Chapter 22
Expense Management and the Government—A Misnomer?

Government should be able to utilize a long time frame when choosing where to spend its citizens’ money. However, this does not usually occur as election cycles ruin long-term planning. More often when a group is in power there is a sense of urgency to get things done and spend ahead of the next election cycle. Sometimes the spending favors groups that support the winning side rather than what is best long term for the country.

Government budgets are enormous compared to most corporate budgets. Therefore, where and how governments decide to spend money has far reaching consequences on the economy and specific sectors.

Governments spend money related to running the every-day business of a nation, and then there are also large projects and contracts associated with the operation of the government as well. There are periods of profligate spending as the bureaucracy adds people in scores. There are also periods where a political party may look to drive some fiscal austerity, at least on projects that are not important to them. The policies of high spending and austerity go through swings of popularity. However, the bias is toward spending, because giving people things generally wins more votes than taking things away.

The cost and number of government employees can create strong political biases. Government employees are critical to the smooth operating of a country’s infrastructure and enforcement of rules. However, government employees tend to increase in numbers, but not always add to economic efficiency. Political leaders interact with bureaucratic government employees every day. The politicians want their votes and, human nature dictates that they are not likely to publicly take responsibility for making these people lose their jobs. Therefore, headcount cuts are not common in the government. As more employees work for the government they become an important political block. However, they are not necessarily generating revenue and if they increase in number they must be supported by taxes and those taxes effectively are coming from a smaller proportion of people in the private sector if more people are working for the government, problems can clearly evolve in this scenario. Redundancies in government add to costs. There are often multiple agencies with similar responsibilities and many layers of government. For example, if you commute to work into New York City from New Jersey, which is quite common, your taxes are going to support at least seven different governments.81 Common sense says that there must be an inordinate amount of redundancy in such a system. The bureaucracy of the European Union is redundant almost by definition.

In times of economic stress in a country, what actions the government should take has typically created much controversy. Stimulus projects can be particularly valuable if unemployment has reached epidemic proportions and if the government has the wealth to pay for the stimulus. Not only is the increase in employment good sociologically it can also be better if it replaces pure transfer payments. One of the risks of stimulus spending is if it is just “make-work” on unnecessary and ineffective projects. This leads to tax revenue being taken from the public that if left on their own could redeploy money more effectively in the economy with a more positive long-term impact. If an economy has evolved into a heavily service oriented economy traditional stimulus programs, that involved physical infrastructure, may prove to be less effective economically and socially.

Government projects can be a major undertaking and typically require cost benefit analysis. This is a valuable type of analysis for all kinds of projects that has been utilized for more than a century. This field evolved rapidly shortly after World War II as work done by entities affiliated with the U.S. Department of Defense developed tools to analyze theoretical nuclear war scenarios during the Cold War. This scenario analysis has also proven to be useful in cost benefit analysis for non-military projects. This type of analysis can get very complex given the multitude of layers in the economy that a government project can impact.

Government cost-benefit analysis should factor in social aspects, generational impact, and financial returns (and, while not officially part of the process, the political risks). This analysis can get mind boggling and often leads to illogical exercises such as having to put a numeric value on a human life or calculating the economic benefits of a tree. Cost benefit analysis is a great approach to all investment decisions as you factor in the opportunity cost of committing to one investment over another and try to calculate multiple ramifications of each investment or project. However, trying to reach a conclusion can be a never-ending discussion as you add factor after factor. To be successful this analysis needs to be approached pragmatically.

Imagine a simple decision about whether a government will build a road from a large highway to a nearby town. Below is a sample of just a few things that would be analyzed in such a project:

Of course, the list can go on and on like winding your way through a labyrinth. This analysis might also have to be factored against where else such a project might be undertaken. One of the problems with this type of analysis is that it can be very time consuming and add to the cost of a project. This type of work can also have a large subjective factor and can clearly be manipulated by people if they have certain biases. Increased computational speed and a matrix of best practices should allow for more efficient analysis, more probability scenarios, and less human bias.

Once a project is decided upon, governments needs to decide how they are going to get it done. They typically have a choice of using government employees or awarding a contract to a private sector company. In the United States and many other regions, there are guidelines on how to award contracts, in the hopes that it will avoid corruption. The specifications are often onerous and do not allow for innovation. While there are specifications on how the job must be done, contracts are typically required to be awarded to the lowest cost bidder. This does not always result in the best execution, simply going by price does not always result in a happy outcome, if you just bought music based on the lowest cost, you might end up having to listen to Two Sides of Leonard Nimoy, rather than The Who’s Quadrophenia. Unfortunately, too often the approach to awarding government contracts is designed to avoid a problem rather than to make something better.

The arguments against hiring the private sector for projects include that the private side is purely profit motivated and does not look out for the public good. However, the counter argument is that if they are incentivized properly to do a cost-effective job, they will be looking out for the public good. The argument for public resources to undertake a job is that they must answer more directly to the citizens and have the public’s best interest in mind. However, the counter argument is that they do not have an incentive to do a better or more cost-effective job, and are driven by their own job preservation.

Homemade digital media is increasing the scrutiny on both public and private workers, and misdeeds can go viral quickly and unwind profitable relationships. A video of a public or private sector employee on a government construction project sleeping or doing drugs can quickly force a change in which company or agency oversees the project.

Government spending on profligate projects might be good fodder for digital media. However, despite the proliferation of social media, it seems to always go on. Dr. Tom Coburn is a former U.S. congressman and senator from Oklahoma. By almost any standard he is considered a political conservative on social and fiscal issues. When he was in office he was so appalled by the waste in the government that he decided to publish an annual “Waste Book.” Each year it identified some of the most egregious waste and inefficiencies in the government. His “book” added up to billions of wasted dollars each year. Some of these include $1.5 billion to keep lights on in unused or underutilized government buildings, $3 million to educate NASA employees on how congress works, and about $280,000 to send twelve music executives and a government employee to Rio de Janeiro Brazil to promote the independent music business.82,83 These are the types of expenditures that lead to less trust in the government’s judgment. The more viral and wide spread publicity is about these abuses and foolish uses of the tax payers’ money, the more efficient government will hopefully become.