Reinventing a Broken Wheel

Why bother, you might ask, to read another book about "reinventing government"? After all, we’ve had decades of time, thousands of consultants, and tomes of written material on the subject of getting governments to budget taxpayer treasure more responsibly.

The answer is that in Michigan, "The Price of Government: Getting the Results We Need in an Age of Permanent Fiscal Crisis" is a book that may help shape the decisions of state government at a critical time in the state’s history. Co-author Peter Hutchinson has been hired by the Michigan Chamber of Commerce and the Michigan Association of Realtors to apply the book’s insights to Michigan’s budget process. Many state legislators seem excited at the prospect, though a close reading of the book suggests they will have to be extremely careful to sort the wheat from the chaff.

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The "Price of Government" is David Osborne and Peter Hutchinson’s attempt to re-reinvent government by reviewing the advice and techniques of the past to differentiate between those that have succeeded and those that have failed. For Osborne, author of "Reinventing Government" from the Clinton-Gore era, this new book is no mea culpa. It is meant to be a step up the learning curve.

The book starts off on the right foot. Readers will acknowledge the accuracy of the authors’ comments on the failure of both major political parties to face the fiscal music and push for permanent systems of accountability in the budgeting process. As the authors note, this has indeed put current — but especially future — generations of Americans at risk. In fact, one of the more valuable aspects of this book is its documentation of the miserable wastes of time and money the past two generations of legislators have produced through spending profligacy and recurrent fiscal mismanagement.

The authors are quick to hit the major targets: Medicare and the Ponzi structure known as Social Security, $42 trillion and $11 trillion in unfunded liabilities, respectively. At the state level, exponential growth in Medicaid spending since 1965 portends a similar outcome.

At the local level, increased funding for public schools over the past generation has consistently rivaled the phenomenal increases for prisons and public sector pension and health care benefits. Yet classroom instruction receives only a much-reduced portion of each new education dollar disbursed — the balance being absorbed elsewhere, often in bureaucracy or nonacademic frills.

How does the authors’ budget advice differ from their past recommendations? They refer to some of their old concerns — productivity gains, technological improvement, spending cuts, revenue enhancements — but their focus in this book is getting government to deliver the "outcomes" — results — desired by taxpayers. The authors justify this focus by pointing to citizens’ rebellion over higher taxes, escalating fees, stifling regulatory costs and long waits for undelivered or bungled public services.

Their answer to these monumental problems is "budgeting for outcomes." They propose that governments at all levels first attach price tags to every service being rendered. This price tag should include not just direct spending on the service within the agency that provides it, but ancillary spending in other departments that provide necessary support for the service.

From there, government officials must determine how far existing or expected revenues will go in funding these functions. If the costs exceed the revenues, it means triage: picking functions with the greatest priority.

Which raises the question: What priorities? And who determines them, and how?

To settle on the outcomes that government should produce, the authors propose beginning with focus groups of citizens, politicians and directors of "steering" agencies like Michigan’s Department of Management and Budget, which gives orders and direction to the actual working agencies of government. These focus groups would help policymakers (and consultants) draw tentative conclusions about which programs should receive priority. These conclusions would then be tested in public opinion surveys, and the survey findings would in turn be used by policymakers to guide taxing and spending decisions that ensure the government lives within the means taxpayers are willing to provide, while producing services (most) taxpayers actually seem to want.

Whatever one’s thoughts on this section of the book — more on that in a moment — the authors move from here to a terrific section, entitled "Smarter Spending: Buying Services Competitively." They explain the galvanizing effect of competition in improving government services, including a very ample argument on the efficacy of charter schools in stimulating improvements in education.

They cite, for instance, the success of Indianapolis, which was the first large U.S. city to contract out management of its wastewater treatment plants. This contract resulted in a savings of nearly 30 percent of the city’s former costs, while improving overall quality. Taxpayers elsewhere accreted similar savings when cities privatized, competitively bid or simply threatened to competitively bid garbage collection.

The authors praise the Education Freedom index, introduced by Jay Greene of the nonprofit Manhattan Institute, to illustrate the overall academic improvement in public schools when faced with competition from charter, home and private schools. The authors quote Greene, who concludes, "Where families have more options in the education of their children, the average student tends to demonstrate higher levels of academic achievement."

This section on competitive incentives is very important to underscoring the importance of what I refer to as the "Equal Threat Theory." "Equal Threat Theory" in this context comes down to this: You do the work you’re paid to do at least as well and as consistently as your competition, or you lose your job. Whether you’re a private or public employee, such threats invariably raise accountability and performance.

Services provided under an Equal Threat regime raise the expectations of consumers (or taxpayers) concerning the return they receive for the dollars they spend. The increase in both performance and expectations sure beats the perennial government shuffling of underperforming employees to other government agencies. Such reassignment is standard operating procedure in government, enabling an agency director or a consultant to claim that their "rightsizing" reforms for a particular agency have succeeded, while the entire operation of government services hasn’t improved a bit. My hat is off to the authors for these pages, because this is where their perspective on government budgeting meets reality.

Too bad this wonderful portion of the book is too little, too late.

* * *

The problem lies at the heart of their method. Using focus groups of taxpayers, bureaucrats and politicians to establish government spending priorities is, at best, a dangerous proposition. As reasonable as this premise for budgeting may sound, it cannot withstand logic, the actual practice of public administration or (no trifling matter) the American tradition of constitutional law.

For one thing, many survey professionals would agree that even extensive surveys can introduce tenuous, volatile and nonobjective patterns for determining public policy preferences. Pollsters know how quickly people change their minds after having 24 hours to think about initial responses to questions raised in a focus group forum, or even a telephone survey or exit poll.

Respondents will also answer similar questions in different ways, leaving survey analysts struggling to determine what voters actually want — assuming the voters themselves know. And in any questionnaire, it must be remembered that both the survey and the respondent need to be evaluated, leading to new areas of uncertainty and dispute. This makes such priority setting fickle, trivial and even dangerous.

At best, focus groups and survey research are expedients that relieve the authors (and clients for whom they consult) of the inconvenience of evaluating public spending in light of an existing Constitution. For example, yes, we might very well conclude from focus groups that, as the authors claim in the book’s preface and conclusion, America’s highest rated priorities include relief from global warming, stemming child abuse, furnishing 44 million more Americans with health insurance coverage, or passing more stringent regulations over financial transactions.

But much mischief already has been inflicted on the U.S. Constitution, government budgets and American economic competitiveness from pursuing such policies. Fiscal hubris from Washington, D.C., already has saddled states with massive numbers of mandates that are passed without federal funding to finance them. States, in turn, pass similar "unfunded liabilities" on to local governments and pre-empt functions that were traditionally the purview of local communities. Even some die-hard public education advocates are having qualms about states — and now the federal government — horning in on education finance and policy issues that were once local responsibilities.

Local governments are often no better. Local ordinances and subsidies have abridged property rights, choices and economic incentives of individuals and businesses for the sake of special interests, such as hard-core environmentalists opposed to new development, or politically savvy firms that can wangle preferential subsidies for their new production facilities.

This record prompts a key inquiry: Is there a moral justification for this spending? Is the redistribution of jobs and incomes, for instance, really a central role of government? Are these proper, necessary, ethical, or judicious niches for the public sector?

The authors never tackle these questions head on.

Instead, they revert to ideas that are depressingly familiar. They roll out the usual buzz words for improving government — euphemisms I heard ricochet in profusion nearly 30 years (and a few budget crises) ago in Michigan when I served for 14 weeks on the Michigan Efficiency Task Force, a privately sponsored, bipartisan effort to improve state government’s operational efficiency. For example, reasons given by the authors for writing "The Price of Government" include standing the budget process on its head; keeping effective programs and leaving others behind; cutting government down to size; using competition and technology to cut costs; and making everyone accountable.

It’s hard to argue with these goals, per se. But it would have been a feather in their caps had the authors cited the profound analysis of Nobel Memorial Prize-winners Milton Friedman and James Buchanan when discussing the theory, experience and intractability of problems related to self-interested bureaucracy and public sector spending.

* * *

In several key sections of the book, readers simply cannot decipher whether omissions and cursory treatments of major problems reflect author bias or naïveté. For example, you will never find meaningful data-benchmarking to verify their claims of success as consultants in leading governmental units to fiscal turnarounds. They may talk about a percentage savings in a government agency’s budget, but they often omit the base at which spending actually started, making it difficult to determine whether the decrease occurred in actual spending or in projected spending (which automatically includes some baseline increase).

Similarly, when they speak of having reduced the number of workers at a particular agency, it’s hard to tell exactly what they’ve accomplished. Did they count unfilled positions in the jobs they purportedly removed? And if workers were actually let go by an agency, were they released from government payrolls, or were they simply transferred to the "turkey farm" (another government agency)?

Whether documenting dollars or public sector employment numbers, the authors would have helped their credibility immensely had they given actual numbers to underscore the value of their "before and after successes" in implementing "outcomes-based" budgeting techniques. After all, we know how hyped various political claims can be, and who takes the time and trouble to audit the numbers?

This failure to explore their case studies in detail weakens their broader success stories, too, since some of them are being overtaken by events. The kudos they give Washington state government for its very recent efforts to improve the "outcomes" of governmental budgeting are overshadowed by signs that the process is unraveling, given the former governor’s departure and the vociferous calls, once again, for rusted-out policies of tax-and-spend. The authors likewise single out San Diego for its fiscal success, but the city today sports a colossal deficit, despite a period of fabulous wealth and growth that few other regions in the nation have ever experienced.

Nor has time been kind to their discussions of budget deficits. For example, the authors cite state deficits to show that states now live in an "age of permanent fiscal crisis." Yet two-thirds of the states were running budget surpluses by early 2004, even before the "Price of Government" was released.

This transition from deficits to surpluses highlights another of the book’s disconnects with fiscal reality. Most students of public finance fully appreciate and incorporate a "dynamic" analysis into revenue forecasts of the budget — one that assumes, for instance, that changes in public policy and the economy will affect tax revenues. For example, when President Bush’s tax cuts were implemented at mid-year 2003, the dynamic outlook for revenue growth was significantly enhanced, suggesting that state government surpluses might lie ahead.

But throughout the book, the authors have instead adopted, by default, a static model of revenue growth, essentially assuming that tax cuts offer little or no measurable incentive for people to work longer, harder or smarter, or for firms to invest more in profit-enhancing plant and equipment. With this jaundiced view of what drives the tax base in a market economy, is it any wonder why policymakers are perpetually trying to reinvent fiscal prudence? The static model renders the merits of lower taxes and spending invisible.

Another example of omitted context appears when the authors mention in passing the generous pension and health care benefits paid to public employees. What they don’t mention is how really bloated these intractable payments are compared to those in the private sector; public employee health and retirement benefits are frequently twice or three times as generous as those enjoyed by average taxpayers. Nor do the authors connect the magnitude of these escalating and generous benefits to the crises in state budgets.

Such omissions make it hard for citizens to see why restructuring these benefits and cutting costs might be necessary. The authors’ incomplete discussion provides elected officials with a bully pulpit from which to call for another round of tax hikes or fee increases to ensure that citizens receive the "priority outcome" of better government services through the "good benefits" the government uses to attract "quality government employees."

It is here, in this all-important realm of public employee benefits and special privileges, that you’d expect a fuller discussion of "defined contributions" plans versus "defined benefits" plans. Forget it. Elsewhere, in contrast, the authors devote much ink singing praises of governments that use bonuses, gainsharing, and other financial and nonfinancial incentives to improve employee morale, accountability, and outcomes in the public sector.

Praising the "carrot" is fine. But why ignore the stick? For malfeasance, ineptitude, absenteeism, where are the firings and prosecutions? The authors discuss nauseating cases of coddled teachers and bureaucrats who have given fellow employees or agencies a bad reputation without repercussion. It would have been quite enlightening to have had objective analysis of why and to what extent bad employees and agencies are buffered against consequences of their waste and sloth, and why this persists to this day, despite "perpetual" fiscal crises.

And what of counterproductive public sector employment rules? While the authors note the problem of "bumping" employees with less tenure — i.e., laying off workers based on seniority, not performance — Osborne and Hutchinson circumvent prescriptions for handling such impediments to upgrading our public sector workforce. Eliminating bumping, "prevailing wage rules," and the prohibitively high legal costs of punishing or removing incompetent public employees are apparently nonstarters for worthwhile reform in Michigan.

* * *

In the final analysis, the authors have sought to publish a guide for reforming public sector budgeting. There’s always merit in this effort, and this book is no exception.

But as the saying goes, "There are none so blind as those who refuse to see." In the 21st century, more is required than just reform.

Reform, after all, refers to when you (somehow) decide to change what you are doing. What is needed is revolution: a change in who has the power to change what is done. Little by little, catalysts for revolution in public sector budgeting are emerging: technology, competition and citizen revolt against government privilege and complaisance. These factors are bringing genuine "power to the people," forcing change on resistant government institutions. Government budgeting cannot forever stand in starker and starker contrast with how the citizens who provide its tax base must live and perform.

Osborne and Hutchinson do provide two very useful and prescriptive sections on charter schools and the efficacy of introducing competition into the public sector. Michigan’s public officials would do well to focus on these items and be wary of the rest. Ultimately, I’d have to summarize the book this way: What’s good isn’t very original, and what’s original isn’t very good.


David L. Littmann is senior economist for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. At various times, Littmann has worked at every level of government during his 40-year career. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.

Book: “The Price of Government: Getting the Results We Need in an Age of Permanent Fiscal Crisis”; Basic Books: 2004; 336 pages; notes & index; $25 (C$39).

Authors: David Osborne and Peter Hutchinson.

Reviewer: David L. Littmann is a recipient of the prestigious Lawrence R. Klein Award for Blue Chip Forecast Accuracy (2003), former chairman of the Economic Advisory Committee of the American Bankers Association in Washington, D.C., and senior economist for the Mackinac Center for Public Policy.