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Drucker Perspective

The Needed Government Turnaround, Part II: Strength of U.S. Economy Depends on Re-strategizing and Permanent Government Cost-Cutting

MMN
Contributor: Management Matters
Posted: 09/08/2016

Democracies worldwide are coming to the point where they have to re-think and to re-form their overriding economic models. The Keynesian Welfare State has ruled for over 50 years.

Peter F. Drucker was no fan of the Neo-Keynesian economic model. In no uncertain terms, he disproved the assumptions underlying this model (e.g., government deficits stimulate the economy and increased consumption automatically leads to new business investment).

In observing the impact of Neo-Keynesian economics in practice, Drucker discussed the inevitability of slow/low economic growth, the impact of welfare in creating dependencies instead of competencies, and the potential for corrosion and spreading decay of domestic society.

Even though this article discusses the U.S. economy, it is equally applicable to other democracies in Europe, including the U.K., Greece, Spain, Portugal, and Italy.

We've had nearly 8 years of disappointing economic results. In the first half of 2016, GDP grew by 1%, much weaker than the 2% average at the end of the recession.

At the same time, we are experiencing declining business investment, declining productivity, a slowdown in new business formations, and trouble in the energy sector. And that's only the tip of the iceberg!

What Can Be Done?

Government must be run like a business. Government leaders must rigorously identify and maximize America's opportunities for long-term growth. 

Said Peter F. Drucker: “They must begin to abandon unproductive and obsolete programs and activities. The first step in a growth/survival strategy is not to decide where and how to grow. It is to decide what to abandon.”

Stated differently, government leaders must practice turnaround management to get the U.S. economy back on track.

To turn around any institution—whether a business, a labor union, a university, a hospital, or a government—requires two essential steps: (1) re-strategizing and; (2) achieving permanent cost-cuts.

Re-strategizing 

In the case of government, re-strategizing (with respect to reigniting economic growth) involves changing economic models. 

We know what economic model works. It's called Neo-Classicism. It's also known as Neo-Conservatism. These two terms are interchangeable.

We also know what economic model does not work. It's called the Neo-Keynesian Welfare State model or just the Neo-Keynesian model.

We suggest memorizing the names of these two models. 

Drucker on Neo-Classics Economics

Here's what Drucker had to say about Neo-Classics economics: 

There can be no doubt anymore that Neo-Classics work as economics…In fact they work like a wonder drug… 

As soon as an economy moves toward free-market policies, that is, cutting government spending, balancing the budget, privatizing government-owned businesses (e.g., the post office), cutting back or eliminating government regulations and government controls of economic activity, an economic boom gets going…

Neo-Classical economics have become the standard prescription for turning around an economy after it has floundered under government controlled (i.e., statist) or Neo-Keynesian economics…

Noble Prizes in Economics have gone to Neo-Classical economists—George J. Stigler, James Buchanan, Gary Becker and others—for demonstrating how economies asphyxiated by government control have been brought back to life via step-by-step implementation of Neo-Classical economic policies… 

The countries of the former Soviet Empire (e.g., Poland), post-Maoist China, South Korea versus North Korea, and, of course, the U.S. tax-rate reductions and regulatory reforms in Ronald Reagan's presidency are just a few of the many examples to prove that Neo-Classism works as an economic model.

Just to be clear: Drucker completely dismissed and ridiculed the Neo-Keynesian economic model in his 1995 essay entitled Can the Democracies Win the Peace? originally published in The Atlantic and extended into the book Managing in a Time of Great Change. (It's a great read!)

Future article will discuss why all the assumptions underlying the Neo-Keynesian Welfare State have been decisively disproven. 

Permanent Cost Cutting

To turn around our economy requires more than just changing economic models. It also requires, according to Drucker, permanent cost-cutting with respect to government spending.

Some economists claim lowering the corporate tax rate will cost an additional $10 trillion over the next decade.

This, in all likelihood, is not true.

It would only be (possibly) true if reigniting business growth through corporate tax cuts would be a stand-alone strategy.

But–as the title of this article suggests–changing economic models must be accompanied by a disciplined program of permanent cost-cutting.

Currently, government leaders find it near-impossible to abandon anything of substance. So they keep adding new programs without eliminating old, tired programs.

Unfortunately, taxpayers have to pay for both new programs and old programs which are result-less and should be abandoned.

Indeed, many lawmakers are now advocating a wealth tax in addition to income tax in order to pay for excessive government spending.

How curious that lawmakers don’t talk about the need to purposefully abandon outgrown, obsolete, and unproductive government activities, departments, and programs before even considering increases in taxes.

Drucker on the Need for Abandonment

Focusing resources on results is the best and most effective cost control. Said Drucker:

Cost does not exist by itself…It is always incurred—in intent at least—for the sake of a result…

What matters therefore is not the absolute cost level but the ratio between efforts and their results…No matter how cheap or efficient an effort, it is waste, rather than a cost, if it is devoid of results.

The government is loaded down with result-less/resource-devouring programs & activities.

Drucker formulated principles and practices for systematically abandoning unproductive and obsolete activities and programs. 

Said Drucker: "Government has to abandon things that do not work, things that have outlived their usefulness and capacity to contribute, things that have never worked. It must begin concentrating on the things that do work, the things that produce results, the things that improve the government's ability to perform."

This is the only way out of the mess we are currently in.

We truly believe all the Neo-classical economic prescriptions (including pro-growth tax cuts) coupled with permanent cost-cutting could revive the U.S. economy quickly and successfully.

Permanent cost-cutting focuses on cutting "fat" not "muscle." It concentrates on reallocating monies and competent people to where they'll do the most good, that is, to high potential result areas.

Putting Every Government Agency On Trial For Its Life 

Why do better what shouldn’t be done at all? That's the essence of what Drucker meant by permanent cost-cutting. 

Drucker suggested every government agency should be put on trial for its life by asking the following questions:

  • What is the function of this agency?
  • If we were not doing this today, knowing what we now know, would we be doing it?
  • Is the mission of this agency or any of its programs still vital? And if it is, what’s the best way to carry out that mission?

Take, for instance, the Department of Agriculture. They are, observed Drucker, always asking very important questions about specific programs. 

But—and this is a very big but—he felt they weren't asking the most important question: If we had no Department of Agriculture, would we now restart one?

Said Drucker: “What do we need a Department of Agriculture for when farmers make up no more than 3% of the population and when farm production does not contribute a great deal more to gross national product of the country? Does it really require a separate department?” 

When the Department of Agriculture was first launched approximately 70% of America was involved in agriculture. This makes it a candidate, said Drucker, for abandonment or extreme downsizing.

Similarly, Drucker critically questioned America's nonproductive investments in education, welfare, and many other governmental programs, activities, and agencies.

Take-home message: Drucker Management, and more specifically his abandonment principles and accompanying practices, could have a significant impact on saving our system.

Without a doubt, the right leadership could whittle trillions of dollars from our yearly deficit by sloughing off result-less activities and programs.

Other Ways to Dramatically Reduce Government Costs

An effectively functioning government makes change its ally. In addition to abandonment, dramatic cost reductions could be achieved by:

  • Using predictive analytics to save hundreds of millions of dollars a year in Medicare/Medicaid fraud. 
  • Privatizing money-losing government operations, such as the post office.
  • Implementing Lean Six Sigma/BPM programs to streamline and reengineer government operations.
  • Launching a major Federal IT modernization/digitalization initiative. Some experts claim government IT is now 25 years behind the private sector.
  • Managing the transition into a fully operative shared services environment (e.g., robotics process automation, HR service delivery).

In Conclusion

Entitlements (good and bad) can’t be maintained unless a competent attempt is made to re-ignite economic growth while simultaneously lowering government costs and improving productivity.

We need strong, effective government. In fact, given all that's happening in the world, we can expect more rather than less government in the next few decades.

The new tasks—protection of the environment, stamping out international and domestic terrorism, combating cyber security vulnerabilities, making arms control effective—requires more government, rather than less government. 

The only way to pay for effective "big government" is to put into practice the right economic policies and management practices.

A good place to start? Government leaders and economists should seriously study the prolific teachings of Peter F. Drucker.

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MMN
Contributor: Management Matters
Posted: 09/08/2016