Well…It Sure Sounds Good

As someone who has spent nearly two decades in the practice of and study of business, I am not a hard sell when it comes to the notion of fiscal conservatism. Waste and inefficiency are the devils that haunt entrepreneurs and managers of businesses of every size, and fads cost money.

I have learned a golden rule of sorts over the years; one person’s waste is another’s investment in the business. I have known perfectly rational and intelligent managers who have chased away daily coffee customers (who buy a product that returns say, $ 0.60 on every purchase) by charging for “extra” creamers, and be perfectly willing to give away a book of matches to every cigarette customer at the same total profit.

Businesses fail most often when their operators take too narrow a view of their market and operations. Short term pressures dominate businesses at both end of the size spectrum; small operations because of their small and erratic cash flows, and big corporations (publicly traded) due to shareholder/trader expectations. This factor limits many businesses, because most need to grow (or at least adapt) to remain viable over the long haul.

Enter the rational middle’s favorite rallying cry; “Government should be run like a business!”

I will be gentle, and disregard the reality that most businesses are designed to run at a profit; the rational middle concedes that point is not intended. I will, however, note that the above phrase is used by any group whose tax dollars are allocated to a purpose they can not or will not understand. Liberals against the military spending of the Reagan Administration who succeeded in driving home their point with Bill Clinton in office, and Conservatives in today’s politics who look down their noses at stimulus and “green jobs” and yell that the “market” will fix everything both use the phrase as a punchline. Both groups are equally wrong, because both fail to truly look at the phrase for what it really means.

Here is my attempt to do just that…and I will look forward to commentary on how close to the mark you think this is.

  1. Businesses hate “transparency”. It is a political “gotcha” phrase now, and most of us want to know where the money is going, but transparency is not available in powder form on the shelves of your local mega-mart. Transparency costs time and money in the form of administrative tasks that do not add value to the finished product. Ask a top manager at a publicly-traded firm about Sarbanes-Oxley (the accounting law passed in the wake of the Enron debacle) and they will tell you how much “transparency” costs. It is contradictory to demand that the stimulus bill be transparent, and then demand a rapid distribution of funds. Imagine a trip to the grocery store; now imagine your spouse and a manager having to go line by line over every item on the list and receipt as the clerk rings in your purchase.
  2. Businesses must invest in infrastructure, labor (training and benefits), and new or improved products. To get this investment, they can do one or more of the following; add new ownership, reinvest profits from the highest performers in their portfolio, or raise debt capital. Most of your favorite businesses, small and large, have grown and are continuing to grow by leveraging themselves. They get a small business loan, a short term loan to cover seasonal cash shortfalls, or issue bonds in order to operate. When you see a factory or other large facility built, it is almost certainly being financed by debt. Something like 15-20% of our annual (federal) budget goes to debt service. I would challenge all to look up the reports of your ten favorite companies and see how that compares; then look at your own spending. I have a hunch that most households spend twice that percentage on debt service.
  3. Businesses tend to be successful when they are led by a single unifying force. Whether that force is a strong management team or a motivated small business owner is not the question; the applicable phrase being “Too many chefs spoils the soup”. We live in a participatory democracy, with many chefs, all theoretically of equal importance. Those that advocate that government be run like a business are well to remind themselves of Stalin and Hitler; capable management should not be the first or last thing scrutinized on a resume.

Being mindful of the budget, and selecting worthwhile projects that add value to the nation are excellent goals to have for those who are employed by, or vote in our government. We, as a nation, do have large scale needs that require the investment of tax dollars for our “business” to succeed in the future. The trick is in the balancing act; need versus expense, short term pressure versus long term growth. The market, when it is functioning well, regulates two things well; price and production level. The notion that it does anything else flies in the face of hard-earned experience. Unless you like the slaughterhouse upriver managing your fish population, or the big corporate group uptown running your police force, the rational middle believes that your stake in this very American style business we call government is something to be proud of.

Looking forward to your comments….