I like this part:
"When Bismarck introduced the world’s first state pension system in 1889, he set the retirement age at 70, some 25 years beyond the average Prussian’s life expectancy, so it did not cost much to run. When America brought in its Social Security system in 1935, average life expectancy was only 62. In the OECD countries men on average now live to 76 and women to 82. In most rich countries raising the pension age to, say, 70 by 2025, and thereafter linking it to life expectancy (which keeps on increasing), would go a long way towards reducing the government’s structural deficit."
and this one:
"Another cause for pessimism is that government does not respond to normal pressures. Most obviously, there is rarely the threat of bankruptcy. Indeed, most of the examples of efficient government involve warfare or other crises. The idea that business skills do not translate to politics would seem to be borne out by the string of businesspeople who have failed to make much of a mark in government. Silvio Berlusconi has achieved a lot less as Italy’s prime minister than he did in business. A more successful transplant from the media industry, Michael Bloomberg, the mayor of New York, says he had not realised how different running a city would be: “People are motivated by different things and you face a much more intrusive press. You cannot pay good staff a lot of money…In business you experiment and you back the projects that win. The healthy bits get the money, and the unhealthy bits wither. In government the unhealthy bits get all the attention because they have the fiercest defenders.”
Full article:
The gods that have failed—so far
Could technology and good management bring the public-sector up to scratch?
Mar 17th 2011 | from the print edition
ASKED to talk about how technology affects productivity, Peter Thiel, the venture capitalist who backed Facebook, draws a simple graph on his whiteboard: input on the Y axis, output on the X axis. He then dabs on two blobs. The private sector goes in the bottom right (you put in relatively little and get out a lot); government goes in the top left: a lot of input and very little output.
Mr Thiel, a prominent libertarian, may be unsympathetic to the public sector, but his chart is not a bad guide to the past 40 years or so. Productivity in government is difficult to measure and statisticians have generally stopped trying to come up with precise figures. But such numbers as there are all point in the same direction. With a few small exceptions, government lags behind the private sector.
Two closely related things have transformed the private sector since 1970. The more obvious one is technology: think what ATMs did for banking. But management ideas—everything from profit-related pay to lean manufacturing—have arguably done even more to raise productivity. Toyota spent less on computers and robots than General Motors did; it won by out-managing its rival.
The public sector has certainly dabbled in both these things. From Berlin to Bangkok, every big consultancy has a thriving public-sector practice. Many of the ghastliest examples of management-speak come from the public sector. And some of the biggest disasters in public spending have involved technology, such as the attempt to link up Britain’s health records nationwide. But neither has really changed government profoundly.
The pessimistic explanation is that they never will: there are good reasons why the public sector will always be resistant to change. Optimists have to make the case that “this time will be different,” which is harder. But just this once it could be true.
Government is different
Begin with the depressingly long list of reasons to be pessimistic. The most fundamental one remains the Baumol effect: labour-intensive services, such as nursing and teaching, have thus far proved as immune to productivity-enhancing technology as string quartets.
Another cause for pessimism is that government does not respond to normal pressures. Most obviously, there is rarely the threat of bankruptcy. Indeed, most of the examples of efficient government involve warfare or other crises.
The idea that business skills do not translate to politics would seem to be borne out by the string of businesspeople who have failed to make much of a mark in government. Silvio Berlusconi has achieved a lot less as Italy’s prime minister than he did in business. A more successful transplant from the media industry, Michael Bloomberg, the mayor of New York, says he had not realised how different running a city would be: “People are motivated by different things and you face a much more intrusive press. You cannot pay good staff a lot of money…In business you experiment and you back the projects that win. The healthy bits get the money, and the unhealthy bits wither. In government the unhealthy bits get all the attention because they have the fiercest defenders.”
There are even ideological reasons why liberals in particular should want to keep the state relatively inefficient. Joseph Nye, a former dean of Harvard’s Kennedy School and author of a book on power, says that Americans do not really want their state to work too well: “There is something special about government. It has coercive power, so it is essential that you have a healthy scepticism of it.”
So why should this time be different? The immediate reason is that in many countries the state is now so bloated that, even without changing the basic structure of government, it could be made much more efficient.
In the short term, assuming a recovering economy, government can surely be slimmed relatively painlessly—if only because it has grown so fat. The howls across Europe about unprecedented budget crises ignore three things. First, Sweden and Canada have chopped their public sectors after financial crises and lived to tell the tale (albeit against a much more clement global economic backdrop). Second, most European countries need do no more than reduce government spending to its level of three or four years ago. And third, many of the cuts are tiny by private-sector standards. At a private dinner in Paris recently a group of French businesspeople listened politely to a politician moaning about his department having to reduce its costs by 5%, until one of the private-sector bosses pointed out that he had knocked out a fifth of his costs in a little over two years. The politician shut up.
People can argue over the respective virtues of making across-the-board cuts or targeting particular departments (they usually do a bit of both), but managerially speaking it is not a tough ask. Reforming American defence procurement does not require structural change, just making use of the Pentagon’s clout with suppliers. A recent study by the National Audit Office showed that Britain’s National Health Service (NHS) could save £500m (well over $800m) a year by bundling its buying power; there is no need for hospital trusts to buy 21 different forms of A4 file paper and 652 different kinds of surgical gloves.
In the longer term, though, two sorts of opportunities present themselves: changing what the state does; and changing its structure. The first set tends to be administratively (fairly) simple but politically hard. For instance, getting rid of industrial and agricultural subsidies makes sense, but politicians cling to them. Even bigger potential “quick wins”, though ones fraught with political difficulty, are to be found in pensions. Switching state employees from defined-benefit to defined-contribution plans and raising their retirement ages to prevailing private-sector levels would save most governments a fortune—but not as much as upping the age at which everyone starts receiving their state pension.
When Bismarck introduced the world’s first state pension system in 1889, he set the retirement age at 70, some 25 years beyond the average Prussian’s life expectancy, so it did not cost much to run. When America brought in its Social Security system in 1935, average life expectancy was only 62. In the OECD countries men on average now live to 76 and women to 82. In most rich countries raising the pension age to, say, 70 by 2025, and thereafter linking it to life expectancy (which keeps on increasing), would go a long way towards reducing the government’s structural deficit.
In America Social Security is known as the “third rail” of politics: state pensions electrocute any politician who touches them. But the case for increasing retirement ages is overwhelming. It also begins to open the door to a proper debate about social transfers, including things like means-tested benefits. That argument will be much easier to make if the second set of opportunities to do with updating the structure of the state has been grasped.
On this score, unlike on benefits and transfers, almost everyone agrees what needs to be done. Britain’s Tony Blair puts it this way: “The modern Western state was created in the era of mass production and command and control, where governments told you what to do and provided everything. Modern life is about choice—and the state, even if it pays for something, should not be the only choice.” He argues that creating “a post-bureaucratic state”, with a small centre and a multitude of public and private providers, should be a particular cause for the centre-left to embrace. “In every other walk of life a citizen gets services from bodies that are anxious for their business. We have to open up the state to transparency and competition, or else anyone who is rich enough will pay to opt out.”
Mr Blair has no truck with the idea that the public sector is bound to keep growing. The key, he thinks, lies in breaking the state down into innovative smaller units, like charter schools in America and academies in Britain. “As more and more choices are made by consumers, not politicians, we will shrink the state,” he predicts.
As is his wont, Mr Blair tends to be more messianic about this than most politicians. But to see how such ideas might work, consider two changes in the car industry. First, in the era of mass production Ford did not just make its own steel; it also owned the fields on which grazed the sheep whose wool went into the covers of its car seats. Now it contracts out much of this, even though its name remains on the car. Second, in the 1970s there was a big gap between the quality of the output and the efficiency of, say, Japanese carmakers and their American peers. Now competition has minimised that advantage (and no longer always in favour of the Japanese).
Don’t do it yourself
For its part, the public sector in many countries still wants to do everything itself. Surprisingly, America, the country that has preached the Washington consensus of privatisation to the world, still owns a lot of its railways, ports and water systems; it also makes less use of for-profit schools than does Sweden. And if Britain’s gargantuan NHS were to contract out as much of its business as the French and Dutch health services do, it would be a lot more efficient. The District of Columbia has shown how much can be saved by outsourcing: it has reduced its e-mail costs by 80% and its video-hosting costs by 90% by moving them to Google and YouTube respectively.
The huge variance in performance between different bits of the public sector that do the same thing is shocking. Sweden spends half as much on health care per person as America does, yet Swedes live longer. Research on degree courses at public universities shows that some Western countries spend 30% above the average on a degree whereas others remain 70% below it, says Lenny Mendonca, a public-sector expert at McKinsey. “In anything even resembling a free market, many of the best-performing public institutions would have wiped out all the others,” he adds.
Variance within countries is harder for public-sector unions and other local vested interests to ignore. Sir John Oldham, an expert in health productivity, points to two similar adjacent areas in southern England where “unscheduled admissions” to hospitals (ie, the expensive sort) vary by a factor of eight; in another there is a 13-fold difference in the number of hospital referrals from similar doctors’ practices.
By reducing these variances, quality would be improved and a huge amount of cash could be saved. Sir John has calculated that if every NHS organisation in Britain currently operating at costs one standard deviation above the mean were to improve its performance to the mean level, the NHS would save somewhere close to the £15 billion it is supposed to find over the next five years.
It is about care as well as costs. The McKinsey Global Institute points out that at some American hospitals nurses spend under 40% of their time with patients. Naming and shaming is one way of getting better results. Sweden’s health registries, a much-cited example, provide statistics on the performance of individual hospitals. The fear of coming out badly in a national league table is a powerful incentive to try harder. A study by the Boston Consulting Group found that Sweden’s National Cataract Register not only reduced the severity of astigmatism resulting from eye surgery but also narrowed the variance between the best and worst hospitals by half.
Just wait till they find out
With such examples in mind, some argue that government reform will be akin to a popular revolution, driven by the spread of information. Just as American motorists, resigned to cars that broke down, rapidly ditched Detroit’s products once they found they could buy cars that worked, so American parents will no longer tolerate the excuses of the teachers’ unions when they discover that children get a much better and cheaper education elsewhere.
There is something in this. Few politicians now question the need to publish school-performance tables, despite the furious fusillades from the unions when they were introduced. One education minister argues that the most powerful force in school reform now is the OECD’s international PISA ranking (see chart 6). “Waiting for Superman”, a documentary by Davis Guggenheim, the director who made “An Inconvenient Truth”, but this time attacking America’s teachers’ unions rather than climate-change deniers, was a big hit. As charter schools and the like outperform their peers, there is pressure to break up the old fiefs and introduce competition.
Clayton Christensen of the Harvard Business School, perhaps the world’s most respected writer on innovation, thinks the public sector will be upset by what he calls “mutants”—new organisms spinning out of it. He points to the success of Guaranteach, an online store of teaching videos set up by two former teachers in 2008, and other similar outfits.
A new wave of frugal innovation coming from emerging markets will also make an impact on the public sector. South Korea is a leader in education testing. India is taking a dramatically different approach to health care. It has found a way to reduce the cost of heart operations by setting up huge hospitals that can reap economies of scale. It is already cheaper for Westerners to fly to India as health tourists than to have treatment at home.
Many think the web will shift the balance of power between the public sector and its clients. Worried about your child’s school? You can join a discussion group on Facebook. Furious with the American government? You can see how much it is costing you at mygovcost.org. Fed up with Britain’s lousy roads? Go to fixmystreet.org. Don Tapscott, one of the cleverer cybergurus and co-author of “Macrowikinomics”, points to the rise of “prosumers”: rather than merely accepting what the government offers, citizens will shape new services as they appear. Places like the District of Columbia and Canada’s province of New Brunswick have been pioneers, spurred on by a new generation of younger, more web-savvy civil servants. Even health care—the field most resistant to change—could be turned upside down (see article).
So a bottom-up revolution is under way. But for all the obvious reasons, it is advancing more slowly than it did in the private sector. For instance, a recent survey by the New York Times of failed schools in eight American states that were bad enough to get federal turnaround money showed that 44% of the schools’ principals had kept their jobs. Resources are another problem: there are fewer computers in the public sector than in the private because many government departments still do not distinguish capital budgets from operating ones.
Mr Christensen thinks one of the main problems is the lack of a common language. As a young academic he was able to persuade Intel to change course by telling its bosses that the sort of disruptive change that had happened in steel (the arrival of cheap mini-mills) would also happen in chipmaking. Yet when he goes to health-care conferences, he says, nobody uses the same terminology. Doctors, insurers, hospitals and politicians all talk about completely different things: “The only people who could really bang heads together would be the federal government.”
Indeed, for all the evidence of mounting pressure from below, a command-and-control organisation will change only when the top wants it to do so. And here most Western countries have something in common with China: leaders are scared. Some attempts to institutionalise innovation have been made. Geoff Mulgan points out that America has committed $650m to a schools-innovation fund; Britain has allocated £200m to health. Barack Obama has appointed Vivek Kundra, the man who led the District of Columbia’s technology drive, as America’s first chief information officer. Mr Kundra has already saved $3 billion by culling programmes.
Yet the same Mr Obama has recently delivered a budget to Congress that does nothing to reform entitlements. It is not just the threats from vested interests that inhibit progress. Mr Mulgan explains that the first wave of privatising governments in the 1980s and 1990s often did badly at the ballot box. Voters could not see enough change to justify the aggravation. And sometimes restructuring was done in several phases, so it was not clear who was responsible for the good things.
The recent economic crisis has changed minds. There now seems to be far greater acceptance that government is broken, and voters are more prepared to give their leaders leeway to mend it. Even if the debate has barely begun to tackle benefits and social transfers, that still gives politicians an opportunity. In various American states governors have seized it. But on a national scale nobody has grabbed it with more gusto than an Old Etonian Tory.
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Soccer is like the metric system, which liberals also adore because it's European. Naturally, the metric system emerged from the French Revolution, during the brief intervals when they weren't committing mass murder by guillotine. 
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