What Would It Mean for Governments to Compete Like Businesses?

Officials can deliver both high-quality public services and low tax rates to citizens by providing services for which outsiders are willing to pay a premium.

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The state of Delaware has extracted a competitive advantage through charging infrastructure tolls at the Delaware Memorial Bridge and elsewhere. (Boston Public Library/Flickr)

My starting premise is that we can and should approach government as a business -- in particular, one in need of a new "business plan" for how to confront a changing competitive environment, with changing demand for its services, and a cost structure out of line with its revenue base. Many will take issue with the premise that government is, or can fruitfully be thought of, as at all like business. So, let's take a little time to discuss this assertion.

The shibboleth persists in politics that government can and should be run "like a business." In fact, an entire presidential candidacy was premised on this notion just last year. But that facile view is not what I mean by "the government business." It's pretty clear that governments do not actually operate like businesses for a vast number of reasons:

  • The employees, for the most part, cannot be fired, and thus have little reason to hit performance metrics, let alone respond to the views of management.
  • The politicians ostensibly overseeing all this are guided by a complex set of conflicting motives and incentives and have little reason to work together or move in the same direction. These managers and executives are in turn guided by the demands of shareholders, investors, and consumers who themselves have contradictory and often ill-defined expectations for the organization.
  • Most of this results from the fact that governments aren't guided by the same profit motive as private-sector businesses. That isn't necessarily bad in itself -- in fact, a lot of what we expect and want governments to do is precisely those activities that are not profitable (or, at least, where profit cannot easily be captured). But the lack of a single, clear metric makes managing government, and assessing how the whole enterprise is doing, a lot more difficult.

So it's not my contention that governments operate "like businesses" or even that they would be better served to do so. It is, rather, that governments today face the same challenges and threats as businesses, and that we could have more fruitful political conversations about what our government should or shouldn't do next if we thought about it in that context:

  • Governments face competition, both from other governments and from non-governmental entities -- ranging from non-profits to private businesses to terrorist organizations -- that offer some of the same services and that their "customer base" oftentimes prefers.
  • Putting aside ideological questions of whether governments should do more or less, there are some government services that these competing entities can provide better and/or cheaper. There are others, including some that have historically been treated as belonging in other sectors, that governments in fact can provide better than others.
  • Governments everywhere face a mismatch between resources and demands. In some cases, that's because governments are less efficient than they should be. But that's not the major part of the problem today. The bigger challenge comes from the fact that the government customer base for the most part demands more of the product at a lower price than it can be produced.

In short, governments exist in a competitive environment for their services, one that has changed and will change further, and where money matters. Governments may not be businesses, and they may not be run like businesses. But they (and we) need to think of them like businesses in order successfully to confront the challenges -- the possible new product lines, potential competitors, and economic constraints -- that governments face across the world today and in the future.

The notion that governments need to compete, just like businesses, defies most people's assumptions about what governments are and what they do. After all, governments are essentially territorial entities; monopoly service providers, and able to compel people to buy their shoddy services, at whatever price they dictate.

So people are stuck with the governments where they live, aren't they? How can there possibly be a "market" for government? How do governments ever compete? In fact, how could governments ever compete (at least, successfully)? After all, we all know that they are inefficient, ineffective, and unable to do anything better or at cheaper cost than a competitive private alternative.

Let's contest all of those assumptions.

That means, first, considering a more sophisticated notion of what it means to think like a business than we find in politics today. Governments, like companies, can and already do compete -- and, like companies, they can and must do so on not only cost (which some try to cast as the sole proper governmental objective) but also quality.

Competing on cost relies on commoditization, low investment, low democratization, highly concentrated gains, and highly externalized costs (such as labor or environmental exploitation). Third World countries and their governments will be those that, like their private-sector counterparts, continue to be resource-dependent commodity producers with low margins, producing better-than-subsistence benefit only for a few who live off the many, placing little value on innovation and ingenuity -- and thus on people and their participation. The United States could (like, say, many firms in the apparel industry, or countries whose economies are based largely on resource extraction) choose that as a competitive strategy. But is that really the vision of the future we prefer?

Competing on quality, in contrast, depends upon constant innovation, produces high margins, and requires widespread investment in people. Either low-cost or high-quality competitive strategies can succeed, in government as in business. Competing successfully doesn't inevitably mean a world "red in tooth and claw," as Hobbes described it, or, in the governmental context, a "race to the bottom" in which governments are forced again and again to lower tax rates and cut civic investment in order to avoid the flight of capital, businesses, and high-income citizens.

The rather extensive literature on the subject shows that tax rates play, at best, a minimal role in business location decisions. Factors such as the quality of labor and public services (schools, roads and highways, sewer systems, recreational facilities, higher education, health services), the proximity to markets, and strength and stability of legal and regulatory systems, are all more important than tax incentives in business-location decisions. In short, higher taxes don't by themselves make governments uncompetitive -- high taxes (i.e. prices) for low-value results do (as in most industries).

It is therefore quite plausible for a government to compete successfully in today's world with expensive, high-end government services that cost a good deal -- if they deliver results worth the cost. After all, consumers and businesses alike are willing to pay premium prices for products they deem worth it -- including government services. Today, governments charge, and people and businesses willingly pay, higher fees for less congested public roadways, faster airport security lines, or cleaner streets -- but the state of Delaware actually pioneered this model more than a century ago in positioning itself as the incorporation capital of the world.

The majority of the nation's -- in fact, the world's -- leading corporations have long made Delaware home ... at least on paper or, today, magnetic digits. By providing a better-quality service -- and, notably, one uniquely governmental -- Delaware became the "virtual" home of modern capitalism. Businesses come from around the world to "buy" the Delaware government's stable and efficient adjudication of corporate issues, from which it earns considerable revenue in return while also generating a substantial in-state legal industry. (Another state that has applied the same approach in a slightly different field is Nevada -- which hit on availability of easy marriages and divorces to attract revenues from those willing to travel for such essential governmental services.)

Delaware also derives a high percentage of revenues from the mere 20 miles of public infrastructure that carry most of the country's commerce and travelers across its borders in minutes. The Atlantic's James Fallows likes to complain about this as one little state clogging the arteries of the entire East Coast's commerce because the tollbooths slow down traffic so much between D.C. and New York (Delaware Governor Jack Markell responds that the installation of EZPass booths is alleviating that problem), but if that really troubles you, there are competitive options: You can take Interstates from Baltimore to Harrisburg and then on to New York, skirting Delaware completely. But Delaware still provides the quicker and cheaper route -- and it uses its minimal role in the I-95 corridor to maximal effect, providing something outsiders will pay more for in order to subsidize other services to its own citizens.

Can government ever deliver both high-quality, attractive public services and low tax rates? Yes -- by providing services for which not only their own citizens will acquiesce in paying, but also outsiders are willing to pay a premium. Any place that can figure out how, like Delaware or Nevada, to "export" its tax burden could offer great public services while keeping taxes low for its own citizens. Governments can adopt other intelligent and successful competitive strategies, too.

Makes perfect business sense.