Sunday, October 27, 2013

The 20-Year Letter as Coercion

I'm thoroughly enjoying Tim Kane's Bleeding Talent: How the U.S. Military Mismanages Great Leaders and Why it's Time for a Revolution. This is one of those rare books that hits all the right notes for me. Kane is former Air Force (I'm former Navy) turned economist (same here), it's about the policies and practices of the G1 (my day job is data analysis for a firm that contracts with the ARNG G1), and Kane repeatedly references the two schools of economic thought that most inform my own research: Virginia Political Economy (aka Public Choice, the school founded by Buchanan, Tullock, et al) and the New Institutional Economics (whose luminaries are Douglass North, John Wallis, and Barry Weingast), putting Kane and me in the same general camp as Coase, Williamson, Grief, Demsetz (maybe), Tollison, Nye, Munger, Grier, and Carden (among many others).

Name-dropping aside (and many apologies if you didn't see your name on the list) the book is quite good so far. I would like to bring up one particular passage that caught my eye. I don't post here all that much about military service for fear of delving too deeply into a subject the general reader might find esoteric, but the personnel side shouldn't be all that confusing. Prepare for a pair of peripatetic paragraphs printed on pages 50-51:
There is a danger in the false pride that military service isn't tainted by money. More to the point, the scornful attitude toward market incentives within some Pentagon circles is simply dishonest. Dollars are used as incentives within the military constantly, in matters large and small. Retention bonuses and early-retirement bonuses are used in force shaping, as just one example. A more important example is the U.S. military retirement package, a relatively generous monthly pension benefit of 50 percent of a retiree's final salary. This pension is only earned after nothing less than 20 years of service. Why 20 years? Why does the military pay no benefit to someone who retires at 19 years? Surely the answer isn't to compensate those who have served, because there is no serious distinction between 19 versus 20 years in uniform.
The real answer to this question is revealing. The army, navy, air force, marines, and coast guard [sic] use a 20-year "cliff " for their retirement programs precisely as a coercive monetary tool. It all but compels officers and enlistees to stay in uniform for a full second decade. And it must be said that such a cliff is illegal in the private sector, precisely because it is coercive.
 What thinketh ye? Does the 20-year letter count as coercion? When you agree ex ante to sign up for the gig, part and parcel of the arrangement is that you'll only qualify for retirement pay once you've done your 20. It's clearly not fraudulent, right?

Unless of course there's systematic asymmetries in the expectations of service. If you're 18 years old and you sign up for God and Country and once you get your AOC you find out that life in the field or the fleet ain't all you thought it would be, the rude awakening you get might be unpleasant. It can be easy enough to imagine that the 20 year letter is a bit like setting the hook once you've got a decent nibble. Of course, this effect can be mean-neutral as well, with some Soldiers and Sailors discovering a deeper affinity for service than they imagined at recruiting time. I knew such Sailors, and I work with such Soldiers now. Still, if Kane is right, there is ample room for improvement, particularly with secondary markets in post assignments.

The good news? The good news is the second lemma to my Second Law of Public Finance: over time, all policy is malleable. Which implies that even the seemingly-immutable institutions that bind personnel management can be reconstituted.

The bad news? Vested interests make institutional change costly. The best reforms would upturn a pretty big chunk of what the Pentagon (and Arlington Hall) does. Pointing your barrel any direction other than downrange can be career suicide.

The ugly news? Half-measures might be even worse than the status quo. The institutional trap happens when the Ouroboros is out for dinner: reforms beget disaster beget reforms ad infinitum until you're left with the self-chewed bubblegum that is, for example, the US health care or banking systems. It would be a grievous error to send the military marching down that road.

Anyway, like I said, it's a great book and if you're at all interested in economics and the military, consider picking up a copy. I might blog more on it later.

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Do you have suggestions on where we could find more examples of this phenomenon?