A couple of big stories this weekend were the continued failure of California’s elected officials to reach a deal on the state’s budget and the emergence of a “new” General Motors from it’s government-forced Chapter 11 reorganization.
In each case, layman and analyst alike were bewildered by a culture that had grown so completely isolated from how things work in the “real world.” California’s Governor and Legislature are like GM managment of six months ago, flying hat in hand to Washington in corporate jets when they should have traveled in hybrids.
Unfortunately, there is little chance that the federal government will take over California, force it to reorganize it’s outdated business model and shed billions of dollars of debt by selling off underperforming assets as it did with GM. However, California’s leaders could learn a great deal from the GM experience.
For years, decades even, there have been warnings that the state, like GM, has been operating under an outmoded and untenable business model. Top management in both cases isolated itself in a cocoon of illusion hung from a framework of false assumptions.
GM executives assumed consumers would buy pick-up trucks and SUV’s forever. Management refused to support policies that would have helped contain the cost of production. They made concessions to workers that were unsustainable in lean times. The company ignored market trends while holding out false hope that the market would somehow turn around and bail them out, even as they hemorrhaged billions of dollars.
Operating under it’s outdated business model, the erstwhile automobile giant suffered a four-decade decline in market share. Over just the last decade, GM lost more than 75% of its market value. A few months ago, it reached the point at which it consumed more money than it brought in by making and selling cars.
As with GM, the state of California has become cash-flow-negative. The business model by which the state once operated is no longer sustainable. Costs must be brought under control and the books need to be balanced. In business, cost control is necessary in good times in order to survive in hard times. State leaders must do the same.
To the Democrats credit, they have moved in the direction of cost cutting, but they need to do more. What they need to do is project expenses into the future and determine a reasonable and fixed baseline amount as the basis for programmatic decision making. The Democratic leadership must then show political courage by making the tough decisions by making deep cuts and show leadership by bucking special interests.
GM was forced by a bankruptcy judge and the Obama administration to shed brands, models, factories, workers and a bloated management. It has also been made clear by the bankruptcy court and the administration that GM needs to undertake a radical restructuring of it’s entrenched management system to survive.
California needs the political will to reduce programs, cut costs and adopt a sound financial structure that will allow the state to live within it’s means. However, such an approach is predetermined to fail unless the Republic minority will consider revenue enhancements.
In business, one cannot simply look at one side of a balance sheet. The other, equal side of expenses is income. Balancing income and expenses is a basic principal of business. Taking income increases entirely off the table makes no sense from a business perspective. Sacramento Republicans cannot expect to solve the state’s financial problems while ignoring half of the equation that is the basis for any successful enterprise.
An example of Republican intransigence is opposition to an oil extraction tax. California may be the only state in the union, perhaps the world, which literally gives away resources to oil companies. Other oil producing states and nations charge handsomely for the permission to drill for liquid gold. Not one oil company has walked away from an oil field because it’s owner charged it for the opportunity to make money.
A modest oil extraction fee would enrich state coffers by about $1.2 billion dollars a year. California’s Republican legislators argue that such a fee would raise consumer costs. But, their argument falls flat because petroleum product prices are set internationally. Market forces much greater that any fee the state may impose governs oil and gas prices. One would think that members of the political party that prides itself for being “businesses friendly” would understand such a fundamental economic reality.
No credible economist in the world would endorse the Sacramento Republican’s approach to addressing the state’s budget stalemate. Members of the political party that has always argued that government ought to be run more like a business have taken what is essentially an anti-business position concerning the state’s budget.
With a sound financial structure in place, a management approach that includes flattening out the company’s multiple layers of executives and another $50 billion in federal loans available to make it through the year, GM has no excuses left if it continues to struggle in the marketplace.
Meanwhile, in Sacramento, Republicans have placed their anti-tax dogma above sound business practices. They have abdicated not only their leadership responsibilities, but also one of their most popular and successful political positions to satisfy right wing zealots. It is almost unheard of. California Republicans have ceded their “run government like a business” message to anyone willing to be reasonable about taxes.
This is where GM and the Sacramento Republican leadership face the same paradox. How do they go about changing the way they do things when they have not changed the group of people that got them in this mess to start with?
