Mythology 12010

The most pervasive and recurring myth locally is that if we could only consolidate — whether it’s the county or the school or anything really– we would be more efficient in running our government and hence our tax rates would be so much lower. It is the defacto solution to all of our woes and one of our loveliest local memes.

Here is an interesting piece of the mythology of large banks being more efficient than smaller ones from Naked Capitalism:

Yglesias is effectively saying smaller banks are less competitive, which is bunk. Every study ever done of banking efficiency in the US over the last 20 years shows that once a certain size threshold is reached (studies vary in their conclusions due to variations in sample and methodology as to where that is, but $25 billion is) banks show an increasing cost curve, meaning they are less, not more, competitive.

So why has there been consolidation in the banking industry? Why would banks get bigger to become less efficient? Simple. It’s the bad incentives and the usual principal-agent problem. Banks are not run to suit the interests of shareholders but of top management (and in big dealer firms, the various producers, who as we describe in ECONNED, can hold the company leadership hostage).

The point is not  that running government is equivalent to running banks, or vice-versa, but rather competitive advantage may indeed be enhanced by remaining smaller.

And how do small companies or firms compete against larger firms: typically through innovation and technology. Interesting, no, that the words ‘innovation’ and ‘technology’ are never uttered as an approach to running local government more efficiently and driving costs down while enhancing services?

That said, I want to note that business cases exist that support bigger is better and economies of scale. However, it is not true in each and every case. It’s the classic ‘I have a hammer so every problem is a nail’.

That is the myth.



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