Government Bureaucratic Waste
vs. Private Sector Efficiency
by
James Kroeger
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Choosing Quality over Cheap Alternatives
It is an objective truth that government organizations are usually
less efficient than privately-owned enterprises (private enterprises that operate in
price competitive markets, that is). We end up paying a
premium for government services because of those inefficiencies.
But as any savvy consumer knows, price is only one of the variables
that one considers when making a purchase. One lesson we all
eventually learn as consumers is that you get what you pay for.
When government is our choice, it is usually because we can clearly
see that the government can provide a product of higher quality that the private sector simply
cannot match. Quality the private sector cannot match?
Is such a thing possible?
Well, consider what it would be like if we were to rely on the private sector
instead of the government for our highways & sewer systems.
We’d find ourselves having to put up with certain 'inconveniences',
like toll booths every few miles. A Private Sector alternative
to this would be a privately-owned monopoly, but
privately-owned monopolies are no more efficient than government
monopolies. If you want to have privately-owned highway &
sewerage industries in order to reap great cost savings from them,
then they are going to have to be price-competitive
industries. But the only
way that is going to happen is if there are multiple firms in
those industries and they are all building parallel highways & sewer
lines. This would result in an incredibly inefficient use of land resources.
Worse, it would provide
us with a
quality-of-product that is far inferior to that which we now
enjoy.
We could similarly rely on private fire-fighting companies to
provide us with fire-fighting services. But competing
fire-fighting firms would only provide their services to those who
had been paying their monthly bills. What if your neighbor’s
house caught fire one night but the owner had not paid for
fire-fighting services? There is a chance that your house
might also end up burning to the ground as a consequence simply
because your neighbor was not able to pay her bill. Likewise,
private sector police departments would not provide police
protection to those who could not afford to pay for the service that
they provide. If you called the police, they would first have
to establish whether or not you had been paying for their protection
before providing you with any of their services.
These examples show us that the
quality-of-product that we seek when we ask the government to
provide certain services is a special level of security
and convenience that can be enjoyed only when
universal coverage is provided as a “right of citizenship.”
The private sector can
produce a cheaper alternative that costs society less, but that
cheaper cost can only be had if you are willing to accept an
inferior level of quality. The great mystery of our day
is why the citizens of wealthy,
economically advanced nations settle for austerity-level services
when they don't need to?
Consumers demonstrate every day that they are quite willing
to pay the higher prices charged at convenience stores because they
value convenience that much. They become very annoyed
whenever they have to wait in long lines. We expect to
pay more for the higher-quality services that we buy from the
private sector. So why should any of us be surprised to discover that
it is necessarily going to cost us more to enjoy the
higher-quality services the government can provide for us?
What ultimately accounts for the higher cost of
right-of-citizenship services? Well, in order to provide
the desired level of quality, the government must often (some
exceptions) eliminate all private sector competition and become the
sole provider of the service. This virtually guarantees that
bureaucratic inefficiency will become a bigger problem than we would
expect to find in private-sector firms that operate in
price-competitive markets. But the very thing that makes it
possible for the government to provide the higher-quality service (eliminating
the competitive market) is also the very thing that is
responsible for its higher cost. Although various initiatives
can be pursued to keep bureaucracy costs at a minimum, we
nevertheless tend to accept the generalization that bureaucracy
costs are going to be higher in productive organizations that do not
have to compete with rival organizations for a limited number of
demand dollars.
Underfunding Government Services
The security and convenience benefits of right-of-citizenship
services are certainly desirable, but why is it that we still hear
anti-government zealots insist that the government 'naturally'
produces a poorer quality product than the private sector does?
To make their point, they’ll remind listeners of the last time they
had to wait in line to see some bureaucrat for a government service.
They insinuate
that the reason for the poor service is the inherent indolence of
government bureaucrats and the inadequacy of government
organizations in general. Are they right? No, not at
all. While there is no denying the fact that many government
agencies do not provide the quality-of-service that we would like to
see, the reason for it is understaffing; not some kind of
imaginary 'government disease.'
When there is a chronic problem with long wait times for government
services, it is always because there is a chronic problem with
understaffing, given the level of demand
for services. Why are government agencies understaffed?
Because they are under-funded. You can only hire additional
staff if you have the funds to pay them. Ultimately, the
primary blame for understaffed, 'poor quality' government agencies
belongs with the elected officials who appropriate funds and raise
the revenue that is needed. During the past several decades, anti-government
politicians have been successful in tarnishing The Government's
reputation for Quality by denying them the
funding that they need to provide quality services.
So even
though government organizations have the potential to provide
services of the highest quality to society, it is still possible for
anti-government political parties to sabotage that potentiality
through deliberate underfunding. Politicians who deliberately
underfund are actively seeking to deny citizens the quality product
they desire. They want people to be unhappy with the
government's quality-of-service. They truly are enemies
of the public interest. They may only be guilty of managerial
incompetence, but that incompetence deserves the public's scorn.
By failing to adequately fund, they are responsible for
squandering the investment
that taxpayers have been making.
Incompetent managers tend to aggressively act to reduce certain
costs while ignoring all other important costs that are involved.
It's something we see in the private sector whenever 'efficiency
experts' are hired to improve an organization’s productivity. These
'consultants' (con artists?) seldom know anything at all about the
operations they promise to 'fix.' They just know that
they will be understaffing every department by 15-25% in order to
create a production crisis. The idea is to goad
everyone who is left into scrambling to produce the same output.
What these consultants don’t tell the dupes who hire them is that most of the
efficiency gains they produce are a result of 'cost shifting.'
Yes, there are efficiency gains, but they are achieved at a price.
The more you 'squeeze the margins' (the more you subordinate all
other cost considerations), the greater the productivity
improvements you can produce. What
other costs? Well, when people start to rush their
work, they make more mistakes. In manufacturing environments,
these mistakes cause increased levels of scrap production, more
're-work', more warranty payments, more injuries, and even more
deaths. In
all productive environments, understaffing can ultimately cause
a business to lose customers, as delivery deadlines are
missed and customers receive poorer quality products and services.
These are very real costs that can ultimately bring a business to
its knees, but they are not costs that concern the efficiency
consultants. They are hired by firms only to produce [what prove to be
short-lived] jumps in labor productivity (something any management
team can do if it is willing to disregard all other cost
considerations.)
Example: Socialized Medicine
Americans can learn a couple of important lessons on the trade-offs
that exist between quality & efficiency from Great Britain’s
experience with its National Health Service (NHS). The NHS is
the purest example of Socialized Medicine that one can find among
economically advanced nations. Throughout its history,
economic conservatives have argued that the NHS is too costly, too
bureaucratic, too inefficient, and too lacking in quality of care &
service. Now, 50+ years since its inception, we can see just
how fat and bloated and costly and wasteful it has become.
Well…maybe not. Instead of becoming a ‘money pit’ that
continually sucked more and more taxpayer money into its ‘black
hole’ bureaucracy, the NHS has actually become one of the least
costly quality health care systems in the civilized world.
By most measures of “health”, the citizens of the UK are either
healthier than Americans, or nearly as healthy. The Brits have
a higher life expectancy rate and a lower infant mortality rate and
almost as many doctors per thousand as Americans have
(2 vs. 2.4). In spite
of roughly equal “health outcomes”, America’s private health care
system costs Americans more than twice as much as the NHS costs the
citizens of the UK. In spite of everything you’ve heard, the
empirical evidence—hard numbers—tell us that Socialized
Medicine in England is far, far more
efficient
than America’s private sector alternative. If
efficiency in delivering health care and cost control are more
important to Americans than the quality of health care they receive,
then they should definitely copy the Socialized Medicine model
established by Great Britain.
Of course, efficiency & cost control are not the
issues that matter to us the most when it comes to health care.
Quality matters more. While the Brits enjoy a quality of
health care that is superior to that enjoyed by Americans in many
respects (no insurance policy headaches, no frustrating discussions
of “ability-to-pay” prior to the provision of health services, no
paperwork hassles) the quality of their health service lags behind
America’s in one important respect: they must put up with far longer
waiting times for elective surgery. Of course, part of the
reason for this is that many poorer Americans are not on any
waiting list for elective surgery because they cannot afford to pay
for it. Even so, the excessive wait times are a serious
quality flaw in the NHS. The good news is that it is (A) the
only flaw of any significance in the NHS that one can point to,
and (B) it is one that can be easily fixed.
The problem is not that British bureaucrats are inefficiently
running their health care system. The statistical evidence
mentioned above (available from the
OECD) tells us that the
opposite is true. The real problem is that the NHS is
underfunded. In 2002, UK citizens spent only about 8% of their
GDP on health care ($2,160 per citizen). This compares to the
approximately 15% of GDP that Americans spent on health care that
year ($5,267 per citizen). It doesn’t take a genius to see
that if the British were to double the amount of money that they
spend on health care, they would be able to dramatically increase
the quality of the health care that the British people
receive by increasing the supply of health services.
Reducing wait times for elective surgery is simply a matter of
paying for more surgeons & operating rooms & equipment & recovery
facilities. If the Brits started spending as much of their
national income on health care as Americans do, their Socialized
Medicine health care system would be the model and envy of the
world. Their health care product would not only be the highest
quality product in the world, it would also be the greatest
value in health care in the world (quality produced with optimal
efficiency).
Lessons
So what lessons do we learn from Britain’s experience with
Socialized Medicine? First, that we don’t have to worry about
government right-of-citizenship services becoming “too
costly” because conservative politicians can be counted on to always
act to keep government programs underfunded. We also learn
that because this is true society should always be far more
concerned about the quality deficiencies caused by understaffing than the “waste” caused by overstaffing.
We also learn
that opponents of Socialized Medicine are flat out wrong when they
suggest that a Private Sector Health Care Industry is needed in
order to control health care costs. This is essentially
because (A) cost-controlling
price competition
does not exist in America’s private health care industry for
clearly identifiable reasons (private insurance, patents, & restricted entry
into the “doctor’s guild”), and (B) the private sector alternative
is not desirable because it puts constant pressure on
providers to compromise the quality of health care in the name of
efficiency and cost control (see Managed Care in America).
Ultimately, the opponents of Big Government do not really care about
the poor quality-of-product generated by government programs they
have underfunded. In fact,
they like it that way because poor-quality government services
are cheaper, and that means that they pay less in taxes to
the government. Then, after they’ve succeeded in degrading the
quality of government-provided services, they have the political
opportunity to say, “Look! I told you that the government
always provides lousy service compared to the private sector!”
Blaming government institutionalism for the poor results that
they are responsible for, themselves, is a favorite political
stratagem of anti-government zealots. A great example of this
in economic history occurred during the Great Depression.
In the mid-term elections of 1938, Republican politicians pointed
out that the Roosevelt administration had failed to end the
depression in spite of the dramatic increase in government spending
that had occurred during the previous five years. They pointed
to this ‘failure’ as evidence that increases in government spending
will not fix an economy that is mired in recession. Only a few
years later, the inanity of that argument was revealed. When
government spending skyrocketed during World War II, the Great
Depression ended almost overnight. The reason why the Great
Depression dragged on as long as it did was not because fiscal
stimulus initiatives failed; it was because the dedicated efforts of
the Republican opposition succeeded in limiting federal government
spending increases to levels that were insufficient to restore the
economy to full-employment spending levels. Today, we can see
clearly that it was the Republican Party that was responsible
for both the length and depth of the Great Depression.
If you happen to be a politician who believes in the virtues of
government, it must be a matter of the highest priority that you not
accept inadequate levels of funding for government programs.
The time to throw down the gauntlet is when economic-conservatives
start calling for a reduction in spending levels in order to combat
government wastefulness. Those individuals need to be forced to admit
then that what really bothers them is having to pay
significantly higher taxes in order to fund government efforts
intended to benefit
others, and not themselves. That is when you can reveal
the stupidity of their
concerns about higher taxes and focus their
attention on the very real benefits that accrue to them when they
choose to heavily tax themselves. When they do this to provide the
less-well-off with a wonderful government-provided service like
Socialized Medicine, they are actually doing themselves a
tremendous favor.
After all, when they look out at the international community, they
would be able to brag [indirectly, of course] to the rich people of
other countries about what they have done for their poor
people. Rich people everywhere have to “deal with” the poor
one way or the other. They can either settle themselves into a
siege mentality, where they worry constantly about the poorer
classes “storming the gates” or they can bring peace to the “class
warfare” battlefield by simply committing themselves to initiatives
that earn them the deep gratitude of the lower classes. It
might take some getting-used-to, but I think they would find it
rather enjoyable to notice that the lower classes do not begrudge
them their wealth, but actually view them with approval and
appreciation. That is an enhancement of the
quality-of-life of rich people that is worth paying for. And
the truly amazing thing about it is,
it wouldn’t really cost them anything!
Efficient:
Even though price-competitive industries have lower
“bureaucratic inefficiency costs” than governments do, much of that
cost is compensated for by cost-reductions obtained through various
economies of scale. Lower total costs are achieved through
volume aggregation, reduced duplication, and cost-sharing practices.
It may even be true that these cost savings are more than enough
to compensate for increased bureaucratic inefficiency costs.
The lower overall cost of health care in England seems to suggest
that this is true. But even so, it must still be acknowledged
that bureaucratic inefficiency is still is one of the necessary
costs that taxpayers must pay for if they want to enjoy the enhanced
quality-of-product that governments are able to provide via
universal coverage.
Related Economic Analysis:
UNIVERSAL HEALTH CARE
MAKE THE
AMERICAN PEOPLE RICHER
ARE INCENTIVES NEEDED TO
ENCOURAGE INVESTMENT?
DO TAX CUTS STIMULATE THE ECONOMY?
TRADE POLICY & JOBS
