The Big Difference between Private Enterprise and Government

 Contrary to what people on the Right tell you, our government is not a business although parts of it can be run like one.  Our government’s purpose is to “provide for the common defense” and “promote the general welfare,” and “Secure the Blessings of Liberty to ourselves and our Posterity.”  Notice our constitution does not say “engage in being a profit center to make a lot of money.”  But today, there are myths that the Right perpetuates without actual proof.

 

But before I get to those, I want to focus on what it means to promote the general welfare.  Our tax dollars should be used to make our lives better.  This means that there might not be any profit involved.  Take the National Weather Service, for example.  This is a department the Right has wanted to privatize for years.  You only want to privatize something if you think you can make a lot of money from doing so.  But this service allows farmers to understand what growing season will look like, warning people ahead of time about impending storms, floods, and other potentially disastrous weather events.  In short, it provides a nationwide service to the American people.  The NWS did not come into existence to make a profit.  It came into existence to serve the public and by doing so, promote the general welfare.  The NWS is supposed to be a nationwide service that provides service to all without political bias.  It is free for Americans except for the fact our tax dollars pay for it.  But the vast majority of Americans do not mind paying for it because it promotes the general welfare in a real and tangible way. 

 

Another example of how the government promotes the general welfare is the National Library Service for the blind, a service dear to my heart since I have benefitted from it for 55 years.  This service provides blind people with a free library of books with over 150,000 audio titles, as well as tens of thousands of braille titles.  In the old days when these audio books, known as Talking Books, came first on records, then cassettes, then cartridges that housed books digitally, posting these media to and from the library was free, courtesy of the US postal service.  This service allowed a legally blind boy to read books ranging from a Johanna Lindsey romance novel to detailed books about quantum physics.  Educated people, especially blind people, have a much higher likelihood of getting a decent job than those who are not.  But no one conceived of the NLS as a profit center.  Instead, it promoted the general welfare of the blind, of their families, and of the hundreds of people who work for NLS.

 

Some government services are not designed to make money.  Instead, they are designed to spend our tax dollars on products and services that promote the general welfare.  And this brings me to some myths that the Right perpetuates.

 

Myth 1: There is a great deal of waste and fraud in the bureaucracy, and this exists in the form of too many workers doing too little work.

 

In his book The Fifth Risk: Undoing Democracy, bestselling author Michael Lewis dispels this myth better than I can in this short article.  He does this by describing how valuable the civil service really is, and imagining a world where this is undone.  Sadly, we no longer need to imagine this world.  He has also written a series of articles on this subject since his book.  Academic research shows that most layoffs for cost cutting reasons are done by new CEOS.  CEOs that have been associated with a company for a longer period of time tend to refrain from such layoffs.  The reason for this is simple.  In America, many CEOs are financial people with very little knowledge of the nuts and bolts of a business.  In Japan, the opposite is true.  CEOs are generally people who began at the bottom rung of the company they lead and worked their way up first as low level nonmanagerial workers.  They therefore acquire an intimate knowledge of their company, and the business it conducts.  Japan does not suffer from hack-and-slash cost cutting job losses.

 

There are three main reasons for the hack-and-slash approach.  First, the parent company wants to flip a company, much like some people flip houses.  They buy it in the hope of flipping in in five or ten years and making a massive profit.  One way to do this is to cut costs to make the business more attractive to future buyers.  A second reason for mass job cuts is to make the company look good on the balance sheet.  A company that looks good on the balance sheet has a chance of increasing its share price and since executive bonuses are tied to the share price, and since executives themselves receive shares, many executives are happy for the company to look good on the balance sheet for a short while, in order to maximize their bonuses and share packages.

 

And finally, a third reason applies to government departments.  By cutting jobs and reducing costs, the department looks more attractive to buyers and reduces the cost for buying the company.  Many executives look forward to nice jobs with the buying company.

 

And it is this third reason, with a little of the first two thrown in, that is what is really behind the first myth.  Massive job cuts have very little to do with making a company leaner and meaner but has everything to do with flipping the company or, in this case, a government department.  If a private company buys a government department for less, its balance sheet looks better.  Its executives get higher bonuses, and their share packages are worth more.  Many investors on Wall Street are only interested in the numbers and the bottom line.  Unlike value investor Warren Buffet, they are not interested in the intrinsic value of the business.

 

Myth 2:  A private company can run things much better than the government can.

 

Although government departments, like any company, have bloat, it is not as bad as the Right would have us believe.  People who are hired by government departments generally fill a need.  The picture of the lazy public service worker is overblown, though it is not 100% false.  There is scope for making a public service more efficient, but this almost always involves improving processes and managing better instead of job cuts.  Hack-and-slash methods do not make public services more efficient.  In fact, the opposite is true.  But targeted cuts can improve things.

 

But this dynamic is just as true for corporations as it is for government departments.  It is true that sometimes private companies can operate more efficiently, but can they operate nationwide?  This myth forgets that one of the purposes of our government is to promote the general welfare.

 

Take rural broadband for example.  The reason rural broadband is behind what you find in cities is because it is not profitable enough for companies like Verizon and AT&T to provide fast rural broadband.  And because it is not profitable, they do not go into really rural areas, and the people suffer.  But since the purpose of government is to promote the general welfare, our tax dollars should be spent to provide these Americans, who are just as American as those who live in the cities, what they need to operate in the information age.  It is precisely because it is not profitable that the government is the only entity who can promote the general welfare of people in rural areas.

 

The US Postal Service goes places that UPS or FedEx do not go.  Their reasons for not going there are the same telecommunication companies fail to provide decent rural broadband.  Setting up UPS delivery boxes in a rural area is not profitable, and since corporations have a fiduciary duty toward their shareholders, they do not go “the last mile.”  Only the US Postal Service can operate there, even though it may and probably does operate at a loss.  This is because it promotes the general welfare.  The founders believed the postal service was so important for promoting the general welfare that post offices are specifically mentioned in Article I, Section 8, Clause 7 of the Constitution. 

 

Another reason the government is often better than private industry is because its infrastructure gives it the ability to cover the entire nation better than private companies can.  Our government has a GPS system.  It has global satellites.  The US Geological Survey has stations in place to measure seismic events.  It is therefore in a far better position to monitor weather, earthquakes and volcanos far better than any private company can.  And furthermore, the government can provide these services when and where they are needed making it much easier for it to coordinate disaster relief and warnings.  Governments have far more ability to act in an emergency than any private company does.

 

America is beset by greedy entrepreneurs who believe that by looting the government, what they call hollowing out government, they can make vast fortunes for themselves by supposedly providing essential services for Americans.  But the primary purpose of private companies is profit.  The primary purpose for government agencies is service.  As it is, our government contracts many things out to private companies and this has generally proven to be a successful model, but with one caveat.

 

Government audits and academic research have shown that time and time again, the vast majority of government waste and fraud comes from private contractors charging far too much for goods and services, or private contractors involved in projects that run way over budget and end up costing the taxpayer huge sums of money.  These studies show that billions of taxpayer dollars are wasted every single year.  As an IT professional I can vouch for this as I have seen both the US and Australian governments ripped off repeatedly by tendering processes that are broken and by projects gone off the financial rails.  The bulk of waste does not come from too many workers.  It comes from the interaction between our government and private contractors.  If the Trump Administration or congress were truly serious about cutting costs, this should be the first, and I would say, only place they should look.

 

Americans should never forget that promoting the general welfare is a driving principle of our constitution.  The driving principle of private enterprise is to turn a profit.  If these can exist hand in hand, so much the better.  But our government is not, nor should it ever be run, like a corporation.