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The Government is not a Business

It is a popular idea amongst many Republicans and more than a few Democrats that the United States would benefit from being run like a business. The appeal of this argument is often tied to faux-outrage ginned up over “wasteful” spending by some part of the giant bureaucracy that “would never happen” if the people in charge had to run their budgets like a company. People who hold this point of view tend to do so religiously as the data clearly doesn’t support the notion at all.

In truth, as we look around the world today, our current experiment with having a “businessman” run the show from 1600 Pennsylvania Avenue has earned us an unusual response from the world. In the last 100 years the United States has been feared, respected, and envied. Now, thanks to Trump, we are viewed with pity. Yup, Pity. I’m pretty sure that being seen by the rest of the world as a nation to be pitied is not in any definition of “making America great again.”

As the American writer George Packer puts it in the current edition of the Atlantic, “The United States reacted … like Pakistan or Belarus – like a country with shoddy infrastructure and a dysfunctional government whose leaders were too corrupt or stupid to head off mass suffering.” Part of the appeal of Trump, for some, was that we we would have an ex-CEO in charge. Someone who would ensure the federal government be run more efficiently than usual.

The more astute voters recognized that Trump was little more than a snake-oil salesman and deal-maker and not actually a manager. Trump doesn’t exhibit classic leadership traits like humility, caution, prudence, and so forth. So then, no surprise really, that he has failed to make the US Government more efficient. This gives an opening for those who would make the claim that if only we had a real CEO take on the role of President, then certainly we could have a more efficient government.

Therein lies a problem. I would argue government cannot be “run like a business,” as people sometimes hope, because government and business are intrinsically different. Sure, the US federal government is a massive organization with thousands of employees and hundreds of divisions, branches, and departments. It has buildings and equipment to buy and replace, teams to be put together and directed, strategies to be formulated and executed, payrolls to be met. However, as Ludwig von Mises emphasized in his classic 1944 book Bureaucracy, such similarities are superficial at best.

Most private companies are organized for one primary purpose: to earn profit. Participation, be it as an employee, supplier, investor, or customer, is voluntary. The capital of the firm is (usually) privately owned. Profit is earned, and losses avoided, by producing goods and services that consumers want and for which they are willing to pay at a cost lower than the price the market commands. Success and failure are immediately calculable by looking at the firm’s income and the market value of the firm’s assets or equity.

Government is, by its very nature, different. It doesn’t have privately owned assets — in principal, the land, capital, and equipment of a government agency are owned by we the people here in the United States. Even if these are de facto controlled by bureaucrats and politicians. The (ostensible) purpose of a government agency is, well, whatever is specified in the relevant statutes, executive orders, etc. The job of the Defense Department is to provide defense. The role of the Department of Education, according to its website: “ED’s mission is to promote student achievement and preparation for global competitiveness by fostering educational excellence and ensuring equal access.”

Each agency, bureau, and department, from the federal level down to the local police department, will have stated objectives. How do we measure how well these objectives are being met? Is the nation being defended effectively and efficiently, in a way that satisfies its “customers”? Do its top officials deserve praise or condemnation? How about Education? The local high school teacher? What constitutes “efficient management” or “high performance” in these contexts?

As Mises explained (pp. 46-47), these questions are fundamentally unanswerable, or at least impossible to answer with the same metrics we attempt to apply to assessments of private businesses. This is because government agencies do not “sell” their services in a competitive market. The “consumer” does not get to choose among competitors, directing their funds toward the firm that provides the best products at the most reasonable price. Rather, the consumer pays, through their tax dollars, whether they consume the specific service or not. So how should one judge performance?

The objectives of public administration cannot be measured in money terms and cannot be checked by accountancy methods. . . . In public administration there is no connection between revenue and expenditure. The public services are spending money only; the’ insignificant income derived from special sources (for example, the sale of printed matter by the Government Printing Office) is more or less accidental. The revenue derived from customs and taxes is not “produced” by the administrative apparatus. Its source is the law,not the activities of customs officers, and tax collectors. It is not the merit of a collector of internal revenue that the residents of his district are richer and pay higher taxes than those of another district. The time and effort required for the administrative handling of an income tax return are not in proportion to the amount of the taxable income it concerns.

Business management or profit management was defined by Mises as “management directed by the profit motive.” Thus, in a large firm, profit management entails a mix of rules and discretion. Management will provide overall direction, establish systems and procedures, recruit supervisors and employees, settle disputes, and focus on strategy, while delegating a large measure of day-to-day discretion to subordinates or to local departments. Of course, firms can be organized in a fairly decentralized manner, featuring “flat hierarchies,” but at the end of the day, management will still matter.

Government or bureaucratic management, by way of contrast, “is the method applied in the conduct of administrative affairs the result of which has no cash value on the market. Remember: we do not say that a successful handling of public affairs has no value, but that it has no price on the market, that its value cannot be realized in a market transaction and consequently cannot be expressed in terms of money” (p. 47).

Profit management and bureaucratic management require entirely different sets of skills. They use completely different management principles. Under bureaucratic management, decision-making tends to be hierarchical with strictly limited discretion for subordinates. This is likely due to the need to understand how individual actions contribute to overall performance, and the need to do so without the traditional business metric of a financial bottom line. Government agencies and private businesses are intrinsically different entities, and one should never be confused with the other.

An additional problem is that people often talk about increasing government “efficiency” in simple terms. Such as making an agency achieve some specified objective with fewer employees or in less time. This, of course, is not unambiguously good. As we learned recently, our nation’s Pandemic monitoring teams were asked to do just this. Rather than allow for some “slack” in the system (like employing people in times of no pandemic) it was assumed that the team could be quickly re-assembled in an emergency. This series of cost-cutting decisions made by the Trump administration over 2017 and 2018 gutted our nation’s infectious disease defense infrastructure.

Our national investment in Government required good stewardship at the top. In many ways it is not clear that a business chief executive’s vantage point of concerns (costs, efficiency, profits vs. losses) is the right lens for the chief executive of a nation. The US Government could have gone into the current coronavirus crisis with immense advantages.

An intact infectious disease infrastructure could have taken advantage of the many weeks of warning about what was coming. Our view into the on the ground situation in China would have allowed us to get ready sooner had we not let go our people there. Government could have better marshaled the world’s best concentration of medical and scientific expertise to attempt a strategy of containment much earlier.

Instead, running things like a business, under Trump (and Faux News leadership), the United States managed to make itself the global epicenter of the COVID-19 pandemic.

Feb 28, 2020 Fox News prime time host Sean Hannity.  Screenshot/Fox News

55,335 dead and counting.

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