Should We Run the Government Like a Business?

We have heard people for years arguing Uncle Sam would be much better off if it could just get its act together and operate like a business. If they did, the government would be more efficient, customer (taxpayer) service would dramatically improve, the cost of government (and taxes) would be lower, we would eliminate unnecessary organizations, angels would descend from heaven and all would be right with the world.

Is that true? Would we be better off if the US government became more like USGov, Inc? Is it even possible for government to operate like a business? Would taxpayers benefit? How about citizens who are not taxpayers? Would business imperatives drive better government? Or less government? Or maybe even more government?

When I hear this idea I’m not sure if I should laugh or just shake my head. How many times do we have to lay out the differences in a for-profit enterprise and a government that derives its powers from the consent of the governed and exists to serve them. All of them.

Sure – the government could adopt some business-like practices to improve how it operates, but USGov, Inc is simply not going to happen. The fundamentals of running a business are not the same as running a government. Businesses exist to return value to their owners. They choose the markets where they want to compete. They almost always want to grow. Good businesses want to serve their customers to grow and build the value of the company. They make decisions based upon what furthers their interests. There is nothing wrong with that. Good businesses are the engine of our economy and a little enlightened self-interest is an important part of that.

Government, unlike businesses, has to serve everyone. It has a public trust because it belongs to the people and it also has substantial coercive power to get what it wants. We can go to jail if we don’t pay our taxes or violate some other criminal statutes. Do we want a government that decides it will not serve the part of the population that isn’t profitable or that doesn’t pay for services? Do we want a government that sees growing itself as part of its mission? The growth aspect is one of the most risky aspects of operating government like a business. Growth is one of the most powerful drivers for a business. It pushes the business to learn, innovate and become more efficient – to find new lines of business, new products, untapped markets, and new goods and services and ways to deliver them. It is a powerful force that drives the best (and sometimes the worst) of businesses. I do not want a government that sees its purpose as growing itself.

The factors that drive businesses and those that drive government are so fundamentally different that it is neither possible nor desirable for the government to operate like a business. Let’s look at a few examples….

Recognizing the Value of a Dollar – This is one of the areas where we hear most often that government should be more business-like. It is probably safe to say a successful business is more efficient with a dollar than government. It’s also safe to say if businesses had to live by government budget rules, most would fold within a few years. Businesses get to deal with real money – not government print-all-you-want-and-borrow-for-eternity money – but actual dollars they have to earn. Having to earn the money makes it a bit more precious. Knowing you are bankrupt if you run out and cannot earn or borrow more is a very powerful driver of efficiency. The government is $17,075,000,000,000 in debt, give or take a rounding error of a few billion dollars. What’s another million billion trillion here or there? Earning real money is only one driver of an efficiency mindset. Another that is equally important is how long and for what purpose those dollars are available. When a business earns one of those real dollars, it can spend it when and how it sees fit. It can save it and spend it next year, or the next, or whenever it wants. It can invest in infrastructure, new staff, systems, training or anything else. We don’t let our government do that. Most agencies get appropriated dollars into specific accounts that turn into pumpkins at midnight at the end of every fiscal year. Everyone knows that causes the mad rush to obligate money and get it spent by the midnight on September 30.

Sounds like the answer is simple – just get Congress to appropriate everything as what is known as “no year money” and the problem is solved. Anything that sounds that simple most likely has a catch or two. This one has a big one. Single year money keeps most agencies on a short leash. If the Congress gave it up entirely, a significant part of their oversight power would go away. The same applies to appropriating money for specific purposes rather than giving agencies a general appropriation and allowing the agency to put the money where it can get the best results. Giving the CEO (the President) the ability to act as a CEO would greatly strengthen the Office of the President, weaken the Congress and undermine the constitutional separation of powers. On top of that, the Congress doesn’t get those annual appropriations done on time. The last time all of the appropriations bills were passed on time was 1994. So – (1) business has a better appreciation of the value of a dollar, (2) businesses do not have the tight contraints and artifical expiration date on their money, and (3) Congress would have to give up much of its power to make the change. That is not going to happen.

Cost and Efficiency – Good businesses know how to squeeze costs and eliminate underperforming lines of business. They watch the bottom line and make the hard calls necessary to let the business thrive. Critics say government is too full of bureaucrats to do that. The truth is a large part of government operates very much like a business. The Defense Logistics Agency, for example, get very little appropriated money. It has to earn most of what it spends and has customers that are free to go elsewhere for the products and services DLA sells. They choose not to. DLA made dramatic reductions in costs while supporting 2 wars. The US Citizenship and Immigration Services (USCIS) operates on fees it earns. Much like DLA, they have made significant changes to the way they operate to reduce costs and improve services. The problem is that squeezing costs and eliminating underperforming lines of business does not always work with a government. If mail delivery in rural areas is not profitable (and it is not), the US Postal Service cannot just stop delivering mail. Charging fees based on consumption if a superb model if you are a utility company, but not so great if you are the Border Patrol, the EPA, the IRS, or most other agencies.

Customer Service – Good businesses care about customer service. Their customers often can and do walk away. I bought my cars from a particular dealer until I had a terrible customer service experience. Now I buy elsewhere. Government doesn’t usually have to worry about that (there are a few exceptions like DLA). If you want to send a letter via first class mail, you have to use the US Postal Service. If you want a social security benefit, you cannot got to Joe’s Bargain Social Security. Many critics of government (and even many in government) believe the US government has a lot to learn about customer service. This one sounds fairly cut and dried. Business is better. Or is it? Some businesses offer lousy service and they not only survive, they thrive. We all have experiences where a business has provided lousy service but is still around. Sometimes, like with my car dealer, we go elsewhere and they lose a customer. Other times, there are not a lot of choices. Even when companies do not have a monopoly, a near-monopoly causes many of the same problems. The truth is that good customer service requires great leadership and well-trained employees who enjoy their work. Agencies that have good leadership and invest in their workforce are providing excellent customer service.

The bottom line is we have a Constitution that was designed to make the federal government less efficient through separation of powers, a partisan political system, a need for the government to serve everyone (not just the profitable ones), and a public trust to maintain. All of those work against operating the government like a business.

Here’s a novel idea – let’s operate the government like a good government.

How 20th Century Reform Became 21st Century Headaches

This is the second of a series of posts on the history and future of the civil service. The first, addressing the Pendleton Act and Theodore Roosevelt’s role in civil service reform is here.

Although it is 130 years old, the Pendleton Act is still a relevant foundation for the civil service.  The difficulty the system experiences in meeting today’s requirements is not because of the age of the system or lack of reform.  In fact, many of the problems the Civil Service currently faces are an outgrowth of one of the largest reform efforts of the mid-20th century – the Classification Act of 1949. The Classification Act consolidated multiple classification systems into one “General Schedule.” President Harry Truman issued a lengthy signing statement outlining the benefits of the new system. The Classification Act made sense and was real reform in 1949, but changes in the workforce and the nature of work make it increasingly unsuited for a 21st century workforce. Let’s take a look at it through the lens of President Truman’s signing statement.

“This act completely revises and brings up to date the salary structure for nearly half the civilian jobs of the Government–that is, nearly all of the jobs in the executive branch except those in the postal service and those paid on an hourly basis which are covered by other legislation.”  The General Schedule is no longer current. When it was established, more than half of Federal employees were GS-5 and below. Because so many lower graded jobs have been automated or outsourced, employees today are grouped at the higher end of the scale. This legislation makes a number of significant improvements in the pay structure of the Government. It greatly simplifies the salary system by reducing the number of pay grades from 41 to 28, and at the same time, corrects inequities among the different grades which were created by piecemeal legislation over a period of years. It authorizes longevity step-increases above the maximum scheduled grade rate for employees with long, faithful, and efficient service. The 21st century job market is far less stable than that of 1949. Employees change jobs more frequently and are more geographically mobile. A system where many of the pay increases are based on longevity rather than accomplishments presents problems that were not anticipated in post-war America. Back then, the idea of a life-long job was the norm.

The act also adds three new grades at the top of the pay schedule, which will permit a limited number of the top career positions to be paid up to a maximum of $14,000. As a result of this action, it will be possible to increase the salaries of some top career positions whose incumbents have been paid the same salary as many of their subordinates. The three new grades are now known as the Senior Executive Service. SES members often make less than their subordinates, and SES pay increases based on performance are so small that they are virtually meaningless. It will also make it possible for the Government to compete more effectively with higher-paying private employment for the services of outstanding people, and to offer a greater incentive to able young men and women considering whether to enter public service as a career. Federal entry-level salaries are adequate or generous for some occupations, but many lines of work are so competitive that the government struggles to recruit and retain talent. It is getting harder to attract high performers to the SES because the risks often outweigh the job satisfaction and benefits.

The new Classification Act also improves Federal personnel administration by decentralizing to the departments and agencies the responsibility for fixing the pay rate for each position, except those in the top three grades. This will eliminate one source of delay in appointing qualified personnel. The Classification Act may have helped at the time, but today’s hiring process is too complicated, too slow, and too unresponsive to changing labor market conditions. At the same time, it will increase the responsibility of the departments and agencies for meeting their own position classification problems. These responsibilities must be carefully exercised. Job classification in the 1950s and 1960s was a rigid and inflexible process. Some HR offices treated classification standards as though they were holy documents and would not let employees or managers read them. As a result, grade creep was contained (although at the expense of flexibility). Today, a classifier is a rare breed. Classification standards are available to anyone with an Internet connection. The authority to classify positions has been delegated to managers in many agencies, and grade levels are often not consistent with the classification standards. Grade creep is pervasive and has aggravated the grade compression at the top grades. The Civil Service Commission, in carrying out its responsibilities for maintaining the consistency of salaries on a Government-wide basis, must also exercise its authority for prescribing standards and reviewing and inspecting the operations and decisions under the act to assure that its provisions are judiciously administered by all alike. The Office of Personnel Management (successor to the Civili Service Commission) still writes classification standards. The process takes several years and requires coordination with many stakeholders. As a result, some classification standards are out of date, and others that should be developed in response to the realities of the labor market, simply do not exist. Cuts to OPM’s budget have limited its ability to address new requirements and effectively provide oversight of the classification process.

The management improvement provisions of the act further assure economy and efficiency by requiring the department and agency heads to review their operations on a systematic and continuing basis. This provision recognizes the importance of improving the management of Government operations which was emphasized so strongly by the Hoover Commission and which is the purpose of the program provided for by a recent Executive order establishing the Advisory Committee on Management Improvement. Interest in improving management of government operations has waxed and waned, but it would be difficult to argue that many people today truly have an interest in getting into the nuts-and-bolts of government. A few excellent organizations, such as the National Academy of Public Administration, the Partnership for Public Service, and the Volcker Alliance, are actively engaged in “good government” activities, but the national interest the Hoover Commission generated is just not there today. Furthermore, it provides for the reward of those persons or groups of persons who have done an exceptional job in promoting economy and efficiency in the Government’s work. Bonuses for SES members and employees have been reduced or eliminated, Presidential Rank Awards suspended, and legislation is moving in the House of Representatives to limit bonuses for employees at the Department of Veterans Affairs. In many agencies, if employee bonuses are awarded they are a few hundred dollars each. It would be hard to argue there is a lot of political support for substantial rewards for people who promote economy and efficiency in government.

The Classification Act is 64 years old. The rigidly structured pay and job classification processes it created were well-suited to the challenges of the post-war world. They provided stability, consistency, and a means of making it easier for citizens to build careers in public service. Unfortunately, the civil service system has not kept up with the labor market in which it competes. It is unresponsive to the market, challenging to administer, and pretends that it provides a high degree of precision in classification and pay setting. It does not really do that, and the job classification process is a mess. Because job classification drives hiring and pay, those are a mess too. Experiments in pay-for-performance have had mixed results at best, although the Department of Defense National Security Personnel System and the Homeland Security MaxHR programs were destroyed more by their attempts to eviscerate collective bargaining than their classification, performance and pay provisions.

The civil service regulations, policies and practices that have evolved over the years to implement the merit system have produced application processes that seem designed to test how desperately an applicant wants government employment, a job classification system that, when it isn’t being ignored, is hated by managers, employees and HR officials alike, and a promotion system that federal managers, employees, unions and HR officials loathe and distrust.  The result is a Civil Service system that struggles to meet the challenges it faces today.  As the Federal government became increasingly complex, little provision has been made for the highly educated and trained workforce necessary to do much of the work.   The one-size-fits-all model might have worked for the government of the 1950s, but it does not work for the government of today.

There are many options for updating civil service to make it more responsive and effective. Future posts in this series will address aspects of the civil service system that must be changed in order to be competitive in today’s labor market and in the future, including more flexible position classification, pay reform, effective performance management, and simplification of the hiring process.