h1

Austerity II

February 13, 2012

It’s been over a year now since I first wrote about austerity measures in Greece (read post here).  Now, to borrow money to avoid default, the Greek Parliament passed further austerity measures required by the EU to obtain the funds.  Again, Greek citizens rioted in the streets[i].

Here, in the United States, we need to take special note of the results of this economic experiment, as calls for the same sort of austerity measures continue to gain traction.  As necessary as frugality in spending is, cutting basic services and postponing infrastructure maintenance and improvements will send us into the same downward spiral Greece is experiencing.

In this politically-charged election year, do not let short-sighted rhetoric undermine the fragile economic recovery underway.  A sound business practice is to look at the Total Cost of Ownership (TCO) and Return on Investment (ROI) before undertaking a project.  Politics rarely explains either when proposing cuts in spending or changes to programs.  Look at it this way, a typical county spends as much as $250 million per year on public schools.  In taking it to the extreme, all that money could be saved by closing the schools and leaving education to individual parents.  What would be the result of such a decision, or what are the TCO and ROI of such a move?

While TCO and ROI are used primarily for physical equipment purchases and systems like transportation, they are useful tools in estimating the true cost of any decision, even decisions of a social nature.  Getting back to the school, what are a few of the positives of eliminating public education?

  1. Lower property taxes.
  2. Smaller government.
  3. Non-tax producing property returned to the tax base.
  4. End of violence in schools.
  5. Reduce children’s exposure to drugs and bad behavior.

Sounds pretty good so far, but what are the negatives?

  1. No standards for primary education.
  2. Most parents lack resources to home school.
  3. Parents bare full cost of private education.
  4. Over time, the workforce education level declines.
  5. Workforce productivity decreases and cost of goods and services increase.

In looking at TCO, it costs more to own and operate a school building than its construction cost alone.  Staff salaries and maintenance add to the mix, as well as its portion of the administration costs distributed out by the school district.  For each year of the schools useful life, these additional costs need to be accounted for as part of the TCO.  Once the TCO is understood, the question of return becomes obvious.  Just what did we get for all this money?  In other words, what is our ROI?

Measuring ROI requires a performance metric.  Simply put, a performance metric is a way to judge a large dataset (in this case – school performance) against a standard index, making things “apples to apples” so to speak.  While many systems exist, looking at graduation rates gives a good bottom-line measurement.  After all, it is the goal of attending high school. Nationally, the United States has an on-time graduation rate around 72%[ii].  In other words, 28% of high school students fail to graduate on-time, if they graduate at all.  With over one quarter of high school students missing the mark, people’s frustration with the education system is very understandable.  Even under the most liberal of goals, a 1 in 4 drop-out rate must be viewed as a failure and a poor return on tax dollar investment.

Regardless, that does not mean we give up on the other 3 to make it 4 out of 4 failure rate.  Schools need improvement.  Improvement takes change and change often requires money.  This is the rub, how to make change that works and not waste the money.   In this sense, austerity measures that cut school budges with have a negative impact on graduation ROI.  Cutting the budget will make matters worse and further degrade our investment.

While it is easy to focus on the positives, it is the negatives that drive the process.  Any tax saving would be spent on home education.  Most likely, much more would be spent for the same lever of education.  The long-term impact on society is where the greatest effect comes in.  This is where we must balance TCO and ROI against the needs for an educated society.  On that score, supporting education by fixing its problems sounds like a much better solution.  It is where the true ROI is found.

While cutting budgets is not the answer, neither is throwing more money at the problem.  This is where austerity has a point, spending must be validated and produce a measurable result.  We are better served when money produces the result it was intended to produce.  Otherwise the TOC continues to rise.  For instance, when Harold McStudent fails to graduate other programs centered on adult education are offered to make up Harold’s deficiency, programs that cost real money.  So now, taxpayers are spending extra money to bring Harold up to a minimum standard increasing the total cost of education and reducing our return on investment.   Having said that, spending more money, to bring Harold up to speed, is better than doing nothing.  The return then is zero.

In the end, by cutting public education rather than fixing it, the effect on society is extremely harmful.  We will debase our workforce and condemn our children to low-wage jobs.  This is exactly the problem with austerity programs.  They save money by gutting the very fabric of society government is there to promote.   We need roads that are drivable, schools that educate, a military that defends, fire and police that protect.  None of that is free.  While there are programs and expenditures that can be cut or put off, the majority of governmental business cannot.

Of course, education is just one example to illustrate the problem with austerity.  The solution comes not in the form of European-style slash and burn austerity, but in frugality.  Each organization, department and government entity must be responsible for ensuring no wasteful spending is allowed.  If people are in place that lack the will to do that, they have to go.  Regardless what a union says, regardless of tenure, regardless of political interest.  It’s too important and our future as a nation depends of getting it right.  Our spending is off the rails and we must return to the tracks.  People who refuse cannot stand in the way of the needs of the nation.

We cannot save our way out of debt; therefore, austerity will not work.  We must encourage growth and grow our economy out of debt.  It is the only way it’s ever worked.  That does not mean government has a blank check, just the opposite.  Every penny must be justified before it’s spent and results must be verified to ensure the spending had the desired effect.  Just because austerity is not the answer, it does not mean the people supporting it do not have valid points that need to be addressed.  It is not in our best interest to have draconian cuts across the board on spending.  No, we must spend wisely but spend nonetheless.  We simply need value for each tax dollar spent.  Perhaps, just perhaps, if we did that, we would not have such animosity towards our government as the country would naturally be in much better fiscal shape.


[i] Maltezou, Renee, and Harry Papachristou. “Violence Offers Glimpse of Greece’s Reform Challenge.” Business & Financial News, Breaking US & International News | Reuters.com. Thomson Reuters, 13 Feb. 2012. Web. 13 Feb. 2012. <http://www.reuters.com/article/2012/02/13/us-greece-idUSTRE8120HI20120213>.

[ii] “Graduation in the United States.” Education Week American Education News Site of Record. Editorial Projects in Education. Web. 13 Feb. 2012.
<http://www.edweek.org/ew/toc/2011/06/09/index.html?intc=EW-DC11-EM>.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: