Last week, Treasury Secretary Jack Lew blasted the IRS for its poor customer service. In 2015, the average wait time when someone called the IRS for help was 23.5 minutes, and just 38% of questions to the IRS were answered.
The IRS’ response has been to ask for more money. But even the extra $290 million they’ll get in 2016 for customer service won’t fix the underlying problem. As a monopolistic entity, the IRS lacks the price signals necessary to optimize their resources.
Ludwig von Mises explained this problem in Economic Calculation in the Socialist Commonwealth. Mises argued that it is impossible to judge the costs and benefits of an activity without market prices. Different activities, such as the cost of more service agents vs citizen wait times, are measured in different currencies, and there is no clear exchange rate.
It’s like walking a tightrope that zigs and zags, without being able to see the rope.
The site directors of the IRS have no way to accurately compare the trade-offs between the additional support staff and having longer wait times. The first is measured in dollars—say, $100 million per year for hundreds more agents—the latter in reduced citizen frustration.
Even if the IRS got the several hundred million dollars more that it requested for fiscal year 2016, more funds doesn’t mean that it will spend them wisely. Is $100 million more per year worth irritating half as many people as the service used to? What about $200 million? Where’s the optimal ‘customer’ service point, where marginal cost equals marginal benefit? Even if the IRS reduces its wait times, it’ll do so at the expense of taxpayers who foot the bill.
Economic calculation works in a free market because all transactions are in a single unit. If Apple hires more customer service representatives, they can measure the benefits in dollars. Decreased customer frustration manifests in increased sales, as better customer service lures users away from competitors.
This lets Apple calculate the benefits and costs of a decision in the same currency, and evaluate whether or not to increase or cut back their customer service staff. If Apple gets the decision wrong, they’ll lose money. This sends a signal to Apple, and it’s competitors, initiating a constant process of trial and error where everyone tries to get the balance right. Failures are avoided and successes emulated.
In a free market, deciding whether or not to pursue a given activity is still like walking a tightrope. There are a million ways to get it wrong. But there are also millions of voices acting as guides. Decisions made elicit immediate feedback from consumers, directing future actions as a result.
According to Mises, economic calculation is performed jointly by everyone. Every interested consumer decides whether or not to buy a new laptop, just as every producer decides how much to charge for a laptop. From these millions of individual decisions, stable prices emerge.
In a government agency, the decision of whether or not to pursue a new policy (such as adding more customer support staff) is determined by a mere handful of people, who simply aren’t exposed to market competition. As a result, the policy they enact is unlikely to be optimal.
Without being able to measure costs and benefits in the same currency, government decision-making is uninformed. Should the IRS add new customer service agents? Should road builders add two new lanes to a highway? What about four lanes? Should a local police department add ten new officers to increase protection, or would that result in unacceptably high taxes? Should the fire department invest in more workers, or in better communication systems?
The best government bureaucrats can do is make an educated guess. The federal government spent $3.8 trillion in 2015, so poor decision-making process has real consequences.
Given the blind tightrope act that the IRS staff have to walk, it’s little surprise that the experience of calling in is so frustrating. They aren’t exposed to the market signals that would force them to improve their customer support. Citizens may complain, but it will not affect their bottom line.
This is why we shouldn’t be surprised when private services outperform their government counterparts. The miracle is that government services work at all.