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ECONOMY AND EFFIC IEN C Y IN GOVERNMENT EX PEN D ITU RES Wilson W right, economist, Procter & Gamble Co. V ie w p o in t The competence of the writer is the ability to analyze economic situations and to suggest appropriate policy and action to meri respon sible for the management of economic affairs. Because this is the competence and viewpoint employed, there is little unusual which can be offered for consideration by readers of this report. Instead, what ever value, may be assigned to the ideas presented in this report must be attributed to the fact th at the author is accustomed to evaluate the economic consequences of expenditure made by Government from the viewpoint of a person observing and appraising rather than as a participant. E conom y, W aste, E f f ic ie n c y ' : = ' The task of describing standards which can be used to determine whether specific programs undertaken by the Federal Government are economical may begin with a statement of what is understood to be economy, waste, and efficiency. Economy is understood to be the management of affairs with special regard for costs and involves the husbanding of resources. Expenditure is wasteful if it is not economical. Efficiency is under stood to be the effectiveness of managerial action as measured by a comparison of the product obtained with the expenditure or cost. A s s ig n m e n t or R e s p o n s ib ility A review of the organization of the Federal Government, and the operation of the Federal Government in the past, may be used to support the assumption th at neither the Congress nor the; executive branch of the Government actually is formally responsible for efficiency and economy in public expenditure. : Persons in both the executive and legislative branches of the Gov ernment unquestionably have been and are interested in seeing to it that Government expenditure is made efficiently and with economy. Yet neither the executive branch nor the Legislature is actually charged with formal responsibility for the performance of this func tion. The executive branch assembles budgetary data and presents the budget to the Congress. The Congress, on the other hand, can either add to the budget or refuse to appropriate funds necessary to finance items in the budget. Furthermore, with several notable exceptions, few Members of the Legislature have made efficiency and economy in Federal expenditure the basis for their political careers. 258 ECONOMIC GROWTH AND STABILITY 259 Long ago the lack of a formal assignment of responsibility for efficiency and economy in Government expenditure presumably was not a m atter of large importance, because the magnitude of Federal expenditure was not such an important factor in the economy. This situation, obviously, has been changed. In the operation of a popular government, in which political parties adopt specific programs and party discipline is observed, responsibil ity for efficiency and economy may be assigned by the electorate to the party in power. In such cases the high administrative officers are the leaders of the party or coalition which comprises a majority in the legislature. In this kind of a situation the citizen may hold the party responsible for economy and efficiency. Because these char acteristics are not to be found in our form of political organization, economy and efficiency seem to be an interest of legislators and ad ministrators as a consequence of their citizenship, and as responsible individuals, rather than as a formal responsibility related to their positions in the Government. While the lack of a formal assignment of responsibility presumably is a defect in the organization of the Federal Government it, also, may be noted that the management of Federal expenditure does not appear to have been less efficient than the performance of the comparable function by the popular govern ments of other countries in which responsibility seems to be formally assigned. This appears to be a tribute to the commonsense and statesmanship of American political leaders. S tan dards The means of measuring economy, waste, and efficiency in govern ment apparently are quite different from those which could be em ployed in the management of a business operation. In the manage ment of a business the operating statement and balance sheet can be used to indicate whether or not operations have been conducted with efficiency. A comparison of these statements with those of similar enterprises may be used to determine whether the operation of one business is more efficient than the operation of another. Such meas urements and references do not exist for the evaluation of efficiency in government and both the objectives and the responsibilities of a government are different from those involved in the management of a business. Two different types of reference may be used to determine the economy and efficiency of expenditure. The first of these is the kind of reference called a “principle.” Such principles, of course, are judgments or opinions derived from the observation of experience and developed by reasoning. The second type of standard consists of a definition of proposed expenditure, expressed in definite num bers. This is the “budget” which is used in managing expenditure made by both persons and organized groups, including government. In the conduct of business operations it is customary to seek ways and means of reducing the expenditure defined in the budget. The reduction of budgeted expenditure, without producing a commen surate reduction of the volume of production, is an important func tion of business management. In business the incentive to provide this function is large. In the management of group operations, where large material rewards are not obtainable by the persons who 260 ECONOMIC GROWTH AND STABILITY perform the function of managing budgeted expenditure, the incentive m ustconsistof personal satisfaction, approbation on the p art ofot&ers, and dedication to attainment of the task. I t is also apparent th a t the establishment of budgets and the actual management of budgeted expenditure can be only the function of managers or executives who are held responsible. These considerations lead to the conclusion th a t the Congress can only use the kinds of standards known as principles in determining the economic and efficient types and volumes of expenditure—supple menting the use and application of principles by obtaining responsible assurance th a t the administration of expenditure budgeted is organ ized and performed with competence. T hree E c o n o m ic S it u a t io n s Government expenditure is made in at least three different types of situation. One of these types of situation is experienced when the Nation is mobilized for war. A second type o f situation is when large numbers of the population are unemployed. The third type of situation, which may be considered as representing “normal,” is when neither of the first two situations obtain. In each of these three d if ferent types of situation somewhat different concepts and standards may be adopted and used by the Congress in evaluating expenditure. Because the third type of situation, in which the Nation is not mobilized for war and the number of unemployed is not large, is the kind of a situation experienced most of the time, as well as in the pres ent, it is appropriate to give priority to a consideration of two prin cipal or basic standards to be used in this kind of a period. Principle I A first principle which may be used by the Congress in appraising the economy and efficiency of Federal expenditure, in the situation de fined, is derived from a consideration of the effects of Federal finance upon the financial system of the economy as a whole. The importance of this standard is that by observing it the Congress may avoid pre cipitating inflation and general economic disorganization leading to boom and depression, inflation, deflation, unemployment, and unnec essary social friction. The principle may be stated in the follow ing terms. The difference between Federal expenditure and income should be adjusted to change in the demand for credit in the rest of the economy. Another way of stating the principle is that the change in Federal debt plus the change in other debt should be equal to the change in the market value of national output required by the in crease in the population and technological improvement. I f govern ment expenditure is adjusted to fit this equation, Federal debt would be retired in periods when the increase in the aggregate debt in curred by the State and local governments and private borrowers would be larger than the volume which could be equated with the other factors. I t is not enough merely to balance the Federal budget in a situation in which State and local governments and private bor rowers are expanding their debt beyond the limits indicated in the equation outlined. The consequence o f violating Principle I .—The principle described may be used to avoid large-scale long-term inflation and deflation. ECONOMIC GROWTH AND STABILITY 261 I t is assumed th at it is not necessary to support the contention th at such inflation and deflation is undesirable and to be avoided. In each period of inflation sincere, respected and honorable voices may be heard advocating expenditure and financial procedure which is infla tionary. Because decisions regarding government expenditure should be debated, it is reasonable to suppose that the arguments supporting inflationary expenditure should be heard. Inflation, however, has been experienced for centuries. I t is normal experience avoided by only unusual nations with unusual leaders. The causes, development and consequences have been observed, understood, defined, and explained. There is nothing mysterious and little that is not known about the sub ject. Deflation, of course, is a consequence of inflation. The prim ary origin of inflation invariably has been and will be an expansion of the money supply in excess of the expansion of the volume of commodities produced. The usual and almost invariable origin of inflation is the expansion of government debt or the debase ment of the money supply as a consequence of political action. In this connection it is to be noted that public debt is an important part of the reserve held against the money supply of this country which was incurred for political purposes. F or these reasons the change in the public debt should be adjusted to the changes indicated in the equation described if government expenditure is to be considered eco nomic and efficient. I f government expenditure is so large that public debt is not adjusted to the limits defined in the equation, government expenditure cannot be considered to be either efficient or economic. The problem of velocity.—Although the prim ary origin of inflation is an improper political use of credit, it also may be observed that a change in the level of prices may be related to a change in the velocity of the circulation of the money supply. This, however, is a matter which is not amenable to control by a legislative body and may be con sidered the special province of the persons responsible for the formula tion and application of monetary policy. In the United States the Federal Reserve Board, rather than the Congress, may be considered the proper authority to deal with the problems derived from changes in the velocity of the circulation of money. Principle I I A second standard or principle which may be used to evaluate the economy and efficiency of government expenditure is the magnitude and incidence of tax rates required to raise an appropriate volume of income. I t is evident that, if expenditure is so large th at the taxation required to finance the expenditure reduces the incentive to produce on the p art of the population, the expenditure can be considered neither economic nor efficient. An examination of the economic consequences of the present hotch potch of Federal tax legislation is not an appropriate subject to the development of this paper. In passing, however, it may be noted that existing legislation, while adequate for the purpose of obtaining the funds with which to finance expenditure, provides incentive to finance capital investment of all kinds with borrowed funds, provides incen tive for small-business men to sell businesses before these become too large, and provides incentive for persons who are unusually competent in the management of economic affairs to avoid action which might increase personal tax liability. 262 ECONOMIC GROWTH AND STABILITY A succinct general label for the existing legislation m ight be th at it is the kind of extravagance which can be afforded temporarily by a wealthy country in a period of booming economic activity. U n e c o n o m ic a n d I n e f f ic ie n t S tandards A percentage of national income From time to time it has been suggested th at an appropriate volume of expenditure might be established by selecting some percentage of national income. This approach has the merit of reducing, the stand ard to a definite number. Such a number, however, would have no relation to the use made of the funds thus obtained and would be a violation of principle I. F or these reasons there seems to be no ra tional justification for the selection of a definite proportion of national output as a measure of the volume of expenditure which should be used for political purposes. Need as a standard , A second standard sometimes used to justify government expendi tu re is “need.” A need is a matter of opinion. Because needs are unlimited and the means available for satisfying needs are not, it ■would seem to be obvious that no expenditure should be made p ri m arily because the expenditure is needed or wanted. When w ant or need is the criterion used to determine whether or not expenditure w ill be made it is to be expected that expenditure will be made without reference to what can be afforded and with little regard for either efficiency or economy. . E x p e n d itu re W h e n U n e m p lo y m e n t I s L a rq e When unemployment is large the public will demand expenditure by the Government to provide income for persons who would other wise be unemployed. This public demand may be expected as a consequence of widespread acceptance of the theory of compensatory government spending, the planning of full employment and the use of fiscal policy to support “purchasing power.” In this connection it is interesting to observe that the .only p art of the theory of full employment by means of planning a,nd the use of fiscal, policy which has proven actually acceptable is the idea that government spending in excess of income is appropriate when un employment is large. The other p art of the theory has been proven unacceptable. When a situation of full employment has obtained governments have not been able to reduce or defer expenditure until a time when unemployment would be experienced. Because the. theory is widely accepted it is to be expected th at there will be a large and important demand for government spending in excess of income when large-scale unemployment again is experienced. I t probably would be possible to observe principle I, described in this paper, concerning government in such a time. When business activity is reduced and unemployment is increased it is to be expected that private borrowing also will be reduced. This would permit government borrowing to be undertaken or increased without violat ing principle I. In this connection, however, it is im portant to note, that if government deficits become too large, property owners and ' ECONOMIC GROWTH AND STABILITY 263 entrepreneurs will fear that tax rates levied upon successful busi ness venture may be increased. I f this proves to be the case the fear of taxation will deter the undertaking of ventures and invest ment which will be needed to increase employment and income. The theory th at the volume of employment can be determined largely by fiscal policy actually can be used to produce a situation which would represent neither prosperity nor depression but eco nomic stagnation. Government expenditure made for the purpose of supporting employment and income but which actually produces a stagnation of enterprise can be considered neither economic nor efficient. M il it a r y E x p e n d it u r e Contrary to ideas which seem to be generally accepted the condi tion known as peace has rarely existed for very long in this world. W hat is now generally thought to be peace seems to be the kind of situation which existed when British naval power dominated the oceans and ports of the world. This situation has not obtained since 1914. In the present and prospective unstable political world it must be expected that a major proportion of Federal expenditure will consist of expenditure made for military purposes. Because expenditure for m ilitary purposes probably will be the largest single item in the Federal budget for many years to come, it is apparent that this item will continue to be the p art of govern ment expenditure in which efficiency and economy will be most im portant. Assuming that the strategic evaluation and planning of the mili tary are adequate, rational and properly integrated, the problem of efficiency and economy in military expenditure will consist largely of the problem of administering the military budget. In this connec tion recommendations have been made by the second Hoover Com mission which supported the recommendations of the Committee on the Business Organization of the Department of Defense. Because the maintenance of a permanent large m ilitary organization is relatively new in the experience of the United States it is reasonable to assume that there is much which is not understood about how to manage the expenditure of such an organization. The development of such knowledge requires time, experience, and study. F o r these reasons it probably will be both desirable and appropriate to establish task forces and working groups from time to time, with functions similar to those of the Committee on the Business Organization of the Department of Defense. Groups commissioned for the perform ance of this task can be used by the Congress in the way th at the managers or directors of a corporation sometimes employ the pro fessional services of firms specializing in operations research or man agement engineering. C o n c l u s io n The review of the standards which may be employed by the Congress to determine the economy and efficiency of Government expenditure supports the assumption that these probably must be standards con cerned with overall Federal expenditure supplemented by responsible assurance that funds budgeted and appropriated are being adminis tered with competence.
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