American government is the smallest it has been in the last 45 years, because 600,000 public sector workers have lost their jobs since 2010. Bloomberg Businessweek asked Mitt Romney what he thought about this. Here was the GOP presidential hopeful's response:
Well, clearly you don't like to hear [about] anyone losing a job. At the same time, government is the least productive--the federal government is the least productive of our economic sectors. The most productive is the private sector. The next most productive is the not-for-profit sector, then comes state and local governments, and finally the federal government. And so moving responsibilities from the federal government to the states or to the private sector will increase productivity. And higher productivity means higher wages for the American worker. All right? America is the highest productivity nation of major nations in the world, and that results in our having, for instance, an average compensation about 30 percent higher than the average compensation in Europe. A government that becomes more productive, that does more with less, is good for the earnings of the American worker, and ultimately it will mean that our taxes don't have to go up, that small businesses will find it easier to start and grow, and we will be able to add more private sector jobs. Don't forget! It's the private sector jobs that pay for government workers. So if you have fewer government workers doing work more and more productively, that means private sector work will grow.
That's Romney's general theory of government in one paragraph, and it's helped me develop a better general theory of Romney: He should think about the U.S. government more like a business.
Let's say that Romney Capital, a private equity firm based out of Boston, heard about a large company called USA, Inc., which had laid off a certain share of its workforce when cash flow was poor. The managing partners would have some questions. What is the business, or purpose, of this USA, Inc? What services and products does it deliver? Where are these cost-cutting measures occurring? Are they happening in the right departments, or might they undercut the company's ability to deliver in the future?
Romney isn't asking any of these questions about the U.S. government. He's not asking whether the public sector cuts are coming from state and local human resources, or fire departments, or education departments, or security. He is more concerned that government is getting smaller because he believe that, as a general rule, it is "less productive."
But it is not intuitive that, as Romney suggests, any way that government shrinks is "good for the earnings of the American worker." The fact that we're not borrowing at low rates to start much-need infrastructure projects is not "good for the earnings of the American worker." There is no reason to think that declining support for public colleges are "good for the earnings of the American worker," nor that repealing federal subsidies for needed health care is "good for the earnings of the American worker." Romney has promised to spare defense spending, but it's hard to imagine an argument where defense technology investments make us richer, but non-defense science investments, which would be at risk when non-discretionary spending shrinks, do not. Government is not a business, but we can apply at least one business rule to government: It's not how much you cut, altogether, but how and where, that matters.
Every time somebody says that "U.S. government is too big", I want to print, laminate and mail this James Kwak column to them, which asks the mischievous rhetorical question: What do you mean by government? Government, like any complex corporation, does so many things, it hardly makes sense to say it has a purpose. Government at various levels pays for roads, it makes regulations, it sets tax rates, it gives companies money. Its purposes are kaleidoscopic. So why assume that, if it's smaller, it simply must be good for everybody? After all, some of the most obvious "big government" things Washington does cost very little:
The Consumer Financial Protection Bureau, an agency that tells businesses what they can't do, sounds like "Big Government." But its budget is about 0.01% of federal spending ... Social Security ($740 billion) doesn't say what businesses can or can't do, and it doesn't say what people can do with their money. It mainly moves money from people's working years to their retirement years, which means that it's doing something that they might have done anyway.
Thinking about the U.S. government as a business is not always instructive. For example the best way to make Medicare profitable would be to not pay for the sickest people, which is a rather morbid sort of efficiency. But by painting government's role in such broad strokes, Romney is violating one of the cardinal rules of consulting: Know your client.