Friday, May 15, 2015

Paul Volcker: Financial Regulatory Reform and the Civil Service

In reaction to my comments on the Volcker Alliance recommendations on financial regulatory reform and the Treasury Department, a correspondent writes me to suggest that Volcker may have given up on his efforts of many years to improve the functioning of the civil service by limiting the number of political appointees and strengthening career senior government executives. In my correspondent’s view, Volcker may be recommending that Treasury play less of a role in financial regulation and the “independent” financial regulatory agencies, especially the Federal Reserve, because he has recognized that the civil service has not been reformed. Also, despite his famous frugality, Volcker appreciates that financial regulatory agencies can pay salaries higher than the regular civil service pay schedule, which is important for both recruitment and retention of staff. Most Treasury employees are paid according to the regular civil service pay schedule, with the notable exceptions of the staffs of the Office of Financial Research, which was created by the Dodd-Frank legislation, and of the Office of the Comptroller of the Currency.  
I think my correspondent is on to something. I do not think that the lack of civil service reform is the only reason for the recommendations of diminishing the role of the Treasury Department, but I think it is part of it. The other reason is that I think Volcker, as well as many others, admire the Federal Reserve as an institution and admire its staff. In fact, the Federal Reserve does have good staff, but, as I have indicated in previous posts, the Fed is not infallible and has its weaknesses, as do all government agencies (and all organizations, public or private).
As far as the civil service is concerned, Paul Volcker is right that it should be reformed and the proliferation of political appointees should be stopped and, even, reversed. Clearly, the President has the right to have his own team in place to formulate policies. However, there also needs to be a recognition that many activities of the federal government (for example, managing the public debt) continue from administration to administration and there is a benefit to having senior career people manage many programs and available to give operational and policy advice on request. The knowledge and experience gained from years of government service is invaluable to continuity and in assisting political appointees carry out their specific policy agendas.
Unfortunately, during my tenure at Treasury (and I am told since the end of World War II), the trend is for each incoming administration to name more political appointees and to place them further and further down in the bureaucracy. In my experience, some of these political appointees are excellent; some are mediocre; and some are outright terrible. I often tell people that the hardest part of my job at Treasury was not the substance of what I was working on but figuring out how to relate to each new boss who appeared on average about every two years.
This state of affairs is in general terrible for morale. Younger employees see the situation and come to the conclusion that after a reasonable period of government service they should probably look elsewhere for career advancement. Consequently, the government loses many of its best people.
Moreover, political appointees are not usually motivated to improve the organization they are working for temporarily; they are usually there to advance a particular agenda and to further their personal career goals – some view it as getting their “ticket punched.”  If political appointees go too far down in an organization – and they do at the Departmental Offices of the U.S. Treasury – then no one with responsibility for multiple offices is motivated in improving the organizations’ effectiveness. For example, there is no political appointee is likely to consider implementing programs for career Treasury employees encouraging them to work in multiple areas, including domestic and international, in order to develop senior officials with broad experience in different aspects of the Treasury’s responsibilities. Finally, a problem with having too many political appointees is that it may be more likely that some of them will do considerable damage that outlasts their tenure to the organization.   
As far as pay is concerned, the George H.W. Bush Administration in the wake of the savings and loan disaster decided that new legislation should enable the bank regulators to pay higher than normal government salaries in order to recruit good staff. After some years, legislation extending this pay preference to the SEC and the CFTC was enacted. While the motivation for this is understandable, the government pay issue should be one that is addressed globally, rather than piecemeal. Given the diverse functions and vast size of the government, it is a questionable system for most civil service employees to be paid according to the same rigid schedule overseen by a single government agency (OPM). A way should be devised to give more agencies more flexibility in determining how much they pay employees. (I know that that pay was an issue at Treasury, because when I was recruiting people I could offer them interesting work but could not match the pay of competing agencies.)

If Volcker has concluded that civil service reform, despite his best efforts, is not going to happen anytime soon, I think he is right. It usually takes a crisis for the government to change, and the problems in the civil service are slowly making things worse but are not creating a crisis. And when there is a crisis, such as in the financial sector, partial solutions can be applied, such as reorganizing some agencies and paying select government employees more money. Nevertheless, I am leery of giving more power to the Federal Reserve. I agree with much of what it has done in recent years, and I think both Ben Bernanke and Janet Yellen have been excellent in leading that organization. One does not, though, have to go back that far in history to find that the Fed has made major mistakes. Moreover, if ultimately, any particular Administration is going to be judged by how the economy performs, one should not continue a trend of giving more and more authority to agencies that the Administration does not control.

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