The Business Model

Everything is connected and one event has many effects.

If nothing else, the travails on Wall Street show the limits of the mantra of running government like a business. During the past decade, financial firms pushed products such as adjustable-rate mortgages, derivatives and mortgage-backed securities that proved too risky for the market to bear.

The 1990s mantra that the government is too risk-averse, that it should adopt businesslike practices that encourage innovation, comes to mind. Clearly, that mantra can be taken too far, especially when the risk that is encouraged is focused on short-term gain rather than long-term growth.

Many lessons will be gleaned as business analysts dissect the faltering economy in the next few months. But one lesson already is clear, for both federal managers and the nation's financial titans: More than ever, everything is connected.

As Treasury Secretary Henry Paulson and other political leaders attempted to deal with the increasingly troubled economy, they argued that the decline of the housing market that started in 2007 crossed over into the financial sector, which subsequently crippled the credit market, which furthered the financial sector decline, which could stifle the entire economy.

The economy is one giant system of systems with complex interconnections among all of them. Problems can travel easily across those connections from system to system. As those problems multiply, solutions become more difficult because the law of unintended consequences is so powerful in complex systems. That fact seems obvious when you look at the snowballing financial crisis. The government's intervention in Bear Stearns, followed by the bailout of Fannie Mae and Freddie Mac, and the nonbailout of Lehman Bros., then the intervention in AIG, followed by the call for a $700 billion asset purchase program run by the government shows how each attempt by Paulson to solve the economy's problems got run over by the snowball. Forces beyond Paulson's control already were working their way through the system of systems. Unintended consequences lurked around every corner.

The government is, of course, one system in the economy's system of systems. Its revenues represent roughly one-fifth of the nation's gross domestic product. The system of government is extremely complex since it is subject not only to the rules of the economy but also to the rules of politics. Just witness the difficulty Congress and the executive branch had in crafting ways to deal with the economic crisis. Federal managers are all too familiar with the frustration inherent in a complex system in which problems far away from their own operations-in Congress, for example-can have profound affects on their ability to do their jobs. Many will be struggling to operate their offices during the next six months at the same funding levels as last year, not because of anything they did but because Congress and the White House did not come up with new appropriations bills for nonsecurity-related agencies.

All this is a reminder that risk courses through both the economic system of systems and the government system. Instead of running government like a business, should business be run like government? Maybe the truth lies somewhere in the middle, where a healthy willingness to experiment is tempered by a realistic dose of long-range thinking about the good of not just one's own agency or business, but also of the country as a whole.

Brian Friel covered management and human resources at Government Executive for six years and is now a National Journal staff correspondent.