March 6, 2013

Budget cuts? For private sector, it’s yesterday’s news

For the federal government, the prospect of cutting spending is creating a political crisis and warnings of catastrophe. For the private sector, it’s “been there, done that.”

For the federal government, the prospect of cutting spending is creating a political crisis and warnings of catastrophe. For the private sector, it’s “been there, done that.”

There could be a lesson for government in how the private sector has bounced back from the 2008 financial crisis and the Great Recession. It wasn’t without pain. But companies big and small alike have had to “downsize,” “right size” and often simply close up shop. Many of those that survived found ways to do more with fewer workers.

“We laid off 7 million . . . we know them all and their families,” said Bill Dunkelberg, chief economist of the National Federation of Independent Business, which represents smaller retailers and restaurants.

Now, “private companies are doing fairly well at maintaining and growing their profits,” said Libby Bierman, an analyst for Sageworks, a company compiling data on privately held companies.

Democrats oppose the federal spending cuts, warning they’ll cause pain and disruption including longer lines at airports, laid-off teachers at local schools, fewer meat inspections and hardship for federal employees forced to take unpaid days off. Worse, the Democrats note the cuts will slow economic growth this year.

Republicans, who’d prefer other cuts, stand by these reductions as a less than ideal but still a worthwhile step to rein in spending and put the government on sounder fiscal footing, although the cuts don’t affect the real driver of spending growth, Medicare and related health care spending.

Lacking a political deal for an alternative, many government agencies now are preparing to do what private-sector companies have already done. They’ll furlough workers, perhaps one day a month or perhaps more.

The Pentagon, for example, plans unpaid furloughs one day a week starting next month for 800,000 civilian employees, perhaps through the end of the government’s fiscal year on Sept. 30. It also plans to close its roughly 250 commissaries around the world for one more day a week. The commissaries are often staffed by families of soldiers fighting abroad.

These sorts of unpleasant cost-cutting measures are exactly what privately held businesses were forced to do in the aftermath of the financial crisis. Many businesses laid off workers. At the peak of the downturn, the country was losing 700,000 jobs a month. There are still 20 million unemployed or underemployed today. Others had unpaid furloughs, some of which continue. Still others cut pay or benefits.

For the businesses that survived, they’re now on stronger footing.

Privately held companies tracked by Sageworks posted a 7.8 percent net profit margin in 2012, more than twice the rate of 2009, when the economy was shedding jobs at a terrifying rate. Similarly, publicly traded companies saw their net profit margins fall to 5.03 percent in 2009, bouncing back to an average of 6.85 percent last year.

The stock market has roared back, this week topping its pre-recession record high.

While mass layoffs are no longer a constant and are again tracking historical norms, banking giant JP Morgan Chase announced in late February that it was laying off 17,000 workers through the end of 2014, about 6.5 percent of its workforce. The layoffs were primarily in the mortgage division and reflect a reduction in the number of distressed homeowners as the economy improves.

If the private sector could tighten the belt and reinvent itself, can the government? It’s a fair question, but an admittedly faulty one. Business operates to make a profit for its owners or its shareholders, while government exists to protect and serve its citizens.

“I know the government is not like business,” said Debra Perry, mayor of Milton, Wash., a town of about 7,000 near Tacoma. “I used to be one of those who used to say, ‘Why can’t government be more like business?’ And now that I’m in government, there is still part of me that says government can be more like business. Because, in your everyday business, there are certain things that are non-negotiable or you are not going to be in business, and those are the things you do.”

Perry suffered through the economic downturn in ways both personal and professional. She was forced to close her antiques business, because “it was not a good time for teacups.” And when her husband tumbled off the roof and was seriously injured, family finances took a big hit.

“So we did the same thing – the house payment first, cable is not important,” she said of setting priorities and cutting other spending.

As mayor, Perry’s most recent budget was $1 million below the final 2011 budget of her predecessor. She sees no reason that the federal government can’t set priorities and determine what it can do without.

“We all have plans that are really great ideas, but is now the time? So you do more with less, same thing with priorities, you go back to those priorities. Then you have to make really tough decisions,” she said, pointing to government promotion of “green” technologies as desirable but not necessary. “Green is great when you can afford it. I know for the city of Milton, if you would have forced me to buy a green vehicle when I needed one for my utility department, (then) that might have been the straw that broke the camel’s back.”

Having suffered through the tough times of 2008 and 2009, many in the private sector think it’s time that government take some of the same bitter medicine and get smaller.

“That’s a tough deal, but you have to do what you have to,” said Dunkelberg of the National Federation of Independent Business. “Unless you’re in Washington – then you don’t have to do what you have to do.”

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