Strength of U.S. Economy Depends on Re-strategizing & Permanent Cost-Cutting

Editor's Note: 

President Trump's mission-critical efforts to reduce yearly deficits and our ever-growing accumulated public debt have produced only a nationwide yawn. 

But the general public, politic leaders and the media fail to understand the implications of out-of-control government spending on America's prosperity, middle-class incomes, military preparedness, and maintenance of Social Security and Medicare. 

Our companion articles Coming: A Potential For Galloping Inflation That Destroys Middle-Class Purchasing Power (Parts I & II) provides readers with a better understanding of why President Trump is deeply committed liquidating the deficit. (Link to articles) 

This article outlines the two-pronged Trump administration strategy for reducing America's accumulated public debt.

Introduction 

The immediate future will make unprecedented demands on political courage, political innovation, and political leadership. Above all, it requires government competence. 

Government agencies must be turned around. 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. 

Translated, this means increasing government revenues and simultaneously decreasing result-less government spending. 

President Trump's team of economic advisers have crafted -- and are in the process of -- executing a plan to stimulate economic growth and eliminate result-less government agency spending. 

If fully enacted, many predict America's economic growth rate (which now averages approximately 2.1% per year) could experience a quantum leap (to between 3-4% per year) and create as many as 25 million new jobs. High paying ones! 

The plan includes pro-growth tax cuts, pro-growth energy policies, a sensible alternative to the Affordable Care Act, and significant cutbacks in job killing regulations. 

But it also includes something that has proven elusive to most 21st-century academic economists: cutting government expenses and with them the creation of money. 

Hard Choices 

Increasing government revenues through rapid economic expansion must be accompanied by permanent cost cuts within government agencies and their bureaus; improving things little by little does not mean sticking wrongly to what should no longer be done. 

Simply put, every agency must begin focusing on identifying and abandoning things that do not work, never worked, or have outlived their capacity to contribute to performance and results. 

Systematic, purposeful abandonment requires thinking through priorities. That's easy to say. But very hard to act on because doing so always involves abandoning things that custom, habit, and tradition make difficult to slough off. 

Both people inside and outside (i.e., politicians) tend to strongly encourage government agency leadership to defend yesterday (and in many instances, fictitious yesterdays). Stated differently, it is very hard to stop doing the unproductive. 

Slightly paraphrasing renowned management consultant and author Peter F. Drucker: "People (always) wonder why the support of the status quo is always pursued so tenaciously…Abandoning anything is thus difficult – but only for a short spell…Six months after such efforts have been abandoned, everybody wonders: 'Why did it take us so long?" 

Re-Strategizing 

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

We know what economic model has produced enviable results. It's called "Neo-Classicism." 

Before we begin, let's make an important distinction. There are two distinct economic models – namely: (1) the Neo--Keynesian Welfare State model and (2) the Neo-Classical economic model. 

Drucker completely demolished the Neo-Keynesian economic model in his 1995 essay Can the Democracies Win the Peace? It was originally published in The Atlantic Monthly and laterally extended in his book Managing in A Time Of Great Change. (It's a great read!) 

Briefly stated, and oversimplified, the Neo-Keynesian model is based on empirically decisively disproven assumptions including government deficits stimulate the economy; redistributing income to stimulate consumption results in new capital investment; the only thing the poor need is money (i.e. the Social Worker's Creed); and savings are dangerous to economic health. (In a future article we will show evidence-based proof these assertions are invalid). 

The alternative to the Neo-Keynesian economic model is the Neo-Classical Model. Without doubt, this is the model President Trump is desperately trying to implement.

Neo-Classical Economics Works Like A Wonder Drug 

In discussing the proven track record of Neo-Classical economics, Drucker said: 

“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.

To repeat: President Trump's economic teams of advisors are, in essence, putting into practice the Neo-Classical economic model. 

It will work if President Trump can orchestrate successful collaboration with congressional members of both the Republican Democratic parties. 

Permanent Cost Cutting

To turn around our economy requires more than just changing economic models. It also requires 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 were 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, that is, with a structured process for determining what to abandon and how to abandon.

Even though seemingly learned economists talk authoritatively about productivity or the lack thereof, most ignore the importance of organized, systematic abandonment as a powerful tool to increase the productivity of existing resources (e.g., capital, people, mission-critical assets, knowledge).

Government agencies will have to learn the appropriate methodologies that will enable them to move scarce and expensive resources from areas of low productivity and non-results to opportunities for achieving much-needed results.

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 and old programs, which are result-less and should be abandoned.

Indeed, many lawmakers (until recently) were advocating a wealth tax in addition to income tax in order to pay for excessive government spending.

How curious 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.

Concentrating Resources On Results

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.

Abandonment & Concentration

Abandonment and concentration are opposite sides of the same coin. Simply put, abandoning unproductive and obsolete activities/programs frees up resources to concentrate on result areas, that is, concentrating on what does work and what is really needed. 

Make no mistake: abandonment comes first in making government agencies more effective. Until systematic, purposeful abandonment has been accomplished, nothing else gets done. 

Said Drucker: “The acrimonious and emotional debate over what to abandon holds everybody in its grip…There are those who argue that it is worth' just one more try.'…There are those who seek (fruitlessly) for a' compromise'… 

… There are the charlatans who promise to be able to amputate a gangrenous limb without inflicting pain; and so on…Until abandonment is out-of-the-way, no work gets done…" 

To Reiterate 

Every government agency must begin concentrating resources on the things that do work, the things that produce needed results, the things that improve the government's ability to perform. 

This requires, Drucker repeated over and over again, "abandonment of the things that do not work…The things that had outlived their usefulness and capacity to contribute…The things that never worked…" 

We truly believe all the Neo-classical economic prescriptions (including pro-growth tax cuts, pro-growth energy policies, elimination of job killing regulations) coupled with permanent cost-cutting will revive the U.S. economy fast and successfully.

Permanent cost-cutting focuses on cutting "fat" not "muscle." Unless challenged, organizations of all kinds and sizes tend to become slack, easy-going, diffuse.

Many agree many of today's government agencies our still allocating resources by inertia and tradition rather than by a structured process for identifying desired results.

Results are achieved by concentration, not by splintering. Every government agency executive must develop the core competencies required to say, "This project or activity or program is not for us… Other people do it better… "

According to Drucker, "Every organization tends to avoid unpleasantness…And nothing is less pleasant and less popular then to concentrate resources on desired results, because it always means of saying "No."

Putting Every Government Agency On Trial For Its Life 

It bears repeating: 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, observed Drucker, are 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, according to 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 restoring government to solvency and making government agencies truly effective.

Without 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). 

Coming: More -- Not Less -- Government

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 with massive, new missile defense systems—require 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.

Summary & Conclusions

Entitlements (good and bad) cannot be maintained unless a competent attempt is made to reignite economic growth while simultaneously lowering government costs and improving productivity.

Many believe successfully re-strategizing and achieving permanent government cost cuts can save certain entitlements (i.e., Social Security and Medicare) from drastic reductions.

However, many genuinely authoritative experts also believe ever-increasing middle-class entitlements have become a threat to the very survival of Democracies worldwide. Re-strategizing and permanent cost-cutting can only go so far.

The only way Democracies can regain control of their finances – and with them control of economic, social and foreign policy – is to cut back on what many label "entitlement addictions."

Peter G. Peterson (founder of the Peter G. Peterson Foundation, President Nixon's erstwhile Secretary of Commerce, and co-founder of Blackstone) has written several clear-eyed, analytical books including On Borrowed Time: How the Growth in Entitlement Spending Threatens America's Future.

Peterson leaves no doubt in the minds of those willing to listen that liquidating the deficit cannot be postponed much longer.

Both Peterson and Drucker have powerfully illustrated how Liberal governments worldwide have threatened (and continue to threaten) the solvency of their respective countries by refusing to cap entitlement programs that have clearly gotten out of control.

Further, both have detailed the outrageous abuses of various countries’ pension systems, among many other entitlements, and the inability of government leaders worldwide (for fear of being tossed out of office) to restore their respective countries to solvency.

Seen in the perspective of the choosing to deal with the dangers of ever-growing deficits and a monstrous accumulated public debt, rather than in terms of domestic politics, President Trump's "First Six Months" looks quite different from the way America's politicians and the American media see them.