Monday, June 26, 2017

Why Governments Aren't Run Like Businesses

Quick question:

What was the last store you went to?

My last purchase was made at Costco.  




The store where you can buy a lifetime supply of soy sauce.

I've never seen anyone with a 5 gallon bucket of soy sauce in their cart, have you?  

Next question:

What year was that store established?  


Remember when Amazon used to sell only books?  

In September of 1983, I was starting 9th grade, had a crush on a boy named Troy Giles, and started listening to a British band, Duran Duran.
I just realized Troy and Simon Le Bon looked a lot alike. 
Memory lane aside, the point is I'm older than Costco.  In fact, at almost 48, I'm older than many of the places where I shop.

But you know what I'm not older than?

The place where Costco is located, Orem, Utah.  It was founded in 1919.  

The year before women had the right to vote.
http://www.historyforkids.net/womens-suffrage.html

You know what else I'm not older than?  

The place where I live, New York City.  It was founded in 1624. 

The year before Charles I became the King of England. 

King Charles I

You know what else I'm not older than?

The place where I was born, Bozeman, Montana.  And the place where I grew up, Las Cruces, New Mexico.  And the place where I raised my kids, Pleasant Grove, Utah.  

Get my point?  Municipalities last longer than we do, and they last longer than most businesses.  

Therefore, when candidates run for office claiming to apply what they've learned in the business world to the public sector, we need to ask, "Should we?"


Yes, we should! 

Or so many claim.  And I can see the appeal.  Businesses run a tight ship.  If businesses don't operate efficiently, their profits go down, and they close their doors.

http://businesstm.com/online-business-blog/closing-a-business.html

How often have we seen a government service run inefficiently and think, "If this were a business, it'd be losing money. Someone needs to come in here and fix this."  

And yet, the public sector remains.  Mainly because it doesn't run like a business.  

Forbes magazine points out that in the private sector businesses have a goal of profitability.  The public sector has a goal of social value.  

And why they aren't necessarily mutually exclusive, it is possible to have one and not the other.

Look at reality TV, pornography, or gambling.  These are hugely profitable industries but it would be hard to argue that they create social value.  

Look at libraries, public schools, or parks.  These are definitely not profitable ventures, but do create social value.

What if we privatized these public services, wouldn't a business be able to make them profitable?   Probably.  Look at Barnes & Noble,  Phillips Academy (the #1 private school in the nation), and Disneyland, all successful and profitable in their own right.  But the public doesn't have access to these establishments.
http://marciodisneyarchives.blogspot.com/2010/07/has-disneyland-ever-closed.html

That's because businesses make their services excludable.  Meaning not everyone can enjoy the service.  And that's how they make their money.  

Yet, as voters and as citizens we continue to like the idea of our government running as efficiently as a business.  Unfortunately, we don't have a very good track record when we do.

The Harvard Business Review gives two examples:

In the 1960's Robert McNamara introduced a business-style approach called a Planning-Programming-Budgeting System which led to the high body count in the Vietnam War.
https://en.wikipedia.org/wiki/Robert_McNamara

In the 1980's a term known as New Public Management was used to run government services like a business and to treat citizens like "customers."  It created a measurement nightmare.  How do you measure safety?  Health care?  Foreign Relations?  Today it's known as Old Public Management.  

About four years ago I was appointed to serve on the Pleasant Grove City Council.  At the time the city was gearing up for an election to vote on whether to bond for a public safety building.  As a city council member, I attended many public meetings where citizens could ask questions and offer suggestions.

It was at these meetings I saw many of the principles of good business get confused with good governance.

"Why can't we just save up enough money for a fire station and pay for it with cash?  That's how I purchase my cars."  

A city would never be able to save enough money to stay on top of inflation and meanwhile a city would go without fire protection for decades.  To learn more about capital projects, click here.  

"Why can't we move money from one fund to another?  If I need to pay my electric bill, we go without pizza that month."  

Years ago I took a government accounting class.  My husband, who got a graduate degree in accounting from the number one accounting school in the nation, was excited to see me finally learning about his craft.  After two weeks he said, "I can't help you with your homework anymore."  

"Why not?"  I asked. 

"Because I don't understand what you are doing," he said.

I was confused.  How can a successful CFO not help me with my homework after two weeks?  I asked my professor why my husband couldn't help me.  

"Because governments don't operate their budgets the same way businesses do." 

City funds do not work like a business or a household.  This is one of the ways they are able to stick around for hundreds of years.  If you'd like to learn more about your city's different funds and how they function you can read this article.    To understand how the government reports fund accounting, you can read this  from the Governmental Accounting Standards Board.  Or you can save yourself a few hours and go to your local park or pool and be grateful there are people out there willing to dedicate their career understanding this stuff.  After one semester of government accounting, I know I am.

"I don't see why the police and fire need a new building.  Our roads need to be fixed."  

Prioritizing which projects get funded and when is complicated for a city.  Thankfully most cities have educated, experienced staff members who guide the local leadership by making informed recommendations.  They are able to see more clearly what citizens need rather than what they want.  Besides, if your house is on fire won't you be more concerned if there is water in the hoses than the kind of drive your fire truck had on the way over?

Now, to be fair.  Businesses shouldn't  run like a government either.   That too would be an utter failure.  Governments have multiple constraints, not just on their budget but because of the demands of the citizens.  If a business had to worry about so many stakeholders, it wouldn't last.

I like how Mickey Edwards, former congressman and Harvard professor, explains it:
"The business of business is business and the goal of business is to earn a profit in the provision of goods and services. The business of government is service -- well managed, one hopes, and not wasteful, but never at a profit." 

So the next time you hear a candidate ask for your vote because they promise to run the government like a business, ask yourself these questions:

  • Is this candidate the first person to think to do this?  
  • No government has ever successfully run like a business, why would it suddenly now? 
  • Don't I want my town to last longer than my Costco?  




Note: Below are the sources I used to write this article. I highly recommend you read the articles to learn more about why governments can't be run like a business and vice versa.  


Forbes Magazine Why Government Should Not Be Run Like A Business October 5, 2012 by John T. Harvey, an economics professor at TCU.

Harvard Business Review The U.S. Can't Be Run Like a Business March 31, 2017 by Henry Mintzberg, an internationally renowned academic and author on business and management.

The Atlantic The Difference Between Business and Government June 13, 2010 by Mickey Edwards, 16 years as a Congressman and 16 years teaching at Harvard and Princeton.  Author of the book Reclaiming Conservatism and director of The Constitution Project.

The Huffington Post Let's Run Government Like a Business -- Or Not August 30, 2013 by Terry Newell, director of Leadership for a Responsible Society and adjunct faculty member at the Federal Executive Institute.


To read my 8 tips for voting in a municipal election, click here.

To read how cities report their finances and receive a credit rating, click here.