Government and Cost-Cutting

Government officials have mastered the cost-cutting game, or should I say the cost-non-cutting game. The trick they have learned is that whenever budget or tax cuts are proposed, they threaten to cut the most critical expenditures.

Now, as I have pointed out, such behavior in a private company would result in one’s termination.

When I was in the corporate world, if I wanted extra funds for my projects, I would have to go in and say “Here are all my projects. I have ranked them from 1-30 from the most to least valuable. Right now I have enough money for the first 12. I would like funding for number 13. Here is my case.”

But the government works differently. When your local government is out of money, and wants a tax increase, what do they threaten to cut? In Seattle, it was always emergency services. “Sorry, we are out of money, we have to shut down the fire department and ambulances.” I kid you not — the city probably has a thirty person massage therapist licensing organization and they cut ambulances first. In California it is the parks. “Sorry, we are out of money. To meet our budget, we are going to have to close down our 10 most popular parks that get the most visitation.” The essence of government budgeting brinkmanship is not to cut project 13 when you only have money for 12 projects, but to cut project #1.

I can just see me going to Chuck Knight at Emerson Electric and saying “Chuck, I don’t have enough money. If you don’t give me more, we are going to have to cut the funds for the government-mandated frequency modification on our transmitters, which means we won’t have any product to sell next month.” I would be out on my ass in five minutes. It just floors me that this seems to keep working in the government. Part of it is that the media is just so credulous when it comes to this kind of thing, in part because scare stories of cut services fit so well into their business model.

Matt Welch has a great 8-point takedown of similar scare story on the current California budget crisis. You should definitely read it, but I wanted to add a #9 — this idea that the core, rather than the marginal, expense is always the first to be cut. From the LA Times:

Gov. Arnold Schwarzenegger has proposed slashing state spending on education by $3 billion to help close the budget gap, and the state would pay dearly for canceling classes, firing instructors, cutting class days and shortening the school year, experts said.

Promising students would go to other states, taking their future skills, earnings and, possibly, Nobel Prizes elsewhere. California companies would then find it harder to attract high-value employees who might be dubious about moving to a state with sub-par schools. [...]

John Sedgwick, co-founder of Santa Clara solar-energy company Solaicx, agreed.

“When you think about the genesis of Silicon Valley, it really started from its superior educational base” at Stanford and UC Berkeley, said Sedgwick, whose company makes the building blocks for photovoltaic cells. “That indicates that you don’t want to kill the goose that’s laying the golden eggs.” [...]

The only way the most “promising” students would be affected is if, when the schools cut back, the best professors (rather than the worst) are fired and the most promising students (rather than the most marginal) are denied admission for limited spots. Really? If Berkeley has 10 fewer spots, it’s going to start cutting admissions with the Physics wiz kid who had a 2400 on her SAT?

Further, is it really true that California only attracts people to its work force who went to school in California? A top Michigan or Harvard grad won’t do just as well? I went to college in New Jersey yet have never held a job in that state.

Now, I understand that part of the argument is that workers may not come if the local primary schools for their kids are bad. And that is true. But California has had poor performing schools despite years of high and increasing spending. Matt has much more on this in his piece.

Postscript: Of course, as crazy as it seems, there may be some reality to this threat. I could easily see the University of California system, when faced with the choice of cutting back on some post-modernist social science program or a physics program that has produced 7 Nobel Laureates, choosing the latter to cut in a fit of outrageous political correctness.

At the primary level, it is very possible that the bloated school administrations filled with rafts of useless assistant principals will choose to fire teachers rather than themselves. So unfortunately the plans to cut the most useful spending in a crisis and keep the most useless is not just a threat, it is a reality.

Layoffs for May 2009 at America's 500 largest public companies

May 30: Deere & Co ( DE - news - people ) lays off 89 in North Dakota and 16 in Louisiana as part of ongoing reductions.
Article Controls

May 29: Cintas ( CTAS - news - people ) projects worse than expected fourth-quarter results and lays off 650 workers.

May 22: Monsanto ( MON - news - people ) lays off 55 in Mississippi as part of manufacturing facilities consolidation.

May 21: UPS's ( UPS - news - people ) airlines arm cuts 80 mechanics on slump in shipping volume.

May 19: Hewlett-Packard ( HPQ - news - people ) announces 17% decline in quarterly profit and reduces workforce by 2% (6,400 workers).

May 19: Medtronic ( MDT - news - people ) cuts executive pay by 5%, freezes salaries and slashes upwards of 1,800 jobs.

May 18: American Express ( AXP - news - people ) reduces global workforce by 6% (4,000 jobs) adding to a 7,000-employee cut announced last October.

May 15: Following review of operations announced in February, Nike ( NKE - news - people ) cuts 1,750 jobs (5% of total workforce).

May 15: Fruit of the Loom--a Berkshire Hathaway ( BRK.A - news - people ) subsidiary--pink-slips 80 in Alabama.

May 12: Applied Materials ( AMAT - news - people ) posts quarterly loss and increases previously announced job cuts by 300.

May 11: Dell ( DELL - news - people ) slashes 260 jobs in North Carolina and blames the economy.

May 7: Cummins ( CMI - news - people ) idles Indiana plant that supplies Chrysler and lays off 610 workers.

May 7: DuPont ( DD - news - people ) adds to December job cut of 2,500 with another 2,000-employee cut.

May 6: Wells Fargo ( WFC - news - people ) freezes pension plans and fires 548 in North Carolina.

May 5: Microsoft ( MSFT - news - people ) pink-slips a second 5,000 employees following its initial January layoff.

May 5: Allstate ( ALL - news - people ) closes claims office in Florida and lays off 66 employees.

Satyam may 2009 lay off 5,000

Board meeting of Satyam Computer to discuss business strategies, is expected to take place on June 11 after the new owner, Tech Mahindra, assumed charge and one of the main agenda’s would be the company’s workforce. There are indications that the company might agree to lay off about 5,000 staffers in phases.

The meeting, scheduled to be held on next Thursday or Friday for the first time in the presence of it’s new board — six government-nominated members and four member from Tech Mahindra, is expected to discuss the company’s business strategies.

Vineet Nayar, the Tech Mahindra CEO, had said recently that Satyam has about 10,000 surplus staff and that the company would come up with the ‘least painful’ ways to handle this situation. Given the sensitivities of the situation, it is highly assumed that the board is likely to draw a consensus on the ‘lay offs’ which might be shaped up in forming about 5,000-10,000 people as the reserve/bench strength.