Originally published on February 14, 2011
Private businesses are continually subjected to the vagaries of the market. While demand may grow steadily for long periods, unexpected shocks invariably hit from time to time. The 2008 recession is the latest episode of falling demand in a wide range of industries. The immediate effect for business is falling sales and reduced revenue. To remain in operation, businesses have no choice but to cut costs as quickly as possible.
Although the process is difficult and painful for those who lose their jobs, for the businesses themselves an economic downturn can force a kind of cleansing. The ones that survive will be those that cut costs in the most effective way, ridding themselves of unnecessary expenses or ineffective workers. For example, a firm with some employees who are lazy and unproductive may find it difficult to fire them when business is good. Once the business faces an emergency though, the least efficient workers can be released with a clearer conscience; firings become the market’s fault.
Thus, one way business weeds out inefficiencies is by suffering through a lean period of low demand and lower revenue.
Inefficiency in government could be reduced in the same way. When US legislators discuss how to reduce government spending they usually try to identify whole programs that might be cut or sharply curtailed. These proposals always generate resistance because entire groups are singled out as being a part of a wasteful endeavor. Additionally, it is hard to imagine that legislators know enough about the details of particular programs to know which are best to cut and which not.
A better approach is to reduce the budgets of all government agencies, perhaps equally, although some variation in the cuts could certainly be considered. An across the board reduction would mimic a recession, only this time it would be a government recession not a business recession. Agencies, forced to survive on less revenue, should be expected to deliver the same services but at lower cost. Of course this would not work with legislated transfer programs like social security, so the cuts could only be made on discretionary spending, including defense and on the administrative component of transfer programs. These internal investigations would have a better chance of identifying inefficiencies than legislators who are too far removed.
Of course, probably the quickest route to improve an agency’s efficiency would be to fire ineffective workers, just like private businesses do. For government though this may be more difficult if union rules make it difficult to fire people. Nevertheless, retiree positions may not be replaced and new hires may cease, leading to a reduced work force in time. This, together with other process adjustments, can lead to a more efficient and effective government at whatever level of government spending we need to achieve more balance in the budget.
