Governments need to be business-like cost-cutters

Terence Corcoran’s brilliant series on Defunding Government is a danger to Canada’s forests. There are not enough trees in the country to list all possible examples of government spending waste. To save the trees, what is needed instead is the wholesale importation into government of the private sector’s relentless pursuit of lower costs. In business, cost-cutting is fundamental to management; in government, it is at best an afterthought when it is considered at all.

The most famous and revered business leaders understood the primordial importance of pushing costs as low as possible. Andrew Carnegie famously said, “Watch the costs and the profits will take care of themselves.” Warren Buffett’s philosophy in building Berkshire Hathaway was summarized by an admiring colleague: “We worked hard to make cost-consciousness a part of our company’s DNA … Cost control was the baseline of our company culture.” This goes back to Ronald Coase’s theory that firms exist in the first place in order to lower internal transaction costs.

As Norsat’s John MacDonald put it, “You know you’re becoming a true company executive when you start treating every company dollar like it’s your own.” There are myriad examples of this mentality in practice: an airline removing an olive from the salads it serves in first class to save $40,000 a year; Lexus hollowing-out carpet fibres to reduce vehicle weight by one kilogram; Toyoda changing its name to Toyota to reduce printing costs. Or consider rocket science. NASA’s government-funded rockets typically were discarded seconds after use, while Elon Musk’s SpaceX figured out a way to slash launch costs by returning them to Earth for reuse. An inevitable byproduct of saving costs is saving resources; the best environmental programs rely on the price system, not subsidies.

The economic historian Deirdre McCloskey argues that lower costs have been the driving force behind most inventions. James Watt wanted to make low-cost as well as good engines and was determined to extract “the last drop of ‘duty’ from the last puff of steam in his engines.” The Bessemer steel process behind Carnegie’s success produced quality steel that was also less expensive. Some inventions are intangible but just as cost-effective: Wedgwood dominated pottery-making for decades after its founder invented cost accounting.

Why are businesses so focused on lowering costs and raising efficiency? Because only lower costs guarantee an improved bottom line. Tactics to raise sales may not work, especially during recessions. But cost-cutting always delivers. There is also the constant threat of competition from new entrants into an industry. The legendary economist Joseph Schumpeter described how this menace “disciplines before it attacks”: the mere fact that a new firm might appear forces incumbent companies to become more efficient.

The University of Toronto’s Joseph Heath has argued that corporate decision-making is the closest thing we have to the ideal of economic rationality, “not because the people are more rational … (but) because they are operating in an institutional environment that is more conducive to rational thought and planning.” It is easy to see why the drivers of business efficiency do not carry over into government. Post columnist Derek Burney has worked in both the public and private sectors. In his memoirs, he observes there is no incentive for government to be efficient because there is no profit and no accountability. Government’s monopoly of its services means it has no fear of the threat from new firms that was so important in Schumpeter’s analysis of capitalism.

Governments can reduce costs when doing so is absolutely necessary. The federal government did it after hitting the debt wall in 1995. It cut both spending and deficits sharply by asking every department to review its operations with six questions in mind, including: Does the activity being reviewed serve the public? Do governments, especially the federal government, need to be involved at all? Can the service be delivered more efficiently or affordably? These simple questions worked budget magic: government spending plunged 19 per cent. Unfortunately, once the debt crisis passed the government stopped asking its managers these questions. In business, by contrast, questions about efficiency are asked every day.

Management guru Peter Drucker’s claim that “beancounters will have the last laugh” does not apply to government. This was not always the case. Before World War II, government leaders imported business attitudes to cost efficiency directly into government operations. U.S. president Calvin Coolidge proclaimed his approach to running the government was “I am for economy. After that, I am for economy.” Government restraint now proceeds quite differently from business cost-cutting: while businesses focus on internal efficiencies, the bureaucracy tries to shift the pain as much as possible to external clients.

These days, sad to say, claims of being able to find billions of wasteful government spending are dismissed out of hand — not because waste isn’t pervasive in government but because experience shows it is impossible to implement cuts over the objections of public-sector unions, who see their mandate as defending their most incompetent colleagues and managers, for whom efficiency is clearly an enemy. Only when public-sector managers face competition or are held accountable for spending will they adopt the relentless focus on cost that makes business efficient and innovative.

Philip Cross is a senior fellow at the Macdonald-Laurier

Institute.

THE FEDERAL GOVERNMENT DID IT AFTER HITTING THE DEBT WALL IN 1995.