Government vs. The Private Sector, Who Does Things Better?
When all is said and done, a lot of your money goes towards paying the government to do whatever it does for us. You pay income taxes, FICA, sales taxes, and hidden taxes everywhere, because every middle-man builds taxes into his cost as does every service provider. When you pay a lawyer he doesn’t charge you tax on top of his bill, but he might as well because he pays taxes, and that is part of where your bill goes to.
It’s your right as a citizen to be concerned how and on what your money is spent. It doesn’t belong to the government, it belongs to you, and the government belongs to you too. The people who work in government are there at your mercy, because you have the power to vote people into office who can terminate their jobs.
The job of the government is to get certain things done. My question is whether government gets things done as well as the private sector does.
The main problem is inherent in the system, and it’s simple to understand. The problem is that people in government have a built-in incentive to spend more money, whereas people in the private sector are incentivised to spend less. Here’s how it works…
Let’s say you get hired into a government position. It’s an entry-level position that doesn’t pay much, but you’re interested in climbing the ladder and getting paid more. How do you do it? You either get promoted, or you find out a way to hire an assistant. You see, the more people you manage, the higher your pay. So you tell your boss that you’ve got too much work for one person, you need someone you can manage. So you get another person. Then you repeat the process a few times. Then you’ll need a secretary just to help you manage all these people. Then you’ll need a tech guy to support them, and another secretary, and so forth. Soon you’ll have a department of 30 people working for you. If you have 30 people working for you, you must be doing a lot, and so you better have a salary to reflect that.
But won’t my bosses crack down on this? Of course not, the more people you manage, the more people they manage. They’d love to manage more managers such as yourself.
Contrast this with the private sector. You get an entry-level job. You want to climb the ladder. What do you do? You work hard and produce results so that you can get promoted. As you get promoted you get management opportunities. And management gets paid more.
Either way, the way you make more money is to get people under you. In government, you do it by bringing in new people and sticking them under you. In the private sector, you do it by climbing over the ones who are already there. It’s kind of like raising a large ship in the one of the locks on the Panama Canal vs. sending a ship up a river.
So why don’t people in government try to get promoted the way people in the private sector do? Well, the truth is they do, and they do it a lot. But it’s easier to do it the other way in government. If it’s easier, why don’t people in the private sector do it the way they would in government? They do, but they don’t do it much, and the reason is that they’d get fired.
Over time, government becomes more and more bureaucratic. So do businesses in the private sector, but they generally never become as bureaucratic and the process is much slower.
So why this disparity? The answer is profitability. That gap between what your organization brings in and what it spends. Profitability creates incentives, and in order for someone to receive an incentive there must be accountability, or the ability to measure performance.
Here in Utah, we have a company called Novell. You may have heard of them even if you don’t live in Utah because they used to be the largest networking software company in the world before Microsoft killed them. Novell hasn’t been profitable for three or four years. As a result, they haven’t given out bonuses to their employees. However, at the end of 2004 they were profitable. And they gave out bonuses. Everyone at Novell knows that if they’re profitable again in 2005 they’ll get bonuses again.
If you were an employee at Novell and wanted to get paid more, you could try it two ways. Get more employees under you, get promoted, or get a bonus, or a combination of those. If you go and try to hire more employees under you, what’s going to happen? Your boss is going to ask “Will this make us more profitable or less profitable?” Then you’re going to have to make a case for hiring these people.
But wait, isn’t this exactly what would happen in government? They wouldn’t just let people hire people whenever they want to, right? Yes, that’s true, but here’s the difference. At Novell, the question is whether or not hiring people will aid or hinder profitability. At the government, there is no such thing as profitability, so the question is will hiring more people help certain tasks get done. The answer is always “yes” to the latter, and so people will always get hired. But what about budgets? Budgets in the government will always get spent, and the next year they’ll ask for more.
At Novell, the boss won’t so easily let those he manages hire more people because he knows he’s going to have to justify it in terms of profitability. Yes, hiring more people might make him look more important, and that trend could continue up the chain, but at some level someone is going to say “We’re spending too much money in this department” and then comparisons start being made. “Why is Larry the Manager spending so much doing his job when so and so over here isn’t?” Nobody knows for sure, but Larry’s job is suddenly in danger.
You see, Larry gets rewarded for doing more with less, because higher productivity is what generates larger profits, and ultimately at some level of management someone will step in and make sure money is only being spent where it needs to be spent. The top management in a company knows that if they’re more profitable that means more bonuses for them. If they’re a public company, they know they’ll be punished by the stock market if they’re not profitable, and they may lose their job.
In the private sector, there is a natural pattern of correcting influences that keep companies from becoming uselessly bureaucratic. That’s the beauty of a capitalistic society or a market-driven economy. In government, there is no naturally occurring incentive to keep costs down. The only way this happens is for those at the top to create systems of forced accountability (as opposed to natural accountability) and to focus on hiring people who are self-accounting. This is not easy.
Once you understand the dynamics that make government inefficient compared to private industry, you can see why socialism failed in the Soviet Union. Not only was the dynamic present in government in the U.S. present in their government, but it extended to their businesses as well, and the entire economy fell apart.
Economically speaking, in an ideal world, government would be a thin layer of bureaucrats, and perhaps would be composed completely of volunteers from the private sector. Taxes could be almost completely eliminated, increasing the productivity of the nation by almost double overnight. However, this is far from an ideal world. There are problems such as national defense and crime that make a large government necessary. But there are still areas in which the government can save plenty of money, which could then be used to cut taxes and stimulate the economy.
I don’t pretend to be an inside when it comes to government waste, but here’s one example. A few years ago I hired a web designer who was previously employed by the state of Utah. He was willing to take a pay cut because he said his job at the state was too boring. He was getting paid $45K per year plus benefits to do what he described as “about two hours of work per week.” The rest of the time he sat working on his own website or surfing the web. When I asked him if the state employed other people in similar positions, he said just about every department had a webmaster like him, so there were about 25 of them and none of them did much work either.
Let’s do the math. If an employee gets paid $45,000 then their actual cost to the employer is usually about 10% more than that. 10% x 45,000 = $49,500. $49,500 x 25 = $1,237,500. Now let’s assume the work each of these people do could really be done in 2 hrs per week. In other words, at 1/20th the cost, based on a 40-hour work week. That would reduce the cost to $61,875 per year, resulting in total savings of $1,175,625 per year.
Even assuming that my former employee was exaggerating, it seems obvious that a substantial amount of money was being wasted, and this is one of those areas you never even hear about. And if you take a look at Utah’s state website, it’s not that great either. You could turn this over to a private company for $50-100K per year and get much better results.