By Mike Walden
One of the initiatives of the upcoming Trump administration is the “DOGE,” — the new Department of Government Efficiency. Its stated goal is finding unneeded government spending to be recommended for elimination. With an annual federal budget of $7 trillion — 46% higher than prior to the pandemic — and with almost $2 trillion of it borrowed, it might appear the DOGE will have an easy time finding millions, if not billions, of spending that could be cut with no harm to government services.
But will it? Prior to becoming an academic, I spent time working in the business sector in the furniture industry, and also in the government sector, at both the city level in my hometown of Cincinnati and with the federal government. So even before I studied the economics of private businesses and public governments, I understood that the incentives, goals and operations of each were very different. Recognizing and understanding these differences will be crucially important for making the DOGE a success.
The incentives of a private company are simple. First, owners of a private company, which can be a single person, a partnership or numerous investors, are using their own money. Owners of a private company strive to sell a product or service consumers want. The owners charge a price that covers the costs of the product or service, with some funds remaining to provide a profit to the owners. Profit is the reward owners receive for taking the risk of operating a company.
Automatically built into these incentives is efficiency in the production of products or delivery of services. If the company can make the product or deliver the service at a lower cost, this leaves more money remaining for profits. Yet at the same time, if the owner cuts corners too much, such that the product or service is not as good, consumers will shift their buying to alternative companies. Hence, the combination of the profit motive and competition keeps costs lower and moderates prices in private companies.
Government is entirely different with many different incentives. First, those who decide on government products and services, such as elected officials and people who manage the government products and services in the federal bureaucracy, are not using their own money. They are using taxpayers’ money or money the government has borrowed. Operators of private companies have their own money at risk or the money of investors who can choose to sell their investment if they aren’t pleased. Taxpayers don’t have that option.
Second, there is no profit motive because profits don’t exist for government programs. Third, there is no competition, especially at the federal level. If a person doesn’t like the products or services provided by the federal government, there is no alternative provider. The only option is to move to another country. However, at the state and local levels, there are numerous alternatives, allowing people to “vote with their feet” if they are unhappy with state or local programs or services.
Hence, in government work there is no automatic motivation to be efficient, as there is for private companies. Indeed, if a government employee makes recommendations to cut costs in delivering programs, the employee may be opposed because cutting costs could mean job or salary losses.
While DOGE may go through the thousands of federal programs and identify those that are wasteful — in DOGE’s evaluation — the ultimate solution may be more fundamental. Can incentives be introduced into the management of government programs such that efficiency and effectiveness become objectives?
One way discussed in the past is introducing competition. The U.S. Postal Service is a good example. Originally funded by the federal government, the Postal Service is now totally self-funded and must compete with other companies for delivering parcels and packages. However, the Postal Service is still the only entity allowed to deliver mail.
Going even further in this direction is the idea of privatization. This approach means taking governmental programs and putting them out to bid to private contractors. The entity with the best bid wins the contract for a specified number of years. Knowing there is a limit on the contract motivates the company to be efficient and effective. Many cities, including New York City and some in North Carolina, have used this method for trash pickup. Yet for privatization to work, there must be an easy and obvious measure of performance. For trash the performance metric is easy: Was the trash picked up and delivered to a landfill or incinerator?
Still, there may be ways to instill efficiency and effectiveness into government programs. The key is developing understandable performance measures for programs. Importantly, the measures must be ones that cannot be manipulated.
As an example, consider a federal program targeted at improving the academic performance of young students, where there are numerous ways the funds can be spent. The federal staff administering the program could be told that for every percentage point improvement in the test results of the students, staff salaries are increased by 1 percent. This would give staff an incentive to research the best way for improving academic performance and for spending the funds in the most effective way.
Of course, all federal programs don’t have easily measured objectives. But this might be another area for recommendations and improvement from the DOGE.
To an economist like me, my conclusion is the DOGE needs to go beyond simply saying, “cut this, cut that.” Instead, have the DOGE also make recommendations for changing the incentives of operating government programs to provide motivation for effective and efficient management. Could this approach work? As always, you decide, and Happy New Year.
Mike Walden is a William Neal Reynolds Distinguished Professor Emeritus at North Carolina State University.
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