Running Government Like a Business: Allocating Resources to the Right Results
There are limits to what a government can tax and spend, as many governments are learning to their cost. Undisciplined spending, many economists warn, will lead to high interest rates, inflation, increasing unemployment and higher taxes. What should be done? For starters, government must decide what to stop doing. Then, it must allocate resources to the right results.
Editor's note: this article was first published 11 May 2009. It has been updated with recent figures.
A joke once told by Harvard's Ted Levitt: "'It appears the biggest problem we have in America today is ignorance and apathy, don't you agree, Burns?' Burns answered, 'I don't know and I don't care.'"
We all should know and care.
Peter F. Drucker believed governments must be managed for economic results... and not for moral causes that inevitably become result-less activities.
He prescribed tested remedies that work economic miracles. To implement the principles and practices of Drucker would make unprecedented demands on political courage and political leadership.
Without doubt, for the politician these remedies are risky. But they are now necessary.
In a nutshell, government now believes "There are no economic limits to what government can tax or borrow and, therefore, no economic limits to what government can spend."
This will prove to be untrue. There are limits to what government can tax and borrow. It will be a painful lesson.
What would Peter F. Drucker say? We believe his answer would be: "I told you so."
Undisciplined spending, as most economists have been warning, will lead to high interest rates, inflation, increasing unemployment and higher taxes.
Budgets must be liquidated or significantly reduced. The United States, for instance, will become a weakened economic power, if if it does not start liquidating the ever-increasing budget. For certain there will be slower economic growth and a lowered standard of living.
And the "blame game" had better stop. Today's decisions determine tomorrow's results.
To liquidate the deficit requires asking the right questions about entitlement programs... health-care reform... welfare... the use of government spending for politicians to buy votes (the pork barrel state)... foreign-aid... the war on drugs... ineffective spending on moral causes... and more. To date this has not been done.
Drucker demonstrated his brilliance in a series of time-spaced articles that focused on the specific questions government executives must ask if the budget deficit is to be brought under control... and if economic prosperity becomes more than a good intention.
This article discusses only a small subset of government programs and policies that could/should be candidates for abandonment and/or rethinking. It is not meant to cover the gamut of possible ways to reduce the budget deficit. It is meant to illustrate the need finding out what performs, what never performed, and what performed but is no longer performing.
The Needed Government Turnaround: Start with Liquidating the Deficit
Drucker was no fan of the Keynesian Welfare State (aka The Nanny State). And let there be no doubt: The Keynesian Welfare State has proven unsuccessful the world over.
One of the key of assumptions underlying the Keynesian Welfare State is that government deficits stimulate the economy. This has been decisively disproven in countless economic research studies.
The Current Facts
The Treasury recently said the United States ran its biggest budget deficit since the Second World War.
For the fiscal year 2011, which will end September 30th, the budget deficit is project to be about $1.3 trillion, or about 8% percent of GDP.
Many economists predict over the next 10 years, America will have to borrow from foreign countries—most notably China—$9 trillion to accommodate the growing deficit.
Indeed, an increasing number of well-respected economists forecast a budget deficit of $14 trillion or more in the coming decade! Put bluntly: "The proper term for this condition is insolvency."
Continuous Deficits Erode Capital Formation
Capital formation is, of course, the economist's term for savings and profits that become available to create new jobs, create new performance capacity, new businesses.
Drucker reminded us, "There is no longer the slightest doubt that government deficits destroy capital formation. This means that to pay their bills governments that run continuous deficits cannot borrow at home to finance themselves."
In short, the United States must become increasingly dependent on foreign money borrowed for shorter and shorter terms. This, said Drucker, is extremely volatile money, easily scared, and prone to panic.
An Example and Its Lessons
No country that practices Keynesian deficit spending can be considered immune to panic. However, Drucker observed:
"The worst consequences of the failure of the Keynesian Welfare State are not economic. The increasing dependence on short-term and volatile foreign money impairs the ability of governments to set and pursue policies.
"...One (relatively) recent example: to attract and keep the short-term money needed to finance Chancellor Kohl's ( ultra-Keynesian) unification policy, Germany in 1993-'94 had to raise interest rates and keep them sky-high.
"This severely hurt Germany's neighbors in Europe who were already suffering from massive unemployment."
Germany's neighbors, said Drucker, in turn had to push up their already high interest rates to prevent the flight of short-term money to high interest Germany.
This stifled business growth, created more unemployment and economic uncertainty.
Summarizing What We Can Learn From the Germans
Chancellor Kohl saddled his country with the biggest peacetime public debt ever taken on, commented Drucker, to buy—successfully—the votes of his new constituents in the former East Germany. Sound familiar?
This was extremely popular at the time. "Only two years later, it triggered the most severe financial and currency crisis in Europe since the Great Depression."
Government Must Be Managed For Economic Results
We must run government like a business. Results and performance are the proper yardstick by which to measure governmental performance.
Once the deficit begins to grow explosively and the impact is felt on the middle class, state and local governments, "then the demand for cutting the deficit will become irresistible and overwhelm Congress, the bureaucracy and the lobbyists."
"If no rational rethinking of government performance has yet occurred, we will in all likelihood do what many companies have done—apply the meat ax and downsize. We will then destroy performance, but without decreasing the deficit.
"In fact, it is predictable that the wrong things will then be cut—the things that perform and should be strengthened. But if we have a plan that shows how and where the government needs to be rethought, we have a chance."
A famed Wharton School professor once said: "Knowledge without confidence is futile; confidence without knowledge is fatal."
An Overview of Drucker's Prescription
For starters, government must decide what to stop doing. Then, it must allocate resources to the right results.
Put differently, the deficit has to be liquidated. Abandoning obsolete and unproductive programs and activities is the only way to make this happen.
The entitlement crisis and the welfare mess are just two Drucker examples of how to begin liquidating the budget.
The Entitlement Crisis
The only way United States can regain control of its finances will be to cut back sharply on entitlements, whether that be health care (including the preposterous health care reform bill, which, in all likelihood, will race out of control); on Social Security; on pensions; on newly-devised giveaway benefits and much more.
Said Drucker: "Any attempt at cutting entitlements is still bitterly resisted... but, actually, the middle class has no choice.
"Entitlements will be cut in all developed countries. The only question is by what method.
"The least painful way is to do it openly—for instance by raising to 75 the age that 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 draconic increases in taxation—in the United States most probably through substantial consumption taxes on top of already high income taxes."
Many economists and other experts have written thoughtful and thorough articles on how entitlements should be trimmed. Smart methodologies exist. Trillions of dollars can be potentially saved
Drucker firmly believed we've turned welfare into degradation and dependence. He once remarked: "In the United States it is now generally accepted that neither of the two big welfare programs works. Both Aid to Families with Dependent Children, and Disability Aid are disasters.
"It's a widely denied, however, that they do damage. Rather, the dependence and degradation of long-term welfare dependence, and the dreary squalor of their lives is being explained away."
"Major countries," observed Drucker, "are now tackling welfare spending and it's working. Positive incentives for not going on welfare and not staying on it are restoring competence, self respect, and self support—and those are the results welfare needs to aim for and to pay for.
"Today welfare concentrates on needs. There will be true 'welfare,' however, only if the focus is on results. Of course there is a need for money. But by itself money encourages incompetence and irresponsibility.
"Welfare can work, but only if the axiom is changed from 'All the poor need is money,' to 'All the poor need is competence.'"
But he didn't stop there. He explained the futility of foreign aid in the majority of cases, and wasted dollars being spent on programs such as The War on Drugs (even though he admitted that this crusade, while morally correct, was bound to be result-less).
A Government That's Effective Does Not Squander Resources on Infinite Moral Causes
A major sin of public administrators in general is the failure to distinguish between moral and economic causes.
The discipline of thinking through what results will be demanded, Drucker observed, protects a government institution from squandering resources because of confusion between moral and economic causes.
In an economic cause, Drucker said, one must ask: "Is this the best application of our scarce resources? There is so much work to be done. Let's put our resources where the results are."
"To believe whatever we do is a moral cause, and should be pursued whether there are results or not, is a perennial temptation for government. And a temptation that must be avoided."
There are, Drucker reminded us, "always so many more moral causes to be served then we have resources for...government has a responsibility to allocate scarce resources for results rather than to squander the money being righteous."
To talk of "moral obligations " without consideration for economic costs is irresponsible and bound to lead to disaster.
The Only Way to Restore Economic Growth According to Drucker
"As an economy moves toward Free-Market policies—that is, cuts government spending and balances the budget... privatizes government-owned businesses... cuts back or eliminates government regulations and government controls of economic activity... opens its borders to imports and thereby allows competition... eliminates—or at least cuts back—government restrictions on the movement of money and capital, an economic boom gets going."
We believe this will eventually happen. Our hope is that the damage about to be done through economic ignorance will be salvageable.
The Nanny State cannot have economic results. The economic burden will soon become unbearable unless the right actions are taken.
In the final analysis, performance is the only test. Speechmaking and twisted numbers won't make things right.
Peter F. Drucker understood and clarified the faulty assumptions underlying the Keynesian Welfare State. We only hope that the current administration would take the time to study and learn from Drucker what works, what doesn't, and why.
Time and again, Drucker showed that there was a time lag between a major social, economic, or cultural event and its full impact. We have not yet experienced the time lag between many of the government's already enacted and proposed economic and social welfare policies.
Successful work requires real work. It doesn't get done with rhetoric or quick fixes. Said Ted Levitt: "It requires discipline and good sense, and thoroughness, proportionate to what is known and what is at stake."