Running the Government like McDonald’s

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Government can learn a lot from business. Most private companies get their revenue primarily from customers so responsiveness is not an option. Keeping customers happy and cutting expenses are essential. Continuous improvement is the norm. Consider the case of McDonald’s.

During the last decade, McDonald’s added a lot of new products, including oatmeal, snack wraps, and lattes. The company doesn’t release specific data, but one estimate identified an increase in the total number of offerings from 85 to 121 between 2007 and 2014. Each new product was intended to expand service. Who can argue with more choices?

There was a problem with this approach. Each new product required a new station for preparation, new training procedures, and additional labor. Collectively, these changes broaden the responsibilities of employees, crowd the food preparation area, increase inventories, lengthen waiting times, and raise costs, all of which have hurt the company’s ability to deliver Big Macs, fries, shakes, and other staples. Rivals like Five Guys, Chick-Fil-A, and Chipotle Mexican Grill are smaller and more focused, and have lured many customers away. As a result, McDonald’s just experienced the sharpest decline in same-store sales in 14 years.

There’s a simple lesson here for business: Sometimes less is more. But government can learn from McDonald’s as well. The Constitution underscored the notion of limited government, giving Washington certain, specific responsibilities. As stated in the tenth amendment: The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people. Sticking to a short list was intended to keep Washington focused and responsive. A government involved in fewer activities should have an easier time keeping its eye on the ball and doing those activities reasonably well.

Like McDonald’s, governments at all levels—especially in Washington—have expanded their reach over the years. Amidst the massive continuing resolutions required to keep the behemoth moving, government waste and cronyism have soared to an all-time high. McDonald’s responded to its crisis by announcing the elimination of eight menu items—about 7% of the total. More might follow, but eight is a start. With an $18 trillion nation debt, why can’t Washington take similar action and eliminate 7% of its spending?

Some will disagree; I’ve heard the rejoinder many times: “You can’t compare government to business because you can’t run government like a business.” There are certainly differences, but the principles associated with managing both entities effectively are quite similar. Besides, if you don’t run government like a business, then how do you run it?

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Obama & the Business Roundtable

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The Business Roundtable (BRT) is a group of US CEOs that seek to promote pro-business government policies. My review of the BRT is mixed. Some of its positions, like the group’s support for “comprehensive immigration reform,” are just plain self-serving. In fact, the notion that CEOs and the President should “work together” to solve our nation’s problems might sound good to some, but it’s a recipe for cronyism.

My concerns aside, President Obama addressed the BRT on Wednesday and made some interesting comments:

http://www.whitehouse.gov/the-press-office/2014/12/03/remarks-president-business-roundtable

The last 2 paragraphs before Q&A were particularly revealing:

But, domestically, the area where I have the deepest concern is the fact that although corporate profits are at the highest levels in 60 years, the stock market is up 150 percent, wages and incomes still haven’t gone up significantly, and certainly have not picked up the way they did in earlier generations. That’s part of what’s causing disquiet in the general public even though the aggregate numbers look good.

And one thing I’d like to work with the BRT on is to ask some tricky questions, but important questions, about how we can make sure that prosperity is broad-based. I actually think when you look at the history of this country, when wages are good and consumers feel like they’ve got some money in their pocket, that ends up being good for business, not bad for business. I think most of you would agree to that. And we’ve got a lot of good corporate citizens in this room; unfortunately, the overall trend lines, though, have been, even as productivity and profits go up, wages and incomes as a shared overall GDP have shrunk. And that’s part of what is creating an undertow of pessimism despite generally good economic news.

The President is arguing that CEOs have a responsibility to be “good corporate citizens” and increase wages when profits and stock prices increase. When they don’t, a “disquiet” and “undertow of pessimism” develops in the populous. He’s wrong for at least 3 reasons:

First, wages are—or at least should be—determined by the market, not profits or stock prices. Companies pay workers what is necessary to get a job done. Companies don’t increase wages because profits increase. If this were true, then wages would fall at a company when profits decline. The market simply doesn’t respond this way.

Second, shareholders incur risk that typical workers do not bear. Companies that lose money still have to pay their workers—or lay them off; their shareholders suffer the consequences. Workers wishing to share in the bounty of anticipated company growth should become shareholders and accept the risk. You can’t have it both ways.

Finally, Obama only mentioned profits, share prices, and wages. He neglected to address the myriad government policies and regulations that discourage companies from hiring workers. Whether it’s Obamacare, his higher minimum wage proposals, or his support for amnesty for illegal immigrants, Obama’s policies—not corporations—have created the “disquiet” and the “undertow of pessimism.”

The President’s comments reflect a continued misunderstanding of how business can and should function.

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The Ferguson Reality

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The Ferguson situation is unfortunate for many reasons. Those burning down the city lack a comprehensive understanding of the case, yet they clamor for the indictment of an officer they don’t know to be guilty. They supposedly act in the name of justice while reflecting a total disregard for private property and the rule of law. They behave like anarchists while simultaneously demanding government intervention. This is a serious problem on many fronts, but I’d like to comment on the business perspective.

Consider a simple question: If you run any type of chain or franchise establishment–or even a small business–would you consider opening in or moving to Ferguson? With the ongoing riots and seemingly no way to protect property there, the answer is obvious. High profile firms like McDonald’s will probably stay, lest they be accused of social irresponsibility. Many others will likely exit, taking jobs and access to daily services with them. Why rebuild a business in Ferguson?

But Ferguson is really a random community in this cycle of violence. What happened there could just as easily have occurred elsewhere. Savvy business executives with their own money on the line will attempt to identify and avoid the next Ferguson. You can’t blame them.

Ironically, while private investment in Ferguson will suffer, some are starting to call for the federal government to step in and “rebuild the community.” Doing so would be a travesty of justice, reinforcing the notion that crime really does pay.

At the end of the day, economic development depends on individual liberty and respect for the rule of law. When these fundamentals are lacking, entrepreneurs demand higher returns to compensate for the extra risk or avoid investments altogether. This is the reality for Ferguson, and perhaps for other urban areas as well.

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The President & Net Neutrality

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On Monday (November 10), President Obama definitely declared broadband Internet service as “essential to the economy.” In doing so, he asked the FCC to declare broadband as a public utility, expand its regulatory control, and invoke so-called net neutrality, the idea that all Internet traffic should be treated equally. Should the FCC oblige, there would be a fight—likely in court—with major broadband providers like Comcast, AT&T and Verizon that seek different cost structures for different types of customers.

Proponents of net neutrality claim that such an approach would ban Internet providers from discriminating against content providers. But neutrality really means egalitarian in this instance. Not all Internet applications require the same speed and bandwidth, so Internet providers should be allowed to set prices accordingly. Net neutrality would end this practice, allowing regulators to set prices, ostensibly in the public interest.

There are legitimate technical matters to consider here, but the core issue is about philosophy. The crux of the President’s argument is quite simple: Anything “essential” to the country can’t be left to the market. Whether it’s the post office, education, health care or the Internet, he’s suggesting that vital goods and services should be centrally controlled.

This argument has emotional appeal and is sold through fear: “We can’t leave the education of our kids to the profiteers.” “Everyone has a right to get the same mail service no matter where they live.” “Medical care is too important to be left to the insurance companies.” “The Internet should be available to everyone, not just large corporations.” But it also has a logical flaw. If central control of “essential industries” is in the best interest of consumers, then why not centrally control other industries as well? While most Americans would reject this idea when applied to grocery stores, restaurants, and gym memberships, many fall for the notion that important goods and services should be exceptions. In doing so, they miss the point.

In general, the more important an industry is to an economy, the less regulated it should be. Mail service, education, health care and the Internet are too important to be left to bureaucrats who lack the information necessary to make efficient decisions about products, services, and pricing. The market does all of this much better and much faster. Health care costs are not high because of greedy doctors and insurance companies who conspire to shortchange the poor. They are high because government regulations of the various related industries make it more complex and thereby more expensive.

Don’t be fooled. The President might be calling for an “open Internet,” but it’s already open without the level of federal oversight he wants. The market has already done quite well making Internet service available to the public.

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Managing the ebola crisis

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Confidence in the Obama administration’s ability to manage the ebola crisis has been low overall, but it has been driven by hourly news events. Approval ratings for the President and the CDC will almost definitely decline if there are additional cases in the US, and they will rise if there are not. This reflects human nature, but also the public’s inability to focus on the issues at hand and the government’s proper role in managing the crisis.

This is a classic case of crisis management. Every organization should be prepared for a crisis—an unlikely but potentially catastrophic event—but some organizations exist solely for that purpose. Police departments, fire departments and rescue squads are prime examples. The CDC is another. According to the organization’s website:

CDC works 24/7 to protect America from health, safety and security threats, both foreign and in the U.S. Whether diseases start at home or abroad, are chronic or acute, curable or preventable, human error or deliberate attack, CDC fights disease and supports communities and citizens to do the same. CDC increases the health security of our nation. As the nation’s health protection agency, CDC saves lives and protects people from health threats. To accomplish our mission, CDC conducts critical science and provides health information that protects our nation against expensive and dangerous health threats, and responds when these arise.

In simple terms, the CDC receives more than $6 billion each year to prevent medical crises when possible, and minimize their effect when they cannot be prevented. The CDC is responsible for understanding ebola and developing protocols for addressing the potential spread of the disease long before it becomes a daily news story. The fact that its director, Dr. Tom Frieden, has changed his response recommendations on several occasions is evidence that this was not done effectively. The fact that President Obama deemed it necessary to name a “czar” to manage the crisis is further evidence.

It doesn’t matter how many more cases of ebola are diagnosed. Our government was not prepared and has failed us. But many Americans won’t see it this way. They will judge the CDC on the number of additional ebola cases in the US and how many die as a result. If there are not many, the “everything is now under control” narrative will prevail and the details will be forgotten until the next crisis emerges.

I don’t expect perfection from the CDC, but I expect preparation and effective management. New leadership is needed. Too much is at stake.

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Ebola and the CDC

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There has been a lot of talk about the Center for Disease Control’s (CDC) role in the ebola scare. Some of it is accurate, but some is completely misdirected.

First things first…CDC director Dr. Tom Frieden should be fired. The CDC is, by definition, a crisis management organization. His job is to ensure that clear, consistent responses are in place when there is a direct threat to the health of Americans. He has been slow to react, evasive, and inconsistent. But the problem goes much deeper than Frieden.

A recent story in the National Review (www.nationalreview.com/article/390254/cdcs-laughable-pet-projects-brendan-bordelon) shed light on budget realities in the National Institutes of Health (NIH) and the CDC. The NIH’s inflation-adjusted budget more than doubled between 1996 and 2005, but many of its expenditures were less than essential. For example, the NIH spent $1.7 million on a Hollywood liaison to ensure the accuracy of medical portrayals on TV shows, over $5 million for a gay-porn website to provide HIV information, and $1 million on a study of sexual proclivities of fruit flies. The CDC recently spent $110 million on its new headquarters, including $10 million in furniture alone.

Republicans have rushed to criticize the President for proposing cuts in the CDC budget. This is true, but not relevant. The problem is not necessarily the size of the budget, but how it is being allocated. Precisely how much money does the CDC need to fulfill its mission? If a higher CDC budget could prevent the spread of ebola, then more spending on anti-poverty, education, and fill-in-the-blank could have the same positive effects. History has shown us that more government spending is rarely the best way to solve a problem, but Democrats—and in this instance Republicans—continue to tell us otherwise.

Leftists often criticize the private sector and those who claim “government should be run like a business.” In the private sector, it is assumed that failed organizations were not run properly in the first place. They are either directed to change course—new leaders, new strategies, new structures, new ideas—or they go under. They only get additional resources if investors can be convinced that doing so would generate a profit. However, failed government entities like the CDC are often excused because of “tight budgets.” Bang-for-the-buck is rarely discussed. This type of thinking explains the current $18 trillion national debt.

The CDC is relevant and should not be dissolved, but it should—like all other government organizations—be run both effectively (doing the right things) and efficiently (getting the most out of limited resources). It has failed in both regards and the answer begins with new leadership.

If you don’t run government like a business, then how do you run it?

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Venezuela’s oil disaster

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Venezuela’s nationalization of the oil industry has been a disaster. After running off the evil capitalists, the government hasn’t been able to extract and process oil at a competitive rate. The nationalization scheme has also failed to compensate oil companies fairly for their assets. Companies are entitled to fair market compensation if their assets are confiscated, but they rarely get it. Governments typically underpay because they get to set the price. Consider the case of Exxon in Venezuela.

In 2007, Venezuela expropriated Exxon’s Cerro Negro oil venture. Exxon attempted to negotiate a fair settlement with the government, but got nowhere and appealed to arbitration. Two years ago the International Chamber of Commerce ordered Venezuela to pay Exxon an additional $900 million. The World Bank’s International Center for Settlement of Investment Disputes (ICSID) just raised that payment to $1 billion.

This might sound like justice for Exxon, but the $1 billion figure is much less that the company should have received. Exxon was actually seeking $10 billion in additional compensation. While the actual value of the venture can be legitimately debated, most analysts agree that $1 billion is far too low.

This type of government intervention is not only inefficient—Exxon would have done a better job managing the venture—but it violates basic property rights. It is not disputed that Exxon has a right to fair compensation for its assets. However, Exxon should not have been required to sell the venture in the first place.

But socialist governments like Venezuela don’t respect private property. They take what they want and pay what they determine is fair. It’s an immoral system. If I tried this with my neighbor’s big screen TV I’d be in jail.

Venezuela’s bully government has run off oil producers, retailers, airlines, and a host of other foreign companies. The private sector is vanishing, leaving production to the bureaucrats. It’s no wonder that the Venezuelan economy is in shambles.

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Republican economics

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Larry asked a great question in response to my last post…so are the republicans supply side economists or Austrian economists?

If you are referring to Republican (or Democrat) politicians, most are attorneys, not economists, and there are different views within each party. The following is my oversimplified interpretation of national politics.

Let’s start with the Democrats. In general, most are part Keynesian and part central planner. Keynesians recognize some value in free markets but think they will ultimately self-destruct if not constantly reigned in by government. Central planners could be socialists, fascists, or some combination of the two; they believe that markets just don’t work or are overtly unfair. I don’t think most Democrats want to completely destroy markets; they just want to “control” them for the better. Obamacare is a great example because it touted “managed competition” in healthcare markets. Of course, competition is–by definition–free and cannot be managed.

It’s not easy to get a good read on Republicans as a group. Most campaign like Austrians in the primaries, promising to cut regulations and scrap the current tax code in favor of a flat or fair tax. They campaign like supply-siders in the general elections, promising a softer version of tax cuts and general regulation relief while promoting certain types of central planning, such as healthcare and education. They usually end up governing like soft Keynesians, favoring a combination of pro-market policies and populist, anti-market intervention.

When you mix the Democrats and Republicans in Washington, you get a blend of hard and soft Keynesian economics, a far cry from either the supply side or the Austrian views. This general mistrust of free enterprise explains why Washington’s best effort at reform typically regresses to talk about cutting the growth of spending or running existing programs more efficiently, and even watered down proposals like these usually don’t go anywhere.

Now back to the specific question…There are some exceptions to the rule, but most Republicans are neither supply sider nor Austrians. They’re middle-of-the-roaders who really favor a mixed economy. They want the growth of free enterprise and the security of big government, and don’t understand why the two cannot peacefully coexist. But trying to do both simply breeds cronyism. Supply-side policies are a move in the right direction, but a more potent Austrian approach attacks cronyism at the core.

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Supply-side economics revisited

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In my recent post on Obama’s “bottom-up economics” I referred to supply-side economics and largely positive but with shortcomings. My reference to shortcomings generated multiple comments and questions on- and off-line. Let me explain—at the risk of oversimplifying some complicated issues.

Economics is about supply and demand, but most “mainstream economists” tend to emphasize the latter. When consumers demand more goods and services the economy grows. This is true to a point, but Keynesians and other demand-side economists are shortsighted. Their solution to a stagnant economy is always about increasing demand and they prefer government spending to tax cuts because they can directly control how the money is spent. This ultimately leads to more centralized control, large deficits, and the like.

Supply-side economists like famous Reagan advisor Art Laffer emphasize the other side of the equation. From this perspective, lower barriers to production and greater access to capital increase supply and grow the economy. Laffer is known for the “Laffer curve,” a simple but powerful supply-side concept about tax rates and tax revenues. According to the Laffer curve, when tax rates become too high, a cut in taxes can actually increase government tax revenues by increasing incentives for companies to produce and individuals to work. There are a lot of other factors that influence government tax revenues, but the Laffer curve helps explain why Reagan’s tax cuts spurred both economic growth and increased government revenues. Reagan fell short of tackling the deficit, but that was largely a spending problem, then as it is today.

There’s no question that supply-side economists offer a breath of fresh air to a Keynesian-dominated world. Supply-siders attack burdensome regulations and confiscatory tax rates, both of which are byproducts of a demand-side approach. Unfortunately, they don’t go far enough. Most supply-siders don’t object to Federal Reserve intervention in an economy. While they tend to be more sensitive than demand-siders to Fed abuses, they take a middle-of-the-road approach and fail to see the long-term problems with an activist Fed.

Second, supply-siders don’t directly address the problem of cronyism, the ongoing collusion between politicians/bureaucrats and private interests. While a regulation rollbacks and tax cuts tend to reduce the influence of cronyism, most supply-siders are satisfied with a tax system with certain elements of social engineering (i.e., special deals designed to favor special interests) and heavy government control in select industries like healthcare and education.

My views are more closely aligned with the Austrian school of economics. Austrians realize that most—not just some—government intervention in the economy is detrimental. They don’t just favor tax cuts, but instead a complete overhaul of the tax system in favor of a fair tax or a flat tax with low rates and few deductions. They also insist on substantial reductions in government spending, not just minor tweaks, reductions in spending increases, or spending freezes. Government spending has always been and continues to be the number one problem. Austrians understand the importance of addressing this head-on.

At the end of the day, I agree with much of what supply-side economists have to say. Reaganomics was certainly a step in the right direction, but the current situation is dire and requires stronger medicine. The Austrian approach offers a more complete solution.

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Obama’s Bottom-Up Economics

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In a Labor Day political push for a minimum wage increase, President Obama ridiculed trickle-down economics and reiterated his support for what he calls bottom-up economics. The former is the pejorative frequently associated with former President Reagan’s supply-side economics, a philosophy built on lower business/corporate tax rates and reduced regulation. While Reagan’s approach was largely positive, it’s fair to say that supply-side economics has some shortcomings. That’s a topic for another post. What’s interesting here is that Obama seems to have backed into the truth with a catchy, but poorly understood quip.

I’m sure bottom-up economics has been thoroughly tested with focus groups or the President would not be using it. While it rings of concern for the common man–the “bottom” of the supply chain–Obama is anything but willing to let individuals determine their own economic fate. His proposed minimum wage hike is a top-down, centrally planned approach to economic growth. It would cost jobs by raising the cost of labor for employers. Prices of products and services generated by minimum wage workers would also rise as employers pass along the increased labor costs to consumers. There’s nothing bottom-up about raising the minimum wage, or about health care mandates, carbon taxes, or most of his fixes for our stagnant economy. Obamanomics is top-down economics.

Many on the left think that corporations control free markets, but consumers have the last say in a free economy. At the end of the day, buyers decide what to buy and companies must compete to win their favor. While many corporations wield lots of power these days, this is due to cronyism–collusion between firms and government–not the free enterprise system. The President has is backwards.

Contrary to the President’s rhetoric, a bottom-up approach to the economy should mean letting individuals make their own choices in the marketplace. Government interference picks winners and losers, and constitutes the very cronyism that is stifling economic growth. I’m all for bottom-up economics. The President is the one who doesn’t understand it.

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