Let's Give Government Incentives to Productivity

MIDDLE-CLASS tax cuts? Capital-gains tax cuts? Greater tax fairness? In the current economic debate, the issue of taxes occupies center stage, as if the conduct of national economic policy involves little more than finding the right level and method of revenue collection.

Squabbling over taxes is beside the point. It skirts the central economic problem of these times, namely, the American government's loss of credibility as an economic institution.

Government is our largest economic entity. It now rivals our entire manufacturing sector; in terms of total employment, it actually exceeds it. But as presently constituted, government is ineffective in performing its most basic functions. The incentives and market pressures are simply not in place to make this institution economically viable.

If we are serious about reclaiming our economic future, this election campaign should be about how to reform government to insure that it can make efficient use of the massive resources it commands.

The overriding issue for public policy is government performance, not government revenues. Because investors can't own and trade shares in the various agencies and departments of government, the only external mechanism to discipline the public sector is in taxpayer attitudes toward the size of the public purse.

The American electorate's resistance to new taxes is not a manifestation of crude selfishness or generational myopia. It is a highly rational economic decision not to channel more precious resources into a notoriously low productivity sector of the economy.

External audits and pressure will be of little use in promoting productivity unless the people inside government itself - including our representatives - have strong financial incentives to change the way they work. "Incentivizing" government, at all levels, for all employees, is the surest way to set us on a course of real structural reform.

Accountability is the prerequisite for productivity in organizations. In the private sector, accountability stems from the pressures of the bottom line that provide a continuous assessment of the efficiency of organizations. Managers bear the consequences, both positive and negative, of their actions. Since these market pressures are absent from the public sector, accountability is diluted. Restoring accountability is a major reason that so many governments around the world have moved toward privatizatio n of state-owned enterprises.

Short of large-scale privatization, can accountability be infused into government? Evidence from the private and public sectors suggests it can. Pay for performance, especially group incentives, is producing results in many organizations.

Recent studies on the effects of group incentives such as profit sharing reveal significantly increased productivity in the private sector, averaging 7 to 11 percent. Case studies of productivity gainsharing programs have shown even larger increases, sometimes approaching 30 percent or more. Similar findings are emerging in accounts of recent experiments with incentive pay in the public sector. Productivity improvement even remotely similar to that detected in the private sector could go a long way towar d easing the structural deficit.

Of the wide variety of incentive programs used in industry, productivity gainsharing seems the best candidate to deliver positive results in government. Under gainsharing, employees are offered a sizable share - usually 50 to 75 percent - of the value of productivity improvements over their own past performance. Generally, employees are given wide latitude to manage production operations themselves, to change the organization of work and tasks in ways they believe will make them more productive.

The wisdom of gainsharing is the recognition that much of real productivity improvement comes from below, from "people working smarter, not harder." Productivity grows when employees are motivated to tap the broader base of skills and information that they possess, when they become willing to extend themselves beyond the narrow confines of their job descriptions. No one knows better what is wrong with an organization than those who actually do the jobs, who experience first-hand the capabilities and shor tcomings of those they work with. Ideas imposed from above, without incentives, without real consultation, often appear threatening to employees and meet resistance. Accountability and authority go hand in hand. Gainsharing operates on this vital principle.

It is time to extend this principle to those who work in our government. The next administration should propose a revolutionary compact with federal employees involving the introduction of gainsharing on a massive scale. For a specified period, the level of base pay in real terms and total federal employment would be capped at current levels, with guarantees that general employment reductions would be achieved through normal attrition or voluntary separation only. In return, these employees would be offe red a very substantial share of the value of annual productivity gains that they are able to produce, with the largest bonus pools going to those units or departments with the largest percentage savings, subject, of course, to strict quality standards. Greater self-management would also be part of the equation.

Budgetary crisis is everywhere, and not all of it can be attributed to the general state of the economy. State and local governments have responded with a sterile mix of tax increases and service cutbacks. At the federal level, policymakers have chosen just to look the other way: The deficit soars toward $400 billion.

We are constantly prescribing aggressive shock therapy for the sick economies of Eastern Europe and the former Soviet Union. A strong dose of shock therapy is precisely what is needed to cure America's ailing public sector as well.

Reversing the relative decline of our economy requires that we muster the will to invest again in our productive capacity, in both its human and physical dimensions. Government is an indispensable agent of this renewal, but its economic credibility must be restored. Only then will the American people be willing to finance the public initiatives necessary to support a truly modern economy.

Congress and the administration want to show that they can manage the economy. Let them first demonstrate that they can manage our government.