Economies of Scale Do NOT Exist in Local Government

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Economies of Scale Do NOT Exist in Local Government

One of the biggest public fallacies of the 21st century is that local government can somehow become cheaper by getting bigger.  It’s called economies of scale.  Study after study has proven that economies of scale do not exist in local government, yet somehow we continue to believe it.  Economists say that economies of scale exist, but when you look closer, there are all kinds of qualifications to their allegation.  Frankly, I have never seen a real economy of scale in local government.

Indianapolis Mayor Bart Peterson swore to the Legislature that police consolidation would save $9.6 million per year.  Then he changed it to $8.8 million.  After the Indianapolis Police Department consolidated with the Marion County Sheriff, it cost the taxpayers at least $3 million more in personnel costs, alone, when the labor contracts were normalized.  Bart Peterson’s response was “personnel costs don’t count.”

As the discussion in WRT continues, beware of allegations about how municipal services can be extended more cheaply by an existing municipality, because of assumed or alleged economies of scale.

Approximately 60% to 75% of Indiana municipal budgets are committed to police and fire services, so let’s take a look at the “economies of scale” for police and fire.  Academic studies for the last 30 years shows that larger cities require more police at a higher cost, rather than fewer and cheaper.  Police services are often determined by something loosely referred to as “national standards.”  (By the way, the Greenwood City Council is on record as saying that Greenwood’s police department does not meet national standards.)  The presumed “national standard” is one cop for every 500-600 population.  If there is supposed to a cop for every 500-600 people, police services have no economy of scale.

Don’t trust me on this.  Get on the web and check for yourself.  Check and see if Indianapolis has more cops per capita than Greenwood, even though Indianapolis population is more than ten times that of Greenwood.

Fire services also tend not to generate economies of scale, once again in part because of “national standards.”  Carmel’s fire department went to four firefighters per engine several years ago.  It wasn’t because they had more fires.  It was because that four firefighter per engine was the “national standard.” Another “national standard” for fire service is response time.  Being located next to a fire station is supposed to provide savings in insurance costs, so fire departments attempt to set a desired response time and then build enough fire stations, and buy enough engines, and pay enough firefighters to respond to a fire in a certain number of minutes.  So where is the economy of scale in this equation?  If the response time is six minutes and the community is twice as large, there will be a need for twice as many fire stations, fire trucks and fire fighters.

None of this is a condemnation of police or fire departments.  It is simply a statement that municipal services do not get cheaper as they get bigger.  In 35 years of working with local government, I have satisfied myself that there are no economies of scale for municipal services, especially using Indiana’s existing models for municipal government.  (New models of local government may generate different results, however.)   Expanding an existing municipal government by 80% is unlikely to generate new efficiencies in service delivery.  There will just be more employees, more equipment and more buildings.  So don’t be surprised if the “merger” of WRT and Greenwood creates a mandate for a new city hall.

But don’t trust me.  Check for yourself.

Mike Shaver is President of Wabash Scientific, inc., a consulting firm specializing in issues of local public policy and community development.  Mr. Shaver has served in the public sector as Director of Community & Economic Development for the Indiana Department of Commerce. Mr. Shaver’s education includes degrees from Wabash College and from Ball State University and he is currently a part-time doctoral student in Public Affairs at IU/Bloomington.He is currently consulting with town of Bargersville, among othr responsibilities.

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