trustworthy and for that purpose
a close connection is essential. In this way we can interpret Congress’s development of
and support for the institutional Presidency.
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274
Part III
Eliciting Information
275
Chapter 7
Information, Regulated Interests,
and Administrative Policy Making
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Thus far our theoretical discussion has focused on archetypal cases in which an agent
of some political principals must “create” policy-relevant information itself through its
own costly effort, and in which an agent exogenously in possession of some information
must decide how much of it to share with a policy maker. In this chapter we turn to
the third archetype case in our theory, that in which an agent must extract, obtain, or
elicit policy-relevant information from an actor in possession of it. In the first two cases
we have seen that the degree of information available for policy making depends on the
match in policy preferences between the agent that is (or might come to be) in possession
of the information, and the actor that determines policy. As we will argue, that is true
in the present case as well. In the first case, the match is achieved by delegating policy
authority (or credibly committing to delegate) to an agent so that it has greater incentives
to acquire information itself. In the second case, the match is achieved by linking the
policy preferences of the expert agent to those of the policy maker. In the present case,
the match is achieved by delegating authority to an agent and linking its preferences to
the informed actor.
The present case is important because one of the core problems of information acquisition faced by executive branch policymakers is eliciting information from actors outside
the government affected by public policy choices. Regulated interests often possess private information about costs, compliance behavior, the effect of industry reorganization,
and the like that would be useful for policymakers to know. For instance, regulated industries often have particularities of cost structure or information asymmetries between
consumers and producers that do not admit of the limiting ideal of “first best” market
allocations. In such an environment the path from existing arrangements to the imperfect
but feasible “second best” result is not necessarily obvious. When fixed costs or network
effects are prominent features of an industry, does allowing a degree of market power
for existing interests stabilize the market in the interest of consumers? Would allowing
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free entry of competitors, though nominally a step closer to the competitive ideal, actually lower consumer welfare because of duplicative investments or lowered benefits from
standardization?
These issues, of course, may in part be amenable to the analytic capacity that agency
personnel develop on their own. By developing policy analysis skills, agency policy makers
may be able to get close to answering such questions themselves. This is the very sort
of expertise development that we considered in a previous part of this book, in which we
analyzed bureaucrats’ incentives to invest in this analytic capacity.
However, we also acknowledge that this solution has limits. In some cases the regulated interests themselves may possess relevant information on these issues, and that
using this information in making policy can result in more informed, and therefore better,
policy. The optimal use of available policy tools can depend on firm- and market-level
information “on the ground” that the regulated interest, by virtue of its day to day immersion in its business, understands better than policy makers operating at some remove
from the ordinary hauling and pulling in the industry. When the requisite information
is privately held by the regulated interest, policy makers can only secure access to it if
the regulated interest voluntarily provides it. For agencies to acquire policy-relevant information, incentives to invest in it by policy makers themselves may not be sufficient; if
relevant information is held by private actors, those actors must also have an incentive to
provide it. That incentive depends on what will be done with it, which in turn depends
on structural attributes of regulatory institutions that determine their policy preferences
and authority.
In this chapter we analyze the issues that this incentive constraint presents for the design of regulatory institutions by legislative principals. In brief, our point in this chapter
is that, assuming (i) realistic (thus sharply limited) abilities of governmental actors to
precommit themselves to policy choices, and (ii) divergence in the policy interests of the
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legislative principals and regulated interests, a legislative principal’s optimal regulatory
apparatus balances the benefits from elicitation of information from regulated interests,
on the one hand, and use of this information in the principal’s interests on the other.
Furthermore, to achieve this balance, the agency must be sympathetic enough to the regulated interest to elicit at least some information, but it must also be independent enough
of the regulated interest—and from the legislative principal—to make different decisions
with that information. Being as there is no alchemy in the agency design process, it is
not generally possible to design one that is at once both perfectly trustworthy to the
regulated interest (so it elicits all available information) and perfectly responsive to its
political principals (so it uses all available information as the principals would use it).
In short, endogenous information imposes an additional constraint on agency design,
in addition to that which ensures faithful use of that information by the agency. In view of
endogenous information, the optimal regulatory agent from the designing principal’s point
of view looks qualitatively different from the optimal regulator when the only problem
is the application of information it already possesses — and thus looks qualitatively
different, in terms of policy ideology, from the principal itself. As in other parts of the
book, this chapter develops an argument in conceptual terms that can help to interpret
and understand administrative and regulatory structures. The next chapter explores how
the argument helps to understand agency behavior and the effects of agency structure in
a concrete case.
7.1
Models of Policy Making
Recent scholarship on principal-agent models of regulatory policy making has approached
the question of delegation assuming the representative side of the equation (the legislature) and the implementation side of the equation (the executive branch) are placed hier280
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Legislature
St
Di atuto
scr
eti ry
on
ing
ak
Bureaucratic Agency
Lobbying
lem
Ru
Public
Policy
Interest Group
Figure 7.1: The Bureaucracy as the Legislature’s Agent
archically within a relatively clear stylization of the policy-making process. In particular,
this theoretical literature has presumed that (1) the locus of policy-making authority is
set firmly within the legislative process and (2) implementation by the executive branch,
while enmeshed within a window of discretionary authority, is carried out essentially in
isolation. This canonical framework, following on the model of Holmström [1984] and
elaborated by Epstein and O’Halloran [1999], Gailmard [2002], Huber and Shipan [2002],
Volden [2002], and others, is pictured in Figure 7.1.
The structure pictured in Figure 7.1 is appealing for a number of reasons. In addition
to offering analytical tractability, it also maintains fidelity to the “delegation doctrine”
principle of constitutional and statutory interpretation.1
1
The (non)delegation doctrine posits, in essence, that the power to make legislative decisions (i.e.,
the discretion to prescribe or proscribe with the force of law) may not be delegated by the legislature
to another body. Within the United States federal government, this doctrine is arguably much more
relevant for constitutional theory than it is for government practice.
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Le
gis
la
Bureaucratic Agency
ak
lem
u
R
tio
n
ing
Participation
Statutory Discretion
Legislature
Public
Policy
Ad
mi
n is
trat
ive
g
Lobbyin
Interest Group
Figure 7.2: The Bureaucracy as a Policymaking Venue
However, this structure is at odds with the realities of policy making within many of
the organs of the executive branch. We extend this structure by incorporating the possibility of voluntary information provision to policy makers by nongovernmental actors.
This extension of the canonical approach allows us to address the legislative principal’s
choice of agents to head policy making agencies as well as the degree of discretion to
grant them in regulatory action, and the effect of these choices on the information that
may be voluntarily provided by outside actors to the agency.
The framework of this chapter’s theory is pictured in Figure 7.2. The three central
actors within the framework are a legislator, a bureaucrat, and an interest group. All
three of these actors have preferences over policy outcomes and all three have various
degrees of information about how different government policy choices will determine these
final policy outcome.
This figure clarifies the differences and similarities between the situation we consider in
this chapter, and those considered in previous theoretical chapters. In part I, the principal
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controlled the delegation of policy authority to an agent, but not the agent’s preferences;
it used this delegation as an incentive to induce the agent to invest in expertise. In part
II, the principal did not control the locus of policy authority, but did control the agent’s
preferences, and therefore the linkage between its expert agent and the policy maker. It
used this control to provide the agent an incentive to share its information with the policy
maker, resulting in more informed policy making. In the present part, the principal again
controls the delegation of policy authority to an agent, as well as the agent’s preferences.
The central argument is that it can manipulate these attributes to induce an informed
actor to provide information to the agent that the informed actor would not provide to
the principal.
Theories that take the information available to legislators and bureaucrats when making policy decisions as being invariant to the institutional structure of policy making
ignore the possibility that participation by outside actors may be informative to policy
makers, and that participation may depend on the preferences and authority of governmental actors. Once the policy-relevant information possessed by policy makers is
viewed as endogenously determined within the policy-making process, many intuitive
results from existing theories come into question.
A common implication of models of delegation of statutory discretion to agencies is
that the legislature should grant greater discretion when the agency’s policy preferences
are similar to those of the legislature. This intuitive implication does not necessarily hold
once one considers the value of eliciting policy-relevant information from outside actors.
Relatedly, this common implication means that one should infer that the policy goals
of an agency that has been granted higher discretion were more similar to those of the
legislature that granted the authority, than were those of an agency that was granted less
discretionary authority. This too is not necessarily true when policy-relevant information
needs be elicited from outside actors.
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In addition, the equilibrium pattern of participation in our theory can be similar
to that described by theories of agency capture (e.g., Bernstein [1955]) in which the
regulator is overly responsive to the recommendations of regulated interests. While the
central mechanisms in the classical theory of agency capture are rent-seeking by policy
makers and (perhaps rational) voter ignorance, the informational theory presented here
offers the possibility of a less cynical explanation: both private and public interests may
be simultaneously served through regulatory policy-making by an appropriately designed
administrative apparatus.
This explanation has an advantage over the classical theory of agency capture: it offers
a strategic rationale for the explicit and costly delegation of authority to a bureaucratic
agency. Capture theory does not offer any purchase on why legislators would bring
bureaucrats into the equation in the first place. According to the theory offered here,
on the other hand, the creation of an agency to which real policy making authority is
credibly delegated relaxes incentive constraints for obtaining policy relevant information
from nongovernmental actors (see also Boehmke et al. [2006] for a model elaborating this
point). In other words, while our theory is consistent with the appearance of an “iron
triangle” consisting of a congressional committee, a regulatory agency, and a regulated
interest (e.g., Lowi [1979]), our theory offers an explanation for not only why Congress
adds the triangle’s third corner, but also for why Congress delegates independent decisionmaking authority to the agency.
In the rest of the chapter we elaborate the argument about the consequences of this
structure of the policy process.
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7.2
Uncertainty, Administrative Policy Making, and
Agency Design
The focus of our theory in this chapter is on the ability of bureaucrats to elicit information
held by regulated interests (RI’s) through their participation in regulatory policy making. As in previous theoretical chapters, we employ a “state-action-outcome” framework,
which we briefly review in the interest of a self-contained exposition. We assume that
all actors in the policy process — legislators, bureaucrats, regulated interests, citizens —
care about policy outcomes, which are determined by actions and the underlying state
of nature. In this chapter, the key issue is whether bureaucrats can elicit information
about the state of nature from the regulated interests, so that actions can be tailored in
response to the state.
The “actions” may be policy choices made by a government agency or legislature.
Conventionally, applications of this framework (e.g., Gilligan and Krehbiel [1987], Epstein
and O’Halloran [1999]) interpret actions in the state-action-outcome framework in this
way; this was our interpretation of this framework in chapter 6. However, the framework
is more general. The “actions” in question might be decisions made by other citizens
besides the regulated interests, not the bureaucrats themselves. In this interpretation,
the bureaucrats act as a clearinghouse for information provided by the regulated interests.
That information can then be made available to other citizens so they can respond to the
state of nature. The important assumption in either interpretation is that bureaucrats
(and legislators) are better off if regulated interests provide information to the agency—
whether because then the agency can better tailor its own policy choices to it, or because
it can then make that information available to other private actors (i.e., “the market”)
in a fashion that improves public welfare.
The “state of nature” is simply the set of all facts and policy-relevant details that
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determine the actual effects of any policy action. Actors in the policy process may be to
some degree uncertain about the state when making their decisions.
7.3
Policy Uncertainty and Incentive Compatibility
A natural source of uncertainty about the state of nature concerns the objective characteristics of the different policy choices. Policy makers involved in environmental, science,
public health, and transportation regulation routinely confront examples of such uncertainty. For example, what is the mortality risk associated with a tolerance of 1 part per
million of dioxin in municipal water supplies? What are the likely scenarios of long-term
environmental consequences flowing from a decision to eliminate lead from automobile
batteries? What are the likelihoods of each of these scenarios? What is the economic cost
of this policy decision over the next five years? How is this cost affected by the incentives
such a regulatory decision would provide for innovation by manufacturers in the relevant
industries? None of these are easy questions answer, but all are clearly important to
policy makers and citizens concerned with the future impacts of today’s policy decisions.
If the bureaucratic agent were exogenously informed of the relevant information, as
is assumed in canonical models of agency policy making under incomplete information
(e.g. Epstein and O’Halloran [1999]), the ally principle would (at least in theory) suffice
as guidance for agency design. Given interests that coincide with the principal’s, the
agency would use its information as the principal would use it if it had it.
But at least some of the uncertainty about the effects of policy action can be alleviated through the provision of policy-relevant information by the regulated interests.
Baron and Myerson [1982] and Laffont and Tirole [1993] present penetrating analyses of
optimal solutions to the problem of eliciting such information in a way compatible with
the incentives of the regulated interests that hold it. These solutions take the form of
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“contracts” offered by the regulator to the regulated interest — grants of economic rent
to the regulated interest in response to the information it reveals. Given this contracting
technology, the remaining problem facing a legislative principal designing a regulatory
institution is, in effect and leaning on all conceivable theoretical simplicity, to determine
the social welfare function the regulator will choose to maximize. Assuming the regulator
has access to the full range of contracts specified in the theory, and the ability to commit
to them once they are announced, a legislative principal would obviously prefer that the
regulator use the same social welfare function the legislature itself would use. This again
is essentially another version of the ally principle.
Yet the assumption of regulators offering iron-clad commitments to regulatory contracts is usually implausible, especially for unverifiable private information on amorphous
issues such as the effect of market structure on consumer welfare. When regulators cannot commit to contracts, they cannot guarantee economic rents to the regulated interest
that are necessary to satisfy incentive constraints to supply sensitive information. In
this case the optimal regulatory contract may involve substantial “pooling” by the regulated interest: that is, non-elicitation of information by policy makers (Laffont and Tirole
[1993], ch. 9).
7.4
Incentive Compatibility and Agency Structure
However, the key issue in incentive compatibility is not the regulator’s ability to commit to specific policy actions per se (as regulatory “contracts” require), but its ability
to commit to leave some economic rent to the supplier of information. Another way to
achieve this is to ensure that the policy maker wants to do so and is able to do so —
that it is an unconstrained optimum for the policy maker. In this sense, the regulated
interest’s incentive compatibility constraint is relaxed when it faces a policy maker that
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is sympathetic to its interests and has the independent authority to act on its preferences. These attributes of agencies, in turn, are affected by the structure of regulatory
institutions.
The effects of regulatory institutions, then, depend on (1) the degree to which they
successfully elicit the relevant facts and expertise from the relevant parties and (2) the
use to which any information elicited will be put in shaping policy. Our main point here
(and more generally in this book) is that these two aspects are interdependent. They
are interdependent in the present context because the incentive for regulated interests
to voluntarily provide information to regulators is affected by the use to which that
information will be put by regulators. That use, in turn, is determined by the policy
goals and authority of the final decision makers who can make use of any information
revealed by regulated interests.
The reason policy makers’ regulatory goals and preferences affect incentives to reveal it is that governments have the ability, and sometimes the desire, to use revealed
information in ways detrimental to the interests of the regulated. Their preferred use of
information provided by regulated interests will often not comport with the preferences of
the regulated themselves. For instance, if an existing industry structure confers economic
rents on a regulated community, regulators or legislators might wish to restructure the
industry so that these rents are dissipated or transferred back to consumers or to other,
politically favored producers. The information they need to accomplish this is about the
effect of alternative models of industry structure on consumer surplus. If the regulated
interest anticipates use of their information that is deleterious to their interests, they
in turn have an incentive to conceal or misrepresent this information. For example, a
regulated interest that obtains rents from an existing industry structure has an incentive
to overstate the costs and difficulties from moving to an alternative industry structure.
The core argument in this chapter is that structural attributes of government reg288
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ulatory bodies can have an important effect on their ability to extract policy-relevant
information from regulated interests. The reason is that these structural features map
into the preferences over and opportunities for policy makers to use information provided
by the regulated community to determine policy. That is, structural attributes of the
agency affect the expected use by policy makers of information provided by regulated
interests, and the expected use of any information channels the incentives of regulated
interests to provide it. If agency structure determines agency ideology and policy authority, and if ideology and authority determine the expected use of voluntarily provided
information, then agency structure in effect determines an incentive constraint on voluntary information provision by regulated interests. Therefore, the information available
to agencies in policy making is endogenous to their structure.
More specifically, structural attributes that link agencies to their regulated interests
and protect them from detailed oversight by political principals can promote the elicitation of private information. The reason is that when agencies are ideologically “close”
to the regulated interest, and possess relatively stable discretion to make policy without
detailed intervention by other policy makers, they can provide a “safe haven” for the
information held by the regulated interest. This means that when agency information
is endogenous in the sense that it must be elicited from regulated interests, the ally
principal — under which the agency’s ideology replicates that of the principal — may
undermine the ability of the agency to acquire policy-relevant information.
7.4.1
Incentive Compatibility and Agency vs. Legislative Authority
If the legislature retains potent instruments of overhead control to determine how regulators use any revealed information, then the relevant policy preferences that channel
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regulated interests’ incentives to reveal information is that of the (median member of
the) legislature. A regulated interest sharing information with a regulator in this case
knows that the regulator’s preferred use of that information is not dispositive for actual
policy choice; rather, the legislature’s is.
This overhead control may consist of ex ante controls imposed by the legislature, ex
post controls, or both (McCubbins et al. [1987]). Ex ante controls are those that induce
an agent to account for and make policy decisions in accord with preferences of the
legislative principal. Under such controls, the agency may be the titular policy maker,
and it may not be subject to revision or scrutiny after its choice is made, but in making
the decision, the agency will track the preferences of the principal. Ex post controls are
those that subject agency decisions to review or revision by the legislative principal (or
other trustworthy agents of it, such as courts) after the decision is made. Such controls
can ensure that agency decisions at odds with the preferences of the legislative principal
are altered to conform to those preferences.2
In either case, the ideology of a closely controlled agent is irrelevant in terms of the
regulated interest’s incentives to provide information in regulatory policy making. If the
interest is aware of these controls, it will anticipate that the actual policy decision in
light of its information will conform to the preferences of the legislative principal. Those
preferences then determine the regulated interest’s incentive to share information.
7.4.2
Incentive Compatibility and Agency Policy Preferences
The legislature might instead create administrative institutions that are difficult for it
to control in a direct and specific manner, so that the regulator’s decisions are likely to
stand. This lack of control can arise either from formal structural or legal attributes of the
2
In the equilibrium of a game with ex post review, the distinction between these types of controls
may be blurred; an agency anticipating ex post control may alter its decisions so that they conform to
the principal’s preferences in the first place, and no revision is necessary.
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agency, or from informal aspects of the interaction between the legislature and regulatory
bureaucracies. Formally, legislatures can mitigate overhead control by declining to impose
legislative veto conditions (assuming these are constitutional, as was the case before
Chadha v. Immigration and Naturalization Service (1983)), by providing for independent
agency funding outside the legislative appropriation process (e.g., as for the Federal
Reserve Board), by designing clear paths for agencies to follow so that their decisions
pass judicial scrutiny, by creating independent commissions with leadership not subject
to Presidential direction or removal (at least since Humphrey’s Executor v. United States
(1935)), among other options. In short, formal agency structure can act as an implicit
commitment device for legislative principals to ensure agency discretion (Horn [1995]).
Informally, legislatures can reduce their control de facto by failing to cultivate robust
oversight institutions, or creating an excessive “span of control” for a given congressional
committee so that it must keep track of too many agencies and activities to reliably
watch all of them.
In this case, the relevant preference that determines the incentives of the regulated interest to share information is that of the agency. If the agency is created as an ideological
clone of the legislature, then the agency will elicit exactly as much information through
participation in regulatory policy making as the legislature itself would have elicited, had
it maintained firm control over the process. This can still be useful for the legislature,
of course, since regulator can act as its deputy and allow for the specific issues under its
jurisdiction and allow the legislature to focus its time on other issues.
If the agency is instead further from the ideology of the regulated interests than
the legislature is, then under conditions of voluntary participation it will elicit even less
information from the regulated interest than the legislature would if it maintained direct
control over policy. This agent has an incentive to use any revealed information in a
way that is more adverse to the goals of the regulated interest than the legislature itself.
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Given its de facto ultimate control over policy, it cannot commit to another course of
action. A strategic regulated interest, anticipating this, has an incentive to participate
less and obfuscate more when dealing with such an agent. Such an agent can be useful
to a legislature; e.g. it can take a “tough” posture in bargains with the regulated interest
that the legislature could not credibly take. But in terms of eliciting information, this is
a step in the wrong direction.
But if the agency is closer to the ideology of the regulated interest than the legislature
is, it can be useful to the legislature in informational terms. The regulated interest
anticipates a more sympathetic hearing with this agency than with the legislature (or
the legislature’s ideological clone); the agency has no problem committing to use any
information revealed by the regulated interest in a way that is more compatible with or
less adverse to its goals, than the legislature’s clone would be able to do.
Moreover, agency structure affects not only the finality of its policy decisions, but also
agency policy preferences with respect to both the legislative principal and regulated interest. This too is an implication of research on agency structure and process (McCubbins
et al. [1987]; McCubbins et al. [1989]; Bawn [1995]). However, while McNollgast discusses
the effect of agency structure and process on agency preference, their theory holds that
legislatures manipulate these attributes to ensure that the enacting legislative coalition’s
preferences are congealed in policy decisions—so that this coalition’s preferred policy is
implemented, even after the enacting coalition falls apart (see also DeFigueiredo [2002]).
Thus, a deal is struck among a coalition of legislators (on behalf of interest groups) at
the time legislation is enacted, and agency structure is designed to “make the deal stick.”
This is again a version of the ally principle; while legislative preferences are expected to
change over time in this account, agencies are designed to reflect the preferences of their
designing principal. Information plays a role in McNollgast’s theory inasmuch as agency
procedure may be interpreted as a means to make fire alarm oversight easier — so that
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interest groups can provide legislators with information about agency activity. Bawn
[1995] is a step closer to our analysis, arguing that if there is a tradeoff between agency
responsiveness and technical expertise, then a legislative principal’s optimal agent will
generally not be perfectly responsive. However, Bawn does not provide microfoundations
behind this tradeoff in the sense of considering an incentive problem for agencies elicit
policy relevant information.
There are several channels by which agency structure can affect agency policy preferences. Administrative procedures may ensure frequent agency contact with regulated
interests to build a record justifying agency policy actions. Relatedly, agency procedures may privilege particular segments of the regulated community so that the agency
is required to give particular weight to information and testimony these segments offer
in regulatory proceedings. Most directly, of course, appointment of agents with known
ideological leanings in favor of firms in their regulated community can determine agency
policy preference. This is particularly true of independent agencies where appointed
leaders have fixed terms and are removable only for cause, and in contemporary terms,
where agency actions are not subject to regulatory clearance by the Office of Information
and Regulatory Affairs.
Of course, if eliciting information were all that mattered to a legislative principal designing a regulatory institution, the design problem is easily solved by, in effect, delegating
policy making authority to the regulated community itself — or its legal equivalent, a
thoroughly captured agency that considers only the interest of the regulated community
when using its policy making authority. Provided this is not the end goal of the designing principals in the legislature, such a solution places too much weight on eliciting
information at the expense of using it effectively.
The optimal agency, from the legislature’s point of view when information must be
elicited and regulators cannot commit to regulatory contracts, strikes a balance between
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these poles of ideological fealty to the legislature and to the regulated interest. In so
doing it strikes a balance between eliciting policy-relevant information and using that
information in the legislature’s interests. From the legislative principal’s point of view,
the best balancing of these benefits is a regulator-agent that is ideologically “between”
the regulated interest and the legislative principal. The “exact” position depends on the
legislature’s relative weight on its two goals for the agent to satisfy, but the qualitative
point remains in any case.3
The logic here is easy to see in the context of a one-dimensional sender-receiver game
(Crawford and Sobel [1982]; see especially Dessein [2002]). Suppose for simplicity that
the legislature is, ideologically, to the left of the regulated interest, and that the regulated
interest possesses private information about the state of the world. The legislature would
like the actual policy decision chosen to be responsive to the state. Any information
conveyed about the state by the regulated interest is, in equilibrium, delimited by the
ideological conflict between it and the legislature. If the legislature can delegate authority
over the policy decision to an agent that is ideologically closer to the regulated interest,
then the regulated interest is willing to reveal more information in equilibrium.
A similar point is made by Boehmke et al. [2006] in the context of administrative
lobbying. In that model a lobbyist voluntarily decides to approach a policy maker to
suggest a change, which can reveal information about the state of the world. An administrative venue that is more sympathetic to the interests of a privately-informed lobbyist
than the legislature is useful to the legislature, because it induces the lobbyist to initiate
policy change in more states of the world than the legislature’s ideological clone would
be able to do. This induces greater responsiveness of policy to the state of the world,
3
Obviously, this is not a comprehensive analysis of possible “locations” of the principal, agent, and
regulated interest; for instance, the principal may be in between the agent and regulated interest. We
do not review this case because, at least in the context of the design issues raised in this chapter, the
legislature would never choose it on purpose.
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which is beneficial to the legislature in spite of the attendant policy drift.
The key point is that when information available to regulators is endogenous, the
optimal agent is not the ideological clone of the political principal which designs it,
and is not tightly “controlled” by the principal in the sense that its decisions are easily
overridden. Instead, it is systematically linked to the political ideology of the interests
it regulates. On a naive interpretation this creates the appearance of “capture,” since
the regulated interest has a relatively easy time getting a sympathetic hearing with the
regulator. But when information is elicited voluntarily, this “cozy” relationship alleviates
incentive constraints for the regulated interest to reveal its information.
7.4.3
Summary: Clarity, Finality, and Participation
Participation in administrative policy making is a strategic activity. Accordingly, choosing whether, when, and how to participate may reveal information that can be used
by others who may or may not share those interests in deciding how best to respond.
Furthermore, this may be phrased as an unconditional statement (i.e., must reveal information) if one focuses on effective participation, since an act of participation must have
potential to change some decision-maker’s behavior in order to be effective. A strategic
regulated interest should consider, then, his or her relative certainty in the interests,
capabilities, and motivations of his or her audience(s). Who has the ultimate authority
to make the final policy decision? What are this – or these – decision maker’s interests?
For our purposes, delegated authority has at least two dimensions, which we term clarity
and finality.
Clarity. The first dimension is the knowledge the regulated interest has of the agent’s
goals. Delegating power to an agent with unknown interests can be useful, but only
insofar as it is vacating the authority of a principal whose interests do not match those of
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the lobbyist. This dimension is critical in the theoretical exposition above; the regulated
interest has to know that the regulator is relatively sympathetic to its interests in order
to respond by participating in administrative policy making in such a way that reveals
sensitive information.
Finality. The second dimension regards the certainty that the regulated interest has
that the agency’s decision will be dispositive for determining policy—that is, the finality
of the agency’s policy choice. This dimension is also critical in the theoretical exposition
above; the regulated interest is presumed to know whether decisions made by a regulator
are likely to stand, or will be amended by political higher-ups. In the latter case, any
sympathetic attachment of the regulator to the ideology or goals of the regulated interest
is not relevant, because such attachment will not determine policy outcomes—and that
is what the regulated interest is presumed to care about.
Finality clearly pertains to the possibility for appeal, override, and oversight of the
decision maker’s decision, most obviously by the legislature or by courts. A legislature
can instantiate finality in agency policy choice relative to the legislature itself only to the
degree that changing statutes delegating to agents is difficult. Any institution created
by statute can be changed by statute. Simply creating an “independent” regulatory
commission does not in fact make the commission’s decisions binding on the legislature.
A legislature has even less authority to determine agency finality with respect to courts;
there is a degree of reviewability of agency actions in court that is determined by common
law and constitutional stricture, not by legislation. As a limiting case, an “arbitrary and
capricious” agency action would not stand up in court even if Congress declared such
action to be legal, i.e., consistent with statute.
But finality is not solely institutionally determined. Practical concerns might delimit
the degree to which institutionally superior actors can (or would wish to) review and
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alter the decision maker’s choice; e.g. a wide span of control for the legislature or legislative committee over many bureaucratic agencies can ensure that the agent has de facto
authority, even if the legislature has retains formal authority to vacate or modify the
agent’s choices. From the regulated interest’s standpoint, it is relatively unimportant
exactly why an agency has high or low finality. Participation is treated here as an instrumentally motivated activity and regulated interests are presumed to not have strong
Clarity
preferences over procedure, per se.
Low
High
Credibility
Low
High
Agency’s authority: Weak
Agency’s authority: Strong
Agency’s decision: Unclear
Agency’s decision: Unclear
Agency’s authority: Weak
Agency’s authority: Strong
Agency’s decision: Predictable
Agency’s decision: Predictable
Figure 7.3: Clarity of Agency’s Preferences and Credibility of Authority
7.5
Conclusions and Implications
The theory presented and discussed in this chapter focuses attention on a relatively underemphasized role of the interaction between delegated authority and administrative
process. In addition to potentially making bureaucratic decision-making more “representative” by at least allowing interested parties the chance to air grievances and offer
suggestions and/or kudos for proposed policy changes, incorporating explicit roles for
nongovernmental actors within the policymaking process affords both the legislature and
executive branch the opportunity to elicit policy-relevant information relevant to new
policies. It is clear that some policy-relevant information is held by nongovernmental
actors and, more importantly, it is at least arguable that such actors will retain their
information if they believe that the use to which it will be put by the government is
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not in their individual and/or collective interests. Accordingly, delegating authority to
actors whose interests represent a compromise between those of the political principals
and those of the nongovernmental actors possessing the policy-relevant information can
potentially increase welfare in strong (i.e., Pareto improving) ways.
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Finance
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The previous chapter laid out a theoretical logic of the design of regulatory institutions
that face the dual constraints of both eliciting information from regulated interests and
of deploying that information in discharging its regulator mandate. In that chapter we
argued that a legislative principal designing such an institution may be better off by
empowering an ideologically differentiated agent or giving regulated interests avenues
to shape the preferences of the agent, than by keeping close watch over its agent or
ensuring it is the principal’s ideological clone. The reason is that such an arrangement
strikes a balance between the elicitation and deployment of the relevant information. An
ideologically faithful agent or one subject to close ex post scrutiny in its policy decisions
may make better use of the information it has from the principal’s point of view, but can
have a harder time eliciting it from the regulated interest in the first place.
The Securities and Exchange Commission offers a prime illustration of these dual
constraints. Its principal task in fulfilling the various facets of its regulatory mandate
is to elicit information from participants in financial markets. Its role in structuring
securities markets has become a given in modern finance. But this was not the case in
the mid-1930’s when the fledgling SEC squared off with a wealthy, hostile industry under
the shadow of a Supreme Court unsympathetic to the New Deal. In this context the SEC
not only succeeded in routinizing the elicitation of information from private interests; it
was also for a time widely regarded as a highly effective regulatory agency. In 1935, Time
magazine dubbed it “the most ably administered New Deal agency in Washington.”1
The SEC was fortunate to have a series of chairmen in this period that were perceptive
analysts of the financial community in particular and regulatory process in general. One
was an influential operator in both financial and political circles; another was among
the most insightful theorists of administrative law in American history; a third became
a prominent Supreme Court justice. We take it as given that the SEC could not have
1
Time, July 22, 1941, p. 41.
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achieved the success that it did without the political and administrative skills of these
chairmen.
But both the SEC and the industry it regulated also possessed structural features
that laid the groundwork for and conditioned the agency’s success. In this chapter
we trace the development of these structural factors, and analyze their effect on SEC
regulatory capacity in light of the theoretical argument elaborated above and in the
previous chapter. In particular, we argue that the SEC’s ideological linkage to (parts of)
the financial community, combined with regulatory discretion under its organic statutes,
created conditions under which the administrative acumen of SEC commissioners could
be effective. Furthermore, we argue that this effectiveness, while it was sustained, turned
on the elicitation of several distinct types of information from interests that the SEC
regulated.
The rest of the chapter is organized as follows. In the next section we provide a
brief overview of the SEC and its powers and responsibilities under its first enabling
statutes. The subsequent sections use the theory to analyze the creation of the SEC
and its operation in several areas of its regulatory domain in the 1930s, specifically,
registration of new securities issues and reorganization of existing securities markets.
A Note on Case Selection and Interface with the Theory.
Early SEC administration of its first two “organic statutes” presents a useful case
to illustrate the insights of the previous chapter’s model for two reasons. First, the
SEC was dependent on information voluntarily provided by regulated interests. The
early SEC case starkly reveals the importance of gathering and eliciting information for
agency development, and the dependence of these endeavors on how regulated interests
expect the information to be used in policy making. Second, the conflict between the
regulated interest and the SEC’s political principals was well understood. Therefore,
these important preconditions for the model to apply are satisfied.
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In addition, the episodes we analyze consist of several interrelated efforts by the
SEC to accomplish a particular goal, but through slightly different strategies. Because
constellations of interests within the regulated community, conflicts between the regulated
community and the SEC, SEC discretion, Presidential support for and relations with
the SEC, and Congressional preferences were relatively fixed over the relatively short
interval we consider,
2
our focus allows us to achieve a degree of control in making
inferences about the effects of SEC structure and policy decisions on responses by the
regulated community.3 A comprehensive SEC history, while interesting in its own right,
would compromise this control and the illumination of the theory, and so we keep a
circumscribed focus.
Finally, we stress two points about interpretation of the model. First, the discussion
in the previous chapter imagines political principals consciously reckoning with incentive
compatibility and commitment problems, and designing regulatory institutions accordingly. This makes the presentation simpler than if it is littered with repeated “as if”
caveats. But our application to the SEC case does not assume Congress and the President were anywhere near this strategic or rational. Our point is not that Congress and
the President were attempting to “solve” the theoretical problems we have identified;
indeed, any review of the SEC’s creation would lead to the quick and ignominious demise
of any such simplistic account. Rather, we are attempting to understand the effects that
its structure had on elicitation of information—however that structure came about. The
problem the institutional designers believed they were solving (if any), whether their
design was a rational response to those perceived problems, and more generally what
theory best explains the structural choices are interesting questions that are beside our
2
These variables were not constant, to be sure, but they changed even more into the 1940s and 1950s,
throwing more serious doubts on any ability to isolate the effects of one variable or another.
3
Thus we primarily adopt a “most similar case” approach with longitudinal variation in explanatory
and depdendent variables, in the sense of Gerring [2007] (pp. 131, 155). This is especially apt with
respect to our analysis of SEC enforcement of the 1934 Securities Exchange Act.
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point in this chapter. One can understand an institutional structure’s effects in light of
the theory without invoking it as a positive theory of institutional design.
Second, it is tempting to argue that the SEC cannot realistically be considered an
“agent” of Congress because Congress did very little to hold the SEC in check or control
its decisions. This reading is superficial and premature; one of the very points of an
agency-theoretic analysis of this structure is to explore the value of agency independence
and “lack of control” to a principal when information is endogenous.
8.1
An Overview of the SEC and its Statutory Powers
We begin with a brief review of the known history of the early SEC and federal attempts
to regulate securities. The legislation creating the regulatory structure for overseeing
capital markets proceeded under two major headings, one for the “primary” securities
market and one for the secondary. To establish the backdrop for further analysis, our
discussion in this section focuses on widely accepted and documented accounts; we defer
more explicit linkage of SEC history and our theoretical account to later sections of the
chapter.
Business firms issue new securities such as stocks or bonds when they wish to raise
new capital. These issues are underwritten by an investment bank, which, in contract
with the issuing firm, manages the sale of the securities and absorbs some of the risk
of the securities issue (e.g., whether it will raise a certain level of capital) in return for
some compensation (e.g., a fixed percentage of the capital raised). The price of the new
security is determined by bids from investors. This exchange of new capital for new
securities defines the primary securities market.
Before 1933 any government regulation of the primary securities market took place
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at the state level (Khademian [1992]). So-called “blue sky laws,” dating to the Progressive Era, varied in their requirements from state to state, but generally demanded only
minimal disclosure of the issuing firm’s financial health (according to accounting rules
chosen and easily manipulated by the issuing firm), with few or no penalties for erroneous
or fraudulent statements (beyond standard common law protections). The most severe
problem with state-level approaches, however, was that they could apply only to issues
by a firm and sold to investors within a single state. A large portion of securities issues
were sold in interstate commerce at the time these laws were written, and any intrastate
firm wishing to evade their requirements needed only use the mail to offer securities
across state lines. As a result, investors in new securities had only the information about
the nature of a firm’s business and its financial status that the firm and its underwriters
wished to provide, as determined only by market competition rather than regulation.
This tended to yield rather scant information (Seligman [2003]).
Occasional calls for federal regulation of the primary securities market were heard
from the Progressive era through the 1920’s, but seemed quaint and irrelevant in the
boom years of Harding and Coolidge. However, a sequence of events starting with the
1929 stock market crash, bank failures in the 1930’s, paralysis of the primary securities
market in the early 1930’s, and especially Senate hearings (run by Ferdinand Pecora,
then chief counsel of the Committee on Banking and Currency) on the financial practices
of large New York investment banks and their senior officers, gave Congress and FDR
the cause and the resolve to develop a regulatory structure for capital markets.
Capitalizing on the ongoing Pecora hearings, which caused a national sensation, the
momentum of his first 100 days, and campaign trail promises to address capital markets, FDR put several teams to work on securities bills in spring 1933. The first bill
to reach Congress was drafted by Huston Thompson, former chairman of the Federal
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Trade Commission.4 which led to sharp disagreements within Congress, with the Rep.
Sam Rayburn’s Interstate Commerce Committee in the House of Representatives particularly negative. Rayburn indicated to FDR that Thompson’s bill had dim chances to
pass, upon which FDR composed another drafting team of “braintrusty” young lawyers
Benjamin Cohen, Thomas Corcoran, and James M. Landis and working under the direction of Roosevelt confidant and future Supreme Court Justice Felix Frankfurter, to
revise (extensively, as it turned out) Thompson’s bill. Taking explicit cues from Congress
and especially Rayburn (the chief counsel of Rayburn’s committee was brought into the
drafting team), Cohen, Corcoran, and Landis expertly crafted a bill over a period of
several weeks (Seligman [2003]).
The Cohen-Corcoran-Landis bill passed the House but the Thompson bill passed the
Senate. In the conference committee to resolve differences, Senate conferees initially
attempted to use their version as the baseline, but Rayburn ultimately succeeded in
securing approval of the House bill with essentially no modifications (Seligman [2003]).
The conference report passed both chambers, and thus the Cohen-Corcoran-Landis bill
became the Securities Act of 1933.
The 1933 Act defined new responsibilities that any issuer of securities must meet
before the issue was deemed valid. The Act required firms seeking to issue new securities
to file a registration statement with federal regulators and have it approved by them
before the firm could legally sell the security and thereby raise capital. The registration
statement’s requirements were spelled out in the Act, and consisted of items such as
basic accounting data, outstanding debts, ownership structure and identities of large
stockholders, profit sharing agreements, and various types of pre-existing contracts. In
short, the chief new obligation for firms issuing securities was disclosure of information
4
The first draft securities bill in 1933 proposed to vest enforcement authority in the U.S. Post Office,
on the grounds that it alone could regulate interstate commerce conducted through the mail. This draft
was aborted quickly and never left the executive branch.
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that would affect securities values.
The Securities Act also defined broad new regulatory powers available to the government agency charged with carrying out the statute. However, that agency was not the
SEC, which did not exist as of 1933, but rather the Federal Trade Commission. Creation of a new regulatory agency was not even contemplated in the 1933 Act and was
not part of any of the major proposed bills. There were at least two reasons for this:
first, some degree of administrative economies of scale were captured by investing new
authority in an existing agency; second, in its two decades of existence the FTC had developed a reputation for willingness and ability to combat industry. This was valuable to
a large contingent in Congress that was skeptical at best of the financial services industry
(Cushman [1941]). The FTC was likely to aggressively pursue a reformist agenda; some
indication of the FTC’s posture is that Huston Thompson, the drafter what became the
Senate version of the Securities Act, was a former FTC chairman.
The most potent instrument given to the FTC by the 1933 Act was the “stop order.”
When a firm filed a registration statement with the FTC, the latter had twenty days to
inspect the firm’s documentation, accounting statements certifying its financial condition,
and other information specifically prescribed in the Act. The Act provided that
if it appears to the Commission at any time that the registration statement
includes any untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, the Commission may, and after opportunity for hearing, issue
a stop order suspending the effectiveness of the registration statement.
Since a registration statement, in turn, was necessary under the Act to legally raise capital
with a security issue, the FTC was a gatekeeper over capital markets for firms seeking
to raise money. A stop order would be lifted when and if the offering firm corrected the
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deficiencies noted by the FTC. Thus a stop order was not an absolute prohibition on
registration, which the Thompson bill did call for.
The expansive discretion available to the FTC under this provision is partially located
in the phrase “necessary to make the statements therein not misleading.” The Act
provided that the orders were reviewable in federal courts, but in the first instance it was
the FTC’s judgment of what constitutes a “misleading” statement, under the statute,
that was to determine access to capital markets.
Before the FTC’s securities division (with Landis appointed as its head) opened for
business, investment bankers were preparing a campaign to amend the 1933 Act, especially its section imposing strong liability on corporate officers in case a registration
statement was found to be incorrect after a security was issued (Parrish [1970]). Beyond
that, the 1933 Act’s regulation of the primary market was only the first step envisioned
by New Dealers in a program of financial regulation. Most prominent of the issues untouched was the market for secondary securities, or securities already owned by investors.
FDR believed it wise to separate this issue from primary market regulation to get a foot
in the door of the securities markets. After a shaky start to the legislative effort in 1934,
the streams of policy inputs seeking liability reform and secondary market regulation
came together.
The result was the Securities Exchange Act of 1934. We discuss the passage of
the act and the creation of the Securities and Exchange Commission in greater detail
below. For the present overview we note that the 1934 Act developed a framework
for the regulation of securities exchanges (in which secondary market transactions were
conducted), amended registration statement liability standards in the 1933 Act, and
created the Securities and Exchange Commission, in which all authority established by
both the 1933 and 1934 Acts was vested.
In addition to creating the agency, the 1934 Act made three important additions to
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the SEC’s regulatory purview. First, it gave the SEC statutory authority to regulate the
governance and trading rules of securities exchanges. This included organized exchanges
with a physical floor for buying and selling, such as the New York Stock Exchange. All
such exchanges were required to register with the SEC. The universe of securities exchanges also included “over the counter” markets with no physical center but instead a
loose network of buying and selling brokers; in time and partly due to SEC regulations
the OTC stock market would be best symbolized by the NASDAQ (National Association of Securities Dealers Automatic Quotation system) market. Most bonds including
government bonds were also traded over the counter.
Second, the 1934 Act imposed similar registration requirements on firms with securities trading on secondary markets as the 1933 Act imposed on firms issuing new securities.
The 1934 Act gave the SEC administrative and enforcement authority over this registration. Finally the 1934 Act gave the SEC authority over the accounting standards
employed by firms filing registration statements.
Altogether, the 1933 and 1934 acts gave the SEC broad discretionary powers to regulate both the primary and secondary securities markets. The SEC used this power
judiciously, and typically issued major regulations only after extensive consultation with
and input from the relevant segment of the securities industry. Yet the SEC’s extensive authority was always implicitly, and sometimes (as we discuss in one case below)
explicitly, a prominent force in structuring its regulatory strategy and the content of
its regulations. The SEC’s broad rulemaking power was, as SEC Chairman William O.
Douglas referred to it, the “shotgun behind the door,” a potent weapon the SEC could
pull out if necessary, and therefore often did not explicitly use.
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8.2
The Creation and Structure of the SEC
In this section we briefly review the creation of the SEC. The key points are that, consistent with the theoretical discussion above, the SEC was ideologically linked to the
interests it regulated, and had abundant statutory discretion to choose a course of policy. In subsequent sections we show that these facets were important in its ability to
elicit information from regulated interests.
The Securities Act of 1933 only partially made good on President Roosevelt’s campaign promises to bring the securities industry under the ambit of federal regulation.
It created a legal framework only for the regulation of new securities issues, or primary
capital markets. Existing securities traded on secondary markets, and the secondary
market exchanges themselves, remained outside of its scope. In particular, governance
and trading rules on stock exchanges and particularly the dominant New York Stock Exchange were left untouched. Thus in 1934 President Roosevelt signaled his intention to
enact further securities legislation regulating secondary market exchanges and requiring
disclosure by firms with securities traded on these exchanges.
Roosevelt set a drafting team to work on proposed legislation that would be sent to
Congress in early 1934. The administration’s bill, introduced in the Senate and House by
Banking Committee chairman Fletcher and Commerce Committee chairman Rayburn,
respectively, came to be known by their names. The bill sought to extend the authority of
the FTC over stock exchange practices. One of its most contentious sections, Section 10,
contained a frontal assault on each of three distinct, and not inherently allied, factions of
the New York Stock Exchange: specialists, floor traders, and broker-dealers. It forbade
“specialists” who acted as market makers in specific stocks to trade for their own account. Because specialists had the ability to act immediately on new information about
securities, this trading represented an exquisite profit opportunity for them and was thus
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jealously guarded. Floor traders also had the ability to trade for their own accounts and
capitalize fantastically on new information by executing trades before broker-dealers not
physically present on the floor. Roosevelt’s team believed they served no socially useful
function and Section 10 sought to eliminate them altogether. Finally, brokerage houses,
which interfaced directly with the public, were prevented by Section 10 from underwriting new securities issues, an attempt to remove the conflict of interest inherent in having
brokers sell securities which their firm had underwritten (Seligman [2003]).
Specialists and floor traders, on the one hand, and broker-dealers, on the other, were
not natural allies with each other. NYSE governance was dominated by the former, a
relatively small group of insiders in terms of all exchange membership. Broker-dealers
not physically present on the floor had to rely on floor traders to execute trades. But the
superior ability of floor traders to profit for their own accounts by acting immediately on
new information meant that broker-dealers were in a disadvantaged position in reacting
to new information. Despite these internal conflicts among exchange factions, Section 10
managed to unite them all in strident opposition to the Fletcher-Rayburn bill.
The Fletcher-Rayburn bill also sought to control margin requirements of brokerage
houses. The drafters decided to vest the administration of this control in the FTC rather
than the Federal Reserve. Politically, this turned out to be an extremely consequential
decision. The reason is that reserve requirements of financial institutions were considered
to be a banking function, one otherwise controlled in federal law by the Federal Reserve.
The Fed strongly objected to allocating a piece of its turf to a regulatory agency such
as the FTC. The Fed contended that the FTC was not well versed in such banking
regulation and that allocating responsibility over reserve requirements in this way would
prevent the systematic integration of reserve requirements across the financial system
that would be possible if instead the Fed controlled brokerage reserve regulation. The
Fed’s opposition aroused the interest of Senator Carter Glass of Virginia, the legislative
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architect of the Federal Reserve Act, a powerful patron of the Fed, member of the Senate
Banking Committee, and a New Deal skeptic.
The Fletcher-Rayburn bill thus fragmented support in the administration and unified
opposition among regulated interests. Still nursing a grudge over the 1933 Act, the
securities industry launched an unprecedented and blistering lobbying campaign against
the bill (Parrish [1970]). All factions of the New York Stock Exchange and industry
players across the country, not just in New York, opposed the bill in testimony and written
communication to Congress. Sensing a moment to obtain favorable regulatory conditions,
NYSE president Richard Whitney, and subsequently other luminaries of the New York
financial establishment, floated a proposal to work with the proposal if jurisdiction were
given not to the FTC, but to a new stock exchange commission explicitly required to
include industry representation. Roosevelt and his draftsmen refused to concede FTC
jurisdiction and industry opposition continued unabated, including even moderate and
reform voices from the NYSE. Facing this onslaught, Congressional support buckled in
committee hearings and the Fletcher-Rayburn bill died before being reported for a floor
vote in either chamber (Seligman [2003]).
Roosevelt refused to admit defeat and communicated through the press that he expected the 73rd Congress to enact stock exchange legislation. Section 10 was removed
from the reincarnated securities exchange bill. But the securities industry, still unified nationwide over the jurisdiction of the FTC, offered to withdraw their opposition if
NYSE president Whitney’s proposal for a new stock exchange commission were adopted
(Seligman [2003]). The interests of the Fed in controlling reserve requirements and the
securities industry of wresting control from the FTC finally converged in the person of
Senator Glass. Glass, an influential Banking Committee member, inserted amendments
in the Senate version creating a proposed “Securities Exchange Commission” and allocating control over reserve requirements to the Fed, and the bill as amended passed the
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Senate. However, the House passed a version maintaining FTC administration of both
stock exchange regulation and reserve requirements (Cushman [1941]).
Resolution of this issue was left for a conference committee. Roosevelt indicated at a
press conference his preference to retain FTC control. Senator Fletcher concurred, and
therefore had the slate of Senate conferees stacked with opponents to Glass’s amendments
and had Glass himself excluded. Glass resigned his seat on the Banking committee in
protest, and an ally appointed to the conference committee resigned this appointment as
well. Majority Leader Joseph Robinson refused to accept these resignations but backed
down; he permitted two Glass allies on the conference committee to vote as free agents
rather than with the Senate conferees as a unit. Glass’s allies insisted on removing FTC
authority and including the Fed for reserve requirements but conceded less discretion for
the Fed in setting these requirements than they had hoped. The requirement that SEC
commissioners explicitly include an industry representative was dropped and an “and”
was inserted into the new securities commission’s name. The conference reported the bill
back to the chambers, where it was successful. Upon President Roosevelt’s signature of
the Securities Exchange Act of 1934, the Securities and Exchange Commission was born
(Seligman [2003]).
For our purposes the most important point of this discussion is that it illustrates that
SEC creation was not the preference of most of the congressional or executive actors
involved in the legislation. The president, the House, and leadership in the Senate all
opposed it. It was the institutional position and strong preference of an opponent, more
closely allied with the regulated interests than were the other key participants, that led
to the SEC’s creation. The FTC, with its progressive Brandeisian provenance, had a
reputation as hostile to big business. Thus the regulated interests feared how the FTC
would use its administrative discretion under the act (Cushman [1941], Seligman [2003],
p. 97) and preferred a new agency, focused exclusively on and more sanguine to the
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securities industry. If the industry hoped to “capture” the new agency, it would soon
be sorely disappointed. Nevertheless it did secure an important victory by removing
the surely-unfavorable FTC from the regulatory landscape, despite the preferences of
President Roosevelt and congressional leaders to retain it.
James M. Landis was the obvious choice to lead the new SEC. He was the leading
administrative law scholars of his generation. He was one of the principal architects of
the Securities Act of 1933. He headed the Securities Division of the FTC, during the brief
period in which the Securities Act was administered by that agency. He had impeccable
New Deal credentials. He was supported by trusted Roosevelt advisors and by the press
(McCraw [1984]).
Landis’s one problem as a candidate for the SEC chairmanship was that he was totally
unacceptable to the securities industry (Seligman [2003]). Landis had earned industry
suspicion for his role in drafting the 1933 Act and his rigorous administration of the FTC
Securities Division. Seeking to conciliate business interests after the bruising legislative
fight over the 1934 Act, Roosevelt conceded that Landis would not lead the SEC.
A more sensational conciliation of financial interests than Roosevelt’s decision to pass
on Landis for the chairmanship came in the form of the man to whom he did give the
nod to lead the SEC. Joseph P. Kennedy had been an early Roosevelt supporter in his
bid for the presidency, and angled to be Secretary of the Treasury but was passed over.
After a brief falling out as a result of this, Kennedy gave useful backing to Roosevelt
initiatives such as the National Recovery Act and a proposed social security program.
But Kennedy was a shocking choice among New Deal reformers and their press allies. He
had made a fortune in the 1920’s by, among other activities, engaging in some of the very
stock market manipulations excoriated in the Pecora hearings in the Senate leading up to
the 1933 Securities Act. Though not a Wall Street insider on the order of J.P. Morgan,
Kennedy was regarded by New Dealers as a prominent symbol of exactly what was wrong
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with financial institutions. He was the antithesis of a zealous crusader who might put
securities trading on a sound moral footing; his appointment was denounced by liberals in
Congress and the press as letting the fox guard the henhouse (Seligman [2003]). But his
combination of New Deal support and financial market savvy made him a useful choice
for Roosevelt. He was known and could be trusted, by the White House on the one hand,
and the financial community on the other. While the president did not have the formal
ability to appoint a chairman as distinct from other commissioners, in order to achieve
staggered terms the 1934 Act provided for commissioners to be appointed to terms of
one, two, three, four, and five years respectively. Roosevelt signaled his preference for
Kennedy both in public speeches endorsing him and by appointing him to the five year
term. The commissioners responded and elected Kennedy first chairman of the SEC.
While Landis was not a politically feasible choice as chairman, Roosevelt nominated
him to the four year term. The strengths of Kennedy and Landis meshed well, and
Kennedy delegated extensive authority over key SEC areas to Landis. For the three year
term Roosevelt nominated Robert Healy, at the time Chief Counsel of the FTC, who
worked closely with Landis in initial FTC administration of the 1933 Act. The two year
slot went to FTC commissioner George Mathews, and Ferdinand Pecora, famous from
the Senate Banking committee hearings exposing the machinations of Wall Street, was
nominated to the one year position.
Thus both the creation of the SEC and the choice of its inaugural leadership were
concessions to regulated interests. These choices resulted in an industry regulator that
was ideologically closer to the regulated interests than most New Dealers were, and
closer than they would have preferred the regulator to be. This is demonstrated in their
opposition up to the last possible moment to removing jurisdiction from the FTC and
creating a new agency, and in their public, vociferous objection to Kennedy’s installation
as chairman. These concessions quickly translated into an SEC policy of cooperation
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with the securities industry, in all of the major regulatory areas within its purview.
Industry observers, though still suspicious of the SEC simply because it was a regulator,
quickly noted its sympathetic posture (Chatov [1975]). Yet the SEC never approached
the caricature of a “captured” regulator. Instead it steered an ideological middle course
between the New Deal coalition and the regulated interests. In the following subsections
we detail the nature and effects of the SEC’s cooperation with industry in two of its
major areas of regulatory responsibility in its early history: securities registration and
stock exchange governance and organization.
8.3
Securities Registration
The framework of the 1933 Securities Act on primary capital markets was conservative
in the sense that it preserved the existing framework of decentralized, private decisions
in the solicitation and allocation of capital, but sought to improve the information on
which those decisions were based. The Act did not compel the FTC or subsequently
SEC actively to direct the allocation of capital among its competing uses. Issuers of
new securities were directed to register the security with the SEC and file a statement
certifying specific aspects of the issuing company’s debt position, ownership structure,
and senior management structure. Only if the SEC found the required disclosures from
the issuing firm incomplete, inaccurate, or misleading could it restrict the firm’s access
to capital markets. This restriction took the form of a stop order.
Nevertheless, the stop order was still a potent instrument for controlling firms’ access
to and investors’ allocation of capital, especially in conjunction with the SEC’s discretion
to determine corporate accounting standards. The declared value of a firm’s assets could
vary dramatically as a function of accounting rules. With firms choosing their own
accounting standards they had wide latitude to massage the depiction of their financial
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health, and therefore perceptions investors held about their credit worthiness and risk.
A firm with an aged capital stock could value it at the present cost of replacement,
thereby signifiantly inflating its stated value. Within the framework of the Securities
Act, the SEC’s discretion over accounting standards provided a degree of freedom to
affect perceptions of credit worthiness, and therefore to channel investment dollars among
competing uses, that could be either benign or deleterious from the point of view of
securities issuers.
This SEC latitude created an inherent element of contingency over how securities
regulation would play out, which in turn created a threat for the securities industry.
Would the SEC attempt to read in its mandate an authorization to undermine or in
any way alter the existing arrangements of issuing firms and underwriters in securities
markets? The answer would determine whether the securities industry would go along
with securities registration or muster its full legal might to nip the SEC problem in the
bud. The answer would be determined by the decisions the SEC made.
The SEC’s choice was to implement a “disclosure-enforcement” framework pertaining
to securities registration (Khademian [1992], p. 37). That is, the SEC’s approach was to
approve registration statements that disclosed the information stipulated in the Securities
Act and the methods the issuing firm used to arrive at this information (Seligman [2003]).
In particular, the SEC took a very light touch in determining accounting standards used
in registration ( Chatov [1975]). It allowed firms expansive discretion to choose their own
rules, but required clear reporting about the rules they chose. In some cases of especially
tendentious choices by issuing firms it also required a report of what accounting data
would have shown about a firm’s assets if it had used less dubious rules. In adopting this
framework the SEC defined its primary role as a clearinghouse for corporate information,
and implicitly held that once this information was provided, it was up to the investor to
make an informed choice.
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The disclosure-enforcement framework was inherent to a cooperative approach the
SEC took to the securities industry with respect to registration (Seligman [2003]), and
significantly blunted the threat that SEC discretion presented to the securities industry.
It thereby enabled the SEC to induce firms to file registration statements voluntarily
before issuing securities. In other words, the SEC’s approach allowed it to elicit the
information it sought with a minimum of attendant legal and administrative costs, and
without harsh battles over stopping the sale of securities covered by the Act after they
had been issued (Parrish [1970]).5 In this way, the SEC could best deliver on its commissioners’ goal of eliciting information from issuing firms necessary to “make capitalism
live up to its pretensions.”
In adopting its disclosure-enforcement framework and cooperative approach on the
registration issue, the SEC’s use of its discretion under the 1933 Act was close to the
natural ideological position of the commission majority. The essentially pro-market ethos
of the SEC, exemplified by the selection of Joseph P. Kennedy as first chairman, demonstrates this. Kennedy’s appointment credibly signaled that the SEC would not use its
discretion under the Securities Act to actively direct allocation of capital or systematically
limit capital market access. This credibility resulted from Kennedy’s own background
and known beliefs about the legitimacy of fundamental arrangements in securities markets. Equally important was the role of Commissioner James M. Landis, who headed
the FTC’s securities registration division before the SEC was created, and Commissioner
George Mathews. Kennedy, Landis, and Mathews constituted a reliable pro-market majority on the SEC.6 With a commission ideology generally supportive of private market
5
Of course, the threat that SEC discretion posed to the securities industry was such that, though the
campaign to secure voluntary acceptance of registration requirements was largely successful, it was also
challenged in court. The constitutionality of the registration requirement was ultimately upheld by the
Supreme Court in 1936 (Electric Bond and Share case).
6
Indeed, though Commissioners Pecora and Healy were much more skeptical of securities markets,
only Healy voted against major early SEC decisions with any regularity (Seligman [2003]).
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allocation of capital, the SEC took an active interest in the administrative burdens that
registration imposed on issuing firms. The commission sought to streamline this process
as much as possible for all firms and particularly to lower the registration costs faced by
smaller issuers (Seligman [2003]). These administrative decisions further bolstered the
SEC’s image as supportive of access to capital markets.
Upon his installation as chairman, Kennedy embarked on an extensive industry relations campaign to promote registration (Seligman [2003]). Given the preferences represented on the commission he was able to credibly convey that firms filing registration
statements were not thereby implicitly inviting the SEC to prevent them from accessing
capital markets. Because of this, the SEC gave issuing firms little incentive to bypass
registration and issue securities in contravention of the law. Compared to the cooperative steps the SEC was willing to take, in 1934 (before the Supreme Court upheld the
registration requirement) such a strategy for issuing firms presented the uncertainty of
whether securities issued without registration would withstand SEC legal challenges, and
the certainty of paying legal costs to find out. The SEC’s legal framework allowed it to
choose the posture it would adopt with respect to preservation of existing market arrangements, and its choice was relatively supportive. While this blunted the early hopes
of the more aggressive New Deal faithful,7 it allowed the SEC to survive a crucial early
test of its implementation ability and thereby to ensure that improved information would
be available to investors.
In short, the Securities Act directed the SEC to elicit information from regulated
interests. This information was deemed necessary to serve the public interest of greater
transparency about the financial position and risk of firms issuing securities, and thereby
7
As Progressive critic John T. Flynn put it, “[T]he SEC...has erred upon the side of amicability in
its dealings...It has been polite, gentle, and considerate to the point of weakness” (The New Republic,
April 1, 1940, p. 441); see also Parrish [1970], p. 186, for James Landis’s wearied response to incessant
critiques from the left.
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to promote more informed pricing of those securities. The SEC scored a major victory as a
fledgling agency in a questionable legal climate by establishing registration in compliance
with the act as a sensible strategy for issuers of new securities. This victory was enabled
by a commission ideology consonant with the regulated interest. This ideology allowed
the SEC to commit not to use registration in a way systematically adverse to the securities
issuers.
The SEC’s cooperative approach did not translate into a green light for all firms filing
a registration statement to access capital markets. The SEC issued stop orders on about
5-10% of new registration statements in the 1930’s (SEC Annual Reports, 1935-1940).
However, stop orders were not a decisive, final disposition of a security. First, the security
registrant could correct the deficiencies noted by the SEC and lift the stop order. Indeed,
since the early SEC internalized a mission of making existing capital markets work, it
developed informal regulatory protocols in which a stop order was used as a last resort in
case consultation with the registrant about the registration statement broke down. For
instance, in 1935 the SEC threatened the Standard Gas and Electric Company with a stop
order because of accounting practices used in its registration statement. As a condition
for allowing the issue, the SEC required a modified balance sheet that reduced corporate
assets by $153 million, and that instead of claimed corporate surpluses of $123 million
the company had a corporate deficit of $30 million. If and when registrants corrected the
problematic components of the statement, the same ethos led the SEC to lift the stop
order. Second, SEC stop orders are reviewable in federal court. If a reviewing court was
more sympathetic than the SEC about the registrant’s attempt to meet the demands of
the 1933 Act, the SEC order could be overturned.
Thus, a stop order was not equivalent to an edict by the SEC barring the security from
being marketed or the registrant from using it to raise money in capital markets. The
most obvious cost imposed on a firm facing a stop order, delay in raising needed capital,
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was thus blunted both by SEC policy and by court supervision. However, even when
lifted or overturned stop orders imposed a more subtle cost on firms subject to them,
a cost that was more difficult to evade. Even if a security’s stop order was removed,
the security subsequently traded under a cloud of suspicion (McCraw [1984]; Khademian
[1992]). Simply by having been called into question by the SEC with its most formal tool,
a security issued after removal of a stop order was problematic. Given the SEC’s rate of
issuing stop orders, a security with a stop order in its registration history is implicitly in
at best the bottom tenth in terms of the information available about it in the registration
statement. This makes the security more risky, all else constant, than a security with
no stop orders in its history. Despite the official SEC stance that the absence of a stop
order does not indicate that the registration statement is true on its face (5th Annual
Report, 1940, p. 26) or, per force, that the security is a worthy risk, a stop order is
necessarily a harder statement of deficient information than the implicit caveat emptor
warning accompanying securities issued without a stop order.
The linchpin of this effect of stop orders is that they conveyed useful information to
investors. A stop order could not have created a cloud of suspicion unless the SEC was
willing and able to differentiate registration statements according to the information they
provided about the security and the issuing firm. If the SEC were not willing to do so,
stop orders would have conveyed nothing about the informativeness of the registration
statement, and therefore nothing of value in determining a security’s riskiness or price.
An SEC fully in line with industry preferences about registration, namely that it not
restrict pre-1933 access to capital markets, would not have been willing to differentiate
registration statements in this way. In this extreme counterfactual scenario the SEC
would have acted as a “rubber stamp” for security issuers. This policy would have
reflected industry warnings that registration was so onerous that it would cause firms
to forego needed capital and choke off investment. In such a case the SEC would have
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demanded only cursory compliance with the registration requirements of the 1933 Act
so as to ease the burden registration imposed on firms. Such an approach would have
instantiated in regulation the industry attitude that traditional common law remedies
and the ubiquitous doctrine of caveat emptor were sufficient to police faulty security
issues.
It may be contended that the preference of industry leaders best represented in Washington was not preservation of the status quo by the SEC, but rather that SEC regulation
give preferential treatment to the dominant firms and investment banks in the securities markets. That is, top investment banks and large issuing firms might have instead
preferred the SEC to regulate in such a way that enhanced their competitive position
in the industry at the expense of less visible and well represented firms. Indeed, in the
Pecora hearings the leading lights of investment banking attempted to deflect criticism
by placing blame on smaller, less well established, “fly by night” operations without the
reputation of a J.P. Morgan or National City Bank to protect. But SEC actions in the
1930s belie the claim that regulation served this purpose. In fact the SEC consciously
sought to establish its credibility by taking on established securities issuers (Seligman
[2003]).
At the same time, an SEC inherently suspicious of issuing firms would have been
equally unable to convey useful information with its stop orders. Such a tendency would
have led the SEC to be too strict rather than too permissive in considering registration
statements. If the SEC had used stop orders too restrictively, it would have lumped
securities with sound and informative registrations together with the deficient ones. As
a result, the issuance of a stop order could not have conveyed information to the market
about the quality of the information in the registration statement, and a stop order would
have been uninformative.
In actuality the SEC fully accepted the basic premise of allocating capital in private
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markets (Khademian [1992]). Its creation as a concession to the securities industry and
the selection of Joseph P. Kennedy as its first chairman are the clearest indications of
this. But its next two chairmen, James M. Landis and William O. Douglas, were equally
if less flamboyantly supportive of this premise as Kennedy, as we detail further below. As
a result the SEC’s course was not to replace allocation in private markets but to improve
it with informationParrish [1970]). Thus the SEC steered a middle course between the
extremes of acquiescence to industry and replacement of the market mechanism. It
was because of this approach that SEC stop orders were able to convey information to
securities markets.
8.4
Stock Exchange Reorganization
Disclosure in the issuance of new securities, the primary securities market, was one of
two major financial market reforms placed under the responsibility of the SEC. The
other was reform and management of the secondary markets on which existing securities,
such as bonds representing a corporation’s stream of payments of its debt or shares of
stock, were traded. Secondary markets such as the New York Stock Exchange (NYSE)
and New York Curb Exchange (later the American Stock Exchange) were built around
trading institutions that had developed literally as private business clubs, and in the
nineteenth century were judicially sanctioned as such (Kenneth Durr and Robert Colby
[2010]). Given the growing importance of large public corporations in the American
economy, the price discovery made possible by these trading institutions had come to
play an important role in capital allocation and managerial accountability. Yet as of the
1930s, stock exchanges were still governed as private clubs, by their members for the
benefit of their members.
While the regulatory framework for primary securities markets was established in the
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1933 Securities Act, the framework for secondary markets was established in the 1934 Securities Exchange Act. The 1934 Act gave the SEC extremely broad authority to regulate
governance and trading practices of stock exchanges. The basic framework of the 1934
Act was exchange self-regulation under SEC supervision, but the SEC had the authority
to determine whether an exchange’s rules were adequate to justify exchange operation,
and to impose modifications as a condition for operation. Thus the 1934 Act implicitly
accepted the value of private stock exchanges and never considered “nationalization” of
them or direct administration by SEC personnel. Instead, the Act sought to co-opt the
exchanges and direct their unparalleled efficiency in price discovery to public ends.
As noted above the 1934 Act required stock exchanges (unless they fell into a small
number of exempted categories) to register with the SEC, just as primary issuers of
securities were required to do so under the 1933 Act. Stock exchanges were directed
to promulgate their own rules for trading, governance, admission, discipline, etc. For
its part, the SEC could withhold registration, and therefore lawful operation, unless it
determined that
The rules of the exchange are designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating transactions
in securities, to remove impediments to and perfect the mechanism of a free
and open market and a national market system, and, in general, to protect
investors and the public interest (Securities and Exchange Act of 1934, Title
I, Section 6(b)).
Since the meaning of any ambiguous terms was subject to definition, in the first instance,
by the SEC, the Securities Exchange Act conferred wide latitude on the SEC to structure
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trading institutions.
Easily the most important stock exchange in the U.S., both symbolically and quantitatively, was the New York Stock Exchange. In the mid-1930s, about 85% of the value
of all securities transactions on organized exchanges in the U.S. took place on the NYSE
(Seligman [2003]).
Moreover, in the eyes of New Deal reformers and SEC leadership, NYSE governance
elevated the interests of the financial community — and a small sliver of the financial
community at that — over any conception of the public interest. A major bone of
contention was the influence of various factions of the NYSE membership over NYSE
governance: a faction’s governing power was distributed in roughly inverse proportion to
both its numerical weight among NYSE membership and its connection to the investing
public. The core insiders at the Exchange were about 300 “specialists,” the NYSE’s
term at that time for market makers. Specialists, in other words, traded in only a few
stocks which they held in inventory, and depending on market conditions, would take
positions on either side of the market to provide liquidity and keep the market for a
given stock functioning. In return for this service and obligation, specialists could obtain
very large rents from the information they obtained. Another group of Exchange insiders
were “floor traders,” members who traded exclusively on their own account and in their
own interest rather than executing orders or serving a brokerage role with non-member
investors or the investing public. Specialists and floor traders together comprised just
over a third of the Exchange’s 1375 members (Seligman [2003], p. 74) but dominated its
governance, including selecting the Exchange’s president from their ranks. At the other
end of the NYSE membership were commission brokers, with whom the investing public
interfaced. Only about a third of the NYSE’s 40-member Governing Committee came
from brokerage firms interfacing directly with the public (Seligman [2003], p. 118).
For all these reasons, NYSE reorganization was one of the foremost goals of securities
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markets reformers in the New Deal. Yet despite the SEC’s formal authority under the
Securities Exchange Act, and its success in inducing the NYSE as well as other exchanges
to register pursuant to the Act, NYSE reorganization proved elusive. This was due to a
combination of other more pressing priorities for the SEC in its first days and resistence
of the NYSE’s governing body to reorganization.
Chairman Kennedy’s tasks simply to get the SEC up and running, establish an enforcement and field apparatus for the agency, put the basic paradigm of securities registration on a solid footing with the financial services community, and jawbone the regulated
interests to break the “logjam” in new capital issues did not leave much time to tackle
NYSE reform in his short tenure. Nevertheless, Kennedy did take up this issue with the
NYSE and wrested some modest concessions from it, in the process signaling at once the
SEC’s acceptance of basic operating realities of the NYSE and its willingness to challenge
one of the most prominent institutions in finance. Both of these elements were to prove
essential for the success the SEC did achieve with respect to NYSE reform, both under
Kennedy and later in the 1930s.
The key regulatory goal for the SEC was, first, simply to obtain a degree of legitimacy
with the regulated interests and — particularly important in the judicial climate of 1935
— withstand constitutional challenge to its existence. The cooperative regulatory posture
the SEC struck with respect to the NYSE was doubtless designed to achieve this goal
(Seligman [2003]). A secondary goal, less existentially urgent but not less important
in terms of regulatory impact, was to preserve the NYSE’s value as a price discovery
institution while making it operate as much as possible in the public interest.
In this respect, with its agenda on stock market reform, the SEC faced a problem of
eliciting information from the regulated interest. How far could the SEC push market reforms without jeopardizing market efficiency? How far could it push reforms before firms
preferred to be listed on the over-the-counter market, which at the time was considerably
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less transparent? At a broad level the SEC faced a problem of achieving a “second best”
institution. The very fact that price discovery is a useful feature of financial markets
implies that information about securities values is asymmetrically held among participants. In such a situation the effect of market power held by a few participants on
market efficiency is subtle. In a pioneering theoretical analysis, Grossman and Stiglitz
[1980] showed that when information about asset values is costly to acquire, a perfectly
competitive market undermines traders’ incentives to acquire it. The core logic is simple:
if market prices instantaneously reveal all relevant information about value, there is no
gain in exerting effort to acquire it. By the same token, endowing a small number of
participants with market making power can provide a powerful incentive for them to
acquire and aggregate market information, because they are assured by their position
in the market of the ability to profit from it. More generally, transferring wealth from
market insiders to the investing public with no concomitant effect on market efficiency is
not as simple as reducing the degree of privilege afforded to market insiders by exchange
governing institutions. While the formal lexicon of information economics post-dates the
early SEC era by several decades, the theoretical points made by information economists
are reminiscent of the protestations and justifications by financial market insiders about
the social value of their institutional arrangements.
Resolving such issues is, naturally, not trivial. For instance, in the political climate
of the New Deal, it was tempting to ban the market making of specialists altogether, or
at least prevent them from ever trading for their own accounts. But how much would
this undermine specialists’ incentive to acquire information about market conditions,
and therefore interfere with price discovery? How much would the loss of liquidity that
specialists provide when capitalizing on their information interfere with market efficiency?
These were the types of questions the SEC confronted in its agenda to reform securities
markets.
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Questions of this nature were ones that the regulated interests were better situated to
answer than the SEC, no matter how deft and able its attorneys on staff. Compounding
the difficulty, the nature of the information is “soft.” Regulators face problems of eliciting
information from regulated interests as a matter of course. But in conventional regulatory
proceedings such as rate regulation for a public utility, where cost information is an
important determinant, the information is “hard” or verifiable. Elicitation is still not
trivial (Baron and Myerson [1982]; Laffont and Tirole [1993]), but regulatory approaches
can be interpreted as tapping into well-understood incentives for firms to provide it.
Quite obviously, the insider faction of the NYSE had no partiular incentive to provide
honest information to the SEC on these matters. Since specialists’ financial interests were
threatened by any reforms which lessened their ability to capitalize on their privileged
information, their incentive is to denounce such reforms as calamitous threats to the
stability of the market. This is true regardless of said reforms’ actual impact; even if
prospective reforms did maintain the market’s ability to achieve efficient allocations of
capital and reveal information, as long as they redistributed rents from market insiders
to other participants, insiders would stand to lose from them.
The key for the regulator in obtaining credible information on such issues is the
existence of an informed party that has a stake in maintaining an orderly market, but
not necessarily in maintaining existing power relations within the market’s governance.
In the context of a sender-receiver game, such a party does not prefer the same action
on the part of the regulator in any state of the world, and does not react the same
way to reforms regardless of their actual impact. Instead, it will sound objections if
reforms damage market operations sufficiently that its own profits are threatened, but
will indicate approval if reforms redistribute governing power to it without fundamentally
threatening market efficiency.
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tence of such a faction on the NYSE, and the SEC’s ideological placement with respect
to it. The dominant, conservative wing of the NYSE — its “old guard” — represented
the specialists, floor traders, and other floor members privileged on the Exchange at that
time. An insurgent wing of commision brokerage members stood to gain from a shift of
governing power within an otherwise stable, preserved institution. This side of Exchange
membership was loosely allied with two prominent representatives of commission brokers,
E.A. Pierce and Paul Shields, and came to be known appropriately as the“Pierce-Shields”
wing.
The SEC, with its modestly progressive but thoroughly pro-market ideology, was
naturally placed to exploit this schism. A too-liberal SEC, whatever its merits to the
purer progressive elements of the New Deal coalition, would have succeeded only in
uniting the contending NYSE factions against its incursions into market structure. Not
only the reliably anti-reform insiders, but also the pivotal moderates, would have opposed
SEC renovations of market structure. A too-conservative SEC, the kind that might have
reflected a captured regulator, would have been a government apologist for existing NYSE
structure.
The value of the SEC’s placement relative to NYSE factions was first suggested by
its efforts to achieve modest reforms under Chairman Kennedy. The 1935 SEC report on
stock exchange governance, which focused entirely on the NYSE (Securities and Exchange
Commission [1935]), proposed several governance reforms designed to shift Exchange
control from floor members to commission brokers. These proposals dealt primarily
with numerical representation of various exchange factions on its Governing Board and
the process of nominating and electing members to the Board. Indicative of the SEC’s
conciliatory methods with the financial services community, it also stated that “[The
SEC’s] recommendations can be put into effect by the voluntary action of the exchanges
themselves...[The SEC] hopes that, in the main, these recommendations will be found
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acceptable and put into effect by the exchanges themselves.”
The SEC’s hope proved correct, in large part because of the ideological placement of
the SEC with respect to the NYSE’s factional politics, and the Pierce-Shields faction in
particular. The actual SEC was situated close enough to the prevailing ideology of the
NYSE to attract its insurgent wing — which publicly endorsed the SEC’s proposals in
the 1935 governance report — but far enough to irritate its old guard.
This placement demonstrates two key points. First, the SEC’s ideological congruence
with the Pierce-Shields faction allowed for revelation of information about the value
(and costs in terms of market efficiency) of the SEC’s proposals. When the commission
broker faction of the NYSE publicly endorsed the SEC’s proposals, it provided crucial
information from market participants that the market would be dramatically subverted
by the SEC’s plan. The important point here is not that the SEC could “divide and
conquer,” but that a group of market-savvy participants was sufficiently moderate that
the SEC could elicit information from it. Second, the SEC’s ideological dissonance with
the NYSE Old Guard demonstrates that the SEC did not act as a mere lap dog for the
financial community, achieving some success in eliciting information simply because the
industry could trust it not to pursue any threatening actions. The SEC was willing to
pull some Exchange control away from insiders in pursuit of its understanding of the
public interest.
While the insurgent wing’s endorsement of the SEC’s proposals would have provided
the agency all the informaton it required to move ahead confidently with regulations
instantiating the proposed reforms, it did not need to do so. The NYSE agreed to
institute several of the SEC’s proposals voluntarily. This is not to say the conservative
insiders acceded to these changes happily. On the contrary, NYSE president and Old
Guard stalwart Richard Whitney directed the NYSE’s general counsel drafted a critical
point-by-point response to the SEC’s governance report. But with its left flank collapsing
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in agreement with the SEC, and facing the certainty of SEC-imposed changes, the NYSE
insiders went along voluntarily.
To be sure, the NYSE governance and trading reforms of 1935 were modest, and
far from sufficient to effect the New Dealers’ hoped-for goal of reducing floor member
dominance of the NYSE. Nevertheless, the episode is significant as a demonstration of
how reform would play out in the 1930s, the brief period in which the SEC was able to
accomplish it.
Chairman Landis more squarely confronted the problem of NYSE governance reform
than Kennedy was able to do during his tenure. Landis assiduously cultivated relations
with the NYSE and attempted to induce reforms such as a modest segregation of floor
traders in the Exchange. Landis’s approach, however, relied on cooperation of all facets
of the Exchange, Old Guard included, and as such led to few tangible results.
Following on Kennedy’s approach of leveraging divisions within the Exchange, the
critical step toward reform of NYSE governance came in 1938 under the chairmanship
of William O. Douglas. Douglas continued the basic pro-market ethos of Kennedy and
Landis; he sought not to subvert decentralized capital allocation, but rather to bolster
transparency of market transactions so that the market would better serve the public
interest. His aims, as he put it in 1937, were to “revitalize the capitalistic system on a
conservative basis.”8 To Douglas this was different from business as usual on Wall Street;
he preferred to alter financial market structure to shift rents away from industry insiders
and toward investors (Chatov [1975]). The SEC could accomplish this by being the
“investors’ advocate,” a counterweight to existing powerful advocates for the Exchange
and its insiders.
Douglas’s ascension to the SEC chairmanship coincided with the deepest ebb of FDR’s
political standing. The economy experienced a severe recession in 1937, one that Roo8
Washington Post, “Douglas Wants a Free Market,” Sept. 23, 1937, p. 3.
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sevelt could not blame on his Republican predecessors. In addition, the stock market
crashed almost as badly in 1937 as in 1929, with the NYSE losing almost 40% of its value
in a two month period (compared to about 45% in the depths of the 1929 crash). The
finance community loudly blamed the SEC this crash and the decline in business investment, arguing that the burdens of securities registration were too onerous, SEC efforts
to streamline the process for smaller firms notwithstanding. Meanwhile FDR concocted
his court packing plan in the wake of Supreme Court invalidation of several major New
Deal statutes, a plan that backfired disastrously. Roosevelt faced broad-based criticism
of his first term and a half in office, enough to make the 1940 election look like trouble.
Because of all these developments, Roosevelt felt constrained to conciliate the financial community with his approach to the SEC at this point (Schwarz [1993]). An
important step in this direction was the appointment of NYSE member John Hanes as
an SEC commissioner, marking the first time that a member of the NYSE served on the
commission. The combination of Roosevelt’s conciliation strategy, Douglas’s philosophical stance on appropriate governance arrangements, and Commissioner Hanes’s status as
a commission broker close with others advocating changes in governance made the SEC
at this time a natural ally of a growing reform wing of the NYSE.
The SEC was able to exploit its ideological position to induce reforms that were
more significant than those achieved under Chairman Kennedy, but it achieved these
results by following the same basic template. These reforms were based on the report of
a NYSE study committee with heavy representation of the Shields-Pierce faction, that
advocated three important changes. The first was that the three major NYSE constituent
parts of floor traders, specialists, and commission brokers should have representation in
NYSE governance proportional to their membership on the Exchange. Since commission
brokers were by far the largest group this amounted to a proposal to expand their voting
power on the Exchange. Second, the committee recommended that the NYSE have a
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paid president with training in administration and management who was not a member
of the Exchange. This made it more difficult to sustain rule by Old Guard insiders
who represented the interests of their faction. Third, the president and all governance
committees were to have expert staffs to support their work, making it more difficult for
Old Guard dominated committees to advocate rules simply because of how they affected
that faction.
To take effect, the study committee’s recommendations had to be approved by the
NYSE governing committee, still controlled at that time by floor traders and specialists.
The SEC put the committee’s proposals in perspective by threatening unilateral use of its
broad authority to regulate exchange governance under the Securities Exchange Act —
the “shotgun behind the door,” as Chairman Douglas put it. The SEC proposed reforms
even more draconian than those favored by the Pierce-Shields faction, suggesting in a
1938 press release that it was prepared to “take over” the governance of the Exchange
if the NYSE governing committee did not voluntarily accede to the proposals of the
Pierce-Shields group (Seligman [2003]). The SEC subsequently offered a taste of the
approach it was likely to take by issuing a rule, without consultation with the NYSE,
limiting short sales. The rule stipulated that a short sale in a given security could only
take place at a price above the most recently transacted price in that security. This
was important because short selling was a tactic frequently and disproportionately used
by floor traders, and requiring short sales strictly above the most recent price (rather
than at or above) made the constraint significantly more likely to bind. While they
maintained that short sales added essential price stability, the SEC suspected that they
predominantly accelerated price declines and questioned their social value. Strategically,
this rule was important because it demonstrated the SEC’s implication that the Old
Guard would like SEC governance even less than an altered NYSE with a more prominent
role for the commission brokers.
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As with any threat a key consideration for it to be effective was credibility. In this case
credibility had two facets. Most obviously was the SEC’s willingness to follow through
on the threat if necessary. If the Old Guard had any doubts about this, they were laid
to rest by the SEC’s short sale rule. This was the first time the SEC issued a trading
rule itself rather than convincing the NYSE to issue the rule itself as self-regulation
(Seligman [2003], p. 165). It was developed without NYSE input. More importantly for
strategic purposes, if the SEC were merely bluffing about its willingness to administer
the NYSE in a way adverse to Old Guard interests, this rule would have been costly
for the SEC to issue. If the SEC in fact held that the NYSE status quo was reasonably
acceptable, or that it would be legally (or politically) too costly to challenge it under
direct administration, the short sale rule would have been ideologically undesirable for
the SEC, and also would have realized those political costs. But if the SEC were in fact
serious about its regulatory intentions and willingness to incur these political costs, the
short sale rule was not undesirable. The natural inference from the short sale rule was
that the SEC meant business.
An equally important but more subtle aspect of the credibility of the SEC’s threat was
the Pierce-Shields faction’s take on it. In particular, the threat could only be credible
if the reformers preferred life under the threatened SEC administration to the status
quo. If this were not the case, the NYSE governing committee could have rejected the
study committee’s recommendations in preservation of the status quo. Having done so
the reformers would have a simple choice: accept SEC regulation they, by assumption,
preferred less than the status quo, or close ranks with the Old Guard and protest the
assumption of control by the SEC. Given the political importance to FDR of support
from the financial community, it is difficult to imagine the SEC proceeding with a hardnosed takeover of NYSE governance in the face of unified opposition from NYSE factions
normally at odds with each other. Thus, the SEC’s threat had to attract the support of
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the NYSE reform faction over the Old Guard status quo. This again was established by
the relatively harmonious relationship between the SEC and the reformers. Not only was
new SEC commissioner John Hanes an ally of the Shields-Pierce faction from his days at
the NYSE, but Chairman Douglas’s longstanding preference, as noted, was to shift the
balance of power on the exchange toward commission brokers. Because of these links, the
NYSE reformers could credibly maintain from the beginnings of the 1938 reform effort
that the NYSE was best served by cooperation with the SEC (Seligman [2003], p. 163).
As it happened the SEC’s threat had the desired effect. It framed the choice for
the NYSE’s Old Guard either to accept governance dominated by commission brokers,
or hands-on control by the SEC. This choice was not a difficult one for the Old Guard
to make, and the NYSE governing committee approved the recommendations of the
study committee soon after they were released in late 1937. Thus, Douglas and the SEC
engineered a power shift at the NYSE, from domination by insiders whose social function,
at best, was to provide liquidity and price information, toward commission brokers who
dealt predominantly with the public. Under the SEC’s moderate pro-market ideology,
this was an improvement.
The NYSE governing committee was an agenda setter, but not the final decision
maker, with respect to NYSE constitutional changes. There was still the non-trivial
matter of approval of the new rules by the entire NYSE membership. In this respect
the reform effort was catalyzed by a high-profile embezzlement from an NYSE surviving
relatives’ trust fund perpetrated by NYSE luminary and former president Richard Whitney, made known to the SEC in early 1938 (Kurt Hohenstein [2005]). Nevertheless, the
more difficult chasm for the SEC to bridge was the larger one with the NYSE governing
committee, stacked as it was in favor of the Old Guard. In any event, the NYSE full
membership overwhelmingly approved the reforms in 1938.
In these reform efforts, the arrangement of preferences of the SEC and the regulated
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interests played a crucial role in line with the theoretical discussion in the previous chapter. In particular, the alliance of the SEC and the NYSE reform faction was enabled
by their ideological proximity. Both parties wished to enhance the power of commission
brokers on the NYSE relative to floor traders and specialists. Without the SEC’s continued support of the basic principles of access and private market allocation of capital on
the secondary market, even this alliance, and the communication it engendered between
NYSE insurgents and SEC regulators, would have been impossible.
Given the position of NYSE factions, the rift within the NYSE was significant in the
1935 and 1938 governance reforms only because the SEC was sufficiently conservative in
its outlook on the role of government in securities markets to place it in alliance with
the Exchange moderates. It was not a given that the SEC would be able to forge this
alliance: recall the controversial Section 10 of the Fletcher-Rayburn draft of the Securities Exchange Act of 1934, which unified opposition from all factions of the NYSE and
the financial community generally. In an alternative world in which the SEC advocated
a more thoroughly radical reform effort, e.g. by limiting profits for commission brokers,
the SEC would have destabilized its crucial coalition with the Pierce-Shields reformers.
In turn, the SEC’s continued conservatism was maintained not because President Roosevelt preferred that position as his unconstrained ideal, but because he felt constrained
to maintain it by the decline in his overall political standing. John Hanes, the SEC
commissioner who provided the most direct conduit to the Shields-Pierce faction, was
appointed not because FDR considered Hanes the ideal agent, but because he believed
he needed to placate the NYSE. Between Douglas and Hanes, FDR ensured close enough
links between the SEC and NYSE moderates to facilitate some cooperation.
Thus two structural facets of the SEC underpinned its success in the 1935 and 1938
NYSE reforms. The first was sufficient ideological proximity to a subset of the regulated
interest that credible communication about the value of SEC reforms was possible. This
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set off a rift in the NYSE that has been interpreted as a “divide and conquer” approach by
the SEC (Seligman [2003]), but the division itself within the Exchange was not the crucial
point. Rather the key driver was the congruence between the SEC and a knowledgeable
group of Exchange participants. The second was broad discretion to determine policy
itself if necessary, and thus issue a credible threat to assume direct control of NYSE
governance. To be sure, the strategic acumen of Kennedy and Douglas and expertise of
the SEC staff were necessary to capitalize on these structural conditions. Nevertheless
these conditions played a crucial role in enabling the NYSE governance reforms.
8.5
Conclusion
One of the fundamental problems of information provision by executive branch bureaucracies is eliciting information from regulated interests. Agencies facing this problem
must be able to solve it to serve their public purpose. In this section we have proposed
a logic of agency accountability that addresses not only the problem of agents applying
policy-relevant information agents already possess, but eliciting that information from
regulated interests in the first place. This logic delivers a qualitative difference from
the case where a principal must only induce an expert agent to apply exogenously-held
information as the principal wishes it to be applied. In particular, when information is
endogenous, the principal must balance the gains of an ideological clone, which applies
its information exactly as the principal wishes, with the gains of a ideologically differentiated agent, which can elicit more information to apply. This balance is achieved
with an agent that is ideologically sympathtic to the regulated interest, but nevertheless
sufficiently independent to set policy as it wishes.
This theoretical lens helps us to understand the operation and effectiveness of the
SEC in the 1930s. The agency’s creation reveals both the requisite ideological links
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to the regulated interest and policy discretion. These conditions played a crucial role
in enabling the SEC to establish early successes in two major areas under its regulatory
jurisdiction, the registration of new securities issues, and the regulation of stock exchange
governance.
In the area of securities registration, the SEC set a course of “disclosure-enforcement”
under which it conceived its role as improving (rather than subverting) a capitalistic
securities market by eliciting information necessary for informed private decisions. Since
this approach was close to the ideological position of a stable Commission majority, it was
able to convey to the securities industry that compliance with not only the 1933 Act but
the SEC’s particular (and long-since enduring) implementation of it was compatible with
the industry’s aims and its fundamental existing arrangements. This implication made
voluntary registration relatively benign for most securities issuers, so the SEC elicited
the information it sought with minimal (not to say zero) resistance.
In the area of New York Stock Exchange reorganization, the SEC’s success depended
on support from Exchange factions which conveyed that the SEC’s plans were compatible
with a well-functioning secondary market that was tilted away from the narrow interests
of market insiders but still entirely capitalistic. The Commission was able to obtain
this support because it never sought more than this goal. The SEC achieved success
under Chairmen Kennedy and Douglas when it was willing to leverage approval from
the moderate wing of Exchange commission brokers to cajole the Old Guard insiders. It
was less successful in Exchange reform efforts under Chairman Landis when it attempted
to bring all Exchange factions, Old Guard included, into the pro-reform fold. In the
end, the SEC’s technical competence and essential sympathy to the concerns of market
participants could not erase the problems of eliciting approval from a faction that had
almost perfectly organized a market institution to serve its interests, and so stood to lose
from any modification of that institution.
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The SEC in the 1930s never strayed particularly far from the ideological orientation
of President Roosevelt. Like the commissioners he appointed, FDR never sought to
displace the paramount role of the private, decentralized market mechanism in allocating
capital and disciplining corporate leadership.9 Nevertheless, FDR’s SEC appointments
allowed him to make public statements in favor of a sympathetic direction for securities
regulation, and thereby stake a degree of his reputation on it.
The SEC’s experience in this era demonstrates the importance of linking the ideological outlook of a regulator with that of a regulated interest for eliciting information.
We have seen in this chapter that the SEC’s sympathy toward the policy preferences of
(segments of) the regulated interest played a crucial role in eliciting the information that
the Commission believed was its social purpose to provide. At the same time, the SEC’s
independence form (other segments of) the regulated interest allowed it use that information to change the industry in ways consistent with the Commission’s own ideological
commitments.
9
Moreover, theories of political insulation of independent regulatory commissions notwithstanding
(Lewis [2003]), FDR’s impact on the SEC was much deeper than appointment power alone; the SEC at
the time was across the street from the White House, and its first three chairmen frequently met with
and took cues from the President (Seligman [2003]).
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Chapter 9
Conclusion
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Executive branch bureaucracies typically claim legitimacy in a democratic policy process, in part, through the expertise and information they are assumed to bring to bear
on the policy process. If they can be induced to make policy decisions that apply their
information in the way that elected officials would use it if they had it, we can have the
best of two worlds — democratic accountability and bureaucratic expertise.
The problem we address in this book is that a narrow conception of democratic accountability may conflict with bureaucratic expertise when the latter must be developed,
rather than taken as given. Specifically, our assumption is that the information that
bureaucratics agents have at their disposal is determined endogenously by the incentives
and constraints they face to acquire and use it. These are determined, in turn, by the
organizational structure and political position of bureaucrats. The core logic behind the
family of theoretical models we develop is that organizational structures and political
environments that de-couple the ideological commitments of bureaucrats from those of
their political principals, limits principals’ overhead control, and give bureaucrats room
to define and act on policy agendas consistent with their own ideological commitments
can provide incentives to invest in expertise, inducements to share information with other
executive branch policy makers, and loosen constraints of eliciting information from private interests. In short, limited control by principals can ironically be useful to principals
when bureaucratic information is endogenous, because it can improve and increase the
degree of information brought to bear on policy decisions.
These points are at odds with well-known and widely-invoked arguments about accountability and agency structure, which assert (positively) that we can interpret bureaucratic structure as designed to make agents faithful to the goals of political principals,
and (normatively) that this is necessary for accountability. This strain of thinking runs
through both “structure and process” arguments of McNollgast (McCubbins et al. [1987];
McCubbins et al. [1989]), and delegation arguments of Epstein and O’Halloran [1999] and
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Huber and Shipan [2002].1 That the availability of the agent’s information is endogenous
to its policy authority and control by principals is an important part of the difference
between our argument and these previous ones.
However, endogenous information is also a centerpiece of informational models of
legislative committees (Gilligan and Krehbiel [1987]; Krehbiel [1991]), and in standard
formulations these arguments are supportive of an “ally principle” logic. The reason
our argument leads to different conclusions is because of the nature of decision making
authority in the situations considered. In Gilligan and Krehbiel [1987], a principal chooses
an agent to give advice to that principal, who then makes a policy choice. The principal
may wish to limit its control over the agent to induce investment in expertise (this is
essentially what a closed rule accomplishes in the legislative context), but the principal’s
ideal agent is its ideological clone.
The situations we consider involve different locations of authority. In sender-receiver
games (at least the uniform-quadratic case of them), conditional on the receiver’s ideal
point, all players would prefer to achieve zero conflict between the sender and the receiver.
In the Gilligan-Krehbiel models, the receiver is the principal itself, so zero conflict is
achieved by making the sender and receiver identical. In part II above, the principal
is not the receiver and does not control the receiver’s ideal point, so its best remaining
option is to pin its agent, the sender, to the ideal point of the receiver. And, conditional
on the sender’s ideal point, a principal choosing the receiver does so to balance the
benefits of more information than the principal could obtain from the sender, against
the benefits of more desirable policy choices. This case is not relevant to the legislative
organization issues in Gilligan and Krehbiel, while it is the thrust of the model in part
III above. Finally, in part I, the principal is able to credibly commit to give agents more
1
They are more consistent with the point made by Bawn [1995], working in the “structure and process”
tradition, though as noted Bawn assumes a tradeoff between political responsiveness and technical
expertise without providing microfoundations for it.
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policy authority than even a closed rule can offer a congressional committee, and we argue
that doing so for a biased agent that cares about policy results in greater administrative
expertise than delegating to an agent that is not interested in polcy, and therefore willing
to follow the principal’s commands exactly.
Overall, the models we develop turn conventional assumptions about principal-agent
theory in political science—that control over and responsiveness of agents is always
beneficial—on their head. This is because those conclusions are derived from models
of simpler problems than the ones we consider. But principal-agent theory is not a
static canon of nostrums about how any actor interpreted as a “principal” interacts with
another actor interpreted as an “agent.” In turn, it cannot be “tested” by examining
whether the relationships between “principal” and “agent” that the theory is assumed
to imply do in fact hold. Rather, principal-agent theory is a framework or an approach
for analyzing how an actor (or set of actors) gets the best results it can, from its own
point of view, out of another party that takes actions affecting the first actor’s utility.
Compared to the baseline agency model typically invoked in political science (which is
often left implicit and not formalized in critical discussions), our models incorporate more
complex versions of bureaucratic agency problems that are important from the standpoint of executive branch development. In the developmental context, creating informed
agents in the first place, rather than simply disciplining their decisions in response to
their information, is a significant issue.
Working in a modified but still canonical principal-agent framework to assess dilemmas of accountability and information acquisition is useful, in part, because it ensures
that agency structures derived from theory ultimately serve the interests of the principal.
The structures that the principal chooses, or merely allows to exist, in equilibrium cannot be worse than other feasible structures. To echo the point made by Morris Fiorina
decades ago in one of the first applications of concepts from principal-agent theory to
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CHAPTER 9. CONCLUSION
bureaucratic politics, if this were not the case then different structures would be chosen.
Of course, we can only guarantee that this is true in the models. We (in the broadest
sense including you, not just us) will never be in a position to certify that observed organizational structures in actual bureaucracies do in fact promote the relevant principals’
interests as well as possible. But what we do have, as a result of the modeling in this
book, is a lens through which to interpret executive branch organizational structures.
Even though these structures may limit overhead control by all principals collectively, or
link bureaucratic agents to other actors with whom the agents’ principals have strong ideological conflicts, we cannot conclude that they are a threat to bureaucratic legitimacy
in a democratic policy process. We would not argue that such structures necessarily
promote that legitimacy either.
Rather, what these sorts of structures indicate is that we have more subtle questions to
ask: do the limitations on overhead control provide—whether by design or by accident—
incentives or capabilities to acquire, share, or elicit policy-relevant information? And is
that information thereby gained important enough for the quality of public policy, and
by extension bureaucratic legitimacy, to make a loss of control beneficial in light of the
incentive constraints for inducing information acquisition?
From the standpoint of evaluating agency structural reforms, this perspective is conservative in a Burkean sense. Agency structure maps into myriad incentives that affect
what an agency does and how well the agency does it. Before we contemplate changes
in pursuit of some vision of accountability-as-responsiveness, we should consider possible downsides of those changes on dimensions such as incentives to acquire information
that may not be cognizable in a simple model of accountability. The value of limited
control over ideologically committed agents for creating informed, learning bureaucratic
organizations is but one illustration of this.
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