230-Costs – The Problem with Weak Constraints

Here are two random observations of the results that any manager can expect to face when there is little to no constraint on the level of costs in an organization.

The first comes from the Heritage Foundation. This foundation analyzed the percentage of jobs gained or lost since January of 2008 through July 2010, a time of recession. The foundation measured job growth in the federal government, state government, local government and the private sector. The private sector was under extreme constraints as revenues flattened or shrank. This sector lost 6.8% of its jobs. Local government was under pressure from the fall-off in property tax receipts. This sector lost a little less than 1% of its jobs. State governments suffered from falling income tax revenues as the recession flattened consumers and commercial tax payers. It lost one tenth of one percent of its jobs. Then there is the federal government, who operated without constraints by creating debt. In just the two and a half year period, total federal government employment increased by 10%. Shocking.

The second observation is also a great source of concern. This data tracks the performance of public schools, K through 12, from 1970 to 2010, forty difficult years. Voters of all kinds have tended to support public education. This support shows up in both spending on the public school sector and in its employment. Since 1970, the real spending, that is after adjusting for inflation, on public K through 12 education has increased by 150%. (See “Audio Tip 195: Economies of Scale and Their Measurement” on StrategyStreet.com.) The total employment has increased by about 100%.

Did we get any more for that additional spending? Enrollment increased by about 5%, after having fallen for the first twenty years of the measures. So, productivity, as measured by employment divided by enrollment, declined a great deal. But perhaps there was more benefit in the quality of the education? It turns out that hasn’t happened either. The scores for science, math and reading have not moved at all, despite the increase in spending.

In both of these examples, we seem to be spending without accountability. (See “Audio Tip 198: Diseconomies of Scale” on StrategyStreet.com.) As much as you can criticize the budgeting system of most businesses, results like these are highly unlikely to occur over a period of time in business systems because there would be quick accountability with this kind of loss in productivity. If that accountability did not come from within the business then, surely, competition would call the profligate business to account.

Posted 11/22/10

Update:

Government employees have grown faster than have public sector employees and with have done so with less economic risk.

In the year ended September 2022, government employment continued to grow faster than did private sector employment. Total nonagricultural employment of wage and salary workers increased from 42.2 million to 47.3 million, a 3.5% increase. The government sector employment increased 4.9% during that time, 40% more than the private sector employment which grew at 3.4%.

The unemployment rate for government workers is also much lower than that of the private sector. In September 2022, private sector unemployment ran at 3.3%. However, the governments sector’s unemployment rate was only 55% of the private sector’s level, at 1.8%. The government seems to be continuing to produce diseconomies of scale and take a greater share of the economy. See HERE for how to measure economies of scale.

10/22

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