What governments can learn from businesses


The performance of municipal governments and publicly traded companies has become a study in contrasts.

Governments in the United States have been, in a word, uninteresting. Fiscal profligacy is a problem, with many city and state governments racking up pension debt in the 5 digits per capita. There are entire organizations now dedicated to criticizing the chronically stupid infrastructure decisions cities make to compound these problems. Once stuck digging these holes, it is difficult for cities to deliver quality services, let alone innovate. When San Francisco officials held a “toilet paper cuttingto celebrate the reopening of a subway station restroom with long shutters, it symbolized how low expectations have become for American urban governance.

Yet there is another culture of governance that thrives in America: publicly traded companies. Overall, investor markets have proven effective as corrupt (Enron) or obsolete (Toys ‘R’ Us) companies go bankrupt. Companies that survive produce wonderful returns for investors and innovations for society. Since 2012, the S&P 500’s overall shareholder returns have been 177%, while the companies represented there have advanced clean energy, digital technology, access to banking, medicine, and more. ESG, a corporate self-monitoring measure, has advanced workplace safety, fairness and philanthropy. Additionally, specific companies have become known for their operating culture, from the decentralization of Berkshire Hathaway to the employee creativity encouraged by Google.

Given these successes, municipal governments have much to learn from American companies. In fact, it may be worth asking whether the way cities are run – with elections, councils, etc. – is ideal. Public companies have an alternative structure that often produces better results due to the following characteristics.

Aligned incentives: the main objective of public companies is to produce things that people want to buy, that is, to make a profit. The interests of everyone within the company advance through greater profit, so there is a laser focus on that goal.

Municipalities, on the other hand, have dispersed and ill-defined objectives. You’ll never hear a public servant say that his city’s goal is to “make profit,” and he rarely advocates things that would produce profit, like population growth. Rather, community “goals” are listed in overarching plans with opaque terms, while real the goals of a given official or bureaucracy vary according to self-interest. Nobel economist James Buchanan has described this phenomenon of conflicting goals as public choice theory, using it to explain why governments perform suboptimally.

The administration’s advice : similarly, the boards of public companies – which often include major investors in the company – have an aligned mission. While not without toxic politics, the overriding goal is profit, and the boards are filled with credentialed individuals who can contribute to that goal.

In municipal governments, the “council” is a council elected by the residents. The councillors, I repeat, do not have a unifying objective for the city that they could easily put into words. Many of them are elected by appealing to interest groups whose objectives go against the general interests of the city, and the councilors encourage them to advance their own political careers (just look at how the public employee unions captured city services, at a major cost to taxpayers).

Shareholder vote: SOEs are not devoid of democratic features, but this is different.

“Unlike the single vote that individuals typically possess in democratic governments, the number of votes a shareholder has is equal to the number of shares they own,” writing Investopedia. This speaks to a “user-pays” principle in which investors have a say in the decisions of big companies sympathize with the stakes they have bought.

In municipal governance, the word “stakeholder” is distorted to include interest groups that do not have a major financial stake or monetary contribution to the city. Elections are an example of this: every adult resident gets equal representation, regardless of the taxes they pay. This causes a tragedy of the commons where some citizens vote for benefits that other voters pay for, contributing to the debt problem mentioned above.

Bankruptcy: this is perhaps the most useful distinction between how cities operate and how businesses operate.

Bankruptcy has proven to be a self-correcting mechanism in the corporate world. Underperforming companies can go bankrupt, investors lose money, and future mistakes are avoided. Business bankruptcy is common (ranging from 20,000 to 60,000 in the US), which means companies borrow at higher rates and are therefore less forced to use reckless leverage.

For municipalities, bankruptcy is complicated. Many cities would have to go bankrupt to erase their unsustainable debts, but some states are making it legally difficult. In the rare cases where this happens, it is not really a “bankruptcy”. There is a non-traditional order for creditor repayments and city bailouts by higher levels of government. This means that failing governments are supported; lessons are not learned; and other cities are making similar mistakes.

Perhaps the main reason for the “lack of innovation” in cities is that they are not subject to market discipline, including outright bankruptcy. This means that no one who lives there or who governs them faces the consequences of bad tax practice, nor has any incentive to drive improvement.

The idea that government municipalities should mirror publicly traded companies may seem extreme, but it is not. The United States has a well-developed culture of HOAs – over 370,000 representing 53% of owner-occupied households – and being private entities, many of which are mirror companies. For example, The Woodlands, Texas is a city of 114,000 that mixes public and private management. It is owned by the public Howard Hughes Corporation and has a professional management team, but also a democratically elected board of directors.

In the future, there should be more advanced versions of privatization. Wyoming and Texas are seeing separate cities experiment with a Web3 technology called Decentralized Autonomous Organizations. Similar to a publicly traded company, the residents will manage the land via shareholder vote.

The most important point is that there is great diversity in the way public companies operate – often very successfully – and there is no inherent reason that municipalities cannot copy them. While political activists find romance in the crude democracy common in most cities, many consumers prefer HOAs with more private management. As publicly traded companies show, there is no limit to the operating structure that these private HOAs can or should test.

Scott Beyer is the owner of Market Urbanism Report, a media company that advances free-market urban policy reform.


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