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CEO Daily: Don’t privatize the VA

Saturday Morning Post: The Weekly View from Washington

Donald Trump won on a pledge to bring business rigor to government. And he’s following through in part by tapping a handful of private-sector successes to fill out his cabinet, a roster that includes Goldman Sachs alum and hedge fund founder Steve Mnuchin for Treasury, billionaire investor Wilbur Ross for Commerce, and billionaire charter school advocate Betsy DeVos for Education. So far, none, however, has the experience that the current Secretary of Veterans Affairs brought to the job. Bob McDonald, a West Point graduate and Army vet, spent more than three decades climbing the ladder at Procter & Gamble, a run that ended with four years in the corner office. President Obama named McDonald to lead the VA in July 2014 after a scandal erupted there over wait times veterans faced to receive medical care. In the two and a half years since, he’s worked to wrench the federal government’s second-biggest bureaucracy into the 21st century by applying best practices from the corporate world.

The VA, by McDonald’s own acknowledgment, still has its work cut out. But the early returns are encouraging. In a wide-ranging interview with Fortune on Friday afternoon, McDonald argued for running the department like a business — “if you took our budget as it if were revenue, we would be Fortune 9,” he notes, with more employees than any company besides Wal-Mart — since it serves 21 million veterans. “Our vision is to be the best customer service organization in the federal government,” McDonald says. He’s moved the organization in that direction by replacing its top ranks with similarly-experienced businesspeople and introducing concepts like human-centered design and Lean Six Sigma. Yet McDonald has also come to believe privatizing the VA’s core functions, as some in Trump’s orbit have suggested, would spell disaster not only for the department but for the American medical system broadly. The VA now spends $1.8 billion a year on research and development, an investment that’s yielded breakthroughs the private sector would otherwise miss, while training 70% of U.S. doctors.

In the presidential election, Trump romped with veterans, as exit polls showed he carried former service members by 26 points. By comparison, Mitt Romney won them by 20 points in 2012 and John McCain, the last veteran to win a major party nomination, only won them by 10 points in 2008. The results suggest Trump’s bashing of the department’s performance resonated, and McDonald says, “I’d be the first one to say that we still have a ways to go.” He’s also keen to see the reforms he’s instituted carried forward and indicated an openness to staying on, as names of replacements like Sarah Palin and former Massachusetts Sen. Scott Brown swirl. You can read an edited transcript of our conversation here.

Tory Newmyer
@torynewmyer
tory_newmyer@fortune.com

Top News

• Trump’s Taiwan call roils U.S.-China ties

Trump’s debut as our diplomatic dialer-in-chief continued its rocky rollout Friday with the news that he spoke by phone with the president of Taiwan, a move that broke with nearly 40 years of tradition in U.S.-China relations. The move could roil the incoming administration’s relations with China, which views Taiwan as a renegade province, and indeed, China’s foreign ministry has already lodged a complaint with the U.S. over the call. The Trump Organization, meanwhile, is pursuing development projects in Taiwan — a revelation that renewed concern Trump is putting his business interests ahead of public ones. Fortune

• GOP eyes “repeal and delay” approach to Obamacare

Congressional Republicans are rallying around a “repeal and delay” strategy for rolling back the Affordable Care Act, a plan that would involve voting immediately to rip up the law but delaying the effective date of that action to give themselves several years to forge an alternative. The approach is built on a recognition that upending a landmark law that’s already extended insurance coverage to 20 million Americans comes with both serious political and technical challenges. Health policy experts warn the strategy will sow chaos in the health care market. Republicans are nevertheless eyeing options for fast-tracking the plan by using budget rules that allow for Senate passage of a repeal measure with a simple majority, meaning they’d need no Democratic support. But Republicans couldn’t use the same rules to replace the law and would therefore need to peel off Democratic votes to make the second half of the strategy work.  New York Times

Rich cabinet picks can benefit from tax loophole

The call of public service isn’t the only inducement for the super-wealthy people that Trump has chosen to fill out his administration. They’ll also get a hefty tax benefit. Federal law forces those joining the government to sell off assets that could pose a conflict of interest in their new roles. To soften the blow of that requirement, the tax code includes a provision allowing the sellers to skip paying capital gains taxes on assets they divest. Hank Paulson used the break to save an estimated $200 million when he joined the Bush administration as Treasury Secretary. Considering the vast wealth of a number of Trump’s picks, the provision looks poised to cost taxpayers more than ever before. It isn’t clear whether Trump himself could benefit if he decides to sell off some of his holdings.  Washington Post

Around the Water Cooler

Howard Schultz insists Starbucks is for Trump voters, too

A day after Starbucks CEO Howard Schultz announced he will be stepping down next year, igniting speculation that the outspoken Hillary Clinton endorser could pursue a political career, Schultz insists the coffee brand itself remains apolitical. Schulz’s political advocacy has caused some headaches for the company, with Trump supporters launching a “Trump cup” protest at Starbucks outlets during the presidential election. But Schultz told CNBC on Friday that the brand isn’t “at any level” at odds with Trump supporters and said he is rooting for the president-elect’s success. He maintains he has no interest in seeking public office himself.  Fortune

CNN under fire, again, for bias in the election

CNN chief Jeff Zucker probably wishes he just stayed home from the Harvard Institute of Politics Forum this week. The quadrennial post election gathering was more acrimonious than usual this year, with veterans of both major campaigns hurling insults and shouting at each other. But Zucker earned some abuse, too, from all sides, as operatives across the spectrum assailed the cable news executive for airing so much unbroken footage of Trump rallies — programming that amounted to $3 billion in free advertising for the candidate, according to one estimate. Zucker has acknowledged that CNN probably went too far but also fought back at the Harvard gathering, arguing other candidates made themselves less available for on-air interviews.  Fortune

• Summers: Trump’s Carrier deal imperils capitalism

Larry Summers argues that the deal Trump struck to keep 700 Carrier jobs in Indiana amounts to an assault on our rule of law-based system of capitalism — and it could have far-reaching, negative consequences for the economy. The ad hoc basis on which the agreement was struck undermines the principle that every rule governing of our free-market system — from those on contracts and property rights to taxes and procurement — should remain in force without regard to who is in or out of favor with the ruling regime. Tossing the principle aside, as Trump did in the Carrier case, risks bringing us closer to a spoils economy like the one found in New York City under Tammany Hall or in Russia under Putin. “I hope I am wrong, but I expect that as a consequence we are going to be not only poorer but less free,” writes the former Treasury Secretary for Bill Clinton and top economic advisor to President Obama.  Washington Post