Cutting the fat

Dieting is difficult because it’s so much easier to give in to temptation and consume what you should not. It’s a constant struggle to cut the fat. The same is true in business. Economists may write down a “cost curve” on the blackboard but these curves, which represent the minimum cost of producing a particular quantity, are not given to the firm they are products of the firm. It takes effort and attention and willpower to keep costs low. Letting costs go by raising salaries, increasing benefits and paying little attention to the bottom line is easy and, for a time, pleasant which is why firms need strong incentives, including the carrot of profit and the stick of loss, to get and stay trim.

Government agencies face few such incentives. As a result, fat is rampant. Case in point, California prison guards. To encourage fitness the California Department of Corrections created a fitness bonus some years ago. The bonus was quite substantial, $100 per month but to get it guards had to pass a fitness test involving sit-ups, running and jumping. Five years ago the state paid out about $5 million for the fitness incentive. But who wants to be the bad guy who denies a prison guard a bonus? No one – if they aren’t paying the bills.

As a result, the fitness test started to get easier as the bonus got larger. Last year, California shelled out $33.2 million for fitness bonuses and some 80 percent of prison employees, not just guards but wardens and mangers also, now get the fitness bonus. Of course, a test is no longer required – all the employee need do to get the bonus is visit a doctor once per year.

With the California budget crunch even the politically poweful prison guards are having to cut some fat but in the long run recognize the incentive structure and don’t expect government to go on a diet.


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