by Michael S. Rozeff
by Michael S. Rozeff
Conglomeration refers to building up a company which, under one roof, houses a bunch of different companies operating in different lines of business.
It is very difficult to do several different things well. Very few individuals can do it. Almost no conglomerate companies can do it.
American companies tried conglomeration in the 1960s. The experiment failed. In an article explaining what went wrong, I wrote: "The company heads were empire-building." It took time, but the stocks eventually fell. Stockholder wealth went down. The conglomerate management destroyed value. Corporate empire-building was bad.
The conglomerate movement was bad for the stockholders, but eventually many of the companies rectified their mistakes. They began to focus on a core business that they could handle. They sold off unrelated businesses. They sold off assets. Some liquidated the companies altogether. These deconglomerating actions created value. The stock prices rose. Slimming the companies down was good.
Governments are something like companies. They too have operations they manage. They too indulge in empire-building. In an article about states, I observed that "If states were business firms, they'd long ago have been taken over, sold off, spun off, restructured, cut back, merged, liquidated, or dismantled." The idea was that if deconglomerating corporate conglomerates created shareholder value, then deconglomerating governments would do the same.
Of course, states are not businesses. States use force and businesses do not. States survive by taking wealth from citizens, while businesses survive by providing value to consumers. Yet there is enough of an overall resemblance to pursue the analogy and see what it suggests.
Every government is like a conglomerate company. It has disparate operations that it runs or manages. It has its fingers in many pies. It can't run them all well.
A local government is usually involved in an amazing number of businesses: sewers, water, police, courts, schools, roads, zoning, housing, sanitation, garbage collection, health, libraries, cable television franchising, welfare, finance, parks and recreation, etc. Sometimes the locality creates separate districts and departments to handle some of these matters. At the state and federal levels, we find the same thing on a larger scale: many operations under one organizational and management roof financed by a common pool of taxes. There is no question that governments are conglomerates.
If companies cannot handle a conglomeration of companies, why should we expect that governments can? This conglomeration is one of the reasons why governments are inefficient. There is no question this apparatus destroys value.
Many management problems emerge when the head officials attempt to run all these different operations. Explaining this in detail is beyond the scope of this article, but a number of things are reasonably clear. (1) It is clear that a mayor, a governor, and a president do not possess experience and detailed knowledge about all the many operations they are running. (2) They do not know what the services provided by these operations are worth to people receiving them, nor do they have market data to guide them. (3) Given competing demands by the various operations for funds, they do not have market data to guide them in allocating tax dollars among them. (4) Not being businesses, the operations can provide no information about whether they are making money or losing money. Profit is a concept entirely foreign to government. Is every operation supposed to break even or what? There is no clear answer. (5) There is no market guide to the size of an operation. (6) There are no market guides to producing the services. The government uses bidding, hiring, and above-market salary practices that sacrifice efficiency. (7) There are no market guides that tell the officials what new services should be provided, innovations made, or what services should be cut back or ended. (8) The incentives of everyone involved to serve the public are lax because of the ability to raise funds by taxes. (9) The "customers" cannot easily stop consuming the services when the government is the sole supplier. This also makes the government lax in serving the public.
The basic result of government conglomeration is analogous to the result with business conglomerates. In the latter case, stock prices fell and that meant shareholders lost wealth. Value was destroyed. In the government case, the consumers/taxpayers/citizens/members of society are simultaneously like owners and customers of a mutual business. They experience the value loss. They give up wealth in taxes and do not get back their money's worth.
All of us who are disenchanted with government want to know what to do about it. One answer is "Deconglomerate government." This is a somewhat different idea than making government smaller or privatizing. It is a somewhat different idea than secession. But these ideas overlap. In the course of deconglomerating, the central government will indeed become smaller. It will lose control over certain operations and programs. They will become stand-alone enterprises. They may not yet be private or even face competition, but a step will be taken toward the goal of transforming the government operations into market operations.
The idea behind deconglomerating government is the same as that behind the deconglomeration of corporate conglomerates. It is to create value for the end-users, the customers or taxpayers who use the services. And the means of doing this is to create more focused enterprises that face better incentives (closer to profit incentives) and have better information at their disposal about market prices and costs.
Deconglomeration can be accomplished gradually. This allows people to accumulate experience about how it is working and gain confidence in the process. It allows for the correction of the inevitable errors that will be made along the way. It gives people time to adjust to new ways of doing things. It allows for pilot trials. All of this may create less resistance than a big bath or push the button approach.
Deconglomeration combines financial and operation steps. People fear big changes in operations. They don't want suddenly to see garbage piling up on the streets, or faucets running dry, or schools padlocked. Deconglomerating government does not initially have to involve large changes in operations. In many cases, the financial and managerial steps that alter the organization are of first-order importance. Deconglomerating government is, of course, a political problem; and that is where obstacles come in. But it also simply a matter of organization; and that makes it simpler than one might think.
Financial information about the operations and costs of government has tremendous importance. In deconglomerating, public acceptance and participation is essential because the government is being made more into a market or perhaps a charitable organization, and people participate extensively in market and charitable organizations. They look at goods and prices, they pay bills, they shop, and so on. The first steps in deconglomeration should be getting governments to produce and distribute the basic financial data, in comprehensible form, about what they do and what it costs.
For example, a first simple step is to inform customers on their tax bills as to how much they are paying for each individual service. Even approximate figures will help, since most voters have no idea what the library costs separately from the police or parks. Even a simple step like that can lead to improvement if voters then pressure government on certain items. It helps if voters can see an unbiased graph or table that shows what they have been paying for a service for the past 10—20 years and what the rates of increase have been. If voters can vote on individual items rather than on a package, this deconglomerates and creates greater accountability. It gets closer to creating separate entities and removing them from conglomerate government. Some of this is already done at the local level. Water companies and sewer districts are often separated, for example, from the municipality.
For some operations, it is possible to provide estimates of costs and even losses. A housing project may have identifiable revenues and costs, giving rise to clear estimates of its money losses, as they in all likelihood will be. Awareness of subsidy costs allows taxpayers to compare them with other private alternatives, and with costs at other municipalities.
The next step is carving out or spinning off discrete operational entities, each with its own budget. There is no reason why police departments can't be separated from courts and both separated from a town, for example. Shall these each have governmental powers of taxation? That is least desirable, but still an improvement. Shall taxpayers vote on the budget of each one, as they do on school districts? That is somewhat better. Shall they be converted into private companies? That is best of all. The answers will vary. There are many organizational possibilities that go beyond these simple arrangements. If people know that their police services are the top item in the town budget and cost them $1,000 a year, they might well decide to contract it out to a different town or to a private supplier. Privatization of many services is feasible.
Deconglomerating government leads to smaller units of government and ultimately to smaller government altogether. But it also provides the guideline that a government should not conglomerate in the first place. If people broadly understand that conglomeration of operations leads to wealth destruction and greater inefficiency, they will be more reluctant to allow governments to keep adding on new departments and services.
For example, the State of Iowa in the year 2000 began its Vision Iowa program, funded at $290 million, which is quite a lot of money for a state its size. The State of Iowa collects tax money from all over the state and then salts it back to communities. A pork-barrel program, it has now distributed money to over 100 separate communities across the state which has been spent on all sorts of things like libraries, pavilions, food service buildings, historical attractions, events centers, transportation centers, housing developments, trails, camping sites, art sites, etc. There is, of course, nothing wrong with such projects if individuals and groups come together freely to fund and build them. But such a state program institutionalizes a complex conglomerate method of forced taxation and capital allocation that is bound to result in sheer waste. It enables municipal interest to secure tax monies, obtained by force, for pet projects that they probably could not have obtained had the local voters been asked to fund them and that really belong in the sphere of private society to fund or not fund. Iowa's Legislative Fiscal Bureau reports (September, 2002) that "Iowa lags behind the nation and the plains states in economic growth." In 2005, Iowa ranked 40 out of 50 states and the District of Columbia in economic growth.
Just as a business works better when focused on its core functions, so do states. But what are these? The states want them to be as broad and large as possible. They want to be empires. No one but taxpayers can step in and stop this. For example, here is a list of core functions generated by Governor Locke of Washington in 2003:
- Increase student achievement in elementary, middle and high schools.
- Improve the quality and productivity of the workforce.
- Deliver increased value from post-secondary learning.
- Improve the health of Washingtonians.
- Improve the condition of vulnerable children and adults.
- Improve economic vitality of businesses and individuals.
- Improve the mobility of people, goods, information and energy.
- Improve the safety of people and property.
- Improve the quality of Washington's natural resources.
- Improve the cultural and recreational opportunities throughout the state.
Other such lists appear here. The extent of social engineering takes one's breath away. States now act as if they own all the resources, human and nonhuman, in their domain. They act as conglomerators that now have absorbed the functions of individuals in all their roles: as fathers, mothers, relatives, workers, providers, educators, men and women in business, etc. They have absorbed many functions previously dispersed among individuals and groups in society. Such centralization is conglomeration, and it means mismanagement and great loss of value to the public. And these kinds of losses are only the tip of the iceberg, as the intrusions of government in once-private matters set off chain reactions of other negative effects.
The U.S. federal government is a massive conglomerate domestically and internationally. Empire-building, domestic and international, is its entire thrust as it absorbs more and more functions and operations of society's traditionally independent institutions like family, church, and business, as well as those of state and local levels of government. There is no way for such a leviathan to avoid severe incentive and managerial efficiency problems, exacerbated by its enormous taxing and political powers.
The U.S. government has huge expansions into such diverse businesses as old-age pensions, world-wide military security, old-age medical care, medical care for the poor, income assistance, space, science, transportation, and education. This conglomerate has liabilities far in excess of its assets. It is technically bankrupt. Unless it deconglomerates, it can stay afloat only by absorbing the wealth of its citizens or reneging on its promises.
Deconglomeration raises a basic issue. Where is the stopping point? What should the federal government's core activity be? If Americans deconglomerate their governments, they need to answer this question. What enterprises, if any, properly should be done by governments at different levels? The answers given in 1787 and after don't work.
June 4, 2007
Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.
Copyright © 2007 LewRockwell.com