President Trump CEO, part 4: Allocating Capital

This is part 4 in a series on President Trump viewed through the lens of being a CEO. Part of President Trump’s great appeal is that he’s perceived as a successful businessperson. He’s even been talked about as being a President with CEO experience.

My article on the duties, responsibilities, and job description of a CEO, lays out four inherent parts of a CEO’s job. These are the parts of the job that, by definition, make a CEO a CEO. The CEO can delegate some things, but others simply can’t be delegated. Capital allocation is the CEO’s fourth main duty.

Allocating capital is the ultimate expression of strategic priorities.

Trump manages money

So far Trump has shown that he takes money very seriously. His position on many international bodies and on America’s role in the world is that all countries should help foot the bill for international costs. His stance so far has, indeed, prompted some countries to step up and contribute more to the U.N.

Domestically, Trump has instituted a hiring freeze on the Government and is presumably going to look at spending within the government.

Like everything else, this is more complicated than it seems. Government spending is a huge driver of the economy, and the government is the largest employer in the country. A business certainly wants to lay off as many employees as it possible can and still keep functioning. That’s how we boost profits.

A government, however, is walking a trickier line. A business is generally not affected by the employees it lays off, or by any reduction in its own spending. But not so, a government. Stop spending too quickly and lay too many people off and it simply drives up unemployment and slows down the economy.

Will spending cuts be done wisely?

In companies, spending cuts can be done by declaration: “cut 30% costs across the board.” This is an attractive way to do things. It’s easy to understand and easy to calculate. But it’s a bad way.

This kind of cutting assumes that there’s 30% waste across the board, and it assumes that all cuts are equal. All cuts are not equal. If you consider a company like Microsoft, cutting 30% of their administrative expenses might be a reasonable goal. But cutting 30% of their programming staff would boost their quarterly earnings while probably destroying their ability to fix bugs and develop products to stay competitive.

Spending cuts + process improvement = win?

The fundamental way to reduce costs in an ongoing business is through process improvement, finding ways to do existing things better.

While the stereotype of the Government is that it is extremely wasteful, that is an oversimplification. Some Government programs (e.g. Medicare) are extremely efficient, much moreso than their private counterparts. Other Government programs (e.g. famously, the Defense Department) have huge amounts of waste.

What matters isn’t whether or not the Government runs a program. What matters is whether there are incentives and structures in place that encourage people to work smarter, work better, and improve continuously.

What gets measured gets … measured

George W. Bush was a Harvard MBA who famously was going to bring business principles to the Government. It’s not clear he did much of that. No Child Left Behind introduced measurement into the educational system, but did so in a way that many teachers view as hindering education, not helping it. The Total Quality movement of the 1970s and 1980s showed that simply setting numeric goals without adding process improvements to reach those goals isn’t, in practice, particularly effective.

The business practices that might help the government use its money more efficiently are those of aligning incentives, re-engineering processes, tying employee pay and promotions to customer feedback, and so on. If Trump implements this kind of thinking in the government, it could, indeed, signal a major shift in how efficiently we use our money.

Big allocations reveal priorities

The capital allocation I was referring to in the CEO job duties article weren’t just cost efficiency. The most important capital allocation decisions are the ones that decide which strategic initiatives stay, and which go.

Whether Trump’s spending will be thoughtful or abrupt remains to be seen. He has already declared his intent to increase military spending, while freezing other budgets. He has given directions for us to build a wall between the U.S. and Mexico. He has stated we will increase infrastructure spending, while possibly withdrawing from international bodies (such as the U.N.) to which we pay dues.

The President doesn’t control the budget

Though Trump can control how capital is allocated within the Executive branch, it’s Congress that sets the overall budget (or often doesn’t, in the cases where we’ve had a Democratic President and a Republican-controlled legislature). Trump can fund or defund the efforts to implement programs created by Congress, but there are limits to how much control he has over the national budget.

Summary

At this point, it’s too early to tell how Trump will allocate capital. If his skills match his claims as a successful businessman, he may well find ways to steamline the government and put it on a path to being more efficient. His larger capital allocation decisions remain to be seen, however.

Return to Part 1 of President Trump CEO