Beware of Service Creep

Over the past several years we've been pounding on Detroit for building absurd amounts of excess capacity, often in response to how a "sale" is counted.  It really shouldn't be that hard: do some basic future planning and create and adjust plans as necessary.  Unfortunately, beginning many many years ago, the Detroit Three bet that the good times would just continue... and they based future plans on that unrealistically rosy outlook.

They weren't the only ones, as the Wall Street Journal reminds us.

When Detroit's auto makers begged for a federal bailout last month, Congress demanded that their CEOs make changes to their operating model in return for a check from Uncle Sam. If only Congress would demand the same from the state and local politicians now seeking $200 billion from federal taxpayers.

The state spending binge of the last five years has been almost unprecedented in American history.  Since 1998 state and local budgets have nearly doubled to $2 trillion, according to the Census Bureau. State and local expenditures rose 34% from 2003-2007 compared to inflation of 19% and population growth of 5%. They also loaded up on debt, which doubled to $2.23 trillion in 2008 from $1.14 trillion a decade earlier. This doesn't include nearly $1.5 trillion in unfunded health and pension liabilities.

This is something that has often puzzled me.  Sure there are some incremental new services that a growing economy should offer, but for the most part the growth in service cost should almost exactly mirror the growth in population.  If you needed one cop per x number of people twenty years ago, why do you need three now?  Perhaps, similar to the dreaded "scope creep" of new product designs, we have a "service creep"?  And to take that analogy or similarity one step further, just as scope creep creates a significant waste of resources that could be better applied elsewhere, so does service creep.

So what ends up happening?

A federal bailout for these distressed states means redistributing income to these big spenders from the most fiscally responsible states. Federal aid also creates a disconnect between the people who pay for the local services and those who benefit from them. Under Mr. Obama's plan, people in Mississippi will wind up paying for swimming pools in California, taxpayers in Colorado will pay for the sewer system in Detroit, and residents of Arkansas will underwrite health care subsidies in Philadelphia.

As a resident of California, looking forward to the prospect of IOU's being issued for a variety of state programs, I thank you.  Especially those of you with state and local governments that had the smarts to live within your means, with an eye toward the future.  Perhaps we were the smart ones though?

This creates an incentive for state and local officials to pad their budgets as their lobbyists race to capture as many federal dollars as they can. One especially ill-designed idea from the Obama Administration is to allow the federal government to pay a greater share of state Medicaid costs. So instead of reforming policy to slow the stampeding cost of medical care, states will have an incentive to spend lavishly, because every health-care dollar lures more money from Washington.

Obama and his new cabinet are very smart people, so I have hope things will change.  But now back to Detroit... doesn't this sound familiar?  I'm not just pounding on government; business, especially poorly-led business, does this all the time.  Remember all the lemmings trying to outsource as fast as possible without looking inside to see where they could become more efficient?  Now they're paying for it as trans-ocean shipping costs go up, WIP/in-transit inventory risk from quality issues goes up, and competitors that did focus inward are now cleaning house.

Detroit, and other traditional businesses, needs to learn from companies that create excellence and thereby competitive advantage by focusing on improving internal processes and the brains of their people.  Government can do the same by learning from local and state entities in the likes of Indiana and Wisconsin and Maine that are continually improving the ability to deliver more services with less taxpayer money.

Comments

[M]

They may be smart, but there is a huge difference between knowledge and sense. I'm afraid they have too much knowledge, too little sense, and no will to stand up to special interests.

[Dan Markovitz]

Kevin,

I have to take issue with your argument that "for the most part the growth in service cost should almost exactly mirror the growth in population."

For one thing, there are demographic shifts that affect state and municipal spending -- if the population gets older (as it is), or there are more poor and unhealthy immigrants (as in CA), you'll see an increase in demand for certain services.

Decaying infrastructure also leads to increased costs. We paid for roads and sewers 20, 30, and 40 years ago and have often deferred maintenance; at some point, the local governments will have to pay for upkeep and improvements.

Finally, I think scope creep and increased expenditures come from increased demand for services and benefits in the electorate. We want our government to provide more and better parks; to help redevelop moribund downtown areas through tax breaks and business enterprise zones; to put in a light rail system and wider roads to reduce traffic; to invest in better schools, etc.

Scope creep, I believe, comes from voters, not (solely) from politicians and bureaucrats. And that's not necessarily a bad thing, except in places like California, where Prop 13 has made it impossible to pay for the services that voters constantly demand in elections.

[Doug Oates]

I think part of your remarks regarding the significant increase in State budgets may not reflect the aspect that many Federal program services to citizens were drastically reduced over the past eight years and States were obliged to fulfill that role under the premise they would receive "block grants" from the Federal government.

I appreciate your blog, having just found it, and am quite impressed with the useful observations provided.