November 17, 2011

Government Shrinkage

Here are two positions that we seem to hear frequently this primary season:
* Government needs to think and behave more like business
* Government needs to shrink and provide fewer services

Times are certainly tough for governments these days, both federal and local, and pretty much all around the world. The calls for austerity programs seem universal, and almost always this means one thing: curtail services by eliminating government workers.

Times are tough for businesses, too, but businesses are familiar with cycles of growth and slowdown. Certainly businesses cut payroll when times get tough, but here's a key difference. Sometimes during a downturn, a business will reduce or eliminate some product or service that is unprofitable or only marginal. But consider the core products and services you are familiar with - when have you heard that a business will reduce or eliminate these just to save costs? A business can't survive at all if it eliminates its income while slashing costs.

So here is a first observation that the analogy between business and government just doesn't work. The motivation for a business to cut costs yet keep its products and services in the market is precisely because its costs and income are directly tied to each other. If reducing costs results in reducing income, that's a bad thing for a business and it will be avoided. Governments do not behave that way for the exact opposite reason; government income has nothing at all to do with the services offered, except in budgeting - but the ease that governments run a deficit completely breaks that relationship so there isn't even a budgeting connection.

This all leads to the second observation. When faced with the choice between lowering costs and the self-destructive path of reducing products and services, businesses have found a third solution: increase productivity. By definition, an increase in productivity is exactly solving this conundrum: how to lower costs but maintain or even increase output. It's a problem that often requires thinking and work and sometimes investment.

Well then, if government should behave more like business, and governments are in desperate need of reducing costs, why do they - almost universally - ignore the possibility of increasing productivity instead of cutting benefits and services? It seems that there could be two reasons.

The first is that governments simply lack the competency to increase productivity. Considering that elected officials, politicians, and agency heads rarely bring operational efficiency as a core competency, this is plausible, but shouldn't it be a solvable problem?

The second reason is that the people calling for smaller government are really not interested in productivity improvement, but are primarily motivated to reduce benefits and services.

It may be hard to know whether this second reason is a real motivator for politicians as opposed to reducing costs, but it sure would be refreshing to hear a politician call for increased government services while lowering costs. And when the media laughs, explains they plan to get it done the old-fashioned way, with productivity improvements. Just like businesses do.

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