CHAPTER 10

Government

Governments have significant interactions with the technology and communications domains. They tax: Wireline telephony used to be a big revenue generator. They regulate: Wireless spectrum is auctioned and regulated by several agencies. They sue: Overly aggressive platforms risk being targeted with antitrust litigation. Finally, they buy: Government is a large but idiosyncratic user of many information technologies. The transition from a manufacturing to services economy in the United States coincides with the rise of computing, with some far-reaching implications.

Isolating how IT has shaped the economy and society turns out to be much less direct than looking for the impact of, say, the automobile. At the macro level, for about a century manufacturing surged at agriculture's expense as the primary locus of employment. From 1950 until 1980, however, while manufacturing employment grew in raw numbers, this growth occurred against the backdrop of the population expansion that followed World War II: as a percentage of total employment, and of economic output, manufacturing was shrinking even as it appeared to grow.

Given that the 1950–to–2000 half century was marked by a precipitous loss of employment as a percentage of the workforce in both agricultural and manufacturing arenas, we know that services have become the dominant economic sector. According to the Central Intelligence Agency's World Factbook, “industry” constitutes 20% of the U.S. economy while services add up to 79%. How could this sector grow so big so fast, and what are some of the implications?

For all the rhetoric about becoming a nation of burger-flippers, government has become a much bigger economic entity, a major driver of that services sector: Prison guards, for example, constitute one of this century's fastest-growing occupational categories. As of 2010, there were more government employees—about 22 million at all levels, not counting military personnel—than in all good-producing sectors combined: At 17 million, that group is smaller than it was in 1961 even though gross domestic product is about six times bigger in constant dollars.

Prison guards aside, about 80% of government jobs involve paperwork,* which IT can automate. Thus, it seems safe to suggest that one feature of the economic landscape—a large governmental economic presence as employer, regulator, and collector of taxes—relates closely to the ability of computers to collect and manage large quantities of information.

The impact of the computer on the U.S. economy can be partially attributed to its automation of government tasks. Those tasks, many of which escape measurement in standard indexes of economic output, are another legacy of the computer: If paperwork gets easier to do, more of it will be generated.

The Biggest Employer

Ever since World War II, the federal government has been increasing as an employer, either directly or indirectly. For example, seven new cabinet departments (plus the noncabinet Environmental Protection Agency, founded in 1970) date from the computer age and reflect the growing scope of government:

1. Housing and Urban Development (1966)
2. Transportation (1966)
3. Energy (1977)
4. Health and Human Services (1979)
5. Education (1979)
6. Veterans Affairs (1989)
7. Homeland Security (2003)

Note that numbers 4 and 5 were broken out of the Department of Health Education and Welfare.

Headcount at these agencies is significant: By itself, the Department of Veterans Affairs employs about 280,000 people, making it both the biggest single federal nonmilitary organization and about the same size, by headcount, as General Electric.

In the aggregate, the U.S. federal government employed more than 2 million people in 2010. That's about the same employment as UPS, IBM, McDonald's, Target, and Kroger combined, which means that the federal government, excluding armed services, employs about as many people as Wal-Mart. As big as the Beltway may seem in the public imagination, however, only about 1 in 6 federal jobs is located in the Washington, DC, metro area.

Finding government employment information at the state level is frustrating, particularly given the use of contractors. A Kentucky legislator introduced a bill in 2010 that would require the state to tally merit, nonmerit, and contract employees: Currently the information is difficult or impossible to obtain in many states, not to even mention the various local layers. All told, it is extremely difficult to count government and government-related workers in the aggregate.

“Government” can be an abstract term, so I looked for concrete data closer to home. As a state, Pennsylvania is reasonably representative, with a relatively large economy (number 6 out of 50), and a per capita income almost perfectly at the median, ranking twenty-sixth of 50. Agriculture is important but not predominant, and 25 Fortune 500 companies are head-quartered here. As of the first quarter of 2010, the biggest employer was the State of Pennsylvania. (No figures were released in the document, compiled by the state Center for Workforce Information & Analysis.) Number 2 was the U.S. government, even after the closing of the Philadelphia naval yard in 1995.

To continue that list of Pennsylvania's top employers, note the paucity of private sector job generators:

3. Wal-Mart

4. City of Philadelphia

5. University of Pennsylvania (roughly 35,000 jobs, including a big medical center)

6. Philadelphia school district

7. Penn State University (not counting the affiliated medical center)

8. Giant Food Stores

9. UPS

10. University of Pittsburgh

11. PNC Bank

12. University of Pittsburgh Medical Center

13. State System of Higher Education (public colleges and universities excluding Penn State, Pittsburgh, and Temple)

14. Weis Supermarkets

All told, 20 of the top 50 employers in Pennsylvania are not businesses in the traditional sense of the word: That's 40% of the leaderboard, including six of the top seven. More significantly, Pennsylvania is officially a services economy: Only 1 employer (Merck) in the top 25 and 4 in the top 50 make anything. Many kinds of services are represented, with healthcare in the lead, followed by education, grocery, retail, financial services, and fast food/convenience stores.

The contrast to the intermediate past is shocking. Courtesy of researchers at the Pennsylvania Department of Labor and Industry, here are the top 25 employers of 1965 (the earliest year for which records are available):

1. United States Steel
2. Bethlehem Steel
3. Westinghouse Electric
4. Bell Telephone of Pennsylvania
5. Jones & Laughlin Steel
6. General Electric
7. Sears, Roebuck
8. A&P
9. Acme Markets
10. Western Electric
11. Philco
12. Budd
13. Philadelphia Electric
14. Boeing
15. Crucible Steel
16. Pittsburgh Plate Glass
17. Allegheny Ludlum Steel
18. Sylvania Electric
19. Sun Oil
20. Pittsburgh Steel
21. Armco Steel
22. Aluminum Company of America (Alcoa)
23. RCA
24. Armstrong Cork
25. Rohm and Haas

(Note that the methodology of the 1965 list was not made clear: Government entities, hospitals, and universities are not listed, but the absence is unexplained.)

Of the 25, services are represented only by retailers and utilities: No banks or healthcare providers make the top 40. Seven steelmakers dominate the list, joined by Alcoa. The state's heritage in energy was still represented by Atlantic Refining in Philadelphia, Sun Oil, and Gulf Oil. Transportation is more of a factor today, with UPS at 9 and US Airways at 30; in 1965, no railroads made the list, even though their suppliers (Budd and GE) did.

The composition of the 1965 and 2010 lists illustrate several germane points with regard to the recent economic downturn. First, it's hard to stay on top: Almost all companies that at one time appeared to be powerfully untouchable sooner or later fall by the wayside. Bell of Pennsylvania, the number-4 employer in 1965, morphed into Verizon, currently number 28. Among retailers, A&P disappeared, as did Gimbels and G.C. Murphy, while Sears fell from seventh to thirty-second. Second, in the Pennsylvania case at least, the kinds of firms traditionally targeted by economic development agencies—addressing dynamic markets, paying high wages, and anchoring a community or region—are not particularly large employers:

• 14. Merck
• 19. The Vanguard Group (headquartered outside Philadelphia)
• 25. Comcast (headquartered in downtown Philadelphia)
• 39. GE (which makes railroad locomotives in Erie)

Government Hiring at a Crossroads

After this historical wave of growth in hiring by governments at every level of U.S. society, however, data points from all over converge to announce a time of reckoning:

• According to the Pew Center on the States, the 50 states collectively have $3.3 trillion of pension obligations, with about a third, $1 trillion, unfunded.
• In part because the recession has reduced states' revenues, 48 out of 50 states faced budget shortfalls in 2009 and 2010; 46 had gaps in 2011. (The exceptions were resource-intensive Alaska and Montana, along with North Dakota and Arkansas.) The 2010 state budget shortfalls totaled $191 billion.
• Illinois, which ranked dead last in pension funding in 2008, was forced to raise taxes on individual income a full 75% in 2011. The state legislature also approved the issuance of $3.7 billion in bonds to more adequately fund pension obligations.
• At the University of California at Los Angeles, the dean of the Anderson School of Business is attempting to privatize a state resource. State budget cuts leave California's support of Anderson at about 6 cents on the dollar. By withdrawing from the state system, Anderson can set its own tuition and pay superstar faculty superstar salaries, thus enhancing its ability to attract top talent.¹ In all levels of government in the United States, the wage differential of the 1990s has reversed and public sector workers earn, on average, 30% more than private sector counterparts. In addition to being paid more, government workers' healthcare, vacation time, retirement, and other benefits typically are more generous than in industry.
• Underperformance is seldom addressed with meaningful action. Firing either incompetent or unaffordable public workers is far more difficult than doing layoffs in the private sector when companies or whole industries face transitions in technology, customer behavior, or competition. (According to The Economist, the Los Angeles school district spent $3.5 million trying to fire seven underperforming teachers and succeeded with only five.² Insofar as the district's entire teaching force numbers 33,000, the effort was aimed at 1/50th of 1%. By contrast, private sector organizations routinely churn the bottom 10% of performers.)

Inevitable Downsizing

The bills are coming due on these public institutions. In the private sector, the cost of unsustainable labor arrangements, defined as payroll costs out of sync with revenues, is layoffs. While Ford can claim a lot of positive news in 2011, for example, the past decade was tough: Total auto industry layoffs after 2006 were estimated at 200,000 jobs, and tens of thousands of jobs were cut at Ford earlier in the decade as well. As services comprise more of the U.S. economy, manufacturing jobs are changing, and the big labor unions that represented these workers in the steel and auto heyday shrank after 1973, from about a quarter of private sector workers to less than a tenth in 2010.

According to the Bureau of Labor Statistics, however, government employees, a key component of that services workforce, increased in union membership from 23% to roughly 38% in the 20 years following 1973, and that membership percentage has stayed pretty constant even as the sector has grown dramatically. But just as the auto industry painfully discovered after 2000 that it could no longer afford the small-C contract it had agreed to with the unions in the 1950s and 1960s, governments at every level are facing deficits that derive substantially from labor costs (see Figure 10.1): Expensive pensions and expensive current workforces (with expensive healthcare) that often lack performance accountability are and will continue to be unaffordable. UBS Securities estimated in mid-2011 that roughly 750,000 nonfederal government jobs could be cut in 2011–2012.³

FIGURE 10.1 U.S. Government Employment since World War II
Source: U.S. Census.

In short, given a protracted employment recession (and thus a downturn in both taxable income and taxable spending for revenue generation), governments are facing truly hard choices. At the federal level, conservative legislators are proposing drastic cuts in the defense budget, previously an approach that ideology would not permit. As he confronted a $28 billion deficit, California governor Jerry Brown (like his counterparts elsewhere) proposed deep, politically and humanly painful cuts in the social safety net, in education (the community college budget was proposed to be reduced by $400 million), and in public safety.

U.S. governments at every level are facing their auto industry moment. The Pennsylvania city of Harrisburg teeters on the edge of bankruptcy; it would be the biggest municipal entity to enter that process since Orange County in California lost billions of dollars in pension investments in 1994. While the likelihood of default is higher for some European nations than in most U.S. entities, the prospect of governments in any country defaulting on their obligations is obviously disturbing to markets and individuals alike. Whether it is debt, pensions, or current expenses, governments are being forced to cut spending in bold strokes.

Government on the Technology Landscape

What does government performance have to do with this book's larger argument? The world we are in and entering is not the world that existed when those budgetary assumptions were being formed. The process of resizing government thus needs to begin with a look at what governments can and need to do as well as how they do it. Furthermore, there are tasks that at one time were essential, but technological obsolescence is slow to alter governments. Thus, at least five buckets of questions need to be asked—the topics under each heading are merely suggestive:

1. What must government do, and how can other entities help deliver necessary services? This is a big category, obviously, but perhaps not as big as it once was. Funding bridges, inspecting food and oil wells, testing new drugs, defending the nation—lots of government tasks cannot go away and some may need to get bigger. At the same time, for-profit universities and hospitals might be better ways to approach some facets of education and health. At the primary and secondary levels, the National Home Education Research Institute asserts that between 1.5 and 2 million U.S. students are home-schooled. Both schools and homes can have their place as loci of education, but the fact is that in many locales, the schools are no longer good enough, and parents have more resources than ever to meet the need. Some churches have proven effective at delivering social services, though of course issues of evangelization and discrimination can be tricky. Prisons, several types of security services, school cafeterias, and many other functions are outsourced or even privatized; perhaps outsourcing more activities should be considered.

   Crowdsourcing (Internet-enabled coordination of mass volunteer effort; see Chapter 11) can assist government efforts. An excellent example is PeerToPatent.org. This joint effort of the U.S. Patent Office and New York University's law school enlists the power of the masses to assist patent examiners. Specifically, people are asked to submit evidence of “prior art”—evidence that a pending patent is not in fact original and should not be granted protection. Given the current state of U.S. patent law, large-scale reform will be impossible to fund for the foreseeable future, so any leverage generated by the masses will contribute to breaking the logjam.⁴

2. What can government stop doing entirely? Agricultural extension agents provided a valuable function in their day. Today, however, if a farmer sees a pest or a leaf condition, his or her first stop is likely to be the Internet. The State of California is attempting to get out of the incarceration business for low-level offenses, shifting responsibility for these to the local level. Republican legislators are asking, sensibly, about federal support for rail transportation, which is expensive, especially when the benefits are highly localized. Debate is increasing over the necessary population density to support unsubsidized high-speed trains; the United States lacks the crowded regions that make Japan's line between Tokyo and Osaka break even.⁵

   Telecommunications regulators were a necessary counterweight to a monopolistic AT&T, but now that wireline telephony participation is dropping and all segments are intensely competitive, the market can do much of what 1 federal and 50 state regulators once did. California, to take one example, administers a billion-dollar universal service fund, dedicated, among other things, to “ensuring basic telephone service remains available and affordable to all Californians regardless of geography, language, cultural, ethnic, physical, or income differences”—even if fewer people than at any time in more than 50 years want that service.

3. What is the right level of organization? The size of administrative units is typically a historical accident. Whether those units are currently the right size is, or should be, open for discussion. Water, sewer, fire, police, school, and recreational districts are rarely coherent. How big should a town be? When many towns are contiguous, why does each need a school superintendent (often with only one high school, which has at least one principal), a mayor and/or town manager, a chief of police? What is the optimum size for a school district, a fire department, a state park in a given part of the country? Most important, what government entity can mandate that other units consolidate, disband, or otherwise change shape?
4. How can interested parties self-organize? In the afterglow of Wikipedia's tenth birthday, it's worth asking what other efforts formerly undertaken by government might be better accomplished by interested citizens. Mash-ups are one easy example: Given good clean data (the collection of which remains an essential task of government), crimes, potholes, economic opportunity, underperforming schools, and other opportunities for improvement can be identified by the people. Noise measurements (e.g., near wind farms) are being crowdsourced. People can also organize on the revenue side: In Mill Valley, California, a community foundation has existed for nearly 30 years to supplement tax funding. To date the organization has raised more than $14 million—that's a lot of bake sales and charity auctions. Similar parent-run organizations exist in many towns, and one question concerns what mobile coordination and payment platforms will mean for the future of such efforts. Entrepreneurial Girl Scout cookie teams are reportedly using Square (a smartphone addon) to process credit card transactions, for example.
5. How can government do what it needs to do, more efficiently? IT in government remains a sore subject. President Obama's former chief information officer Vivek Kundra recently put forth a 25-step plan to reform federal IT management.⁶ Many of the items are broad and seemingly self-evident to anyone familiar with industry (“consolidate data centers” and “develop a strategy for shared services”). The fact is, however, that industry does not follow federal acquisition or implementation practices; getting federal IT to perform at a reasonable fraction of an Amazon or FedEx would be a massive achievement. Many of the most notable IT project failures of the past decade are government implementations: Systems development disasters at the U.S. Census and the Federal Bureau of Investigation are prime examples of the performance gap.

   Compared to customer service in travel, banking, shopping, or information businesses (iTunes is an obvious example), finding even basic information on most government Web sites can be painful. Transparency can be difficult to track down. Control of bills passing through legislation is a key perquisite of power, and holding up the process with committee hearings that happen very slowly and/or erratically is common, so clear, open calendars are not always the rule. Like legislatures, regulatory bodies can be opaque, in that budget and headcount information is typically difficult to obtain, unlike the information readily available in a private company's annual report.

   If information can be hard to find, the state of online transactions is even more dismal: Compare getting a fishing license or renewing other permits to checking in for an airplane flight. While efficient government looks much better to citizens on the outside than to gainfully employed government workers on the inside of slow-moving bureaucracies with no incentive to improve customer service, perhaps the current crisis can provide the impetus for real change to commence. In a sector that lags private industry by many performance metrics, a combination of new tools and more focused motivation has the promise to improve service, cut costs, increase accountability, and enhance security.

Looking Ahead

As government at the scale of 2010 employment grows less and less affordable (not least of all because of the paperwork costs of healthcare for aging and retired government employees), the challenge to both bureaucrats and citizens will relate to information and technology at multiple levels. How can groups self-organize to accomplish things that used to require formal entities? How can government reorganize and reprioritize in light of 2012 realities of telecommunications, nutrition, and water consumption, to take three examples? How will such cultural norms as trust, aging, ethnic identity, and literacy evolve after mobile phones, after Facebook, after the Kindle, and after WikiLeaks? President Obama spoke of a “Sputnik moment” for the economy at large, but perhaps the challenge could be better and more pointedly addressed to the same government that put a man on the moon in response to the original Sputnik moment.

Notes

1. David A. Kaplan, “UCLA's Plan to Take Its B-school private,” Fortune, September 20, 2011, http://management.fortune.cnn.com/2011/09/20/uclas-plan-to-take-its-b-school-private/?section=magazines_fortune.

2. “(Government) Workers of the World Unite!” The Economist, January 6, 2011, www.economist.com/node/17849199.

3. Reuters, “State and Local Governments May Cut 450,000 jobs in FY2012,” May 23, 2011, www.reuters.com/article/2011/05/23/us-markets-municipals-idUSTRE74M60U20110523.

4. www.peertopatent.org/.

5. “A Lost Cause: The High-Speed Rail Race,” Washington Post, February 16, 2011, www.washingtonpost.com/wp-dyn/content/article/2011/02/16/AR2011021605977.html.

6. “White House Forum on IT Management Reform,” www.cio.gov/pages.cfm/page/White-House-Forum-on-IT-Management-Reform.

*According to the Bureau of Labor Statistics, management, professional, and administrative support jobs represented 80.4% of federal jobs as of 2008.