Running Government Like a Successful Business

If the United States were run like a successful business, then the political, policy, and public sector strategies would be strikingly different.  Politicians seeking to dismantle the government perpetuate a myth based on an oversimplified version of economics — which is leading to widespread economic pain.  Instead of racing to the bottom by slashing taxes and costs, the government would make strategic investments in its work force, infrastructure, and research for innovations.

“Business” Practices in Government

Since the turn of the twentieth century, politicians have echoed the calls of “reformers” to “run government like a business.”  This demand seems to have started as a response to political machines that functioned on graft, payoffs, and other transactions widely seen as corrupt.  Running government like a business meant eliminating the corruption through a business-lite structure and civil service, a series of laws to make sure state employees were qualified to serve rather than a political hack.  To this day, many government jobs require a competency exam.  Reformers even shaped how local governments function — as the majority of American cities function like a corporation under the council-manager structure.

Tax revolts during the 1970s led to a revival in these reform efforts.  Applying an extremely oversimplified business model, “new fiscal populists” started seeing any expansion of government as inherently bad.  Raising revenue (taxes) is seen as a terrible sin, to the extent that candidates swear oaths to never even consider raising tax rates.  Some states have imposed “fiscal straitjackets” onto themselves, creating a system of rules that do not allow government to grow.

Most new fiscal populists claim that economics “proves” that taxes kill businesses.  Due to a deadweight loss created by taxes and (alleged) government mismanagement of resources, new fiscal populists conclude that tax cuts will grow the economy.  Some even argue that tax cuts will increase tax revenues!  (This is theoretically possible, but evidence suggests that this outcome happens extremely rarely.)

When applied to a larger scale, state and federal politicians continue to focus on where to cut budgets.  This mindset sometimes leads to laughable, tragic decisions.  For example, when Kansas faced budget shortfalls during the Great Recession, the state government drastically cut taxes hoping to spur growth.  Eliminating various taxes may have had some positive impact on the economy, but it destroyed the state budget.  Officials cut public services to cover near-billion dollar shortfalls year after year.  Young Kansans started an exodus, creating a brain drain.  Businesses left Kansas — giving up lower taxes — likely following those skilled workers.

What Went Wrong?  Austerity.

Kansas’ story can be found in multiple states and cities across the United States and many nations around the world.  Leaders often associate fiscal austerity (only using budget cuts to balance budgets) with good business practice.  This assumption could not be further from the truth.

Austerity programs remove critical support for those in most need – the ill, the elderly, and those ill-equipped for a changing marketplace.  The result of these policies is not a Fairy Tale economic revival, it is the economic pain that is fueling the attack on neoliberalism as we know it.

Successful businesses make critical investments – in their workforce, their infrastructure, critical parts of their business, and their research to innovate the next generation of products.  Austerity reduces investments on some or all of these fronts.

Evidence

Below, I analyze the high points of the Fortune 10 companies’ business models. Here are the highlights:

Fortune 10 corporations’ business model:

  1. Walmart
    Excellent supply chain, transportation and retail infrastructure
    Critical partnerships with key suppliers for very diverse offering of white-label products
    Lead on price, wins on assortment (see Dixit Stiglitz, constant elasticity of substitution)
    Passes the cost for worker benefits (to the state)
    Monopolizes and exploits local markets
    Large amount of working capital to make large investments at critical moments
  2. Exxon Mobil
    Excellent supply chain, transportation and value-add infrastructure
    Vertical integration of petroleum-chemical industry in all phases of production
    Exploration and exploitation of natural resources
    International footprint of marketplaces, market segments
    Large amount of working capital to make large investments at critical moments
  3. Apple
    Strong supply chain, excellent access to exclusively controlled proprietary platform
    Top in class branding
    Large research and development budget to maintain branding
    Vertical integration of production – specifically high margin software products
    Expensive barriers to exit allows for exploitation of customer base
    Large amount of working capital to make large investments at critical moments
  4. Berkshire Hathaway
    Excellent fiscal model that leverages/exploits insurance “float” to purchase successful corporations
    Unrivaled, multifaceted conglomerate with a balanced portfolio
    Reinvests all earnings into future investments in the portfolio
    Large amount of working capital to make large investments at critical moments
  5. McKesson
    Excellent supply chain, infrastructure, branding, and business-to-business sales
    Critical partnerships with key suppliers to drive market share
    Very diverse offering of white-label products (generic drugs)
    Large amount of cash on hand/working capital to make large investments at critical moments
  6. UnitedHealth
    Diverse product line of insurance and risk-mitigation products
    Diverse market segments, from B2C, B2B, and B2G
    Critical partnerships with key suppliers
    Large amount of cash on hand/working capital
  7. CVS Health
    Excellent supply chain that supports an extended network of retail pharmacies
    Aggressive acquisition and rebranding of multiple pharmacy chains
    Exploits corporate synergy with related services, including a cottage pharmacy insurance and clinic chain
    Large amount of cash on hand/working capital to support acquisitions and supply chain for high-margin, low-volume products
  8. General Motors
    Excellent supply chain that supports auto manufacturing across five continents
    International footprint of marketplaces and market segments with national-level branding
    Exploits corporate synergy with related services, including auto leasing
    Large research and development budget to innovate new auto features; often operated as independent subsidiaries
  9. Ford Motor
    Excellent supply chain that supports auto manufacturing across five continents
    International footprint of marketplaces and market segments
    Standardization across models to streamline innovation and reduce production costs
    Exploits corporate synergy with related services, including auto leasing
  10. AT&T
    Excellent supply chain that supports telecommunications across multiple platforms
    Vertical integration of telecommunications across multiple platforms
    Exploits corporate synergy with related services, including attach products and combination packages
    Strong use of loss leader strategy on partner-fulfilled hardware for high-margin subscription services

To summarize the observations above, it looks like the best practices are:

  • Large amounts of cash/working capital to make investments
  • Established investments and maintenance of critical business infrastructure
  • Diverse portfolios, often with a mix of large-quantity-low-margin products and high-margin products
  • Synergy where possible

It general, it looks like the nation’s most successful companies follow a relatively similar pattern: leverage revenue opportunities to make investments today to secure productivity tomorrow.  Even Ford — an auto manufacturer which was hammered by the Great Recession — looked to innovate (standardized production across models and brands) in the midst of budget shortfalls.  Ford shut down parts of the company that were not profitable in the short run, but Ford kept long-term prospects in place, because today’s decisions are how businesses succeed tomorrow.

Back to Theory

Macroeconomics teaches two starkly different models of analysis.  In the short run, supply and demand are extremely sensitive to price, taxes, and tastes.  Short run production depends on whether central banks manipulate the price of money through the bond market, whether governments manipulate currency to gain competitive advantage through arbitrage, or whether governments tax or subsidize businesses.

In the long run, none of that really matters.  Labor, land, capital, and entrepreneurship (e.g., innovation) replace prices, taxes and taste.  Growth in each of these categories is in the public interest. Investments in labor (education, health), investments in land (infrastructure), investments in capital (infrastructure, unfinished goods), and investments in entrepreneurship (innovation, research grants) are often public goods exposed to the free rider problem.

Not making the investments necessary for future economic growth is a market failure, just like every other free rider problem.

Luckily, the state has intervened in many of these cases.  American government subsidy in education has created arguable the most skilled labor force in history.  American government subsidy in transportation infrastructure (planes, trains, and automobile highways) has solved the logistical problems of linking one of the world’s geographically largest nations into a single economy.  American government seed investments, small business subsidies, and local government programs have helped prime the pump with capital investments.  Finally, American government investments in research have created trillions in revenue potential for entrepreneurs to monetize clever go-to-market strategies for public innovations.

Running the Country Like a Successful Business

According to the United States Constitution, the government is in place to (in part) promote the general welfare.  To that end, the United States government has historically made critical investments to grow the economy.  Large investments like the Louisiana Purchase, land grants and in-kind subsidies for the transcontinental railroads, electrification projects, the creation of (at one time) world-class public education, and the Internet have all instigated decades of strong growth.

Since the Great Recession leadership has shifted towards an austerity-based approach. This is precisely the incorrect approach.  Instead of cutting taxes for outbound corporations, Kansas should have invested in its people, limiting the brain drain through investments aimed at young skilled professionals, its infrastructure, and capturing synergy from economic opportunities based on existing business.  (And the problem is not limited to Kansas.  The same could be said for Illinois, Oklahoma, Greece, or increasingly the United States federal government.)

Great Recession Austerity policies led massive profits for large businesses (and their stockholders on Wall Street), but Main Street never fully recovered which left families rubbing pennies together to make ends meet.  In a cruel irony, the reformers’ push to run government like a business has created a new, plutocratic form of corruption.  Twenty-first century corruption occurs when business leaders manipulate voters’ and politicians’ misunderstanding of economics to implement policies that help business leaders exploit voters and politicians.

The solution to the economic woes is not more of the same failed austerity programs; it is to invest in the United States like a successful business.

The United States needs to invest in its work force.  Primary, secondary, vocational, technical, and higher education are all critical elements to preparing new workers for the economy.  Retraining programs are also necessary to help those workers displaced by automation and innovation.

The United States needs to invest in its infrastructure.  Our railroads, roads, and bridges crumble.  Our power grid is aging and relies on archaic fuels.  Our bandaid, patch-fix approach to answer increasing demands on a communications network is unsustainable.  Building this infrastructure will lay the foundation for a prosperous twenty-first century America while stimulating the economy in the short run.

The United States needs to invest in its ability to innovate.  Research grants to build new solutions to lingering problems may not always pan out, but when they do quality of life always improves.

These investments will cost money.  They will require taxes to go up.  But the investment is worth it.  The United States of America has the opportunity to make the twenty-first century the American century.

The decision is simple: run government like a successful business and invest in prosperity for years to come, or continue to run the country into the ground.

Written by Sam

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