Richard Zeckhauser on Creating Public Value

Interviewed by Doug Gavel May 16, 2011

Getting more for less is the focus of much discussion and debate in Washington, state capitals and city halls these days, with debt obligations growing and resources shrinking. Making government work better has inspired much of Richard Zeckhauser’s research and writings. Zeckhauser is the Frank P. Ramsey professor of political economy, and author of several books and dozens of articles proposing procedures for allocating public resources effectively, and promoting methods to make markets work better.

Q. All governments, from the national to the local levels, are grappling with intense economic pressures at the moment. How are they responding to these pressures – in order to balance their obligation to citizens with their need to maintain fiscal integrity?

Zeckhauser:
Unfortunately I don’t think they’re doing a very good job. The sterile political conflicts in Washington, which are being replicated in many state capitals, are contributing to this problem. The conservatives merely want to cut programs and curb taxes while liberals want just to preserve programs and boost tax revenues. The resulting tug of war produces no progress.

The solution, I believe, comes in three parts. First, we’re going to have to raise some taxes. I would speculate that a value added tax – basically a national sales tax – is part of America’s future. It’s found in almost all major developed countries. Second, we’re going to have to slash some entitlements. Medicare and Social Security, however sacrosanct, are the leading contenders, because that’s where the dollars are. Third, we have to find a way to get more output from the same amount of input, from the same tax revenues.

Q. Your latest book, co-written with Jack Donahue, is titled “Collaborative Governance: Private Roles for Public Goals in Turbulent Times.” Please explain the thesis of the book.

Zeckhauser:
It addresses the crucial third part of the solution – getting more public value created for every dollar of tax revenue used. The prime thesis of the book is that collaborative governance is a remarkable tool created predominantly in America. Its use is now widespread. Many critical activities in society – ranging from job training and welfare services to cleaning up hazardous waste sites and operating public parks -- employ collaborative governance. However, neither the media nor the public have paid much notice to this profound development. Our contention, which we demonstrate with considerable evidence, is that once the principles and proper use of collaborative governance are better understood, we can achieve much more for public goals by involving the private sector – both for profit and non profit.

Q. Please discuss the promise and potential problems surrounding collaboration.

Zeckhauser:
First let me explain what collaborative governance is. It’s basically a relationship between the public sector and the private sector, either for-profits or non-profits, where discretion is shared between the two parties. So let me give you two examples: anyone who’s been to Central Park in New York City in the past 15 or 20 years has seen a remarkable resurrection. Central Park was a dangerous place filled with litter, broken statues, defaced buildings. It’s now a lovely playground for all of New York’s citizens and for tens of thousands of tourists. And this was accomplished because basically the New York Park’s Department, recognizing that the city didn’t have revenues, turned to its private citizens and said, “We would like you to contribute your dollars and your time to creating a renewed Central Park.” And an organization called the Central Park Conservancy has done precisely that – raising many tens of millions of dollars and contributing many tens of thousands of hours and it works extraordinarily well.

We find another under-examined example in America’s space program. The space shuttle fleet is operated through a partnership between NASA and a corporation called United Space Alliance. United Space Alliance (USA) is a joint effort of Boeing and Lockheed born in the wake of the Challenger disaster. It employs over 8,000 employees and it basically enables us to have operations like the space shuttle. USA handled ground operations for the recent successful launch of the shuttle Endeavour.

Collaborative governance provides benefits in three ways, beyond the obvious one of supplementing tax dollars with private resources. By involving the private sector, it frequently gets advantages of legitimacy; advantages of information; and advantages of productivity.

But there are also dangers in collaborative governance. Once you give another party discretion, they may abuse it. An example is the delivery model for providing loans to college students. Until the Obama administration finally pushed through reform, these loans were run by the banks with the provision that if any loan got in trouble, the government would just take it over. But the banks were also guaranteed the kinds of high interest rates that only lots of risk could justify. So the program was much more costly than it would have been if the government had been in charge. The banks were exploiting what we call “payoff discretion” – dipping unfairly into the public purse.

The other significant challenge to collaborative governance is what we call preference discretion. As an example, consider charter schools. Many charter schools are wonderful, and they do a terrific job. But there is the danger that when you give them discretion to create great curricula, they will take advantage to advance their own preferences, not those of the public. For example, we would not want a charter school that indoctrinated students with a particular political or religious view. An effective arrangement will have the chartering organization – usually the state or a city – putting various requirements on charter school operators such as accepting students by lottery, teaching required subjects like math and science and not teaching to inculcate ideologies. But beyond that the charter school should be free to decide the length of the school day, what additional subjects will be taught, how much they will use technology, and so on and so forth.

Q: Some of your other work has examined market forces and their impact on the nation’s health care system. How is the system beginning to respond to the health care reform bill signed into law by President Obama?

Zeckhauser:
Well, it’s really too early to tell how the health reform bill will play out, assuming there wouldn’t be significant alterations, because many of its provisions only go into effect in the future.

The reform bill suffered a recent setback when a number of well respected health care institutions, which had been cited by President Obama as being outstanding in the delivery of care, publically opposed the structure of the provisions for accountable care organizations (ACOs) that the government has put forth. The idea behind ACOs is to pay providers to make Medicare patients healthier and to give them some portion of the dollar savings. Such an arrangement would be workable, and desirable. The complaint filed by these institutions was that the proposed regulations were much too onerous, much too restrictive.

I hope that with proper understanding of the collaborative governance model, and with some concern for giving discretion where discretion would be beneficial, the government will go back and re-write the regulations, secure the support of current opponents such as the Mayo Clinic and the Cleveland Clinic, which are wonderful operations, and that the country will be able to move forward with cost-effective health care for the elderly. But as for where the Obama health care bill will ultimately lead us, it is much too early to tell.

Q: Creating “public value” is a theme that runs fairly consistently throughout your research. Please discuss the concept and what it means for effective governance.

Zeckhauser:
I think that the whole goal of effective governance should be to create public value. Public value is basically how all the citizens within a country weigh the benefits that they’re getting from various public activities, including public activities run through the private sector. For example, when we create a charter school, all the benefits that go to the students and the people who might ultimately employ the students, the people who contribute to the charter school, etc.

I mentioned Central Park; Central Park is also a terrific example in which you see old people, young people, poor people, rich people, all benefitting from this terrific operation.

We see another example of public value in the work of the Army Corps of Engineers these past few weeks confronting surging rivers in the Midwest. The Corps has opened spillways along the Mississippi River and blasted levees along the Ohio River. The Corps did this to flood lower-value farmland and rural townships in order to save major cities further down river. The losses averted dwarf the costs that the Corps’ actions imposed.

The idea of imposing significant costs on innocent citizens, however, is not something that Americans like, and we will have to wait and see what compensation is ultimately provided to the property owners whose lands were flooded. I would argue that a superior arrangement would have anticipated these problems. Floods from rivers will always be a threat. Thus, we should be able to work out arrangements in advance that would lead to upfront payments to people who are willing to have their fields flooded, with further specified payments should the circumstances arise. Government compensation arrangements that facilitate actions that create public value while simultaneously providing fair compensation exemplify effective collaborative governance at work.

Q: Historically what have been the greatest obstacles for the United States in creating public value? And where are we now? How are we faring? What are our success stories?

Zeckhauser:
The democratic system doesn’t always achieve the greatest level of efficiency. Politics often gums up the works, but the benefits that come when citizens decide their own fate are very great. As usual, Churchill put it best: “Democracy is the worst form of government, except all the other forms that have been tried …”

One major challenge to creating public value is our failure to replicate successful models when they do come along. I mentioned charter schools. There are now more than 5,000 charter schools in the United States. Some of them are extraordinarily successful; some of them are unsuccessful. If we could learn how to propagate the best models, winnow the worst, and have the best imitated by public schools, then immense public value could be created.

My favorite charter school in the nation, called the Academy of the Pacific Rim, is located in the city of Boston. Every student there is required to learn Chinese or Japanese. Its school days are much longer than they are in the Boston Public Schools, as is its school year. The Academy’s students score at the top of the state in the MCAS tests, which are the standardized tests which are given in Massachusetts. The overwhelming majority of these students are poor Hispanic and African-American students, who are succeeding within this innovative environment. Certainly if environments like this one were to be created in other schools – both private and public – the public value would be huge.

In my opinion, lengthening the school day would probably do more than any other simple measure to improve the education of American students. Our students go to school for far fewer hours than students in most other leading countries around the world. So we have to replicate successful models and change our ways. We know what to do. Now we need the political will.

 


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