It’s the government’s business

J.T. Young Former Treasury Department and OMB Official
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Government should be run like a business. One of the most prevalent reformist assertions about government is also one of the most inaccurate. Why when government assumes the proper role of private enterprise, does the business aspect never prevail? Because government and business are virtual opposites—much to taxpayers’ detriment. Until this, and the reason for it, are understood, any chance of real reform is simply wishful thinking.

A business that lost money in all but 12 years since World War II, would no longer be in business. But that is precisely what the federal government has done. And if Congressional Budget Office projections are correct, it is on pace to outdo itself—losing $3.7 trillion from 2009-2011.

Such observations are more than cynicism. They reveal a fundamental difference between government and business. Government can command capital, despite fiscal failure. Business must earn it, despite past profitability. For a business to attract capital, it must show an ability to pay it back. For government, its ability to tax is its collateral—it can compel its citizens’ “investment.”

In truth, government is the ultimate monopoly. In the private sector, monopolies can not long exist. Without legal enforcement, competition eventually undermines every monopoly. In contrast, government is the legal system. Good luck to government’s “customers” and “shareholders” seeking to take their business elsewhere. Their only recourse is to take themselves elsewhere.

A virtuous cycle drives private enterprise. When business cuts its costs, its profits increase. The increased profits allow it to reduce its debt. Its reduced debt allows it to further reduce its costs. Its profitability continually increases.

All benefit from this cycle. Customers see the prices they pay fall. Employees see their wages rise. Shareholders see their stock values increase. It all happens because the company captures the rewards of its success. Even if positive encouragement were insufficient, negative encouragement would be. The company failing to pursue such a course is quickly overtaken by those that do. Either way, there is a relentless incentive to compete.

In public enterprise the cycle seemingly runs the opposite way. A vicious cycle predominates. It does so despite the fact that government has some of the same incentives that prevail in the private sector.

Like a business, if the government cut its spending, it could run a surplus. This would reduce its debt. It would see its interest costs drop—not just from lower debt, but also because a reduction of its massive demand for borrowing would lower interest rates. Both would create even more savings.

The virtuous cycle is potentially there for government. Why then does it not prevail in the public sector? Because the element that starts the cycle is missing: competition. Unlike business, government has neither customers nor competitors to force virtuous actions on it. The positive actions that are the norm in business are therefore beyond a rarity in government.

It is impossible to simply legislate the business dynamic onto government. The laws of government cannot replicate the laws of economics, without competition.

Since government is not forced to take these actions, it only does so in rare instances. This is true not just in America, but across the world. The severe debt problems now being faced abroad by some European governments and at home by several state governments, are merely an extension of what the U.S. government will face as its entitlement spending begins to metastasize.

Without igniting competition in government, it will only intermittently attain true efficiency. What is needed is a compelling, competing demand to cut spending and offset government’s demand to increase it.

Because government itself can never have a competitor in its governing role, a countervailing demand within its “shareholders and customers” must be created. Citizens themselves must receive a stake—the “dividend” of a tax cut—from government’s positive fiscal action. Only such a broad-based demand can counteract the current demand for more services.

Competition drives business. Monopoly drives government. Were a pure monopoly to be granted in business, we would not expect it to operate much differently than a government does. Conversely, if competition could be injected into government—at least by allowing citizens to benefit from savings—then why would we not expect government to at least begin to function more like a business?

J.T. Young served in the Department of Treasury and the Office of Management and Budget from 2001 -2004 and as a Congressional staff member from 1987-2000.