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What the sequester teaches us

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By James McCusker
The state-by-state listing issued by the White House provided details of the services threatened by the federal budget sequester. The reaction to this listing seemed to raise all sorts of questions … except the most interesting one. How did we ever get ourselves into this kind of New Feudalism where individuals, communities, cities, counties, and states are so utterly dependent on federal handouts?
The answer is that it involves a process that, much like a disease, has a logic, symmetry and even beauty of its own.
We can see one dimension of the development process by examining the similarities between the U.S. Postal Service and the University of Washington. Both institutions are caught up in a conflict between their chartered goals and the economic systems that support them.
The USPS is proud of its record of delivering the mail, even when the going gets tough. That is undoubtedly one reason why it licensed an allusion to its unofficial motto, "Rain Heat & Snow," as the name for a new apparel line being developed by a Cleveland, Ohio, firm.
The other reason for the USPS decision is less about pride and more about economics and management.
The Post Office is not going into the apparel business but is looking to generate cash as part of an effort to stay afloat and, more importantly, to begin to regain control of its destiny. Right now, it exists in a sort of netherworld where it is expected to earn its own way, but is controlled and micromanaged by an often capricious Congress.
The classic model for this strategy in the private sector is Harley Davidson. The iconic motorcycle company managed to rescue itself from the jaws of bankruptcy by jumping into the licensing and sales of apparel and paraphernalia bearing its name and logo. The cash flow from this activity saved the company.
In the public sector, the most visible model in our state is the University of Washington, which for decades licensed its logo for apparel and all sorts of paraphernalia. In recent years, the UW also has been increasingly active in licensing technology-based intellectual property as well as taking equity positions in enterprises launched and developed on the basis of the university's research.
The UW had its beginnings as an arm of the state government, the physical manifestation of the state's desire to educate its young people. As time went on, though, changes in both the supply and demand curves faced by the UW began to reshape the university.
By the 1970s, supply-side changes plunged the UW into a price-intense competition for key faculty members, a process that pushed costs ever upward. At the same time, the Legislature became more balky and unsympathetic to the academic cost structure. The university increasingly turned to underwritten research as both a source of funding independent of state government and a lure to attract outstanding faculty. Its research funding now exceeds a billion dollars a year, a major enterprise in its own right.
The UW and the Postal Service find themselves holding together organizational structures in which economics has been dissociated from the management decision process. Each continues to do its job, but neither institution at this point can be described as healthy.
They got that way by different paths, but both reflect the pernicious effects of divorce -- economics vs. management -- on our institutions.
Our federal government wasn't always viewed as the "go-to" organization it now is. It gained public credibility in that role as the result of the Cold War and two high-profile national issues which had revealed the infirmities of state and local governments: civil rights and environmental decay.
The credibility the feds built up in these areas provided the political foundation that allowed the expansion of federal taxation and redistribution of funds throughout our economy. State and local governments found it easier to compete for federal funding than it was to get taxpayers to fund their expansive dreams. Better yet, the federal government could manufacture money. And here we are.
The story doesn't end here, of course, and there are several possible outcomes; some happy, some not so much. We still have choices, but the lesson of how we got to this unsustainable point is clear. Economics does not like being made to sit at the kiddie table.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.
Story tags » Economy, Business & Finance



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