Total Government Outsourcing

A drastic application of a tested business technique: Outsourcing

This site is for those who want to solve the economic problems of the country and improve the standard of living of the people; it is for people looking for solutions.
It is not for those who think they "know better" (and want to impose their ideas on others); it is not for those who are ideologically rooted in doctrines of socialism or communism (you can certainly find many of those sites); it is not for people rooted in partisanship.

 

WHAT IF: We could double the country’s GDP?
WHAT IF: We could significantly boost wealth creation?
WHAT IF: We could substantially increase the standard of living of the poor and the middle classes?

Here is How

1. Government budgets and services do not necessarily need to be cut (as a result of this particular idea), but ALL of the human resources in government should be outsourced. However, elected politicians would maintain their full decisional power, as representatives of the people.

2. The Total government budget amount for the year should be set as a percentage of the current GDP. Politicians will be able to only appropriate that amount for government programs. Incidentally, they should deal only in percentages of the budget for each program, not refer to explicit amounts.

3. Only elected positions should be paid a salary directly by taxpayers. Government bureaucrats would disappear (including personal secretaries of politicians): They would become employees and contractors of private companies. Appointed positions should also be treated as independent contractors. If a person can be appointed, it can also be "disappointed" (pun intended).

4. What politicians cannot do personally should be outsourced through a public bidding process and paid according to the agreed budget allocations. No political appointments should occur (nor positions created) outside the elected positions enumerated in the Constitution.

5. From the very top level, a management company should be hired though a public bid, to manage the outsourcing of government programs to other companies through similar public bids.

 

But let's go in order and see fist why we have a need of such a basic reform and how TGO can accomplish the three initial claims, and more...

THE ROLE OF GOVERNMENT
This is not the place to discuss in detail what the role of government is. However, we want to clarify here the difference between two critical aspects:

Government Responsibility: the power of the peoples' representatives to take decisions.

In any free country the people have the power to govern, through their representatives. For example, in the U.S., the "Powers of Congress" are explicitly enumerated in the U.S. Constitution (Art. I, Section 8).

This responsibility includes the power to make laws for carrying into execution those powers.

Government Competence: the ability and competence of the people who carry out government programs. 

The question of competence has generally been handled "by default". Once the elected representatives had voted to initiate a new government program, they automatically assumed that they (usually one of the government offices) could competently carry it out. If interested in history, you can click on: A bit of History and Data.

The first example of government outsourcing is in the US Constitution itself (Art. III, S.2). The founders realized that not every judge might be impartial. To avoid the situation where a private citizen could be criminally condemned by a corrupted judge, they established that the verdict in all criminal cases would be delivered by a jury. These people would not be employed by government and presumably would have no ulterior motives.

Their decision indicates that they believed that "outsourcing" constituted a citizens' defense against the possible corruption of government officials.

Definitions:

NATIONALIZATION
Nationalization, the act of taking over of industries by governments, has been tried in different proportions and has been adopted in different measures, by all industrialized countries. A complete nationalization of the economy, called national-socialism or communism, has been tried at different times and in various countries, notably Nazi Germany, Communist Russia, Communist China, Cuba, etc. Many dictatorships create nationalized economies, or create conditions where the free market cannot operate (See: Government Interference with the Free Market).
We know that a nationalized economy will eventually fail. Not one has ever worked.

PRIVATIZATION
Privatization, the opposite of nationalization, is when the government releases some of its functions to the private sector. In various countries people who had tried nationalization have reverted to more privatization under freer economies and democracies.

While complete nationalization has been tried (and failed) many times in many countries, no country has tried the opposite: complete privatization. Even countries like the U.S., which are criticized by some for their "capitalism", allocate only part of their human resources to wealth creation.

For example, currently in the U.S. more people work in various levels of governments than work in the good-producing industry. Some industries have been nationalized, others have been regulated out of business and, at the same time, the "Obamacare" massive legislation is in the process of nationalizing a large percentage of the US economy.

 

On the brink of Economic Collapse

During the last 200 years we have delegated more and more to government.
After the 1960’s, when government size reached and surpassed its optimum, we have been operating on the brink of economic collapse (See the STING curve – Economic Optimalism).

The Critical Section of the STING curve:

 

FIGURE 1: The “optimum” government size was reached in the 60’s. Since then, we have been operating in the critical section of the STING curve: on the brink of economic collapse.
Now any increase in government size reduces wealth creation and economic performance. When austerity programs start making a difference, we use the fruits to grow the public sector again.

 

Government Size is measurable in the resources it uses: such as assets, expenses, currency, future wealth (debt) and human resources.

Government has a tendency to grow and historically it has continued to grow. It uses more and more human resources to create bureaucratic, non-productive, service-oriented jobs. It started two hundred years ago with about 550 people elected to the federal government.

Today the federal government uses (i.e.: removes from production) almost 5 Million people (Source: US Office of Personnel management). At all levels of government, over 20 Million people in the US (Source: US Census Bureau) are employed by governments and their contribution to wealth creation is limited.

Government size:

 

FIGURE 2: Government “size” can be measured by several indicators, among which:
 - total government expenses,
 - total number of government employees, and
 - their increasing salaries with respect to equivalent salaries in the private sector.
These indicators have historically continued to grow and have a compounding effect on the “size” of government.
Of particular concern are human resources.

Over 20 Million bureaucrats in a work force of 121 Million is a significant amount. It is more than the total amount of goods-producing employees (Source: U.S. Bureau of Labor Statistics).

These 20 Million people are using the existing infrastructure, products and services, but are not contributing to wealth creation, apart from their ability to spend their own salary. In a competitive environment (i.e. when creating profits for their bosses) they could be providing the same services and also directly contribute to wealth creation through their work. If they were, then the GDP would double, tax rates could be reduced and government revenue would greatly increase!

The human resources dedicated to wealth creation have been exploited by governments which are non-competitive in the services they offer and compete unfairly in the salaries they pay.

Public Service Unions have no real counterpart to deal with and have unreasonably increased the salary of bureaucrats, with respect to their counterparts in the private sectors.

Public service efficiency and motivation are low. We are not able to measure the efficiency of bureaucrats, far less increase it.

 

We can do much better

We measure the wealth of a nation not by the number of people employed, but by the wealth people create. That’s the GDP.

FIGURE 3: Wealth Creation Cycle

Wealth creation works both additionally and exponentially: Not only any new idea, product or service increases the nation’s wealth, but there is an exponential component: every new idea, product or service can be used by someone else to produce more wealth. This cycle repeats itself over and over.

Wealth Creation Exponential Growth:

 

FIGURE 4: Wealth creation compounds exponentially because of at least two factors:
 1. (vertical axis) New products in the market require products, services and human resources from someone else, and
 2. (horizontal axis) The newly created ideas, products and services (technology) now available in the market can be used for more innovation and higher productivity by someone else.

 

A Classless society?

Many people have a dream of a "classless society" in which people are evaluated and respected for their ideas and the work they are doing. In many respects and in a large measure we have achieved a better society with respect to a century ago. However, because of the increasing compensation disparity between private and public sectors, we are creating a new class division between the people who produce wealth and the people who administer the "rules of the game" for them.

The gap between these new classes is becoming of Orwellian proportion.

At the same time, we are not using the full potential of our human resources. We even have more people out of work.

Finally, because we are operating far from the optimum in the STING curve, the economies of the industrialized nations are not growing at the rates they were growing in the 60's, even though we have incredibly superior technology, better tools for production, improved and cheaper communications and improved personal productivity.

Total Government Outsourcing aims at eliminating these problems. It also aims at reducing corruption, reducing waste and costs, improving quality of service and improving the efficiency and the motivation of the people currently working in government, by "outsourcing" them to the private sector.

Because of the exponential features of wealth creation, the addition of a large number of people to the private sector work force (for example, 18%) can double the wealth being created (GDP) with advantages for all, but especially for the poor, the jobless and the disadvantaged.

Private businesses are missing much of the potential of our national human resources, which currently work in government.

Current Model:

FIGURE 5: Currently we delegate to Government not only the decisional power, but also the opportunity to administer and carry out programs and services.
These are often non-competitive, may become monopolies, or are unwanted, useless or wasteful. A large part of a highly educated work force is used in this environment, below their potential ability, and with a limited opportunity to produce wealth.
The remaining work force can only produce a limited amount of wealth.

 

The cost of a non-competitive government

The public sector margins (Budgeted amounts in addition to prime materials, salaries, administration and marketing – if any) go into expansion of bureaucracy, duplication and often unwanted products and services (See Figure 6). Essentially, the Public Sector tends to grow itself. Bureaucracies tend to deduct from the GDP.

The private sector margins go into taxes and profit. The goal of the private sector is to maximise profits. Profits are re-introduced in the market, thus produce more wealth and add to the GDP.

FIGURE 6: The possible margins left in the yearly budgets of the public sector tend to be re-invested in more government. The private sector margins are used in a large part for corporate taxes. Only the profit part (if any) is used to create more wealth.


WHAT IF: We could increase assistance programs? Increase emergency resources? Start new highway construction projects? Increase Investment in infrastructure, defence, policing and justice?

WHAT IF: We could balance the Federal budget every year? Reduce inflation to zero? Stop the devaluation of the dollar?

WHAT IF: We could drastically reduce the opportunity for public service corruption?

WHAT IF: Government bureaucracy could be reduced to practically ZERO and its 22 Million workforce transformed into new, efficient, customer-friendly, wealth-producing businesses?

WHAT IF: Every Public Sector Union could become a Private Sector Union?

 

The TGO Model:

FIGURE 7: With Total Government Outsourcing, over 20 Million people would be added to the cycle of wealth creation. All non-elected government positions and programs would be contracted out (by private companies) to individuals and companies through open bid processes at all levels of government.
(Optionally, with tax reform in addition to TGO, all government revenues would be collected through a sales tax.)
The GDP would double, tax requirements would be reduced and government revenues would greatly increase. These revenues would re-enter the cycle, creating more infrastructure, programs and services. With increased economic activity, demand for human resources would increase, and drive up salaries and the standard of living of all.

 

FIGURE 8: All people participate in wealth creation.
Lower costs of production, higher salaries and/or profits.
(In this figure, it is assumed that taxes are only collected when goods and services are exchanged – i.e.: Sales tax.)
All margins (profits) are re-invested in more wealth creation.

 

Examples

Click here for: Examples of how Total Government Outsourcing would affect the provision of Government Services.

 

An example of privatization of one particular sector of the economy:

FIGURE 8: This is an example of the growth of personal pension funds achieved in Chile with the privatization of their pension funds program: 9,100% growth in 15 years. This growth had an impact on domestic savings, on the housing market, on the insurance industry and financed a significant reduction of the public debt.

Download the PDF report on the Chilean Pension System here.

 

A REVIEW

At this point there may still be some confusion:

Is Total Government Outsourcing (TGO) proposing a reduction of government?

TGO, by itself, is not a way to reduce government. It is a way to separate the decision power of government representatives (how to allocate government revenues), from the mechanism of offering government services, using people motivated to carry out their provision competently and efficiently.
A certain amount of government is needed, for the purposes listed in the US Constitution. The discussion about "Limited government" is tackled elsewhere.

Is TGO proposing that every product or service should be provided by a private corporation?

Although products and services would provided by private corporations, the two distinguished private and public path of decision making are maintained (see discussion and tables below).

The objective of TGO is an efficient use of government revenues and a competent and efficient delivery of government services.

This is achieved by using the business model of outsourcing.

Outsourcing implicitly creates fair competition, through the process of open bidding.

As a consequence of fair competition, outsourcing would improve efficiency of operation and would provide closer services to what we, the people, require. It would also improve end-user satisfaction.  

A more detailed analysis:

We can divide working people in the following categories:

A. People working for themselves (consultants, professionals, etc.)

B. People working for a business or organization (full time employees).

C. Elected (or constitutionally appointed) representatives.

Furthermore, businesses and organizations (all of them strictly speaking pursuing the goals of the owners, shareholders, founders  and directors) could be further classified according to their "vertical market" as:

A. Ultimately working for private projects,

B. Ultimately working for government projects, or

C. a mix of the two.

Eventually, "at the end of the chain", any person working provides a product or service utilized in some project, either for:

1- a private goal (a product or service requested by other people for their enjoyment and pursuit of happiness), or for

2- a public goal (a product or service requested by people as a "return" for their common investment in Government),

Notice that the end user is always a person, one of us "people".

LET'S FOLLOW THE MONEY 

Private path
(projects with a private goal)

Public path
(projects with a public goal)

People are willing to spend their own money for a product or service "in the marketplace". Something they need or desire. They are willing to pay for the cost of research, production, distribution and even a consumption tax, for the privilege of owning that product, or using that service.

People are willing to pay a reasonable amount of taxes (for example a consumption tax on everything they acquire) to contribute to government projects that guarantee their safety, freedom, justice, social programs, and whatever else government can provide them.

The difference between the private path and the public path is who decides how the money is allocated (i.e: profits given, or losses shared).

Lets follow the money initially given by the end user as part of the transaction (acquiring a product or a service):

Private path

Public path

The money is given by the end user (through direct payment) to another person or a private business.

The money is given by the end user (through taxes) to government. 

In this case an individual, a president of a small business, a board of directors, or shareholders of a corporation, decide how to use that money.

In this case, a group of elected representatives, at various levels of government, decide how to use that money.

In this case, either a person immediately profits for providing the requested product or service, or the president of the company decides how to share profits, or the shareholders receive a share of that profit.

In this case, any "profit" is called a government "surplus" and is either refunded to the taxpayers, or used for the following year's budget. 

We call this path "private", as ultimately a person or a group of people decide where the profits (losses) go.

We call this path "public", as any surplus (deficit) is equally reimbursed to all the taxpayers.


In the above paths, if intermediate corporations participate in adding value to the final product or service, they maintain their profits. As usual, in a competitive environment, such profits are limited. Profits guarantee both motivation and quality. However, in the public path, the decisions about the whole path (e.g. which companies to hire, what services to provide, what quality to require, etc.) are taken by elected people's representatives.

CONCLUSION

TGO makes a distinction between government responsibility and government competence: Our representatives are responsible for the appropriation and decision of how to spend government revenues. Competence (knowledge, experience, efficiency, affordability, quality, responsibility and service), is best developed and advanced in a competitive business environment and not in a bureaucratic environment.

TGO can be implemented together with other measures intended at improving or limiting government. TGO maintains the difference between private and public paths. It maintains government "size" chosen by the people, measured as the total amount of money we are willing to spend on public services. The discussion about what is the optimum amount of government, is tackled elsewhere (See "Economic Optimalism"). 

TGO (without considering other measures) maintains the same amount of government revenues (today measured in the Trillions of dollars) and expenditures - although expenditures will tend to drop and revenues will tend to increase.

Our elected government representatives (as it is currently the case) will continue to debate which share of government revenues is allocated to each government  program and how these revenues are spent in order to provide public services.

TGO only changes the way in which such money is used to carry out these services: i.e: through the normal practice of outsourcing, applied to all government levels.

______________________________


* Total Government Outsourcing is just one of the ideas of Economic Optimalism: A more scientific, less political approach to improve government.

Where to go from here:

The Self Government Foundation
Giuseppe Gori's blog
Mr Gori's site