So you are saying that government employees are greater at serving the people who actually matter. Not the people who should matter, but the people who do.
Imagine a startup that focused on its customers' customers (maybe once or twice more removed) instead of the people paying it. Would anyone be surprised if it gets out competed by a different startup focusing directly on their customers, even if at the cost of their customers' customers?
This isn't unique to government. I've seen private organizations where employees will make choices that benefit their own department at the cost of the overall organization. I sometimes wonder if a natural selection-esque drive behind this is the reasons that inefficiency grows as organizations grow.
> We should pay market rates, but we should pay them for market quality.
I think this would fix a lot of problems, but implementing it is going to be a nightmare because it isn't just the rank and file employees who you need to do this for. You almost have to start at the top, and from what little I've worked with governments, you are looking as a massive cycling of employees and a large loss of institutional knowledge. Also, given that much of how any government agency works is dictated by some of the same people who would be replaced under this, you are looking at having to pay people much more than even going market rate because of the extra costs of working the position.
For example, hiring good government IT is not just going to mean having to pay market wages, but also having to account for paying people to work in dead languages and eldritch abominations built by poorly managed contractors who often still have rights to the software that prevent the government employees from doing major changes (lots of contract security).