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Globality: Harold L. Sirkin

Managing Perception, Ignoring Reality

By now we've all seen the signs announcing projects "Funded by the American Recovery & Reinvestment Act." There's just one problem: The projects are not funded by the American Recovery & Reinvestment Act. They're funded by American taxpayers—and to be absolutely accurate, by future taxpayers, since Washington had to borrow heavily to "finance" the recovery act and other legislation.

Much of Washington increasingly seems like a shell game; the triumph of perception over reality. This is not new; it goes back decades, and politicians of both parties play the same game and share the blame. All business executives know that if they play the same games, their companies will fail. But no such fate awaits the political classes.

To prosper, companies must prove their value day in and day out to customers and shareholders. A car rental company will change the composition of its fleet if it has excessive maintenance problems with a particular brand of automobile. An airline will cancel orders (or negotiate a penalty) for new planes if the manufacturer doesn't meet delivery deadlines. An appliance manufacturer will buy rolled steel from whatever supplier can meet the company's specifications at the lowest price. Every day is another test. And the competition for almost everything—from markets and customers to talent and raw materials—is now global.

Government doesn't work this way. All too often, government doesn't solve problems but perpetuates them, while convincing voters that it's doing everything possible to fix things. "Doing something"—holding hearings, creating commissions, launching programs, spending money—is the coin of the realm, not results.

Program Proliferation

If a problem persists or worsens, business executives will see that it's fixed. Politicians, by contrast, will typically add another program or seek more money for the existing program (or both). Thus, at various times we have had (and may still have), according to the Government Accountability Office (GAO) and other sources, 26 food and nutrition programs operated by six different government agencies, 40 employment and training programs operated by seven departments and agencies, and 69 programs providing or supporting education and care for children under age 5 operated by nine departments and agencies. And this is just the tip of the iceberg.

The perception is: Government is fixing things. The reality is: Government has been expanding its portfolio of underperforming assets.

The government shell game takes many forms. Consider the following:

• Airline safety

The government's approach to air safety is to make you feel safe, even if the government's mandates and actions slow air travel, unnecessarily increase airline costs, and make air travel so annoying and inconvenient you no longer want to fly. This is no way to run a business; it's the way to run a business down.

There are two realities here: First, there is no such thing as a perfect, fail-safe security program; there are too many airports, too many flights, and too many passengers to guarantee 100% safety 100% of the time. The second reality is that the technology (yes, including body scanners) exists to get us closer to 100%. And combined with the kinds of sophisticated passenger and baggage screening techniques the Israelis use (including passenger "profiling"), we could reduce the threat and inconveniences the current system creates. Some people might be inconvenienced more; the vast majority of passengers would be hassled less.

But the government doesn't do these things. Instead, the Transportation Security Administration adopts an alternative strategy, distracting both the airlines and their passengers. The airlines, after every "incident," are forced to adopt new rules: disabling the cabin avionics so passengers won't know their location relative to their destination, forbidding the use of bathrooms during the final hour or half-hour of a flight, removing pillows and blankets from cabins. Most of these new rules are later abandoned, since they don't accomplish anything, other than adding to the airlines' costs and reducing passenger satisfaction. The TSA, meanwhile, provides more distraction—forcing passengers to remove their coats and shoes among other tasks—so passengers don't have the time or energy to ask, "Is this really the best way to get the job done?"

In the TSA's world, perception trumps reality: We are made to feel safe while the TSA must know we could be safer still.

• Public education

The perception is that our public education system is failing because we are not spending enough, not reducing class sizes, not paying teachers enough, and not providing them with adequate benefits. But these are inputs; the focus for too long has been on process and budget. It needs to be on performance and success—the measures by which businesses are judged.

The reality is: Many of our schools are failing because we have created a system that accepts and even rewards failure. Anybody can push illiterate students through the system; it's much tougher to teach them how to read, write, add, subtract, multiply, measure, make something, and think.

To his credit, Education Secretary Arne Duncan is seriously trying to change the incentives—no smoke and mirrors this time—and make the schools accountable through a competitive program that will explicitly reward success. This is a new approach for government.

• The deficit

When is a spending increase a budget cut? Answer: when you're discussing the federal budget. No wonder taxpayers are fed up and confused. And no wonder the annual deficit will top $1.56 trillion this fiscal year, on top of $1.4 trillion in fiscal 2009, with another trillion-dollar-plus deficit projected for fiscal 2011 and the cumulative deficits over the next decade, according to the Congressional Budget Office, projected to add $9.8 trillion to our national debt. How did things get so out of control?

When creating the federal budget or "scoring" legislation (translation: figuring out how much legislation is going to cost), government officials measure everything against the so-called "baseline." This baseline is on autopilot and increases year after year—supposedly to take into account demographic and inflationary changes. Thus, in Washington's bizarre world, if a program cost $87 billion this year and Congress allocates $92 billion next year, Washington will call the $5 billion increase a "cut" if the increase is less than the projected year-out baseline. The perception is that Washington is saving money; the reality is it's spending more.

There are two great problems with political budget-making. The first is that every program has a solid core of supporters who care very much about the program and want it to grow, while most taxpayers probably don't know the program in question even exists. And since it costs them just a couple of dollars a year, they probably don't care. With the scales thus balanced, those wanting the program to grow almost always win.

The second problem is: No program ever goes away. In business, new constantly replaces old. Economist Joseph Schumpeter in his book Capitalism, Socialism and Democracy describes this upheaval and renewal as "creative destruction."

In government, there is no such destruction and renewal; the old merely grows a new appendage, increasing its cost. During the New Deal, Washington established the Rural Electrification Administration to bring electricity to rural America. For all practical purposes, the job was completed quickly, with an estimated 90% of rural homes having electricity by 1939, up from 10% in 1930. But the REA was never given a gold watch and retired. Instead, it kept spending money and in 1994—decades after it completed its mission—was renamed the Rural Utilities Service and given an expanded portfolio. (The REA is a government rarity: It accomplished its original mission. How about the many government programs that don't? They're never retired either.)

How to Make Government More Like Business

It's time to face facts: Despite the corporate world's many shortcomings, business is a far more careful steward of resources than government and is judged by more demanding standards. So what can be done to make government more like business?

First, all government programs should have a clear and specific mission: reduce welfare dependency; increase literacy; make the regional power grid more efficient, whatever. There need to be serious and regular performance reviews. And if the program isn't working—and by that I mean if it hasn't made quantifiable progress toward accomplishing its goal—it should be eliminated.

Second, while "waste, fraud, and abuse" should never be tolerated, the congressional oversight committees and agency inspectors general need to focus on a much bigger problem: duplication of effort. When taxpayers are footing the bill for two dozen different programs that are all supposed to do substantially the same thing, something is wrong. When such duplication is found, let the programs compete. The programs that perform the best—that is, make quantifiable progress toward accomplishing their goals—should receive increased funding. Those that perform the worst should be shut down.

Third, Washington needs to stop playing games—and we need to stop enabling it. We know huge deficits are unsustainable. We know that more money this year than last year is an increase, not a decrease. We know that rewards should be based on accomplishment, not on good intentions or the amount of money spent.

By allowing the politicians to keep us focused on what they are "doing" rather than what they have accomplished, we act as "enablers"—giving another drink to a drunk. We've got to make them more accountable for results.

With their power of the purse and their ability to control the national agenda, politicians have shifted attention from their own shortcomings to the shortcomings of others. Perception has trumped reality.

Business executives, in particular, need to fight back. If they don't, they will remain a political punching bag and Washington will continue its wayward ways.

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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