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PrintJanuary 31, 2011
Bill Daley Is Right: Government Should Copy Business
On Sunday's Face the Nation, White House Chief of Staff William Daley said government should act more like a business: "Take some of those cuts, invest them in things that will have a return as you come out of this recession. That's what successful companies do. And that's what the government has got to do." At Bill Daley prompting, let's look at how businesses act during a recession.
Most companies experience sales declines during a recession. Likewise, the federal government's revenues fell 22 percent from fiscal year 2008 to fiscal year 2009. The initial response of any company seeing such a large decline in sales is to start cutting. The company lays off workers, eliminates unprofitable lines, reduces travel, and cuts salaries. A company that refuses to cut spending or even increases spending would quickly go bankrupt.
Companies with falling revenues often reduce prices to try to drum up more business. That is another great lesson for the government. The federal government should lower taxes to stimulate the economy and attract foreign capital. I'm sorry, a temporary two-percent reduction in payroll taxes will not stimulate the economy or attract investment. Instead, we need a reduction in the corporate tax rate, for starters. The United States now has the highest corporate tax rate in the industrialized world. Many foreign companies avoid the United States because of this tax and because of the onerous regulatory environment. Even many American companies have shifted divisions or their entire businesses overseas.
But the heart of William Daley's argument is that government should continue to invest during a recession just like businesses do. Businesses invest, at any and all times, with the expectation of making a positive return on its money. When the government "invests" in roads, rail, and other infrastructure, it does not really expect to make a profit. It does not even have a method of measuring the return on capital. Government simply spends money in what it thinks are good projects and hopes the returns are good without ever knowing if they were.
However, during a recession most companies cut back on investments. They do not eliminate them completely, but they are reduced, often dramatically. When the business outlook darkens and expected consumer spending declines, companies are forced to reduce their investment in future production and even their investments in research and development. The company that fails to reduce its investments or is foolish enough to increase them, as William Daley suggests, is much more likely to need bankruptcy protection if the economic recovery does not come quickly enough for those investments to produce positive returns. The wise and frugal act, as most companies have discovered, is to play it safe and reduce investments until the business environment improves, its sales and revenue increase again, and access to capital becomes readily available. The solution is never to increase the amount of debt during a recession to fund investment that may or may not pay off, as William Daley effectively proposed to do.
When businesses do invest during a recession, they often invest in new technology that will enable them to produce more at a lower cost. In other words, investments are made to reduce expenses, not to increase production or invent new products. The investments Bill Daley speaks of surely will not lead to lower government spending; instead they will likely create more government bureaucracy.
So I do agree with William Daley that the government should act more like a business. Like business, government should lower its expenses, eliminate wasteful and unprofitable agencies, cut salaries, lay off employees, and reduce the prices it charges, i.e. taxes. Yes, businesses may invest some money in new technology, but they only do this in a reduced manner and most often to reduce its overhead. They certainly do not invest in new programs when it is deep in debt and losing money. The government's focus on investing is misguided. Like the business world, government should first focus on revenue and expenses and turning a profit (balancing the budget) and only after that should the government talk about increased spending... I mean investing.
Michael E. Newton is the author of The Path to Tyranny: A History of Free Society's Descent into Tyranny
