Friday, August 7, 2015

Business Experience Is No Cure-All in Government

Because government and business are fundamentally different in their financing and their evaluation, good business practices can make for poor governing.

The election cycle regularly brings forth successful businesspeople who argue that voters should select them for public office over seasoned politicians because of the skills and experience they acquired in the business sector. In 1996, billionaire Ross Perot started his own political party to advance his quest for the presidency of the United States. Financier Mitt Romney was the Republican nominee in 2012. And now Carly Fiorina and Donald Trump are vying with politicians for the 2016 nomination, arguing, as the New York Post put it, that “America is in desperate need of a suave, successful businessperson like Trump — or former HP CEO Carly Fiorina — to solve what ails our economy.”

In their natural habitat, business leaders work with investors, customers and employees to create value. Each of their relationships is typically voluntary in that no investor is forced to provide funds, no customer is forced to purchase the product, and no employee is forced to work rather than pursuing some other opportunity.

The financing of government is unique in that the government can, and primarily does, force people and organizations to provide resources – these are taxes and takings. As a result, those at risk of taxes or takings change their behavior in order to reduce their exposure. A family may work less, in part because of the income tax burden that comes with working more. A business may cease to operate, or operate on a deliberately limited scale, in part because of the sales tax or regulatory burdens it faces while in operation.

Tax and regulatory avoidance behaviors are known in the economics profession as “excess burdens” because the burdens of taxes and regulations exceed the amount of resources that the government is acquiring. The family that pays $10,000 per year in taxes of course loses the $10,000, but it also has lost something in the adjustments it made – maybe working less – in order to avoid paying even more tax than the $10,000 it already pays. It makes tax-avoiding adjustments because it does not voluntarily pay taxes; rather, it pays them to prevent punishment, and it is perfectly legal to pursue less heavily taxed activities.

Some of the lost tax dollars might be recovered if the government spends it wisely – something like the dividend an investor would receive if he invested funds in a wisely managed business. But the losses due to tax-avoiding adjustments are irrecoverable and have no analogue in business, because unlike taxpayers, investors, employees and customers are voluntary contributors. As a result, a government leader ought to be less ambitious with his or her project ideas than a businessperson should, because government projects have their excess burdens.

The employer-employee relationship is also different in the public sector than it is in the business sector. Public-sector employees are five times more likely to be unionized than private-sector employees are. Moreover, the ultimate government employers are the elected officials, who of course cannot persist in their roles without being re-elected. As a result, a number of government employees are “asked” to participate in political activities that support their boss’s continued tenure.

Although past governing success is no guarantee of future performance in office, the next great president will likely have more experience in public office than business triumphs.

1 comment:

Patrick Sullivan said...

You might be right, but some 'great' Presidents didn't have much, if any, prior governing experience. Eisenhower for one.

While Reagan was Governor of California, his philosophy was undoubtedly formed due to his experience with the high tax disincentives to his movie career, as well as his (oddly ignored) battles with Hollywood Communists in the 1940s.

George W. Bush, Harvard MBA was also a businessman; oil and baseball. While I do see a lot of Ross Perot in Donald Trump, Carly Fiorina is a different breed altogether. She sounds a lot like Margaret Thatcher.