Public Sector Takeover? We Need a New Powell Doctrine

April 11th

Professor Jim Heskett asks When Should the Public Sector Take Over in the Event of a Meltdown? in the newest edition of Working Knowledge.

There’s a need for a new doctrine such as the one that Former Secretary of State Colin Powell sought to define to answer the question when to intervene – remember that “if you break it you own it”.

There is strong value in the HBS “analysis-decision-reflection” framework for questions such as those of Professor Heskett – when should the public sector takeover strategy be used in the case of a meltdown? There are, as has been noted in the discussion that Professor Heskett’s question triggered, significant questions of public sector values as well as public sector competence.

The question of the public’s right to know is a good example of the issues underlying this concern. In Japan there has been strenuous debate following the near meltdown at the Fukashima plant about the right of the public to know about the risks and the state of the crisis. Here the comparison of last year’s BP oil spill is instructive. In 2010 when BP was finally forced to make the video from the undersea camera available on-line, expert estimates of the extent of the damage of the oil flowing into the sea jumped by tenfold in 24 hours in comparison with previous assessments that were limited to company data after it was screened. Disclosure would seem to be one area where there are strong public sector values at stake.

But takeover? Even assuming that the issue of competence could be resolved, that some form of expert conservatorship could be established (as for example, in the case of Fannie Mae in 2008) there are two questions that will require analysis in every meltdown case: What’s the cause of the problem? And what are the public interests at stake?

The day may come when some will argue that there should be a takeover of the money losing Postal Service for example. (See RReisner, “When a Turnaround Stalls”, HBR 2002.) After all, it will be argued, the post office is losing billions each year.

But in fact, analysis will show that the Postal Service would have broken even so far this year if it had not had to “pre pay” the health care costs of its retirees, a special multibillion dollar provision added to postal reform in 2006.

So is the Postal Service a dinosaur of the information age that could meltdown? Should there be a public takeover? You have to first analyze what’s the problem?

In the short term the postal service is losing billions so that Congress can sustain its pay/go rules. This is an accounting problem having to do with federal cash cow status.

But the long term? Is there a need to move paper and packages? Through a public infrastructure? For how long? What’s the 2030 forecast? How can revenue exceed costs? What should the Postal Service be permitted to do to make money? What should it be free to do to cut costs?

Before the rhetoric that the Postal Service is “not too big to fail” starts and someone decides that creating a postal meltdown is a good idea, its useful to analyze the causes of crisis and decide whether there is a public interest at stake.

The public sector does some things very well, but not everything. Public takeovers are like invading Libya. We want to be very careful to understand where the problem is coming from, what can be done about it, and to continuously improve the performance of interventions before we try them.

We have vast social and economic systems like the Postal Service and Medicare and Medicaid and Social Security that will have to be realigned in coming years. There may have to be a threatened meltdown before the political consensus will support action. But public takeover? Even by a competent designated management team, we should be clear on causes and remedies, very clear, before we move there.

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