Business acumen and government decisions

Published 11:08 pm Wednesday, December 9, 2015

Our Presidential selection process typically includes at least one contender with a business background. This cycle features real estate developer Donald Trump and former Hewlett-Packard CEO Carly Fiorina. Many people hope that a dose of business wisdom will fix Washington’s problems. This hope fails to recognize a fundamental difference between business and government.
To see why, let’s try applying profit considerations, the bottom line of business, to one issue this past year in Troy. The Troy Police Department, like many departments across the nation, has officers take the police cruisers they drive home while off duty. Many law enforcement officials believe that police cars parked in a neighborhood deter would-be criminals.
How much business insight can we draw on here? A city official who cares only about minimizing cost would never let police cars sit idle while officers currently on shift could be using them. A police department has to purchase and equip more squad cars when they are not shared across shifts. Just equipping a cruiser can cost up to $20,000.
An exclusive focus on costs, however, ignores potential benefits, in this case the reduction in crime from cars parked in neighborhoods. No business ever succeeds by spending as little money as possible, and many successful businesses supply expensive products. Making a Corvette costs more than a Chevy Spark, but General Motors makes Corvettes because some buyers will pay a higher price. Builders can profitably sell both starter homes and executive homes.
A sensible business person would consider the benefits of this expenditure. She would want to know the size of the effect, that is, the number of robberies and assaults prevented. The calculation would require effort, but is possible if we know exactly when and where crimes occur and when squad cars are parked in different neighborhoods.
Thinking that the extra cruisers are worthwhile so long as they prevent even one crime is not helpful. This attitude, frequently voiced in policy discussions, totally ignores the cost. Similarly, a profitable business cannot include every conceivable valuable feature in its products without driving the price sky-high.
Ignoring costs is a sure way to bankrupt a business, and this leads to poor government decisions as well. The Troy Police Department needs to compare the effectiveness of the extra cruisers with other crime control actions. Would additional training for officers or hiring more officers be more effective? The police budget must then be balanced against other government functions, and ultimately against our budgets when we decide on taxes.
A good business decision would evaluate the tradeoff between police cars and crimes prevented. But here business people in government would face a huge challenge. Businesses sell their products and services to customers, and the price reveals how much consumers value product attributes. Improved tech support might allow Hewlett-Packard to sell their printers for a higher price. Ms. Fiorina, when she was CEO, could compare the additional revenue with the extra cost to see if better tech support was profitable.
We do not charge for the vast majority of services government provides, and so cannot compare extra revenue and extra costs. We could charge for more government services than we do currently, but oftentimes we explicitly choose against this. Charging for government necessarily means that citizens who cannot afford to pay will go without, which we sometimes consider unacceptable. For instance, no one deserves to be robbed, assaulted, or worse because they cannot afford to pay for police protection. But government officials cannot compare extra revenue from better police protection with the cost.
Economists have developed cost-benefit analysis for these questions, and have devised some clever ways to estimate the value of government services. But cost-benefit analysis is imprecise and inferior to the information revealed by market prices.
Would business experience help government officials better evaluate the tradeoffs they face every day? Perhaps. But to hope that the business acumen of Mr. Trump or Ms. Fiorina will solve all of the problems of our government is unrealistic. Complex problems rarely have simple and painless solutions.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. Respond to him at and like the Johnson Center on Facebook.

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About Dan Sutter

I am the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

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