There is an unfortunate perception, broadly held in the United States, that government spending – particularly at the federal level – is synonymous with waste, while the private sector is a bastion of efficiency. However, both government agencies and private companies are operated by human beings – often the exact same human beings, in an endless rotation – and therefore are susceptible to the same incentives. If working as a legislator or for a government agency precluded someone from ever working for a company or lobbying firm under the purview of that agency, perhaps an argument could be made for differences between the motivations of private versus public employees. But the much-maligned revolving door has proven exceptionally durable, not least because lifetime bans seem anathema to ideas of freedom, and instituting them could also sap expertise from inevitably lower-paid government roles.
Consequently – and with apologies to true servants of the public good – the people both inside and outside government are generally similar. As an example, one oft-cited case of government waste is the credit card fraud uncovered in the USDA and the Department of Defense, involving charges made for personal rather than work reasons. However, anyone who has ever been out to dinner with someone paying with a corporate credit card knows that this problem is not limited to people working in the public sector.
Perhaps people do broadly understand that human impulses don’t change based on their employer, but the inevitable misappropriations rankle more when perpetrated by those working for the government because of the belief that taxpayers end up paying for the foibles of public workers, while the frauds of private-sector workers are Someone Else’s Problem. This belief is wildly misguided, though. Even if we still lived in the halcyon days when companies provided pensions, the assets backing those pensions likely included a slice of stocks.
Today, 401(k) retirement plans have largely replaced pensions, and the “lifecycle” accounts that are popular choices for 401(k) investments almost always include index funds that are meant to be representative of “the market.” In other words, of the 44% of private-sector employees who have 401(k) investments, almost all have a financial interest in nearly every company that has publicly traded stock on a major index (eg, Dow, S&P 500, Russell 2000). According to the Tax Policy Center, about 55% of Americans pay federal income taxes.* It is probably not too far of a stretch to assume that there is a lot of overlap between this group and the people who opt in to their employer’s 401(k) option. Consequently, anyone complaining about the federal government wasting their tax dollars should also be complaining at least as strenuously about corporations wasting their shareholder returns.
While corporate waste is not something new, one instance of it has grown markedly in recent decades, and it has done so in stark contrast to the analogous situation in government: executive pay. The President of the United States makes about 37 times what a newly enlisted US soldier makes and about 21 times what the average soldier makes, a ratio that has declined over the decades even as pay for both has risen. In contrast, the average CEO of a publicly traded company in the US private sector makes about 300 times what the median worker makes. At least on this measure, it appears that the federal government is far more efficient than the private sector.
Although some may argue that running a company adds more value than running the federal government, the historical record indicates that CEOs made 20 times the compensation of the average worker in 1965, a ratio that crept upward slowly until the 1990s, when it jumped initially to 100 times and then soared to 300 times. If the value returned to shareholders during this most recent period were substantially better than in the earlier era of less stratospheric executive pay ratios, then perhaps those who argue that leaders are worth the extra pay would be justified. Unfortunately, although risk-adjusted returns were higher in the 1990s before CEO pay jumped beyond 200 times that of the average worker, since 2000, they have been essentially the same as in the prior era back to 1965, making it seem that perhaps this is an area of waste that could be addressed in favor of shareholders.**
Even for people who don’t have 401(k) retirement plans or other investments in the financial markets, the issue of executive pay is meaningful, particularly right now. Many of the architects of the latest budget proposal from the executive branch have been key beneficiaries of a private sector system that increasingly values executives at staggering multiples of average workers, despite their inability to deliver results. When a small group of people who believe they are worth 300 times more than others are making decisions that affect how the tax dollars of millions of average citizens are spent, it is worth questioning their motivations. This is particularly true when there is no actual evidence to support their valuations of themselves, and yet they proclaim that any program in the budget not showing “results” is subject to being scratched.
Like many Americans, they likely also believe that government waste is a primary cause of the federal budget deficit. According to a recent survey, “waste” in this context is demarcated by most people as spending on programs they don’t like. Just as there is a disconnect between CEOs’ compensation and the value they actually create for shareholders, there is likely a disconnect between the programs people steeped in that kind of corporate culture believe are “wasteful” and the value those programs actually create for taxpayers. Corporations are not inherently more efficient than governments as long as both are operated by human beings, and shareholders should learn to be as angry as taxpayers, particularly since “waste” in the corporate sense is more inimical than just “spending on a program they don’t like.”
*Note: Although most people who work pay taxes for specific federal entitlement programs (Social Security, Medicare), as well as a variety of local and state taxes, not everyone makes enough after various deductions (eg, for local and state taxes) to owe federal income taxes. Consequently, those people are not supporting the various discretionary portions of the federal budget, including most of what is on the chopping block in the current budget proposal from the executive branch.
** Sources for salaries and compensation, as well as market returns are below. Risk-adjusted return was calculated as the Sharpe ratio for the given time periods.