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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