In the face of low growth and unpredictable volatility it might be time to give the U.S. government a lesson in efficiency.
Only 30 years ago, US corporations were the laughing stocks of the world. Companies were rife with waste, rigidity and low productivity. But in the past few decades, US corporations have gone through a metamorphosis and are now the world’s model of efficiency.
Sadly, the US government now finds itself where many of these iconic US companies were in early 1980s. Some might argue it’s not as bad as other governments around the world in terms of its ineffectiveness or corruption—but that’s a low bar.
But the question is: Can the U.S. government use the same “lean enterprise” principles as US companies?
A New Era of Efficiency
In the 1980s, a management methodology known as Six Sigma was used by many leading companies to reduce costs and improve the quality of their products. Six Sigma steered businesses to streamline processes with the goal of maximizing resources and streamlining production.
In retrospect, Six Sigma wasn’t revolutionary by itself, but it was part of a revolution that helped make American companies profitable again, and in many cases, brought them back from the brink of extinction.
But is it time for the US Government to attempt the same metamorphosis? There seems to be a resignation that there’s nothing we can do about it—that’s just the way it is and we need to accept the fact that government operates under different rules.
For government, taxes and spending are the same as revenues and costs for a corporation. No one is asking or expects the government to run a profit or to drive higher margins. Why not? Clearly, politics plays a role as it becomes very difficult to cut programs that members of Congress were elected to support. Lobbyists, too, have their say, which speaks to the potential for corruption. These are hindrances for sure, but they do not explain the whole story.
Capital Allocation Issues
The reality is that we have plenty of revenues, but do a poor job of allocating that money efficiently. We all know that entitlement programs have mushroomed over the past half century, but most probably fail to realize they are now well over 50% of the total federal budget—up from 25% just 40 years ago.
Rather than get into a political debate around entitlements versus military spending or other programs, I would rather boil this down to a more simplistic analysis that everyone can appreciate without getting emotional. For that, let’s focus on health care and education spending, which are funded from both private and public sources, but which are heavily influenced by government intervention and/or execution.
The Health Care Cost Problem
First, let’s look health care spending as a percentage of GDP. US spending is six percentage points higher than the rest of the developed world and yet results in no significant difference in longevity or quality of life. For comparison, I chose Germany and Japan, thinking their older demographics would at least put their health care costs on par with the US. Instead, Germany is six percentage points lower and Japan is seven.
Why is the US so much less efficient with its health care spending? Could it be that Medicare is extremely wasteful in how they deploy their resources? How about fraudulent insurance claims? Perhaps it’s the legal system in this country that allows frivolous lawsuits against doctors that leads to needless tests and overpriced malpractice insurance.
Whatever the reason, I don’t think it would be an insurmountable task to figure it out and fix it. There is no reason we can’t be as efficient as Germany or Japan in health care delivery, much like Six Sigma and other process improvements that made our private companies so much more profitable than their German and Japanese competitors. To be clear, 6% to 7% on health care would come to about $1 trillion. If we redirected that to an infrastructure-based fiscal stimulus, imagine the productivity and long-term growth-enhancing benefits.
Time to Restructure?
Education isn’t much better than health care in terms of efficiency. Despite spending 35% more than the average OECD country per precollege student, the US ranked 27 out of 34 in mathematics and 17 out of 34 in reading, according to studies by the Program for International Student Assessment, the OECD, and the National Center for Education. That’s 35% more money for mediocre results. There is no reason we can’t redirect our country’s resources to more productive uses, which will solve a lot of the problems currently plaguing our economic future and financial markets—negative interest rates, low revenue growth and pockets of enormous and unpredictable volatility.
While I am not expecting any magic bullet from the upcoming election or the current slate of candidates, there is definitely a groundswell of attention from the public that it might finally be time to restructure the biggest corporation in America—USA, Inc.