Management

A Good Executive Never Faces a Fiscal Cliff


A good corporate executive would have avoided the fiscal cliff crisis.

Photograph by Connor Walberg

A good corporate executive would have avoided the fiscal cliff crisis.

Let’s not forget, as we review the recent partisan melodrama involving the “fiscal cliff,” that this was a problem of Washington’s own making. The histrionics were entirely unnecessary. There isn’t a good chief executive in this country who would have created such a predicament—or waited until the last minute to find a way out, as Congress once again did.

On the first point, that the “crisis” was self-made, I refer you to the Budget Control Act of 2011. Signed into law on Aug. 2, 2011, the act provided that automatic spending cuts would take effect on Jan. 2, 2013, if Congress’s Joint Select Committee on Deficit Reduction was unable to craft an acceptable bipartisan plan to reduce long-term deficit spending by at least $1.5 trillion over the next 10 years.

Just before Thanksgiving a year ago, on Nov. 21, 2011, the committee abandoned hope, issuing the following statement: “After months of hard work and intense deliberations, we have come to the conclusion … that it will not be possible to make any bipartisan agreement available to the public before the committee’s deadline” (of Nov. 23). So Congress and the White House had, at a minimum, 13 months to get their act together.

Instead, the two sides dug in. And then just about everybody in Washington turned their attention to “more important” matters: the 2012 election campaign.

One of the problems with Washington is that it doesn’t deal with real numbers. With federal spending nearing $4 trillion, does anyone really know how much money is being spent on exactly what?

President Jimmy Carter tried to get a handle on this problem in the late 1970s with an approach known as zero-based budgeting, which he had adopted, as governor of Georgia, from Peter Phyrr, then a controller with Texas Instruments.

Another attempt was made during the first year of the Clinton administration, with the adoption of the Government Performance and Results Act (amended in 2010 by the Government Performance and Results Modernization Act). But neither of these efforts really proved fruitful, serving as bureaucratic window dressing rather than providing serious budget analysis.

A corporate executive would do things differently.

First, he or she would know how the company’s money is being spent and how much everything costs. If belt tightening were needed, good executives would almost never order across-the-board cuts, as the Budget Control Act required.

Many executives have faced tougher decisions than Washington faced this fall. The federal budget proposed by President Obama for fiscal 2013 calls for $3.8 trillion in total spending. A $110 billion reduction, as required by the Budget Control Act, would have reduced overall spending by less than 3 percent. If a CEO had to pare back 3 percent, he or she would look at the performance of the company’s operating units, determine which units are underperforming (and why), and close, sell, spin off, or provide necessary additional resources to the laggards. It wouldn’t take long.

Lots of government activities could be cut. A Feb. 2012 Government Accountability Office report found that Washington wastes tens of billions of dollars annually on overlapping government programs. An example: 53 programs run by four agencies that provide economic development assistance.

CEOs rarely make indiscriminate cuts across the board; they eliminate waste, duplication, and programs that aren’t meeting their objectives. Why in the world can’t Washington do this?

Hal_sirkin
Harold L. Sirkin is a Chicago-based senior partner of The Boston Consulting Group (BCG), a professor at Northwestern University’s Kellogg School of Management, and co-author, most recently, of The U.S. Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback (Knowledge@Wharton, November 2012).

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