Friday, February 22, 2013

The Federal Government is Not a Business

Matt Miller writes,
It’s hard to know which is stupider: the coming sequester cuts or the arguments being made to avoid them.
He later proposes,
Luckily, even though it looks like Democrats and Republicans have tied themselves into a political knot on the sequester, there’s still a way out. They can simultaneously re-enact a payroll tax cut equal to or greater than the sequester and call it a day.
Which makes it difficult to argue with his initial argument. No, in fairness Miller is engaging in a bit of hyperbole, proposing a "solution" that "would be so perfectly cockeyed, herky-jerky and devoid of anything resembling an economic 'strategy' that it would be a perfect fit for this moment." But given that he started out by treating political hyperbole as if it represented serious policy positions, a bit of turnaround seems fair.

Miller makes a significant mistake, though, when he confuses budget cutting in private industry with budget cutting in government. Sure, there's a simplistic "In a large organization, if you have full discretion to identify and eliminate waste, and to identify and fire the least productive workers, you can maintain or even improve efficiency while cutting expenditures." But that's usually not what happens in private industry, even though private industry is normally far less constrained than government when it comes to making cuts and firing workers.
When I worked as a management consultant as a younger man I was involved in a few cost-cutting efforts at large, admired companies. I knew of many more from colleagues. These were never happy exercises. Some people lost their jobs. But it was a truism that even well-run firms could cut 10 percent (and often far more) of their expenses with scant impact on the quality of their products or services, or on their “seed corn” for the future.

That’s just the way large organizations are. Over time, various accretions of people and activity take place during periods of growth. And that’s in the private sector, where competition and the profit motive act as continuous prods to efficiency (just think of how many firms went through much larger cuts during the Great Recession only to come back stronger). In government, the organizational tendency toward endless expansion is much greater.
Let's note first of all that a lot of the "management consulting" Miller describes is not acutally about identifying inefficiency, reporting it to the company that hired you as a consultant, and letting them act on your report. A substantial amount of that work involves being retained to provide cover for management decisions that have already been made. "Here's what we are going to do. Now go out, analyze our business, and 'objectively' report back to us that we need to make those changes." It's not unlike the rating agencies who rate garbage bonds as AAA because they don't want to lose the work - you do what you're paid to do.

But let's assume that Miller's employer was different from the norm, and all of its clients retained it to provide arm's length reports. "We don't care what you find - just find our inefficiencies and report back to us so that we can make our company more efficient." In such a scenario, Miller's team would spend a great many hours, billing substantial fees, to perform their investigation and analysis, and would provide detailed reports to support their recommendations to management. Does Miller believe that such an effort is being made in every single government agency that is going to be hit by the sequester? Agencies will have, for the most part, made an effort to prepare for the sequester, but under the circumstances we can expect that their preparations are going to be ad hoc, and colored by the hope that the sequester is avoided.

Note also that Miller speaks of "well-run firms" - as if that's the typical client of a management consulting firm brought in to legitimize budget cuts. Let's think for a moment about how various "well-run firms" have managed to save that 10% over the past few decades. Hewlett Packard cut its R&D budget and went from being a well-run firm that led in product design and quality to... pretty average for the industry. Seriously, though, a well-run company might identify factories that could be closed or consolidated, jobs that could be outsourced, product lines that could be eliminated - or marketed more effectively. How much of that does Miller believes applies to the federal government?

If you read on, the answer appears to be "All that, and more!" Yes, let's think about those firms that were "strengthened" by the Great Recession - like G.M. and Chrysler. Heck, AIG isn't doing too badly these days, either. So maybe the solution is a government bailout of the government? Or a managed bankruptcy that allows the government to shut down the least productive states, just as G.M. shed product lines and dealerships. "Sorry, New Mexico, West Virginia, Mississippi, Alabama - we've been subsidizing you too long. And Hawaii, Alabama, Alaska, Montana, South Carolina and Maine - you had better shape up fast!" Maybe we could deport the least productive 10% of the population? We'll be smaller, but stronger, right?

It's important to recall, also, that the sequester is all about numbers, not about efficiencies, and does nothing to create efficiencies between agencies or to overcome politics. A management consultant might say to the government, "You know, you could create a lot of efficiency, reduce staff and cost, and ease the regulatory burden for business if you merged the SEC and the CFTC." I would respond, "I can't disagree, but that is not likely to happen before they start having snowball fights in Hades." The sequester is apt to put pressure on a lot of the wrong places. Miller complains that the government will somehow find a way to maintain all vital functions, such that it's wrong for the President to suggest that any vital functions are threatened, but that's an article of faith. Miller is looking at the government in toto, but not every government agency is presently well-staffed or well-funded relative to its mission.

Miller complains "When independent or Democratic business people in high-tax states such as New York or California hear the president say the feds can’t possibly endure a 5 percent cut but instead need to hike effective top marginal tax rates beyond the mid-50s level to which Washington’s last fiscal deal just raised them, it turns what should be a winning economic showdown for the president into one that leaves influential constituencies wondering if Obama 'gets it.'" Surely Miller does not believe that Obama's tax reforms raised Mitt Romney's effective tax rate to @55%. Or that of California billionaire Warren Buffett. Or that of New York billionaire Michael Bloomberg. I suspect that if you were to show Miller's example to one of those "independent or Democratic business people" they would "get it" - they would tell you that Miller is looking for the most exceptional cases, pointing to them due to their high state and local taxes, to try to confuse his readers about the magnitude of the federal tax increases and into believing that their situation is representative of the nation as a whole. (Assuming they don't chuckle and explain that their "tax guy" is better than Miller thinks.)

If Miller believes that we can easily and harmlessly cut 5% of government spending, without affecting the core missions of the federal government, I think a much better article would be one in which he outlines those achievable budget cuts. Put that "management consulting" experience to good use....

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