The Oversized Conglomerate

An argument for limited government based on management principles

The Washington octopus is an essay by James Piereson, in which he argues that the United States Federal government has become too big and too powerful.

This is the “Washington octopus,” its tentacles reaching into every area of national life, with support from federal officials, advocacy groups, and the press, but without any effective control or oversight that might be exercised by voters, representatives, or the two political parties.

If you are already inclined to agree with him, I am sure that you will appreciate his essay. But I want to raise a point that people who are inclined to disagree with Piereson, and who generally favor government interventions, might wish to consider: the more aspects of private behavior that government attempts to regulate, the clumsier it becomes. We should prefer a government that does a few things well to a government that does many things poorly.

Populism and Conservatism

Piereson’s case relies on populism and conservatism. You will see that the argument that I am making does not.

The populist point is that the technocrats who work in the government differ in background and outlook from most of the people in the nation that they govern. The conservative point is that America was founded by men who wanted limited government, and the Constitution achieved this goal until well into the 20th century.

If ordinary people resent the elite, the feeling is mutual. Piereson cites a poll by Scott Rasmussen, who surveyed the attitudes of people with at least one graduate degree, live in or near large cities, and make over $150,000 a year.

In this group, 73 percent identify as Democrats, 67 percent are between the ages of thirty-five and fifty-four, and 70 percent trust the federal government to do the right thing most of the time. Nearly 80 percent of the elite groups would impose restrictions on the private use of gas and electricity; 70 percent would ban gas-powered vehicles and stoves; 55 percent would ban nonessential air travel; 53 percent favor a ban on private air-conditioning, in the interests of slowing down climate change. More than 80 percent approved of President Biden’s job performance versus 44 percent of the public at large. On a more alarming note, roughly 40 percent of these elites said they would rather cheat than lose an election, compared to just 7 percent of other adults surveyed.

Piereson writes that Thomas Jefferson

was aware that a conflict between “country” and “court” parties was a feature of British politics throughout the eighteenth century and a key background factor in the American Revolution and Constitutional Convention. In that conflict, the “court” party organized itself around the politics of the capital city, fueled by high taxes, government debt, patronage, and foreign wars, while the “country” party …

was suspicious and resentful of the political class, much like today’s populists.

Piereson continues,

Britain created the first “fiscal-military state,” funded by long-term debt. From the standpoint of the country party, this revolution provided the government new sources of patronage and gave bankers and bondholders great influence in the capital

I want to come back to this in a subsequent essay. I will argue that the creation of the Federal Reserve had similar consequences in the United States. Reining in the central bank could be a powerful lever for cutting the Federal government down to size.

Doing too much, poorly

In business, a sprawling enterprise is known as a conglomerate. There have been times, most notably in the 1960s, when management experts praised conglomerates. The idea was that being in many businesses at once would provide synergy.

In economic jargon, synergy means increasing returns to scope. When you get into a new line of business, your existing lines of business improve. For example, when Google acquired YouTube, it obtained more user information, which strengthened its advertising model in Google search.

But most of the time we observe decreasing returns to scope. The more business lines a firm gets into, the less well it manages each one. Excessive conglomeration leads to bad business results.

In the 1980s, the idea of a “financial supermarket” was a gleam in the eye of every banking industry consultant. The idea was that “one-stop shopping” for insurance, loans, checking accounts, and corporate stock would be so seductive to customers that narrow, single-purpose institutions would end up in the dustbin of history. The apotheosis of this idea came when the department store Sears bought the brokerage firm Dean Witter, building on a supposed synergy between “socks and stocks.”

Ultimately, Sears/Dean Witter and other attempts to implement the “financial supermarket” were what ended up in the dustbin of history. Other conglomerates also failed to achieve the promised synergy. One successful late 20th-century conglomerate, General Electric, articulated a policy that it would shed any business in which it was not among the top three in its industrial category.

The limits to conglomeration are obvious, once you think about them. The top executives have scarce time, so that they can only focus on portions of their business. They also have expertise in at most a few domains; in a conglomerate, they end up overseeing businesses that they know little or nothing about.

The clear lesson from the private sector is that as a firm adds business lines its efficiency degrades. That is why we end up with millions of separate businesses, not a few giant conglomerates.

The Federal Government as a Conglomerate

The Federal government spends money on many things. It regulates many areas. One may think of it as a sprawling conglomerate.

Because government is not a business, we do not think of it as having management problems. But it does. When FEMA is disappointing, when the CDC has lost focus, when the Obamacare web site crashes on introduction, these are all reflections of management problems.

From a management theory perspective, the Federal government is a nightmare. There are agencies with overlapping responsibilities. There are agencies with goals that are in conflict, and there is no formal mechanism to resolve such conflicts.

A typical chief executive operates with fewer than 10 direct reports. The CEO does not have time to meet regularly with dozens of department heads.

If one were to try to draw an organization chart for the Federal government, the President would have over 150 direct reports—that is how many agencies that connect right to the President, with no cabinet official in between. Priorities are misplaced: some agencies that are small and relatively unimportant are directly under the President, while other agencies that are large and significant are buried several layers down.

The President himself has very little time to oversee the bureaucracy. He has many other political tasks.

In practice, the President exercises much less oversight of the government than a CEO exercises over a business. Instead, for better or worse, the agencies run themselves.

In business, letting departments run themselves without oversight is a recipe for stagnation. Managers will be strongly biased toward doing the same thing tomorrow that they did yesterday. There is no incentive to improve. The only motive that leans in the direction of change is the desire for more power and a larger budget.

In government, the fact that agencies run themselves has similar results. Managers face no pressure to excel or to adapt.

It gets worse than that. In business, if an attempt to provide a service fails, the money-losing effort is discarded. In government, there is no such pressure. Thousands of programs that fail to achieve their intended objectives continue to run on autopilot.

Adjusting Expectations

Government interventions are undertaken under the assumption that they will be well executed. We assume that a program to build charging stations for electric vehicles will result in lots of charging stations. We assume that bank regulation will result in a sound financial system. A President assumes that his order to end illegal immigration will result in ending illegal immigration. We assume that a student loan program will be a benefit to young people, not a burden.

In practice, the oversized conglomerate blunders time and again. Considering the management problems involved, we need to adjust our expectations accordingly.

When we decide whether we want government to intervene in some area, we should take management weakness of the oversized conglomerate into account. We should assume that there will be a large gap between intentions and results. Maybe we will achieve 70 percent of what we intend. Maybe we will achieve 20 percent.

By adjusting expectations for the flaws inherent in managing an oversized conglomerate, we can make practical decisions to reduce the scope of the Federal government. If we evaluated the decision of whether or not to encourage government intervention by realistically discounting the effectiveness of intervention, we would introduce fewer new agencies and cut back on existing ones. We would move in the direction of having a government that does a few things well rather than many things poorly.