Business review; Government finance difficulties

From the national educational radio network here is a Business Review ASSOCIATE PROFESSOR ROSS Wilhelm of the University of Michigan Graduate School of Business Administration presents his views and comments of business and economic activity. City and state governments been having serious financial difficulties in recent years per capita spending rose six point two times from one thousand forty two to one hundred sixty six. Well per capita revenues rose by only five point five times while these financial difficulties are troublesome for these governments. The long run consequences for the entire society can be healthy. The rise in spending by local and state governments has been mainly for added services most of us agree are desirable. The greatest increases have been for added education for added health care and facilities. The additional spending by local and state governments has not been for increasing public welfare as many believe. Indeed public welfare spending on a per capita basis from one thousand forty two to 1066 only increase 3.7 times while overall spending went up by six point two. In addition spending for such services as police and fire protection sanitation and

general government went up only 5.1 times. It's clear from the record that the spending increases have been for services we all would agree would are desirable and wanted. And yet despite the fact that local and state governments are satisfying urgently demanded needs. They're still experiencing financial difficulties. They have a hard time securing the money required to meet their spending. This is a paradox in business when a firm is selling an urgently needed product it usually has no trouble in obtaining the money it needs indeed the usual case is that the firm has a surplus and earns a profit. Why is this not the case with government. Why is it that when government agencies face a rising demand they most often have money shortages and often have losses instead of profits. I believe the answer to this paradox is to be found in the incentive system in government as compared to the private sector. And a private business the incentive of the manager is directed toward reducing its costs and toward reducing increasing as revenues the income of the business man depends upon his making certain that

the firm earns a profit. The business man's income depends on his pricing the product correctly and upon minimizing the cost of each dollar of sales. But in government the incentives for the managers work in exactly the opposite direction. The government manager whether elected or appointed has a strong incentive to minimize criticism. Politicians and government bureaucrats do their utmost to avoid complaints from voters or criticism from other politicians and this is very reasonable. Such criticisms are often the reason why elections are lost and politicians are run out of office. How unfortunate. However unfortunately the process of minimizing criticism. Can result in poor management practices and the money difficulties we see facing our governments. The minimisation of criticism leads the underpricing of government provided services and being lax on cost cutting. It's the least painful path for government managers to not charge the full cost for the services they provide or to continue to

employ unneeded employees or to provide low demand services. We have taught our bureaucrats and politicians that it's easier to go to the taxpayers and to ask for more money or to pressure the government federal government for more money than it is to do an effective job of managing and properly pricing services and cutting costs. As a consequence I don't think it's bad from the long run view of point of society that city and state governments are finding tax payers balking at higher taxes and that the federal government is not as easy a source of money as it has been. It is desirable over the long run that we do use our resources in both the private and the public sectors as best as possible and we will only obtain the proper use of resources in the government sector. When politicians learn that it's not easier to raise taxes or to run to the federal government for more money than it is to do an effective job in managing public enterprise. That was Associate Professor Ross Wilhelm of the University of Michigan Graduate School of

Business Administration. With his views and comments on business and economic activity Business Review is recorded by the University of Michigan Broadcasting Service. This is the national educational radio network.