Government Is Not a Business

n 1953, then-Defense Secretary-designate Charles "Engine Charlie" Wilson, a former General Motors chief executive officer, said, "For years I have thought what was good for our country was good for General Motors and vice versa."

One wonders, reading news about government's effort to emulate business practices, whether we are simply repeating past mistakes. That is not to suggest that the current zeal to adopt business practices in government is the same as the 1950s phenomenon. Engine Charlie was saying that if the federal government acts in the interest of big business, it acts in the interest of all Americans. Recent efforts to emulate business are based on a narrower premise: If government entities would act like businesses, they would be more efficient and better serve the public. We seem perilously close to adopting a mantra that says: "Good business practice is good government practice," which isn't always so.

The National Performance Review has made great strides in moving highly regulated, input-driven government agencies toward becoming more results-oriented and performance-based. Federal managers have too long been hampered by dysfunctional regulatory restrictions. Giving bureaucrats greater discretion in return for being accountable for results makes eminent sense.

Using private- or other public-sector organizations as models--benchmarking--can be a powerful tool. However, these healthy developments have spawned a new and dangerous trend. Federal operations, most notably data processing centers, have come to believe they should be allowed to operate in a newly defined marketplace in which public and private sector are equal.

But the notion of government as business is fundamentally flawed. Growth and profitability are not the bottom line in many governmental activities. Even if you do not buy the Jeffersonian notion that "government which governs least governs best," it is for the polity to decide the scope and size of governmental activity. Under our Constitution, there is a fundamental presumption that the federal government will do only what Congress expressly authorizes it to do. That is the opposite of Adam Smith's Darwinian model of capitalist society in which, as long as they are engaging in lawful pursuits in a lawful manner, actors in our economy are encouraged to grow and maximize their return on the assumption that this will serve the greater good.

Public service and efficiency, while important values, are not the only public policy objectives. It is perfectly legitimate for Congress, acting on behalf of the people, to say, for example, that public procurement must not only be efficient but must also promote opportunities for disadvantaged or underrepresented groups. Or politicians may choose to locate a federal facility in a particular place to promote employment or economic development there, even if labor and other costs are higher. Some in the procurement community argue they should not be burdened with social purposes-but that political/value question ultimately is decided by the people through their elected representatives.

Then there is the law of unintended consequences. This is best illustrated by the recent ill-fated effort to use the federal government's procurement process as a supply line for state and local governments to give them access to cheaper prices available through bulk purchasing. An appealing idea, the proposal was ultimately rejected because it became apparent that it would hurt small, regional business that cannot compete for national contracts.

But not all governmental enterprises should be eliminated. Cross-servicing among agencies allows the ones that do something well or that can achieve economies of scale to support others. To keep a good idea from running amok, I would offer the following guidelines:

• All costs should be reflected. That includes overhead, the cost of capital and contingent liabilities. As long as prices agencies charge each other do not reflect the full cost of providing services, distortions will occur.
• Users must have exit rights. If cross-servicing arrangements are to allow customers to choose low-cost providers and put price pressures on them, then customers must have the right to take their business elsewhere. That is not to suggest one- or two-year commitments should not be required if the provider will have large up-front costs.
• Enterprises must be permitted to fail without bailouts. Failure is a corollary and consequence of customer choice. If you build it and they don't come, you must be prepared to tear it down. The risk of failure must be reflected in the cost of financing the operation, which in turn must be reflected in the cost of services.
• Capital should not be reinvested automatically. Recovering capital makes sense; it should be part of the price of a service and be used to create a fund for capital renewal. But the decision on reinvesting should not be made by the service provider. I presume that we pay off part of GM's investment in plant and equipment each time we buy a GM car, but I would bet the money doesn't go back to the plant manager. Indeed, the board of directors may decide not to build a new plant when the old one wears out.

Business practices can be instructive for federal managers in meeting the public's expectations. But managers are not running General Mills or General Motors. They are doing the public's business.

Franklin S. Reeder heads The Reeder Group, a Washington-based consulting firm he founded after more than 35 years in government. His e-mail address is reeder@pop.erols.com.