The Serious Business Of Government – Divided We Stand United We Fall

Perhaps the biggest complaint critics of big government make is that it’s wasteful. I don’t think that’s an unreasonable criticism.

Every four or five years, a new government is formed and new people get placed in control of departments that affect the lives of tens or hundreds of millions of people.

Consider if you were one of those new ministers or secretaries newly in charge. Wouldn’t you think that you had to do something, to make changes to justify your new role?

Wouldn’t that be a natural reaction to acquiring a new position of power? The people have put their trust in you to deliver, so you need to repay that trust and deliver, ideally in a big way. And big ideas require big budgets.

A common complaint levelled at government is that it’s wasteful because those in charge aren’t using their own money. Those on the right will insist that society is much better off placing as much power and control in the hands of private businesses because they’re using their own money and so can’t afford to be wasteful. We’ll consider just how true that really is shortly in terms of privatisation, but the sentiment sounds quite logical, doesn’t it?

So why can’t governments operate more like commercial businesses?

Businesses pay attractive salaries to encourage the best prospects to work for them, so should politicians be paid more to encourage the most able to consider public service?

In the UK, a Member of Parliament is paid £91,346 with the Prime Minister being paid £166,786.¹ Government ministers also earn more than the basic MP salary, varying depending on the level.

Those salaries are significantly above the UK average, but how do they compare to what commercial businesses are paying? In 2022, the CEOs of the biggest 350 companies listed on the London Stock Exchange earned a mean average salary of about £2.96 million.

The contrast in salaries is even greater in the US. Members of Congress receive $174,000 and the President makes $400,000.

The bosses of 500 of the biggest businesses traded in the US received an average salary of $16.7 million in 2022.²

If we compare the salary levels, we might wonder why anyone would choose public service. We might also understand how those who do could also be susceptible to being influenced by interested parties.

And does it make sense in your mind how different the salaries are? Sure, those are big businesses that may have some very large revenues and huge numbers of staff. That’s a lot of pressure for those in charge to work under.

However, the budget of almost every one of those businesses will look relatively insignificant compared to the government budget in their respective countries. And some of the workforces may be large, but nothing like the national populations that the politicians have responsibility for.

In that context, don’t the relative salary levels seem somewhat topsy-turvy?

There may be additional reasons why higher salaries for politicians could offer benefits.

In both the UK and the USA, elected politicians can work other jobs. Paying a higher salary could make it possible to ban them from working other jobs. That would ensure all their working time is spent on serving their constituents.

A higher salary could also make politicians harder to influence. While we can hope that outright corruption among the highest levels of elected politicians is rare, the risk of politicians being influenced by outwardly innocent gifts and hospitality seems a more common issue. Even if a freebie is offered completely innocently and received with no thought of obligation attached to it, our natural inclination to reciprocity means recipients’ behaviour may be unintentionally influenced. Politicians earning a more substantial salary should find it easier to reject freebies that would otherwise tempt them.

Performance Related Bonuses For Government Departments

We’ve already seen that one of the arguments for private companies being more effective than government is that companies are using their own money. That’s not untrue but perhaps doesn’t fully explain the reason. Private businesses tend to reward great work by paying bonuses. They also seem to pay bonuses for average and bat-ship crazy poor work too, but you get the idea.

Could governments leverage this effect? Though, as a twist on the common commercial model, only rewarding great work.

Shareholders in private companies are happy for bonuses to be paid to help ensure that the companies do well and pay out handsome dividends.

Voters are basically the shareholders in government. Don’t you think most voters would be happy to reward government workers who can achieve more with the budget they have or achieve their goals and spend less than anticipated?

Imagine that the Ministry of Silly Walks³ underspent their £348 million budget by £50 million, even after funding someone to develop a Japanese matching walk that sees them bend their leg back over their head and back again with every single step.

Wouldn’t you be happy for part of that £50 million saving to be paid as a bonus to the ministerial and civil service staff of the Ministry of Silly Walks to reward them for their success in saving money?

Under such a system, every part of the government is now strongly incentivised to act much more efficiently and proactively look for ways to achieve their targets while spending as little as possible.

Efficiency is injected into government using the exact same mechanism that is meant to make private businesses better at running services. The difference is that there are no wealthy shareholders reaping the benefit, just all members of society as a whole.

Is It Fair To Profit From Essential Human Needs?

Every society needs a variety of essential services to maintain the expected living standards of the people. Various things like the supply of water, electricity, gas, sewage removal, internet access and transport services.

Do you think it’s reasonable to consider these requirements should be basic human rights that all members of society should have access to?

Maybe you think there are other things that should also be considered basic essentials or would you remove some of the items I suggested?

I’ve made the argument before that every member of society is important as a healthy functioning society requires a wide range of roles to be fulfilled. Obviously, it would be crazy unfair to expect some members of society to contribute to society while not being able to afford the basic human essentials.

So why does it make any sense for anyone to profit from supplying basic human essentials?

It doesn’t, does it?

Government should clearly take responsibility for supplying the essential services. We’ve just seen how if government acted more like businesses, they could supply services more cheaply than commercial businesses because they don’t need to generate a profit for shareholders.

In some countries, many of these services have always been provided by private businesses. As I briefly studied the US, I was a little surprised how few services have ever been supplied by public entities, either at a state or federal level. That’s because I’m British and old enough to remember a time when the supply of electricity, gas, water and sewage services, telephone and public transport, like buses and trains, were all supplied by national or local government.

It was the Conservative government of Margaret Thatcher that embraced the idea of privatisation, with some 40 state-owned businesses sold off during her time as Prime Minister.

The reasoning for selling off these businesses, many of which supplied essential services to society, was the common refrain that they’d operate more efficiently under private ownership. More efficient businesses would lead to reduced costs for the end users.

In effect, what we’re meant to believe is that:

Cost of workforce + cost of materials = A

Cost of workforce + cost of materials + cost of shareholder dividends < A

So, by adding in another expense, the cost of running the business will be lower. Does that look even remotely plausible to you? Unless the shareholders are paying money into the business, rather than taking dividend payments out, the second equation makes no logical sense

There’s absolutely no reason a publicly owned business should be less efficient than a privately owned business, if those running the business are incentivised in the same way. In the same way that those working for publicly owned businesses aren’t focused on doing a good job for the people who own the business, those working for privately owned businesses aren’t focused on maximising dividends for shareholders, they’re focused on maximising their own income.

The two things may be connected, but only one is incentivising the workers. The CEO of a private company isn’t trying to increase profits so that shareholders can buy new Rolls Royces, they’re trying to increase profits so that they can afford to buy a new Rolls Royce.

That doesn’t mean that they won’t do their bit for shareholders though. There is in fact a reason why CEOs of private companies may be incentivised to reward shareholders. Shareholders generally need to vote in favour of the wages and bonuses paid to senior staff of private companies, so CEOs do need to keep them on board. Very much a case of I scratch your back and you scratch mine.

That almost certainly explains one of the most bizarre aspects of the finances of some of the businesses that were privatised by the Tory government of the 80s.

We’re going to look at just the water companies that used to be owned by the British public before they were privatised.

Early in 2024, these companies were reported to have debts of £60.3 billion, yet over the period since 1990, the privately owned water companies had paid out £53 billion pounds in dividends to shareholders.⁴

I am so, so naive. I always thought that shareholders were rewarded with dividend payments when companies made profits. A reward for the gamble of investing in a company that could lose money as well as make money. Yet somehow the shareholders have been rewarded despite the industry building up debt.

I’m sure an economist would be able to dazzle us with the reasons why this makes complete financial sense, but it doesn’t. If a company has excess cash, then use that to pay dividends, but if they’re somehow using other assets or borrowing to create cash in order to pay dividends, they’re using cash that doesn’t exist right now. It may exist in the future and that will be the time to pay dividends.

Some companies are described as too big to fail, but utilities companies are too important to fail. Societies rely on water suppliers and businesses providing other human basic essentials. If one fails, the taxpayer will have to pick up the pieces, including paying the debts that have been run up to pay dividends to the shareholders. The shareholders are the ones who are meant to be risking their money, not the public.

No doubt, the management and shareholders will argue vigorously that this is just a hypothetical and none of these businesses will fail, but big businesses do fail and on occasion the rest of society have to pay sort out the mess. We’ll see that shortly.

A common claim for the case for cutting taxes on the wealthy is that it gives them more money to invest in businesses and that will have a positive knock-on effect for the rest of society. That’s a bat-ship crazy claim. The wealthy aren’t stupid, they won’t invest in something unless they know a demand exists. That’s what makes utility businesses that provide for the basic human needs of societies so attractive. Day after day, year after year, they know there will be a persistent demand for their services.

To take these businesses away from the private sector means resorting to the N word. No, not that one, but one that staunch capitalists everywhere find even more offensive, nationalisation.

That is the act of the government forcibly taking ownership of privately owned businesses and making them publicly owned. The private owners may or may not be compensated for the transfer.

The wealthy claim that nationalisation will scare them off from investing in those countries that carry out such acts. There may be some truth in that, particularly if fair compensation isn’t paid for the assets. Even if fair compensation is paid, some heffalumps will probably hurt themselves to make a point. Remember the billionaire businessman planning to move himself and his family from the UK because he was having a meltdown over the way non-doms were being taxed? It made little logical sense and seemed a clear case of cutting off his nose to spite his face, but he was doing it all the same.

However, much as nature hates a vacuum, heffalumps hate low-interest savings accounts. When one heffalump takes their money away, we shouldn’t be surprised when another wants to put theirs in. If opportunities exist to make more wealth for themselves, heffalumps will invest.

Still, if I’m wrong, there’s always the issue of self-respect. Do we want to be forced face down over a barrel while being taken roughly up the pooper or do we choose to duck ourselves?

However, capitalists aren’t always against nationalisation. In 2008 the US government acquired 79.9% of the insurance giant AIG in return for a huge loan in order to prevent the company from collapsing.⁵ In effect, for the duration of the loan, AIG was nationalised. Similarly, we can say General Motors was nationalised in 2009 to save the business. And in the UK in 2018, the government renationalised the East Coast rail service when the operators couldn’t fulfil their contracts, reportedly saving those privately owned businesses as much as £2 billion.⁶

So that may undermine one argument against nationalisation. Many private businesses clearly support nationalisation as a concept, so why should they complain if it happens at a time they don’t like?

We are still left with a wopp-off sized elephant in the room – the cost of nationalising the various businesses. Rest assured that unless the businesses are in trouble and need help, the management and shareholders will highlight the fact that it would be hugely costly for the public to buy businesses for nationalisation. It would, but do you think they want to hold on to the businesses for the public good?

Western governments can generally borrow money at low rates in comparison to all other types of borrowers. They’re seen as reliable, more so than businesses who in turn are seen as more reliable than individuals. So the money may be available to nationalise, but it will make a country’s debt level look rather more alarming.

However, the Sam Vimes “Boots” theory of socioeconomic unfairness⁷ may make the numbers appear less worrying. Described by Terry Pratchett in the novel Men At Arms, Vimes worked out that the rich were rich because they spent less money. His example was that a rich man could spend $50 on a pair of boots that would still be in good condition after 10 years, while a poor man will have bought a new pair of low-quality $10 boots every year, spending twice as much over the same time.

Yes, nationalisation comes with eye-watering upfront costs, but over the course of a few generations, it offers marked economic benefits to society as a whole.