The Grand Illusion
In my experience, a great number of Americans tend to think of economists as either ivory tower pedagogues or unrealistic ideologues, while classifying business executives as practical and down-to-earth. Both government and business have number-crunchers, but government numbers’ types are usually economists while business prefers accountants. One reason for this is likely because public policy economics and business economics differ in their basic structures and aims.
In business, an individual or a business provides a good or service to another individual or organization for a defined price. If the revenues from those prices do not cover the operating costs of the business, sooner or later the business must cut costs, raise prices, go bankrupt, or be bought by another business.
In government, a department, agency, or commission provides a service for the public, for which the Treasury provides reimbursement from funds appropriated by Congress to provide that service. While government may buy goods, those goods are bought for use in providing a service. At least, they’re supposed to be, although one might question whether multi-million-dollar DHS productions of Kristi Noem on a horse constitute a public service, even if it turned out that she was riding into the sunset.
In business, the goal is to make a profit, hopefully by providing a solid product or useful service, but in practice any cost-cutting that’s not illegal is allowable, particularly where it comes to wages, and it’s left to the consumers to determine whether they want to pay for the product. Of course, from the beginning of human history, businesses have attempted to corner their market so that the only choice buyers have is to pay an exorbitant price or do without. This was and is known as “free market economics.”
Not surprisingly, that hasn’t changed, which is why the U.S. government ended up regulating business, and why businesses complain about excess government regulation and continue to push for government to be run like a business.
So when politicians talk about running government like a business, voters should be wary. For example, Trump sold himself as a practical businessman. In his case, practicality has primarily translated into amassing funds by shifting costs onto others, failing to fully pay subcontractors, and using his office to enhance family-related businesses on an unprecedented scale. That doesn’t even include trying to gut social programs to finance a war that he promised he wouldn’t ever get us into.
His rhetoric and that of others tend to ignore the fact that failure of government to rein in business excesses in seeking to maximize profits results in more people who need to rely on government income and medical support because they can’t make a living wage on what businesses are paying.
And,so far, I’ve seldom ever heard an accountant consider such economic considerations, and any economist who points them out is considered unrealistic and anti-commerce by those who think government should be run like a business.
There’s also the government failure to understand the sort of actuarial models that insurance companies understand, and stick to them rather than being influenced by moving political targets. Otherwise the hard decisions to keep Social Security and Medicare solvent would have been made. One easy thing would be raise the maximum Social Security tax, which would sort of be a tax on the rich (which normally I think is class envy pandering in principle, since one could liquidate all the wealth of the rich and still have the government in debt), but as such things go, a relatively sensible and not excessively burdensome one; not the sort that would drive the wealthy to take their wealth out of the country.
I’m delighted to find myself in unaccustomed agreement with Mr. Hamilton. As a first step in ensuring the ongoing solvency of Social Security, I propose we abandon the fiction that Social Security is a system where everyone gets out of it what they put into it but is rather the social safety net that it has become. To this end, we may begin by eliminating the cap on contributions. While I was working, I certainly enjoyed the annual bump in pay that occurred along about every September when I maxxed out those contributions, but I can’t honestly say I needed the extra money since I’d been chugging along all year without it up to that point. It seems silly to tax someone less simply because they’re making good money.
What I didn’t say is that I wish government run social safety nets had never been thought of; there are many downsides to the concept that doubtless few here will agree with. Only that IF they exist, they should be run in a sound manner, not as political theater, and for Social Security, it may be that only raising the cap (but not unlimited to allow more benefits, just enough to make it sound again) is politically possible.
Businesses and those who have considerably more than required for their own basic needs are NOT a resource to be tapped when some politician wants to appear to be doing good at other’s expense. There is a perhaps underestimated basis in enlightened self-interest for both businesses and the rich to CHOOSE to do some fraction of what some wish to require of them, but except for a reasonable degree of transparency, that should be up to them.
I too agree with R. (and Darcherd).
Just want to add:
“Not surprisingly, that hasn’t changed, which is why the U.S. government ended up regulating business…”
This is why I remain doubtful about socialism. If government owns the businesses, who’s going to regulate them? The govt’s track record at regulating itself is about what you’d expect, human nature being what it is…
Socialism is not communism, and doesn’t require public ownership of production. But the UK’s experience of privatisation has firmly shown that privatisation of the provision of common and networked goods such as water supply and sewage can massively destroy value and undermine necessary services.
If pure communism is everything being owned and operated by the state, and pure capitalism is nothing being owned and operated by the state, then everything in between is some level of socialism. The only question becomes to what extent do you want the government to control cost and access to ‘necessary’ services. I think even R. Hamilton would hesitate at the idea of privatizing the military or the police.
For my part, I think a system of private business with strong government oversight provides about the best system you can hope for, especially given the nature of human foible. But I’m open to being convinced otherwise.
Fire departments in some areas are voluntary and donation supported…and just might refuse to aid non-donors, although they’ll protect neighboring houses.
It’s not always pretty, but it isn’t all that bad, either.
I recently looked up the difference between USS and USNS ship designations. Turns out the latter are mostly civilian (contractor, typically) operated, unarmed or minimally armed Naval vessels; only a minority of the crew is military. Support vessels, but not just logistics but oceanographic survey, even intelligence, etc. So sometimes we outsource things one might not expect.
Water and sewer should probably not be commercialized, although there are examples of government failure with both (Flint, MI notoriously for water – lead in pipes plus a change of water source to one with minerals that released the lead, various locales for sewage spills; sewage systems tend to be underfunded).
Other utilities are private but heavily regulated. Mostly that works, sometimes it doesn’t (like the poor maintenance that led to California fires, or the incredible disincentives on building more power plants, when with growth we can’t just conserve to meet demand; in the former case, I’d say there was malfeasance both public and private, in the latter, I’d say over-regulation is a real thing too; however well-meaning the environmental goals might be, an economy slowed by energy shortages or economic burdens won’t get faster to a low-impact state).
“But the UK’s experience of privatisation has firmly shown…”
1) How so? Didn’t the original public ownership get overturned, and rails and such were re-privatized? Was I not paying attention that time, and missed how things improved?
2) I thought public ownership of large businesses was a cornerstone of socialism. I’m pretty sure it used to be; has that changed? Genuinely asking.
Collective ownership, not necessarily public. Just not owned by individuals.
For example a large manufacturing company could be part owned by the unions, giving the workers a representative say in the direction and the rewards.
That’s different to shareholdings, which tends to be more around how to fund a particular business.
But most modern countries don’t support pure socialism, they support social democracy, which effectively aims to curb the excesses of capitalism while still encouraging private businesses alongside representation and social welfare.
As for privatisation … the UK has had a few cycles, but many privatised commons have been subject to the same problems across the world. Rail, water, energy, communications, key manufacturing, it’s a common trend.
Effectively maintenance and investment in new stock is minimised, while profits are redirected offshore and debt or losses redirected into the business. When service inevitably fails, the state is forced to step in, investing heavily with public money to restore what is considered an essential service. Later the new owners will repeat the process. It’s privatising profits, and socialising losses.
Alongside that is the separate problem of natural monopolies. If you’re Thames Water, you control water distribution for London. There’s no other system of pipes available and no means of competition. That’s a recipe for price gouging and profiteering.
Instead, the underlying networks should be operated by a state owned business (but not necessarily state run) who set priorities and expectations around service delivery and then separate retailers can share the commons (the pipes) and compete on investment and service.
This model has actually worked quite well in the communications space, which is very competitive, but OpenReach owns all the cabling and many masts. A similar model has been used with the re-nationalised rail track infrastructure with third parties simply operating the trains, and failing operators allowed to go bust since they can’t ruin the commons.
Thanks for being a source of light during times when the world feels heavy
Thanks for sharing your unique perspective that always makes me think differently