Thursday, June 2, 2011

Two Different Worlds: The Public and Private Sectors

Most everyone realizes there are differences between the economy’s public and private sectors. However, they may not appreciate just how great the difference is.

We have an ongoing debate about the size of government, and by implication the size of the private sector. When choices are made about what responsibilities and functions to assign to the government, a crucial consideration should be the relative competencies of the private vs. the public sectors.

Consider, for example, differences in how the two sectors take advantage of advances in technology. In the private sector old products become better and cheaper, and new products flow with increasing frequency.

My 2009 car is the same make and body style of a 1990 one I owned years ago. It is significantly better in every way — more powerful, 25 percent better gas mileage, better brakes, more safety features, better handling, and more fun. The application of numerous breakthroughs in technology would be too numerous to count. The inflation-adjusted sticker price has actually declined. I have seen similar improvements in virtually every consumer product I buy and use.

The private sector’s products all around us — food, shelter, clothing, automobiles, home appliances, entertainment, for example. The public sector’s products include defense, the justice system, roads and highways, public schools, income redistribution (welfare), laws, and regulations.

Many of the government sector’s outputs are more like anti-products than products. Regulations stifle innovation, decrease productivity, increase costs, and generally drive people crazy. Rather than wealth creation, regulations result in wealth prevention.

In the private sector virtually every product and every service has been profoundly affected by the technological revolution. The government sector, on the other hand, seems to have no learning mechanism. The private sector is responsive and dynamic; the public sector is almost catatonic. In the private sector new products are introduced at a dizzying rate of speed.

The private sector provides ideal growing conditions for creativity. A striking example of this is the explosion of “apps” (applications) for “smart phones.” (A smart phone is a cell phone that connects to the internet.) The two leading providers of apps are Apple and Google. The current population of available apps is over 350,000 and still growing. Many of the apps are free or cost only one or two dollars.

What these apps can do for you is absolutely mind boggling. The proliferation of the apps is a dramatic example of R.W. Emerson’s observation, “Invention breeds invention.” The apps’ universe has provided creative opportunities for thousands of widely dispersed innovators and entrepreneurs. Hundreds of thousands of innovative people are diligently “finding a need and filling it.”

The government sector is “so yesterday.” Is there any example of technology noticeably increasing the efficiency of government? Does government productivity ever increase? We have expended trillions of dollars on the “war on poverty” and the incidence of poverty is as basically unchanged. Public schools consume a large fraction of state and local budgets. Public schools have grown progressively more dysfunctional over the past several decades.

One of the public “products” most of us are forced to “consume” is the Internal Revenue Code. During the almost hundred years of its existence its efficiency has consistently grown worse. Its birth coincided with that of the Model T Ford. Automobiles are vastly superior to those of the early 20th century, the IRC has evolved backwards. In terms of resources consumed and the burden on the economy, the costs of collecting a dollar of revenue has increased dramatically over the life span of the Internal Revenue Service. The Model T is a museum piece. The IRC should be.

The relative shares and importance of the public and private sectors are only partially a political decision. It isn’t simply about spending money and passing new laws and regulations. The public sector is certainly doing enough of that.

There is in effect an undeclared race between the public and private sectors in regard to satisfying human wants. Who’s winning that race? Which sector is doing a better job of affecting peoples’ lives in a positive way? In fulfilling human wants the private sector is leaving the public sector in the dust. People get more and more value from the private sector and the same or less value from government activity even though the cost of government has increased at an exponential rate.

Why is there so much difference in how the two sectors function? Two important reasons are incentives and competition.

The University of Rochester economist, Steven Landsburg, says, “Most of economics can be summarized in four words: ‘People respond to incentives.’ The rest is commentary.” Although I think that’s an exaggeration, there is much truth in it. The private sector is vastly more effective and efficient than the government mostly because of the differences in the incentive structures. In the private sector you can get rich filling needs and solving problems. The public sector’s incentive structure is totally dysfunctional.

In a competitive environment, innovation, efficiency, and product improvement become matters of survival. Apple and Microsoft spend billions of dollars annually on research and development. They spend those vast amounts more out of necessity than choice. If they did not they would fall behind and lose market share.

President Obama complained recently about the White House’s obsolete phone system. He said that the White House phones are “30 years behind,” and “we can’t get our phones to work.” He said that he was disappointed by the lack of “really cool phones and stuff.” Does he ever wonder why this happens? I doubt that he does. I’m pretty sure no major corporation has an obsolete phone system.

Mr. Obama’s campaign themes were “hope and change.” Ironically, he is intent on increasing the role of government, the entity most resistant to and even incapable of change and innovation, and there is little reason to hope that will change any time soon.

In light of the stark difference in the effectiveness and competence between the private and public sectors, it totally mystifies me that any sentient person would want to transfer more power and money to the government.


Two Different Worlds: The Public and Private Sectors June 1, 2011

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at

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