About this site

I was a Governing Board Member of the San Carlos School District, elected November 2007 and again in November 2011. This site was originally used for the purpose of communicating with school district constituents, however now it is used for surfacing ideas and expressing opinions on various subjects in education, politics, business, or otherwise.

Please note that any opinion express here is purely personal and does not necessarily reflect the position or opinion of anyone else or any organization with which I am, or have been, associated.

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January 2017
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Why Government is Not (and Should Not be) Like Business

Political chatter seems to always center on how government is inefficient, inept, and wasteful; the oft-cited remedy for such failures is to make government act more like business. After all, isn’t it capitalism — the enterprising spirit, the competition, and the focus on the bottom line — that has made this country great? It is perhaps this sentiment, in part, which has fueled our electorate to support “outsiders” and “businesspeople” to the highest forms of our government.

As someone who studied economics and has worked in business for almost thirty years, I am very much a capitalist, so on the surface this point of view has appeal. But even a cursory review will demonstrate that these arguments miss the point — government institutions exist for a different purpose than businesses, and they should operate by a different set of rules. These distinctions are not trivial or accidental, but based upon the specific design and purpose of these institutions. I have grouped these distinctions into four specific areas to consider when we evaluate the effectiveness of our governing institutions and our elected leaders. These areas are (a) Mission and Focus, (b) Risk Profile, (c) Decision-Making, and (d) Measuring Value.

Mission and Focus
In business, the ultimate goal of the organization is to maximize the return to shareholders (i.e., make as much money as possible). A company’s “mission statements” is often its organizing principle to create value (e.g. Google’s mission is to “Organize the World’s Information”), but these mission statements are a means to an end…the end being to maximize shareholder value. This profit motive is the driving force behind capitalism and the catalyst for innovation, efficiency, and competition.

Government agencies, on the other hand, are not motivated by profit, but rather by a “mission” in the more literal sense of the word, e.g. to educate children, to keep the public safe, etc. In this way, government agencies are more akin to non-profits than for-profit corporations. This very purpose shapes the goals set by the organization, the types of people it hires, and the context in which those employees work.

Fundamental to a profit-maximizing business is the axiom that businesses choose what business they want to be in. In order to maximize return for shareholders, businesses must find what unique value they bring (versus their competitors) to what unique segment of the market. Business strategy is about focus and positioning — what product/service will I deliver, how will I deliver it uniquely compared to alternatives, and to whom will I deliver it. This last piece is critical — businesses get to pick their customers! Even thought it serves a huge market, Apple doesn’t make computers for everyone — it makes them for customers with a certain profile, and then markets those products with messages that resonate to those customer segments. When an organization picks its customers, it is also implicitly picking the customers it will not target or even serve at all. This holds true for General Motors, Time Warner, or your local Italian restaurant. Businesses need to deliver something uniquely valuable to a targeted market. (This is not to say that all businesses actively refuse to sell to certain people — it’s just that the very nature of their messaging and product focus, by definition, will appeal to only a subset of the market that they choose).

Contrast this to public institutions, which don’t have the luxury of picking their customers. By design, government agencies have to serve everyone in their domain, and the likelihood that such constituents are homogenous is very slim. Take public schools, for example. A private school — by definition — gets to choose what students it serves, and by doing so, it should excel. It can effectively become a specialist in delivering a certain type of education to a certain sub-population of students. Economists refer to this phenomenon as “cherry picking.” Public schools, on the other hand, must serve all children that live within that population, and of course the needs, abilities, and respective support structures for these children will be very different. The very requirement to serve a broad, heterogeneous population inherently makes a government agency less “efficient” as compared to its private entity counterpart. However, being less efficient does not mean it is not fulfilling its mission and purpose.

This is true because “efficiency” (in its narrowest sense) and “efficacy” are not necessarily the same thing. Particularly with government services whose missions likely involved some sort of universal delivery model, efficacy is achieved by something other than the strategy taken by an “efficient” business. For a local Fire Department, the most “efficient” model would be to staff the firehouse with only enough firefighters so that they are deployed close to 100% of the time. However, since fires don’t occur in regular intervals, such efficiency would result in the fire department not getting to certain fires. No citizen wants it to be their house that is missed by the firefighters, so fire stations staff up to ensure capacity for close the maximum perceived need, not the average forecasted need. Of course, this means that firefighters will be less than fully deployed for a good part of the day. But we should be ok with that, as it is much better than the alternative! So in this case, the firehouse is “efficient” with respect to accomplishing its mission, but not “efficient” in terms of a traditional business paradigm of output per person hour.

In business, it is competition which keeps organizations in check in terms of the prices they charge and the quality they deliver. With few exceptions (such as natural monopolies), this competition is fundamental to a capitalistic system. But competition often means that some entity wins and some entity loses. Losing could mean having the smaller market share, but it could also mean going out of business. In fact, businesses close down and others start up every day. Government agencies, on the other hand, don’t “compete” in the same sense, and it’s unrealistic to ask them to. Do you want to have two police forces fighting to get to the same crime scene first? Do we want government agencies to go out of business and others start-up on a regular basis? Of course not. Consistency of delivery is a hallmark of a public service. If my TV manufacturer goes out of business, well no big deal — I’ll buy my next TV from someone else. But for our armed forces, do we want a different organization managing the country’s defense every year?

Risk Profile
Risk is inherent in the capitalistic notions of profit maximization and competition. Businesses take risk. By and large, it is the businesses that take the most risk (and then in turn succeed) that deliver the greatest return to their shareholders. However, for every company that succeeds, many more fail. This is totally acceptable in a capitalistic system because it is this risk taking which fuels innovation and growth. However, no one in business would be willing to take these risks unless they had a system that protected their “downside.” The corporation was invented to do exactly that — it shields the individual owners, directors, officers, and other employees from individual liability. They are protected from financial loss (shareholders can only lose the money they put in, but not more) as well as legal liability in the case where the company causes harm to others (except in extreme circumstances). This is known as the corporate “shield.” The ultimate manifestation of this shield is the bankruptcy process. When a company goes bankrupt, it restructures or eliminates its liabilities. The corporation can be re-formed and start again, or it can be dissolved. In any case, the individuals within the company have no downside other than the money they invested themselves. In fact, the bankruptcy process in this country has been crucial to its economic growth. Without a bankruptcy system, companies would certainly not have taken the risks that they have, and without the risk taking, there would be little innovation or growth.

With very limited exceptions, government agencies don’t go bankrupt. The risk of their not being able to deliver on their services is just too great. Again, we’re ok with a restaurant going under, but what happens if my police force goes bankrupt? Do I not have police protection for a while? Therefore, government agencies by design will be more risk averse. The consistency of delivery of those services trumps the potential to optimize them.

In a government setting, risk is also measured in more than just financial terms. For example, no one argues that public schools are doing everything possible they can for all students — we know there can be improvements. Even though most school districts are constantly trying to improve curriculum and instruction and learn new “best practices,” schools will inherently move slowly and cautiously in making changes. The reason is simple. In a corporate setting, the risk of experimenting on a new product is limited (the risk is the loss of the investment made in that product), but do we really want to dramatically experiment with our children’s future? The price for being “wrong” is often just too high in delivering a public service. Of course, schools and government agencies should always look to improve, but it’s hard to fault them for being cautious.

Decision Making
Otto Von Bismarck allegedly remarked that “laws, like sausages, cease to inspire respect in proportion as we know how they are made.” The work of government is like sausage-making — slow, sloppy, and ugly at times. Why is that? I would argue there are two main reasons. The first is that it is the inevitable outcome of the government’s need to serve a broad constituency as well as the need to reduce risk as described above. Serving a heterogeneous constituency and being more risk averse will always make things a little slower. However, the other reason lies in another fundamental tenet of government — openness. We see the sausage making because we’re allowed to, and our very witnessing of this process inherently makes it more sausage-like! As someone who has worked for many companies over the last couple of decades, there were countless very painful decision decision-making processes, however none of them were visible to the public. Business interactions are by and large secret. Compensation levels of most employees are secret; strategic plans are secret; computer code is secret, and the discussion at board of directors meetings is mostly secret. This secrecy — or at a minimum the ability to choose what information is made public and what is not — is another cornerstone of capitalism. It allows companies to compete with each other, to shape their overall message to the market, and to manage their employees in the most flexible way. So, in most companies there is plenty of sausage-making; it’s just not visible to most of us.

Contrast this to public agencies, which by most measures are an open book. The very nature of the decision-making process of a public institution requires the input and participation of the public, and the nature of bringing in such a broad and diverse group of constituents into your decision-making process necessarily makes it slower and more complex. Board meetings of all elected bodies are held in public. All contracts are made public. All salaries are made public. The process to get bids on large projects is a public and inclusive process. From a businessperson’s perspective, these are all anathematic requirements — it would be viewed as impossible to run a real business that way. Could you imagine a scenario where any Apple shareholder can get three minutes to address the Board of Directors of Apple at every board meeting (not just the quarterly shareholder meetings)? But this seeming lack of efficiency and flexibility is the price for openness. And after all, as these are public institutions funded with tax dollars, would we expect our citizens to want something less than transparency? (Obviously there are areas of government that are secret — which include things such as war plans all the way to the identity of kids expelled from school — but in aggregate, the level of secrecy is miniscule compared to that in business. And that is how it’s supposed to be.) The public benefits from being part of this public process.

Even though governments are often accused of “waste, fraud, and abuse,” that is hardly limited to public institutions — it’s just that in the corporate setting, we just don’t often hear about it. This is why I find this critique to ring both hollow and hypocritical. Just because we don’t as often hear about mistakes or misconduct reported in the private sector, that hardly means it doesn’t exist, or even exist on a much bigger scale. Think Wells Fargo, Samsung, Volkswagen, Enron, Lehman, BP, Halliburton, et al — and these are just the ones that got caught! Anyone who has had any significant business experience has personally witnessed all forms of bad behavior — everything from padding expense reports to lying to customers to harassing employees to actual fraud. In any organization of humans — public or private — there will be those who abuse the system. It just so happens that the private sector has more tools to hide it. Personally I have witnessed all of this bad behavior in my business career, but most people can’t give specifics because they are bound by non-disclosure agreements – so many matters get settled outside of the public eye. So, I always find it ironic when businesspeople who decide to run for political office suddenly rail on government for their excesses.

Measuring Value
One makes decisions to affect value. The hope is that every decision we make enhances value somewhere, or why would we be making that decision? In business, every decision is about furthering the company’s mission. Fortunately, business has a common currency to measure that value — money. Profits are relatively easy to measure. Individuals within a business may disagree on the best way to achieve their goals, but the end game is rarely in dispute. This is not true for government institutions — in any sizable group of citizens, there will be honest disagreements on the goal. Even within a small city, some citizens will favor high growth and more development while others will want the opposite. Again, the institutions are designed to best serve the interests of the broadest group of people.

How does government measure the value it delivers? Certainly it takes money into account, and often this is subject to healthy debate among the citizenry as to the level of its spending. However, the real problem is that it is extremely difficult to measure the value of government output. This is driven by two distinct problems:

  • The fundamental difficulty in measuring the value (and agreeing on the value) of areas such as security, education, happiness, community, convenience, and recreation. Everyone values each of these things, but try to get people to tell you how much they are worth. They are fundamentally difficult to measure and impossible to get agreement on.
  • Government services affect an extremely long time horizon. Although businesses may do 3-5 year strategic plans, government services can affect people’s lives decades after they are delivered. How does the education I provide a kindergartener today affect his/her life twenty years from now? And how does it affect other people’s lives, in terms of economic growth, crime, or in other areas? Although few would argue that there isn’t such a long-term connection, it is daunting to try to measure that connection and near impossible for the citizenry to take that account when asking governments to make decisions today which affect theirs and other’s lives decades from now.

This is another reason why governments are often accused of waste, because often such waste is in the eye of the beholder. For example, if you are personally not in favor of government spending money on high-speed rail, then from your point of view, it’s a “waste” of money, whereas the proponent would consider it an “investment.” That perspective is completely independent from whether the money is spent “efficiently” to achieve its outcome. If you don’t support the outcome in the first place, then it’s “waste” to you. Public institutions have the burden of serving a much broader group of “shareholders” — the entire taxpaying public — who of course will rarely agree on the value or necessity of any particular initiative.

Conclusion
I believe capitalism is a beautiful thing. But it is clearly not perfect. Capitalism is conditioned upon the free flow of information, capital, and resources (the last being the most difficult) and it fails in certain areas like externalities and natural monopolies. And as they are run by fallible people, businesses are also fallible. Whether it is oil spills, unsafe toys, or financial market manipulation, capitalism does not in and of itself protect the citizenry from unscrupulous or manipulative behavior. Therefore, government is in the odd position of both being a promoter of capitalism (providing the regulatory environment to promote business and innovation) but also acting as the check on its potential excesses. Only the most orthodox of Libertarians would suggest that we don’t have an FDA with at least some regulation on the safety of our food.

All of this analysis is not to suggest that government can’t learn from business. Quite the contrary. Many innovations and methodologies developed in private enterprise have been and should be adopted by many government agencies. But we must recognize that government will always be a laggard by design.

One should also not conclude that public agencies are beyond criticism — of course not. There are legitimate differences in what we all value, and it’s reasonable to debate the role of our government agencies and the decisions made by our elected leaders. It’s also very reasonable to debate whether we should even have a certain government service, and if so, how much we should spend on it. However, in having this debate, we should remember the role of government and how it is distinct from many of our own experiences in business. It is unfair (and unproductive) to criticize our public agencies for doing what they are designed to do, but rather we should focus the debate on those things that are within their design — what do we value as a community and what are the long-term effects of government decisions made today.

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