Government Debt Crisis: The Perils of Amputation Without Diagnosis




If the recent agony over raising the deficit ceiling in the US and the financial turmoil over euro-zone debt is anything to go by, reducing government deficits and cutting back on the programs that fuel them is more important than ever. But where do you start? Peter Drucker’s theories provide government decision makers with some guidance.

If there are five birds resting on a branch and one decides to fly away, how many birds remain?

Of course, you realize this is a trick question. So, you hesitate to answer. But, in your mind, you believe only four birds remain.

Wrong! A decision is not an action. Indeed, a decision is supposedly a commitment to action.

The correct answer? Five birds remain.

Until the bird who made the decision actually flies away, there has been no action. It's only a good intention.

Without doubt, the bird who decided to fly away told the other birds about his/her decision. It's even possible the big boss bird blessed the exit decision with a statement such as: "Your decision to fly away has my full support."

Decisions are not good enough. Decisions are not deeds. Decisions must be converted into action.

By now, we all know the debt ceiling has been raised, and the US government will not default on its obligations. Further, government spending is slated for dramatic reductions. At least, that's what the news headlines shout.

Unfortunately, no clear-cut strategy (what- to- do- plan) for reducing expenditures has yet emerged. Equally important, no tactical (how-to-do-it plan) has yet been discussed.

If past history is our guide, we will soon hear a great deal about a grand strategy. And as usual, our politicians will be long on strategy and short on tactics.

We should keep this age-old story, about the five birds, in mind as the battle for entitlement reform and meaningful government reorganization unfolds.

Entitlements threaten democracies' prosperity and health

We’ve known for quite some time that entitlements and/or benefits (e.g. healthcare, social security, welfare, pensions, or unemployment benefits) threaten every democracies' prosperity, health––and indeed their very survival.

As early as 1988 it was proven with mathematical rigor by Peter G. Peterson (President Nixon's erstwhile Secretary of Commerce and co-founder of Blackstone Capital) in a book entitled On Borrowed Time: How the Growth in Entitlement Spending Threatens America's Future.

Of course, nobody was willing to listen to Peterson's arguments that so accurately predicted today's realities. Now it's a different story. Everybody is listening.

We all know that cutting entitlements––or even slowing their growth––will be bitterly resisted. Witness the street protests that have rocked Greece and Spain. Britain has already implemented a series of austerity measures and is planning more dramatic cutbacks to government services and spending to widespread union resistence.

There are many people who don’t want the party to stop.

But, there is also a growing number of people who realize that if the party doesn’t stop soon, we’re in for the mother of all hangovers. In the United States, for instance, Republicans and an increasing number of Democrats now agree that many entitlements must be pruned back.

Peterson, Peter F. Drucker and many others have detailed intelligent and beneficial ways to reduce spending related to social security, welfare, health care, military aid, public service pensions, extended unemployment benefits and the like.

It still remains to be seen however whether politicians can get themselves to do anything so unpopular. But liquidating the deficit can no longer be avoided. It cannot even be postponed much longer.

Drucker believed entitlements will be cut in all developed countries. The only question, according to Drucker, will be by what method.

Said Drucker: "The least painful way is to do it openly––for instance, by raising to 75 the age at which Americans get full Social Security benefits.

If this is not accepted, middle-class entitlements will be cut by inflation, that is, by destroying the purchasing power of middle-class incomes. Or there will be Draconian increases in taxation––in the United States probably through substantial consumption taxes on top of already high income taxes."

Further, the majority of Americans now believe that there is indeed need to overhaul the bureaucratic sprawl in Washington. Translated, this means carrying out meaningful government reorganization and improving the efficiency of government operations.

How Do You Decide Which Government Services To Cut?

To restore government to solvency requires making priority decisions –– what to cut and what to fund. We are not talking about cutting many worthwhile programs that people depend upon… we are talking about eliminating aimless programs and activities that have been result-less for decades.

This also requires systematic methodologies for enabling government agencies to improve performance via organized abandonment, organized improvement, business process management, benchmarking best practices, outsourcing and change management.

Peter F. Drucker's prescriptions for reinventing government provide government decision-makers with a blueprint for converting good intentions into operating reality––and the ability to minimize the potential pain when getting their finances in order.

More than ever before, governments need to understand and put into practice Drucker's management principles. Without such principles to guide their actions, the deficit problem will not be conquered.

First We Make Choices. Then, Our Choices Make Us.

Peter F. Drucker believed that uncontrolled government spending would force the government into downsizing. He also believed that "hasty hatchet work" would substitute for thoughtful analysis unless something was done before it was too late.

He called this "amputation without diagnosis." Specifically, he stated in 1992 (as reported in the magnificently edited book by Rick Wartzman entitled The Drucker Lectures) :

"We need 'reinventing government.'If we do not make a start on it, then pretty soon we face catastrophe within the next 10 years or so. In the presidential election in 1992, Mr. Ross Perot––remember him?––won almost one fifth–of the vote.

And he would've gotten much more having not turned off a great many of us… a different candidate, out to downsize government, might well have carried the day.

And one–fifth of the American electorate that voted for Mr. Perot made it very clear they did not greatly care what part of the government would be downsized, as long as the deficit would be cut––and without additional taxes.

The danger here is very great that government will be exposed to something very similar to what has happened in a lot of big companies. I call it 'amputation without diagnosis.'

In a lot of big companies, there has been wide slashing without any clear idea what to slash, why to slash, and what to keep."

Drucker always emphasized that these cost-reduction drives usually do not improve performance… and six months later costs are back where they were––and the business braces itself for the next cost-reduction drive.

Altogether, he observed, focusing resources on results is the best and most effective cost control. " Cost, after all, does not exist by itself. It is always incurred––in intent at least––for the sake of a result."

And that's the crux of the problem. Every government agency must rigorously define what it means by results. And focus resources on achieving those results. This is easy to say but hard to do.

"Unless the federal government really starts to reinvent government, we face downsizing for the sake of downsizing––that is, slashing and cutting for the sake of the numbers rather than to restore government to function, to strength, to performance."

" The rising deficit is demanding government become effective again––despite the near collapse of government's capacity to make decisions under the pressure of special-interest groups and the tyranny of the small minority… "

Without doubt, this is a challenge facing government’s around the world today and it's a problem that’s been building for many decades. Because of the profligacy of many governments around the world – one has to look no further than the growing concerns over a possible default by one of the euro-zone members - tomorrow is arriving much sooner than anticipated.

Coming: The Needed Government Turnaround

In 1993, Drucker predicted the next decades will make unprecedented demands on political courage, political imagination, political innovation, political leadership. This, he said, will demand high government competence.

In essence, he felt government must be turned around. The term itself is a business one. But, he said, to turn around any institution––whether a business, a labour union, a hospital, or a government––always requires the same three steps:

  1. Abandonment of the things that do not work, the things that have never worked; the things that have outlived their usefulness and a capacity to contribute
  2. Concentration on the things that do work, the things that produce results for the organization, the things that improve the organization's ability to perform
  3. Analysis of the half successes, past failures. A turnaround requires abandoning whatever does not perform and doing more of what performs

Interestingly, Drucker warned not to start out with what should be abandoned.

"Start out by thinking through what should be strengthened and built. Do not start out by trying to save money. Start out by trying to build performance."

Abandonment comes next in a turnaround strategy. Once it's decided how to build performance, free the resources needed to do the job.

Until the unproductive and obsolete are abandoned, nothing has been accomplished, nothing else can get done. No work gets done. All resources, said Drucker, are still being allocated to the "problems.

Strategic Planning for Government Agencies

Peter F. Drucker invented the notion of strategic planning. He felt that government executives must ask the basic strategic planning questions:

  • What is the function of this agency?
  • If we were not doing this today, knowing what we now know, would we go into it?
  • Is the mission of this agency or any of its programs still vital?
  • And, if it is, how should or could it best be carried out?

In a startling paragraph reported in The Drucker Lectures, Drucker sums it all up:

"These are the beginnings of doing the right thing. The Department of Agriculture, quite clearly, is asking basic questions about mission. But it is asking questions, so far, about specific programs.

It does not, it seems to me, ask the question:'if you had no Department of Agriculture, would we now start one?'

I suspect––and I hope you don't mind me saying something so nasty––but the great majority of the American public today would answer the question with a loud 'no.'

What do we need a Department of Agriculture for when farmers make up no more than 3 percent all of the population, and when farm production does not contribute a great deal more to the gross national product of the country?

Does it really require a separate department? These are the questions that have to be asked. If they are not taken seriously, we will, in a few years substitute the meat ax for thinking. We will not reinvent government. We will severely damage it."

Similarly, questions such as this have to be asked about many other departments in government. Can you name a few such departments?

In a future article, we will detail Drucker-inspired specifics about meaningful government reorganization.