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October, 2004

  

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