Bureaucratic Friction Defined by Clunkers Program

Having received some feedback on my last post criticizing the Cash for Clunkers program...I just couldn't help myself...

I have to post an "I told you so" post now that phase one of the program has come to completion. After all, this is a classic example of government waste, and one of the more wasteful ones at that. Don't believe me...or understand how it could be? Read on dear reader and see if you don't agree.

Congratulations to the Obama administration and its cadre of economic and business geniuses for so clearly demonstrating how "bureaucratic friction" works. For those non-economists out there, bureaucratic friction is a term for the loss of production in the economy due to the size and inherent innefficiencies of the organizations in the ecomony. Every organization is inherently less than 100% efficient...the larger the organization the greater the loss of efficiency.

One of the major chores facing management is to constantly seek means of decreasing this inherent loss of efficiency. Every human being has a set amount of production they can do in a set period of time...say an eight hour work day. If we start with a measure of ideal production, then start subtracting time spent on other issues, like breaks, we get a very simplistic measure of inneficiency.

The real measure is actually a result of all the frictions faced by the person in a day. The mind simply wanders, work is not scheduled efficiently, the pace and delivery of other persons with whom our subject interacts slows the process...meetings, phone calls, putting out "fires", customer issues, materials and tools issues....any of a vast number of distractions take away from the original estimation of how much this person could actually do in a day.

A really well-run firm, with motivated and happy workers, if accurately measuring their bureaucratic friction, might uncover a loss factor of 20 to 30%. In reality, it would be really difficult to do much better.

We can also look at how money moves in and out of a firm...what we call cash flow. We can uncover certain innefficiencies through this methodology as well. In a private company, we might find that expenditures of $100,000...for example...result in productive activity of $92,000. In essence, we find certain losses inherent in the operation of the company...in this instance an 8% friction loss. Management can attempt to isolate these "leaks" and patch them up. This is a rather straightforward way of measuring how well the firm and its processes are managed.

In a private company, this 8% would likely be considered too high and remedial steps would be taken immediately. If $100 grand was spent, they would want $100 grand of goods to come out the other end. Of course, this ideal is impossible to attain thanks to bureaucratic friction.

In government, it's quite another story. We have to remember that the real goal is not to get value from money spent...it's to get the spenders re-elected. The folks spending our money...and remember it is our money...want only to impress us with the benefits they "give us" or make us feel we have received something for nothing, or will receive it in the near future.

Thus; Cash for Clunkers! The government is "giving" you up to $4,500 to buy a new car. Pretty sweet deal...right?

Well, let's remember they had to take that $4,500 from someone first. "That's okay" you think, "it probably came from some rich guy who won't miss it."

Remember again, that the rich guy would have spent it on something...possibly something you make at your job...and would therefore help guarantee you keep your job. But that's a philosophical argument that can easily be shrugged aside.

Let's look at reality however; this may change your whole outlook! Remember bureaucratic friction....the law of bureacratic friction tells us there must be some loss of revenue due to the inherent friction within an organization. In this case, the US Government agencies which manage the Cash for Clunkers program. How much loss could there be? After all...all they do is give out checks to car buyers...right?

Let's do the math: the first phase of the program cost one billion dollars...that's $1,000,000,000. The number of cars sold, according the news media and the government posts, was under 25,000. Crunch those number and you get...$40,000 per car!

$40,000 per car! That represents bureacratic friction of some 90%. For those who haven't yet caught on...the Obama folks spent $40,000 of your money...gave about $4,000 to somebody else...and kept $36,000 within their agencies as overhead!

Boy...that really helps "kickstart" the economy doesn't it? You might notice that the agencies which kept the $36,000 don't produce anything of value. Therefore your $40 grand was also used to pump up inflation and devalue the dollars you still manage to keep after taxes are deducted from your paycheck.

Such a deal! Still like this program?

Here's the really scary part: Cash for Clunkers is small change...imagine the bureaucratic friction inherent in government taking over some 20% of our free market economy....say perhaps the entire health care industry! You think an operation is expensive now? Wait till these geniuses start to manage things.

We Americans choose to spend hundreds of billions of dollars every year to keep ourselves healthy and alive as long as possible. As a people with a certain amount of disposable income, this seems a pretty good choice of what to spend it on. After all, you can't enjoy fancy cars or clothes if you're dead!

Imagine if those hundreds of billions, which now go nearly 100% to giving us better lives, were suddenly "filtered" through a government sieve that removed 90% of the production value of that money? It will be the death of healthcare quality and quantity as we know it.

Where we now pay $40,000 to crush a car...we could eventually spend enormous amounts of money to provide us with all the bandaids and aspirin we'll need for the rest of our suddenly shortened lives...but only if the government run health care system works as efficiently as everything else government does so well.

The Professor