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Reinventing government

February 2nd, 2011 · 5 Comments

It’s one of the best ideas, but hardly a new one..
Barry Ritholtz excellent website  is embracing (with one, rather silly caveat) Lou Gerstner’s call for reinventing government, and rightly so.

Government tends to get larger almost by default because:

  • As people get richer and many of their basic material needs are satisfied, their demand of public goods goes up (safe, nice neighborhoods, safe products and services, health-care, education, social security etc.)
  • Bureaucrats’ power and status is often measured by the size of their budgets
  • The public sector largely consists of services. Unlike industry, it’s generally more difficult to increase labour productivity in services. Hence, if salaries increase in step with the private sector, but without (much of) the productivity gains, the public sector becomes more expensive automatically (this is known as ‘Baumol’s disease’).

Health care in particular has a habit of driving up the cost of the public sector because:

  • People are getting older, disease has a habit of striking disproportionally in old age
  • More diseases are treatable and more and more expensive treatments become available. So, rather than having positive productivity growth, health care is actually likely to suffer from negative productivity growth.

The productivity problem in services, and more especially in public services is the single most important reason for increasing the cost of the public sector. A large public sector doesn’t necessarily have to be a drag on the economy, as many Scandinavian countries have shown, but there is a distinct danger of that if the public sector is less well managed. (Hence, our argument for quality, rather than the size of government as the element to focus on).

Which is why Louis Gerstner’s (former CEO of IBM) article on re-inventing government is helpful. Apart from the fact that this isn’t new at all. There is even a ‘reinventing government’ movement, which sort of started with the book with the same name by Osborne and Gaebler. It’s quite a compelling read as well.

However, infusing the public sector with business logic (based on liberating market forces, empowering and incentivizing people and measuring outcomes and results) has been sort of a mixed blessing, as experiences in health care and education in England and the Netherlands show. As any doctor or teacher will testify, these sectors are now plagued by an even far greater bureaucracy who manage processes and front-line people (teachers and care-givers) and measuring every aspect of performance.

At the end of our university days, we even had to fill out detailed time forms to the minute, as if there is a predictable relationship between the time put into scientific research and the quality of its outcome. Rather than being empowered, front-line personnel felt distinctly the opposite. A feeling reinforced by the rapidly growing salary differentials between them and the usurping management layer steering every aspect of their job.

Not only have have these sectors been plagued by a growing an unproductive (management doesn’t teach students or cure patients) bureaucratic labyrinth, what’s more, intrinsic motivation, based on professional ethics of teachers and doctors, has often suffered as a result, having been reduced from relatively autonomous professionals to mere functionaries who have to do as they’re told and their status (and relative salaries) greatly reduced.

Keep in mind that the main secret of the Finnish success in secondary education is the high status and training they bestow on their teachers.

Now, that doesn’t necessarily mean ‘reinventing government’ is a bad idea or not necessary. It does mean, however, that it’s all about how it’s executed.

The author on Ritzholtz website, Marion Manneker seems to argue something entirely silly though. He warns that increasing public sector productivity will make a lot of semi-skilled people unemployed. If we apply that logic to the economy as a whole, we should have no productivity growth whatsoever. We would still live in a subsistence economy of hunters and gatherers.

Tags: Public Policy · Reform Capitalism

5 responses so far ↓

  • 1 N // Feb 2, 2011 at 5:26 pm

    Come on IOC…give us some sort of operation status…who cares about future conferences and useless info

    Should put my money with the other Exxon in 2010 who is in the upsrteam/downstream operation of PNG

    up 70 to 83 since Dec with a 2% divendend yeild….come on Phil whats the word

  • 2 Barry Ritholtz // Feb 2, 2011 at 5:57 pm

    That was written by Marion Manneker, as the byline in the top right indicates.

    Also, one Z, two Ts — “Ritholtz”

  • 3 admin // Feb 2, 2011 at 6:21 pm

    Apology to you and Marion, we missed that byline (obviously).

  • 4 admin // Feb 2, 2011 at 6:43 pm

    N, perhaps this is what you like:
    https://shareholdersunite.com/2011/02/02/interoil-energy-world-corporation/

  • 5 N // Feb 2, 2011 at 7:24 pm

    admin…haha… Phil heard me loud and clear with info released during trading session….Thanks for the update Phil