Why Most Business People Don’t Make Good Public Servants
Part 3 from …”Have We Chosen the Wrong Type of People to Govern Ourselves?”
Uplifting America Series by Michael Krajovic
In the opening article “Have We Chosen the Wrong Type of People to Govern Us?” I discussed how most business people are mentally programmed to think short term for the pursuit of self interests. This does not prepare them very well to address common interests and think long term to solve systemic social problems. I would like to spend a little more time examining this in greater detail given the unprecedented amount of corporate influence in public election processes especially in America.
Business people often run for public office because they say that government needs to be more competitive, and they know how to compete. They were able to be a winner in the private sector competition between companies successfully growing their business and creating jobs. Since jobs and the economy are usually at the top of any political agenda, they feel they are ready to lead the public sector. They feel if they could be successful creating jobs in the private sector, they should know how to create jobs by changing policies and programs in the public sector. Most often this is done by advocating for either regulatory reductions or tax cuts to increase business profits, believing that profits and job creation are directly proportional, where increased profits automatically means increased jobs. This myth, while still widely believed to be true, was blown away by the jobless ‘lost decade’ between 2000 and 2010 in the United States that saw large increases in corporate profits with no new job increases. To most corporation executives, jobs are equivalent to labor costs, something to be minimized or cut to increase profits. Increasing jobs is not a business objective, but an unavoidable consequence of investment that is to be minimized. So why should the public trust business people to lead the public sector and set policies to create jobs when it was not their conscious objective to create jobs in the private sector, and in fact reduce them as much as possible?
Despite the claim of excessive tax and regulatory burdens holding business growth back, some of the largest corporations in the world are now sitting on the largest amounts of cash they ever had totaling in the hundreds of billions of dollars, but employment rates are not increasing. Jobs simply shifted from the business losers to the winners, or to developing countries, in the cut throat game of competition with no net employment gain. Profits were used to merge with or purchase other companies creating ever bigger corporations that could cut their workforce. Or, profits were used to buy back stock to increase stockholder value, not to invest to create new jobs. Most business politicians believe that cutting taxes, both business and personal, will increase national job and GDP growth, but the fact remains that growth in both areas was much greater in the past when net tax rates were much higher. This is not necessarily an argument for greater taxes, but it is an argument showing that cutting taxes to increase corporate profits does not necessarily lead to creating new jobs. If there is no consumer demand or decreased spending power, no amount of corporate tax cuts will increase a corporation’s sales and the jobs that come with producing more to sell. In many cases, the tax cuts and tax payer funded corporate subsidies are used to support corporate earnings where the wealth is redistributed to the executives and shareholders.
History has shown that when corporate taxes are higher, businesses are more eager to invest their cash in their business, rather than withdraw as profits which will be taxed. Investing to generate even a modest 5% to 10% return is better than taking money out of the business and paying 30% to 50% in taxes. But with the globalization of the economy, and loop holes in the tax codes around the world, what corporation or wealthy individual is really paying the top nominal rate anyhow? In 2011, with the world economy still trying to recover from the Great Recession, some of the world’s largest corporations despite making billions of profits, did not even pay any corporate taxes. Meanwhile the call to not raise business taxes led by politicians supported by major corporations resonates well with small business owners who are paying the nominal tax rate. They don’t realize that they are being used to do the bidding of the large corporations. They have to pay more to cover the large corporate subsidies. Or if they do realize it, they don’t really care about it as long as they get what they want in the short term, not realizing that they are paying the price in the long run through either less public services, higher taxes or fewer customers. These small businesses don’t make billions of profits on top of billions of government incentives while avoiding paying taxes. For individuals, even Warren Buffet, one of the wealthiest men in the world, admits that he actually pays far less than the nominal top tax rate, often far below the income of working families, and thinks he should be paying more. In Pennsylvania, the democratic governor in 2002-2004 tried to lower the corporate tax rate by half. His administration calculated that by eliminating the loop holes, the state could cut its rate from 9.9% to approximately 5%. The effort failed for lack of support in the business community who did not want to see the loop holes eliminated. Imagine that, an American politician being unable to reduce the corporate tax rate due to lack of business support.
Another simple political approach by business people to reduce the size of government and increase jobs is to outsource public services, but over time costs will increase as the private contractors seek to increase profits. The profits go into the hands of the owners rather than into the pockets of the workers who often have to work with fewer benefits and less wages than before. They certainly will not have the same pension benefits that government offers. The tax payer saves in the short run, but there is less money circulating in fewer hands of workers which reduces economic activity. This is not to say that public sector pension benefits have become excessive. Being able to retire with only twenty five or thirty years of service, when employees are at their peak abilities, is a huge cost to society and needs to changed. But outsourcing public sector jobs for the benefit of a few companies and their individual owners is not the best way to address the problem of job creation to support the economy and it may or may not save public money.
In many other cases, it is also true that government has grown fat. This is at all government levels – local, state and federal. Government employees can suffer from low morale and apathy from having to work for a new politician every so many years. The constant changes from having a different government CEO, results in working without clear, consistent direction. Not having a clear sense of direction hurts the effectiveness of any organization, especially large organizations like state and national governments. It is even worse if it is a group of politicians setting direction that can’t get along. But low morale, poor inconsistent direction, lack of leadership, inefficiencies and waste does not mean that the services are not needed. Whatever happened to the reorganization of the organization, reengineering, training and leadership, employee engagement, coaching and mentoring to make an organization more effective? Why don’t we hear of business leaders setting a clear mission and vision needed for the long term, not one that changes dramatically every few years with election cycles. Sure adjustments need to be made to respond to external circumstances, but the core direction and purpose needs consistency. All successful business executives know this. Their culture and the productivity of workers are ultimately the foundation upon which business success originates from. But somehow, this aspect of running a business is lost in improving government. Instead of concentrating on improving government effectiveness, they focus on short term measures to address immediate crises caused by long term systemic problems. This only delays addressing the core problems which will only get larger over time. For example, cutting services, reducing investments in public infrastructure needed to support common assets, or slashing education budgets are easy to do and may reduce government spending depending upon how much tax revenue is lost, but they do not address the core social issues that created the need for bigger government in the first place.
Simply blaming government for all of the problems is even easier for businessmen and women to do. Government is not being credited for the record increase in corporate profits, but blamed for the loss of jobs. It is blamed for the economic results of running export deficits and off shoring of jobs which have resulted in stagnant wages and higher unemployment. But the off shoring of jobs and importing of trillions worth of goods are trade policies led by large multinational corporations in the private sector. Through their financial influence, they were able to get government to approve trade policies good for corporate profits, but not good for the national economy. A government of the people does not encourage imports at the costs of exporting jobs, but is blamed by people who lost their jobs. This creates fear and anger in the general working class population, which is used by business politicians backed by large corporations to get more favorable government treatment such as tax breaks, more free trade laws and fewer regulations to reinforce the same business practices that created the problem in the first place. People don’t understand what happened, because it happened slowly, the ongoing effect over time of closing a town’s manufacturing plant one at a time. These people and the politicians that they elect to office cannot distinguish between policies that benefit large multinational corporations which have no loyalty to any community or nation and small business owners who are solely dependent upon their local community’s economy.
When these struggling, small businesses have to pay their taxes to support their community and their country, there is less to give. Contributing by paying taxes to support each other – the unemployed, seniors, children – is viewed as a taking by the government. This creates an environment where people can be easily misled by candidate running for office who is good at pointing fingers, not working solutions, to stoke the fires of anger. They can’t figure out why they have less money when costs keep rising, but they know the government is taking some of it away through taxes, so government becomes the easy target for all of their problems.
This is especially true for small business owners who often pay the personal tax rate. Very few make over $250,000 per year in the United States, but these small businesses are used as the tip of the spear to defend not raising taxes in higher income brackets for very wealthy individuals. The argument is that higher income tax breaks damage the economy by reducing new business investment. But as explained earlier the concept of “trickled down economics” is flawed as higher concentrations of wealth increase. The luxury expenditures of a few do not create enough cash flow in the economy to support the many despite every business owner’s best efforts from the smallest business to the largest corporation, to get people to consume more.
At the same time, corporations and the upper class want more profits in their stock portfolios and therefore want to cut government taxes and regulation. The suffering middle class can’t make more money so they want to cut taxes to cut their costs. Everyone wants to pay fewer taxes, therefore it is easy to join forces against government with a common objective – cut it. But with long term high unemployment, a crumbling public infrastructure of roads, bridges, water and sewer lines, and needs to install modern communications, retrain workers, expand and improve education in all communities across the country to remain economically competitive, pursuing the path of just cutting costs across the board is a childish and simplistic approach. It may provide short term gain and instant gratification, but it will just delay addressing serious problems that just keep getting bigger over time. It will not get the job done that needs to be done.
Of course after business politicians backed by large corporations have built the argument that government is incompetent, it is easier for them to begin selling a relatively new idea of privatizing public assets and services. The government often gets a short term lump sum payoff or reduction of expenses, but the public as the users of the services now has to satisfy private sector investors who seek ever greater returns which will paid for by future taxpayers justified simply as the rising cost of doing business. Blame and poorly thought out cost cutting is simply kicking the can down the road for someone else to have to pick up at a later time. The problems are much more complicated and require serious attention. Issues like monetary reform need addressed to effect the systemic change that is needed, but this is a discussion that can’t be had as business politicians seek simple solutions like cutting costs and privatization in an attempt to gain public favor. It is all they know how to do.
Recently in the Spring of 2011, the United States Congress had public hearings on whether to continue giving big oil corporations public tax breaks and incentives. The vote was brought to the floor of the House of Representatives and was defeated along party lines as the Republicans holding the majority of the seats voted against the bill. Despite record profits, the oil companies said the losing the incentives would cause a price rise that would be passed on to the consumer. But the price is not even controlled by the oil companies, but by global commodities markets. What was shocking about the vote was the votes by those who believe in the free market, but were not willing to let big oil compete among themselves in the market place without government subsidies. While these same corporations are racing to compete aggressively among themselves by bidding billions of dollars to give to other nations to have access to oil reserves in other foreign and often dangerous countries, they are hypocritically defending the need for American subsidies to maintain their business. During this period, the US was actually exporting more oil than it was consuming. Why would the US tax payer need to subsidize private corporations to sell its own oil to others around the world at the highest market price as determined by speculative futures’ contracts to benefit a few? Should not the people of the country at least get to benefit of using its own oil at a cheaper price at the pump if it is going to subsidize it?
The point of this example is to demonstrate how business people will complain about government about being the problem, but fight against reducing government expenditures if it means reducing profits for the special interests of particular businesses. They argue that eliminating unfair subsidies and incentives are actually tax increases. To them, reducing big government is about reducing subsidies for individuals who need government assistance, not for large global corporations who want the benefits of subsidies. Business people often seek public office in order to give tax loopholes, reduced regulation and reward government contracts to businesses, especially those that contribute to their campaigns. Considering the unprecedented fiscal challenges facing the United States, the vote in the Spring of 2011 to continue unneeded, tax payer funded big oil subsidies clearly demonstrates the corporate agenda of many business politicians. Even though corporate profits are so high and corporate tax revenue is at an all time low for government, the business oriented politicians won’t do anything to interfere with the maximum pursuit of corporate profits by eliminating subsidies or increasing tax rates even though they pay far less than the average small business. The increased profits will not mean one more American job, cheaper oil or even a more reliable source of supply. Meanwhile it is the small business sector which is forced to pay for not only higher fuel costs, but taxes to subsidize the profits of the oil companies. Hundreds of millions of consumers and small businesses have less money to spend as they pay hundreds of more each year for fuel costs. They try to create jobs while large corporations shift their jobs and their customers right out of the country, taking even more money out the pockets of small businesses. This is the clearest example of “business friendly” politicians putting self interest ahead of common interests and the best interest of the nation. “Business friendly” actually means corporate friendly at the expense of millions of small business owners.
Let’s look at one example of one business person’s engagements in fixing the public sector. Since our society measures business success according to the amount of revenues and wealth generated, Bill Gates, one of the wealthiest people in the world, is considered by many to be one of the most successful businessmen of all time. He has not run for government, but nobly he has moved billions of dollars of his own money into his private foundation to help address world problems. In the US, he has focused a lot of attention on improving public education. Besides selecting and backing best practices around the country to be used as examples, the Gates Foundation is strongly supporting teacher financial incentives. It seems normal and reasonable to a business person to motivate employees by using a pay for performance compensation system. The better the performance is, the higher the monetary reward. Employees compete within the company to advance. So should not the best teachers be paid more? As fair as this may sound, it does little to improve public education. How many teachers or young people go to college to become a teacher say that they want to teach because they want to make money? Making money is not their motivation. Do we want a person that loves teaching children to teach our children or someone who just wants a job to make money? It is hard for business people to understand that not all people are motivated by money. Teachers and public servants want to contribute to society to help others, not compete against their neighbor’s company to get ahead. Based on the fundamental purpose of teacher and the benefit they provide society, I believe teachers as group of professionals are underpaid, but more importantly underappreciated. The overall blaming and labeling of public teachers as poor performers or the reason for failing schools due to union issues that need addressed specifically, is only exacerbating the problem of recruiting new, qualified teachers. This is especially true as schools struggle to file vacancies with good math and science teachers as the shortage of technical workers pull the brightest college graduates away to work in private industry.
Mr. Gates is right about the need to pay good teachers more, but he is wrong about motivation. This does not mean that the bottom performers should be tolerated or protected by teacher unions that have only hurt themselves by defending poor performers. Even the best teachers can be demoralized working in a system that is in different to incompetence. While Mr. Gates intentions are good and his methods were successful in the private sector, teacher financial incentives are not going to solve the problems with public education. It is not even the best available strategy to pursue, but to a business person, it is because of how they think.
In summary, most business people in public office cannot make the transition from thinking about short term profits and maximizing the self interests of businesses to thinking about acting in the best interests of all people, now and for future generations. All of their decisions and actions are based on or around the concept of money and the pursuit of profit in the shortest time possible. Concepts such as common interests, social justice, and long term economic and environmental sustainability are just not in their vocabulary. As discussed in earlier parts of this article, their brains are not developed to think that way.
Government is about operating society, not running a business to make money. (For those who make the valid argument that government should not waste money and act more like a business that would never consider wasting money, that is an entirely different subject worthy of discussion). Government is about fairness and requires cooperation. Actions are taken because they are right to do, not because they make money, or cost money. Developing and following higher principles to guide public decisions are foreign to most buinessmen and women with their imbedded profit driven thinking. To most of them, leadership in government has been downgraded to using the influence of money and power. And since most of this money comes from large multinational corporations, it is their views they represent. And herein lies one of the biggest points of confusion in American politics – people do not realize the difference between assisting large multinational corporations that have no loyalty to any community or country including their own, and small business owners who are committed and dependent upon their local community and country. Too many corporate backed pro business politicians are actually assisting the demise of small businesses and the economies of local communities upon which they are dependent, for the benefit of large industrial conglomerates, all the while the small businesses believe these politicians are representing their interests. They have not yet realized that the reason they need help is because they are being used to support the agenda of multi-national corporations at their own expense, the expense of their local communities and the expense of their country. And for those small businesses owners who are also in business to simply make money, it is costing them money. In the war between the Haves and Have Nots, they are becoming the Have Nots.
To reverse the trend of choosing people with the wrong backgrounds to lead our society, I invite you to read the fourth and final article in this series, for more insight into answering the question –“Have We Chosen the Wrong Type of People to Govern Us?”