I'm fascinated by one specific detail in the story of the Warren Buffett-backed Heinz taking over Kraft, along with 3G Capital. For details on the actual deal try here or here, while the specifics are interesting that's not the point that caught my eye. Rather, there seems to be something about the way that 3G manages organizations that has long been something of a dream about the way that government should organize itself. This is the idea of zero-based budgeting and I can remember PJ O'Rourke railing about the manner in which government doesn't do this all the way back in the 1980s.
Matt Levine points out that Buffett and 3G have done very well out of taking over Heinz:
Not only have 3G and Berkshire Hathaway quadrupled the value of their investment in two years, but this new deal also de-levers their leveraged buyout.
That's really very good indeed. And it's not something that has come about just because they got lucky with their timing of the purchase or anything. They must have changed something about the way that the company is run. And that's described by the Wall Street Journal:
At Kraft, as it has elsewhere, 3G plans to implement something called zero-based budgeting, an austerity measure that requires managers to justify spending plans from scratch every year. The technique has triggered sweeping cost cuts at 3G-related companies including Heinz—from eliminating hundreds of management jobs to jettisoning corporate jets and requiring employees to get permission to make color photocopies.
The technique isn't actually all that difficult. Nor is it all that odd. All it really is is insisting that as people prepare this year's budgets they start with a blank sheet of paper. Rather than just taking last years' budget and updating it a bit for inflation and or wages. But the effects seem to be really rather large: which is why we almost certainly want the government itself to take up the practice when looking at its own budget.
The real point being that when you start with a blank piece of paper then you've got to actually think about how you're going to justify each piece of spending. The "we've always done it this way" doesn't work. It should be noted that this zero-based budgeting method isn't used by most people: and it's most certainly not used by government. There, rather, the system is to look at what was spent last year. Then add a bit for population growth (hey, if there's more people, they must need more government, right?), add a bit for inflation (hey, if prices have risen then providing government is going to cost more, right?) and then adding a bit for better government. At no point does anyone ever ask, well, should government still be doing this?
Do note that no one ever actually reads the US budget. Sure, everyone has a look at the sections that contains a subsidy to them, to make sure that that section and that subsidy is still there. But there's no one looking at it in toto and wondering whether government really ought to still be doing these things. An O'Rourke example is, when he was writing at least and for all I know it's still there, subsidies for goat and mohair farmers. And what national interest is served by this is quite beyond anyone to divine. The goat and mohair farmers are presumably pretty happy about the subsidy but no one else seems very interested in questioning the entire idea. Thus it is that the ship of state becomes encrusted by the barnacles of the special interests.
It's not obviously certain that an annual questioning of such special interests is going to mean that they stop managing to suck on the public teat. But an annual appraisal of each and every one of them, as zero-based budgeting demands, would mean that we'd get rid of some of them. And we'd also, on the things that we still do, have to justify the actual levels of spending upon them, rather than the current very lazy method of "last year plus a bit."
Zero-based budgeting: just what we should be insisting the government itself does. It obviously works out here, in the wild, so why shouldn't we insist they justify, each and every year, the amount of our money they demand they get to spend? And justify it in detail, starting with a blank sheet of paper. What is it that government needs to do, what would we like it to do and how are we minimizing the cost of that?
Also on Forbes:
