Perhaps the central right-left debate of our time is actually about industrial organization. How do we structure institutions so that they are most effective? And can lessons from one cluster of institutions be applied to another? On the right, there is a widespread belief that spending discipline begets organizational discipline. One of the reasons is that economic profits are present in all kinds of institutions, whether formally organized for the pursuit of profit or not. When institutions are given access to essentially unlimited resources — indeed, when institutions are rewarded for failing to achieve their objectives — the incentives for improving efficiency are likely to be weak.
On the left, in contrast, there is a widely held belief that increasing public investment levels is almost always a good thing, and that a profit-oriented mindset can actually be destructive in many domains, particularly when it comes to delivering high-quality public services. These views are not entirely incompatible. There may well be some institutions that should have a “guardian” as opposed to a “commercial” mentality.
This helps explain the conflict over Mitt Romney’s private equity experience and, more recently, dueling interpretations of collective bargaining reform efforts in Wisconsin and other states with powerful public sector unions. Many on the left have characterized collective bargaining reform efforts as an assault on workers’ basic rights to self-organization and representation in the workplace and an assault on the middle class. Critics of public sector collective bargaining tend to focus on the ways in which it empowers employees to structure work rules, wages, and benefits in ways that serve the interests of employees rather than the intended beneficiaries of public school students and taxpayers. Moreover, unions, as representative organizations, tend to represent the interests of their median member. But the interests of the median employee in a given organization might not be well-aligned with the interests of the intended beneficiaries, etc. Limiting collective bargaining, e.g., limiting it to wages, can give public sector managers greater flexibility to restructure organizations in response to the changing needs of those consuming public services, etc. To be sure, public sector managers might prove incompetent or they might lack foresight, but this flexibility means that churn in public sector leadership can be reflected in the shape of the institution. The workforce tends not to shift quite as quickly in the public sector.
This is an extremely long-winded introduction to fascinating new findings by Catherine Wolfram on how a new managerial approach improved output at nuclear power plants:
Increased nuclear output is an example of what I call “low-tech cleantech,” or the intelligent management of our energy infrastructure to make it more efficient. A small improvement in nuclear operations can have a much bigger impact than double- digit growth in renewable power sources for a simple reason: Nuclear reactors today generate far more of the U.S.’s electricity than wind turbines and solar panels.
When nuclear reactors were sold to nonutility buyers, the new owners faced strong incentives to increase output. They wanted to make a profit, and, unlike utilities, they weren’t compensated by electricity rates set by the public-utilities commissions. Rather, they earned wholesale market prices for every kilowatt-hour of power they sold to the grid. My Haas School colleague Lucas Davis and I found that these divested nuclear power plants increased their electricity output by about 10 percent compared with plants that remained with utility owners. One way they did this was shortening the down time for the reactors’ refueling.
Given that there is considerable low-hanging fruit in the operation of nuclear reactors, Wolfram asks the obvious next question:
So why aren’t utilities already seizing these opportunities? The problem is, at least partly, bad incentives. In most of the world, electricity-sector managers don’t have to fight for profits and share in a free market. In U.S. states that haven’t deregulated, utilities can pass along their fuel costs to customers. In China, too, many plants receive coal at heavily subsidized prices.
Removing bad incentives and encouraging managers to improve the efficiency of existing power plants may be the most immediate low cost, large-scale solution we have in the battle against climate change. [Emphasis added]
Utilities that can pass along their fuel costs to customers perform somewhat less well than firms in competitive markets. The public sector analogy could be that institutions that can pass along their costs to taxpayers perform somewhat less well than institutions that are forced to operate under conditions of spending discipline provided managers have the flexibility to embrace business-model innovation and to deploy staff more effectively. That is, spending discipline alone won’t do enough. Organizational discipline is crucial, yet collective bargaining rights severely constrain what managers can and cannot do to revamp organizations.