Running Government "Like a Business"

Kari Chisholm FacebookTwitterWebsite

This week, the Oregonian has covered what seems - at first - like another stupid and wasteful use of taxpayer dollars by Portland's city government. Here, and here (and a ripping editorial here.)

Portland has paid twice for about 30,000 square feet, or 11/2 floors, of downtown office space since two bureaus moved out of a city-owned building at 1900 S.W. Fourth Ave. last year. While that space remains vacant, eight city bureaus pay $2.5 million annually for private downtown offices. Five of the eight bureaus could fit in the vacant space, saving the city $640,500 a year in private lease payments.

Now, I'm not condoning stupid decisions that waste money. But, I do think it's important to recognize how this happens.

For years, we've heard critics argue that government should be "run like a business." Heck, I've been one of 'em from time to time. It's true: when possible, decision-making should be pushed down to management levels and free market incentives should be created in order to make things more efficient.

And that's exactly what happened in this case.

In order to "run like a business" the city decided about a decade ago to stop 'giving' the bureaus 'free' space in city buildings. After all, if they could get all the space they wanted, well, they would take all the space they could get. People would sprawl everywhere, good offices would get used for storage, etc. In short, waste.

So, to create a free market incentive, they pushed the money that pays for buildings into the bureaus - and then charged 'em all rent to use city buildings. The 1900 Building, the city's newest and finest, costs bureaus $25/sqft.

And then, the office space market in Portland slumped. By 2003, effective rents were averaging just $16/sqft (source: Business Journal).

So, smart bureau managers "ran government like a business" and got out of their $25/sqft offices and moved down the street for cheaper office space. Exactly as the free market incentive told 'em to.

Of course, the free market incentives for individual bureaus leave the city government at-large with a bunch of empty office space, wasting money.

So, what's the solution? I don't know. Smarter real estate managers and budget mavens than I will have to put their heads together. We want to nurture the entrepreneurial spirit in the bureaus, but we have to be sure that the sum of those free market decisions isn't a nasty outcome for taxpayers.

Sometimes, government needs to be run like a business. But sometimes, government needs to be run like a government.

Next time, you hear "run government like a business!" remember that sometimes there are unintended consequences to that approach.

  • Tenskwatawa (unverified)

    I can't think of an instance where or when government needs to be run like a business, but surely the good people of govenment work efficiently, and with 'business' sense.

    It seemed that describing government revenues and appropriations balance-sheet aspects, using some profit-and-loss analogies as an introduction for pre-voting teenagers or first timers, (as you say, such simplistic treatments of government concepts were concocted and spread in Newt's coots about ten years ago), all got mistaken as government definitions, not analogies, for many many Limbaugh learners.

    One more time, on the topic, with feeling: Rightwing corporatists say, The business of America is business. That is bogus false, go ahead and get in their face for it. Truth is: The business of business is business.

    The business of America is justice.

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    Having spent almost 25 years in corporate American at various levels of management, I don't know any LARGE business that doesn't rationalize real estate decisions at corporate, even when allowing lots of entrepreneurship in business operations. This sounds more like running government like a bunch of small unconnected businesses.

    That's not the answer either.

  • Steve Bucknum (unverified)

    Sure Government should be run like a business, but a special type of business - a non-profit.

    I spent nearly 20 years in administrative positions in non-profits, and I can tell you no non-profit I know of would have allowed the movement of a bureau out of City space into space where the rent payment actually increased the overall budget. If all the other conditions were the same, a non-profit would have lowered the rent to be at market levels, precluding the move.

    The "non-profit" corporation is the most lean type of organization around. In Oregon, State government contracts out all sorts of services to non-profits, getting as they say it "more bang for the dollar". (It is actually an apt expression, coming from prostitution - and that is how govenment treats the non-profits.)

    This is yet another example of rhetoric getting in the way of making sense. Frankly, no pragmatic rural government would do this stuff!

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    Kari: Are you really suggesting that what occurred with city bureaus leasing expensive office space when the city-owned offices remained vacant is an example of the government running like a business?

    Far from this being an expample of "Exactly as the free market incentive told 'em to," this is just another typical example of what happens when a government gives a PERVERSE incentive to act in certain way.

    In the market, a "buy vs. make" decision hinges on the long term total average cost of options being considered. Businesses make these judgements all the time. Is it cheaper to deliver the good "in house" or buy it in the open market?

    In this case, the city adopted a policy that gave a perverse incentive to its bureau managers, which was basically to ignore the fixed cost of the office space the city already owned when making the "buy vs. make" decision.

    So, managers looked only at the "marginal cost" of their office space, and the city arbitrarily priced the marginal cost of the city-owned space at $25 sf. As long as they could find office space for under $25, they had the perverse incentive to lease it, since the city was going to charge them $25 from their budget.

    Far from being a free market incentive, this is a CLASSIC example of a common confusion of fixed vs. marginal costs that businesses rarely make and governments routinely make.

    The city's investment in the office building is a fixed cost. One of the first things you learn in econ 101 is fixed costs are sunk costs. The stupid decision the city made was to "price' the fixed cost of the office space for internal purposes as if it were a marginal cost, which then gave the perverse incentive to the bureau managers.

    This is NOT an example of the city running like a business. A business that could not distinquish between fixed costs and marginal costs would not be around very long.

    Let me use a different example: Say a business made and sold widgets, and had a big widget factory that produced widgets at a total average cost of $2 each. Of that average cost, $.50 per widget is the marginal cost of making the next widget, and $1.50 is cost of the plant and equipment factored into each widget, based on assumptions of the life of the capital and how many widgets will be produced over that life.

    Now, what if the plant manager could sub out the widget production to a contractor, and only pay $1.00 per unit? Should it do it? After all, it costs $2.00 to make in house, and they can get it for half that thru a sub.

    No, because the average total cost of subbing out would be $2.50, since they still have the imputed cost of the existing plant and equipment to consider. A business would NEVER make this mistake. It would continue to make the widget in house because the total average unit cost is lower. Only if they could sub out production for under $.50 per unit would they do it.

    But that is precisely the mistake the city made in giving the perverse incentive to its bureau managers. It "priced" the fixed cost of the existing office space as if it had a marginal cost of $25/sf. A CLASSIC example of a government NOT using basic business principles when managing its affairs.

    So, be careful before you start claiming that it is an example of a government running like a business.

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    I have to disagree with you on this one. The city can and should coordinate its overall office space needs.

    And for those who think that the city was somehow unaware of the overall cost implications--it's not true. I'm not sure how clearly all this came through in the media coverage, but BGS was actually attempting to make things work at the 1900 building, but fell victim to timing, and insufficient control over bureau decisions.

    We probed into this particular issue well over a year ago, and spent a lot of time on it during the spring's budget review of the Bureau of General Services. At that time we let BGS know that we would support stronger council controls over these decisions, and the Mayor's office has stepped up with a policy to do that.

    As I understand it, after the I-Tax passed, and the county contracted with the city to collect it, the Bureau of Licenses needed more space, since they had to staff up for collections, etc. Licenses signed its lease two weeks prior to PDC electing to leave the 1900 building. PDC was sitting on a 10 year lease at the creative services center, and decided that it made more sense to fill that building itself.

    If bureaus are free to make their own moves, stuff like this is going to happen from time to time. The decisions should instead be coordinated, and given enough advance review so that there is plenty of time to arrive at an optimal overall fit.

    The "gotcha" angle on all of this is perhaps a little off the mark, but that doesn't mean coordination isn't the smart thing to do.

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    As a slight left turn, there's one thing that always irritates me when the "run government like a business" panacea is offered up by people who mainly want government not to run at all. The notion is, I guess, premised on the belief that competition produces efficiency while government is innately wasteful and slothful. But it misses the obvious Adam Smith truth that business functions within markets, whereas much of government provides services for which there is no market--or more importantly, where a market would be very expensive for the citizens.

    The free-market system is great. I know of no one left in America who doesn't think this (though I suppose a few Marxists hang on). It's just not a universal solution.

  • TK (unverified)

    Government SHOULDN'T run like a business because a business is accountable to bottom-line results, not people. A government exists to take care of NEEDS... needs that don't make sense, from a financial standpoint, to a business.

    Much needs to be said about the priority this country places on 'equality'. The needs of all citizens should be met, but the rush to run government like a business requires that the least vocal get left behind. Why? Businesses assess 'opportunity costs' every day, forgoing the least viable markets (read: least attractive financially, etc) to cherry-pick the best out there.

    Look no further than the K-street lobby and industry association set to determine whether government should be run like a business; one-issue groups have no regard for the impact of their cause, or lack-thereof. Loyalty to company. Loyalty to party. Loyalty to both over this country. If you can't see the poison here, then you're either blind or foolish.

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    Rob, for once I think I agree with you. You're right - the question of marginal vs. fixed costs is exactly the problem here.

    That said, my criticism is with the critics who demand "run it like a business!" Too often, they wind up suggesting dumb ideas like "we should make 'em pay rent so they don't waste valuable office space."

    My point isn't that we should or should not run government like a business. Rather, it's that we should ignore the shrill ideologues who make silly demands and don't think through the unintended consquences.

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    10 years ago, i sold computers for a while. there were 3 of us in-store, and i was the top performer the entire period. but after xmas, sales slowed a lot -- and i was the one let go. it took me a while to figure it out: sell less, the store buys less and can reduce overhead. to me, this is what running a business comes down to: profit is job 1. a few places can put service & employees high on the list, but that's a rarity. profit is god.

    we can never run government on those terms. government is a public enterprise with goals of preserving "life, liberty and the pursuit of happiness." ain't no business with that in its mission statement

    i think if the founders had known what the corporation was going to become, they would have added an equivalent to the establishment clause: separation of business and state!

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    Don't blame "running the government like the business" for this particular malarkey. No business wastes time charging itself rent.

    The problem here is that the "business" was being run by Erik Sten, Vera Katz, et al., whom I wouldn't trust to run a small gelato joint.

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