Cutting the Right Expenses

In 2003, my company was in some serious financial problems.  Post 9/11 commercial insurance premiums had just risen substantially, so much so that my premiums went up more than my total annual profits.  At the same time I found out that a number of operations I had just acquired were profitable only because they were not in compliance with labor law, and my crash program to bring them into compliance was going to put me deeply in the red for that year.

I did a whole bunch of things to right the ship, but the two most important were 1)  I eliminated a whole layer of management, slashing 5 vice-presidents and having all the front line managers report directly to me; and 2)  I eliminated the smallest and worst performing business units.

Now, contrast this to what governments do in the same situation.  Their first response, of course, is to do something I could not do - compel more revenue for themselves by increasing taxes.  Those of us who make our living by the free decision making of others don't have this dictatorial option.

The second thing that governments do is cut their MOST important, MOST valuable operations.  In Seattle, it was always fire and ambulance services that would be cut.  Because the whole game was to find the cuts that would most upset the public to try to avoid the necessity of having to make cuts at all.  Its an incredibly disingenuous process.  Any staffer of a private company that made cost savings prioritization decisions like government officials would be fired in about 2 minutes.

The third thing that governments do if forced to actually, really cut costs (meaning that every other stalling tactic, taxation method, and accounting trick has been exhausted) is to cut field staff who actually do the work rather than high-paid, bloated administrative staffs.  This means teachers get cut but not vice-principals.  And it means that preventative maintenance gets cut and not transit staffers:

Having removed a mere 25 employees so far, and having just suffered its deadliest year ever, Metro officials now want to raid $10 million from the agency's preventive maintenance fund in order to cover operating expenses, including salaries and benefits. Metro managers would rather skimp on passenger safety and reliability than clear out the system's deadwood and force serious concessions by the transit union.

Moreover, even as it asks riders to sacrifice, Metro is fattening itself up, hiring two new "senior planners," one to a newly created position. According to Metro's official job description, they will be "responsible for participation in the development of an annual business plan ... identifying opportunities for future growth and development" and "defining future strategies."

  • Jess

    "This means teachers get cut but not vice-principals"

    No kidding. The local Board is floating cuts/fees/cut hours for teachers & students, but finds the $ to fund (at my kid's HS) Parent Liason Staffs... a Latino/Hispanic staff, Hmong staff, Vietnamese staff, Korean staff, African American staff, along w/6 (!) Vice Principals.
    The Budget is a joke.

  • Mark ii

    I call this the "Barney Defense", named after the decision by the Corporation for Public Broadcasting's claim that if their federal subsidy was cut by 4% they would have to take Barney and Sesame Street off the air.

    It is an effective policy because the liberalism of the major media in this country does not critically analyze any claims made by liberal groups they support. THerefore, the debate was not over a trivial cut in their funding, but funding Barney. The question of what kind of executive would make that decision was left unasked.

    AS for education funding, one of the major problems we have in this country is that the vast bulk of our citizens believe the myths that the education lobby presents. The most pronounced myths are these three:

    1. Teachers are underpaid and overworked.
    2. Teachers do teach because they have so much compassion and care about kids.
    3. If the NEA endorses it, it is good for education and good for kids.

    THe actual facts are teachers are paid very well when you consider that they only work 9 months out of the year and you include total compensation, including gold plated benefits, the ability to retire very young with high pension levels, and the fact that they can obtain tenure. Further, when you consider that academically teachers are not the top level performers, their total compensation is probably TOO high.

    As for being overworked, teachers are far from it. The school day is only 7 hours long. THis includes a lunch break and a prep hour. Many of these weeks are not even full 35 hour work weeks because as any parent can tell you, the number of "work shop" four day weeks is ubiquitous. Sure, every teacher will tell you about the amount of work done at home "grading papers", etc, but I will bet the comparable professional spends AT LEAST as much time working at home as a teacher, PLUS puts in 40-60 hours on the job without perks like "prep hour".

    Our teachers are failing their students. We spend more and more money for less and less education. It is sad. But, the fact is, because we believe myths and are willing to go along with things like "THe Barney Defense", it is us that are also failing to make the changes we need.

  • Jess

    "I will bet the comparable professional spends AT LEAST as much time working at home as a teacher"

    At least??? You're kidding, right? My teaching neighbor learned not to b*tch about hours long ago when we (during a neighborhood BBQ) challenged each other to call & email from work. After 2 weeks my margin was already 10 hours ahead & pulling away... but I'll never match her benifits & retirement.

  • NormD

    I agree completely. I grew up in the semiconductor industry where it was always feast or famine. In the downtimes we always found things to cut. We had to, we had no choice. I always disliked the uptimes because organizations never act efficiently and always find stupid things to waste money on. Its not just government, CEOs hire management consultants, corporate masseuses and if two departments are warring they decide to let each do what they want.

    I am wondering if one key problem is that it is not easy to get the details on government budgets. Voters are told:

    1. There is a crisis
    2. Popular service XXX is going to be cut
    3. If they want to prevent XXX from being cut, they must campaign for tax increases.

    If small government (rational government?) advocates are going to win we must have and provide voters with easy access to the actual numbers. How much money is coming in and where is it being spent, IN DETAIL. Big government types have become experts at hiding, obfuscating and spinning.

    Access to raw data has been key to overcoming AGW arguments and it will be key to overcoming Big Government. Even very liberal people generally support the idea of open government.

  • Mark

    I wonder if there is a way to actually change the incentive in government to encourage doing the right thing.

    Any thoughts on this. I am blank.

  • ADiff

    And there we have Arizona's budget dilemma in a nutshell. The only 'product' of government is bureaucracy, and it will do everything it can to protect it's 'productivity'......

  • ADiff

    And there we have Arizona's budget dilemma in a nutshell.

    The only 'product' of government is bureaucracy,

    and it will do everything it can to protect it's 'productivity'......

  • DrTorch

    Mark,

    The French Revolution comes to mind.

  • Hoodima2000

    Mark:
    The main incentive for the government is voters approval. So the right question to ask is why the voters consistently vote for the government which is ever bigger and ever less efficient? The straight answer that an average voter is just stupid and ignorant has some truth to it, but is still a simplification. A more subtle truth though is that when the government collects taxes from affluent people, and that's where most taxes are coming from, it actually spends some part on itself, and just plainly wastes some more, but still some part does trickle down to the poorer folks who forms the majority of the electorate and like to get goodies. That's how democracy works!

  • Mark ii

    I agree. I challenge a candidate to campaign on the slogan "I will do nothing for the district". No water treatment plants, no airport expansion, no federal matching dollars for transportation.

    AS I pointed out earlier about the myths about education, the average person believes that there is some sort of multiplier effect in first sending their money away to Washington DC and then receiving some of it back. In some ways this is a correct view, but the multiplier can only come from the federal government taking on debt or printing money. The true real capital impact is zero.

    But this is a myth the voters believe and from my experience they cannot be convinced otherwise.

    Likewise, the average employee believes that their health insurance coverage from their employer has some sort of multipling impact. They cannot be convinced that receiving an equivalent after tax income amount would make them better off. Most people believe that health care coverage is VERY expensive. From my experience if you ask a person what they could get a reasonable individual policy for, lets say a $2500 deductible Blue Cross/Blue Shield in my home state of Minnesota, they will estimate that it will cost 3-4 times more than the actual cost. The reason for this is that the information they receive through media is so slanted they simply do not know reality.

  • http://johntantalo.com John Tantalo

    “Its an incredibly disingenuous process.” should be “It's an incredibly disingenuous process.”

    http://emend.appspot.com/sites/www.coyoteblog.com/edits/0

  • O Bloody Hell

    > Any staffer of a private company that made cost savings prioritization decisions like government officials would be fired in about 2 minutes

    Yeah, I'd like to see laws passed that required budget officials to actually rank all expenditures on a simple scale, 1-5, with one being "of little import" and five being "of great import", then publish those lists for viewing. Provide reasonable avenues for legal challenge in the courts by the public as to the import being applied, with budgetary officials being sacked permanently if too many of their importance figures get overturned.

    Then, from that point on, all budget cuts must be allocated, in order, 25% of the budgets of tier-1 stuff, then of any remaining cuts, 25% more from tier-1, and 25% from tier-2, then, if more still must be cut, 25, 25, and 25 from tiers 1,2,3 in that order (i.e., you cut 50% of T1 before you cut anything from T3), and so on, until the necessary budgetary needs have been met.

    It unfortunately appears needful that we make this into law, just because it's quite apparent that government officials just can't do the job responsibly.

    >:-/

    .

  • Mark

    I don't think the fatalistic answers above, are really the answer - that you can not really do anything. There must be a way to incentivize government to stay small.

    I read somewhere about a state where the sheriffs had to pay for the prisoners food, and got a $3 or $4 daily allowance, if there is extra the sheriff can pocket it. In that state, even though the food allowance has not gone up in years, the Sheriffs all seem to find creative ways to keep the costs down and feed the prisoners while enriching themselves.

    I think that is the answer. Find ways to get our legislators, and senior members in departments to share in the take when costs go down.

  • Hoodima2000

    I'd put more hope into natural "negative feedback" than creative incentives for government's efficiency. Simply, as the government keeps growing, more and more voters should feel the pinch and come to a conclusion that things have gone too far.

  • tb

    I read somewhere about a state where the sheriffs had to pay for the prisoners food, and got a $3 or $4 daily allowance, if there is extra the sheriff can pocket it. In that state, even though the food allowance has not gone up in years, the Sheriffs all seem to find creative ways to keep the costs down and feed the prisoners while enriching themselves.

    It's where I live - Morgan County, Alabama.

    http://www.nytimes.com/2009/01/09/us/09sheriff.html

    The food allowance is $1.75/day/prisoner. AL state law allows the sheriff to keep whatever is leftover after feeding the inmates. Over the last three years (06-08), Sheriff Bartlett kept $212k, including $100k last year (08) alone.

    Disgusting.