Punishment: Public and Private
What's the difference between the cultures of the private sector and the public sector? Consider the difference between Arthur Andersen and the U.S. Forest Service.
A jury has announced that Andersen was guilty of one felony count of obstructing the Security and Exchange Commission’s investigation into the Enron Corp. Although the government’s prosecutors have been loudly proclaiming the great job they did, in truth they won this case by a whisker. The jury discounted the testimony of the prosecution’s highly touted star witness, former Andersen employee-turned-turncoat David Duncan, in acknowledgement that his words were bought by the state in exchange for immunity. His entire contribution to the case turned out to be much ado about nothing.
What became important to the jury, however, was a single email by a Chicago-based Andersen attorney named Linda Temple, far away from Enron’s Houston headquarters. Last October, Temple urged another Andersen employee to edit a file memo "to protect ourselves" from SEC regulators. Under the law, this small shred of evidence proved to be sufficient to hold Andersen criminally responsible.
Not that this matters to Andersen’s future. The government’s surprisingly light penalties against the firm—the maximum sentence is five years' probation and a $500,000 fine—simply underscore the irrelevance of the government’s attempt to enforce its regulation. Andersen has long since paid the price of market regulation, as Forbes Magazine’s "Andersen Defection Directory" shows. You can stick a fork into that accounting firm.
Why don’t we see the same outcome with the National Forest Service? Consider, for instance, the record-setting fire that has raged in Colorado, scorching well more than 130,000 acres of land in three counties and forcing thousands from their homes. As Andersen’s culpability can be traced to Linda Temple’s email, so can the Forest Service’s culpability be traced to Terry Lynn Barton, a technician who was paid, ironically, to patrol the Pike National Forest to warn campers against starting fires.
On the same day that the Andersen verdict was announced, a repentant Barton confessed to investigators that she started the fire (whether accidentally or maliciously, we do not know). Federal prosecutors asked the judge not to allow Barton to post bail because they feared she might flee the area. "She would return to a community in which there is considerable hostility towards her, which adds to the possibility of her being a flight risk," said U.S. Attorney for Colorado John W. Suthers.
One would think that the system that causes fires such as the one raging in Colorado would be called into question as much as the corporate culture of modern accounting has been called into question following the Enron debacle. After all, these fires have turned into annual events, occurring primarily on public Western lands.
Besides damaging the landscape, they ruin private property and place individuals in serious and immediate danger. No one has accused Andersen or Enron of causing such damage, and yet the damage they did inflict was sufficient to bring down both firms. And yet, the future of the U.S. Forest Service seems secure. Why the difference?
The answer can be traced to property rights, and it explains why market outcomes are always held to a much higher standard than public-sector outcomes.
As private-sector firms, Enron and Andersen are ultimately responsible to consumers, and firms that persistently fail in satisfying consumer demand eventually fail (unless they receive protection from the state). Enron made bad investments, and Andersen provided poor-quality information, and the market responded so that both firms are shells of their former selves. Firms that do not utilize resources which maximize the social good eventually face some market penalty. Enron and Andersen’s penalty has been harsh.
Individuals who operate the U.S. Forest Service, on the other hand, do not stand to receive direct, long-term benefits (or damages) from the proper (or improper) utilization of the resources placed under their command. This guarantees that these resources will rarely be utilized in ways that maximize the social good. In fact, while a major-yet-rare scandal such as Andersen’s can bankrupt a firm, a major-yet-frequent scandal such as uncontrollable forest fires on public lands may serve as the basis for enriching a public-sector bureau like the U.S. Forest Service with even more tax dollars. Talk about perverse incentives!
These incentives don’t exist where property rights are enforced. In the South, where I live, forestland is every bit as plentiful as in the West, yet it is rare for forest fires to reach the same proportions as they routinely do on public lands. And why should they? Down here, the land is primarily privately owned, and private foresters have huge incentives to maximize its long-term benefits. The obvious solution to the fire problems on Western lands is to sell them off to private owners and allow them to utilize them as they see fit.
If they did, then firms that managed forests in the same manner as the U.S. Forest Service would not last. The administrative ethos that attracted employees like Terry Lynn Barton would see the same fate as that which attracted employees like Linda Temple. The high standards for performance in the market could finally address the scandals of public-forest management.