The difference between shareholders and citizens is the reason business reforms and government doesn’t. The difference explains why a virtuous cycle of savings prevails in the former and a vicious cycle of spending prevails in the latter. The difference also argues that, far from being an obstacle to deficit reduction, tax cuts are crucial to it and to any real reform of government.
In business a virtuous cycle of continual cost reduction and increased efficiency prevails. It does not mean that it exists in every instance – certainly, some operate counter to it and subsequently fail – but it is on what long-term success depends.
Business’ virtuous cycle is enforced by competition. Without it, in the face of competitive pressure, the opposite occurs, ultimately resulting in bankruptcy. The culture of savings and the scrutiny of spending permeates business and is rewarded throughout.
In government, the opposite dynamic reigns. Its vicious cycle of spending is allowed by competition’s absence. Spending is the mark of governmental success. Increased spending means more power for politicians, more prestige for bureaucrats, and more programs for politically-selected recipients. Saving money means lowering all three groups’ return – to the benefit of none, because none profit from saving and competition does not require it.
The difference in the two systems’ primary stakeholders is no less pronounced. Again competition’s presence is determinative.
In the private sector, shareholders voluntarily choose their association with a business. They bring capital and the business returns wealth. In their decision, they have complete flexibility and mobility. They thus reinforce competition.
Again, in the public sector, the opposite prevails. For the most part, citizens’ choice of association is much more limited, thus reinforcing government’s lack of competition.
These fundamental differences explain why business and government relate so differently to their stakeholders. Business, because of its reinforced competition, must seek to please all its shareholders. Government, because of its reinforced lack of competition, need pass only limited spending to select groups.
Each government program creates a relatively small group of highly motivated recipients. These receive a comparatively large per capita return. In contrast, the much larger group of paying citizens are far less motivated to oppose spending, because their per capita spending costs are small, being spread over a much larger number.