Saturday, September 29, 2012


       Privatization is not a new concept—it got its start under Ronald Reagan—but it has become one driving force behind conservative—today, read: Republican and Tea Party—approaches to government.  It is a con job; whatever can be said about privatization in theory is invariably falsified by practice, at usually greater cost to the public.

The theory is simple.  Privatizers and political supporters allege that government is bloated by waste, fraud, and abuse in performing certain government functions, and often bungles their execution.  They assert that businesses can perform these functions more efficiently than, and at least as effectively as, government agencies can perform them.  They argue that businesses can save money doing the same job for a profit—all at the same time.  Because it seems too good to be true, it is too much to believe.

In addition, privatizers and political supporters use the cover of promises to achieve savings and sustain quality to conceal a political agenda to make government smaller.  When conservatives undertake comprehensive assessments of opportunities for privatization, they use pretexts of efficiency and effectiveness to propose shrinking or eliminating government programs and roles not to their liking, like Social Security or Medicare.

I know something about privatization from experience with Republican initiatives to promote it.  In the early 80s, the Reagan administration chartered the Private Sector Survey on Cost Control, commonly known as the Grace Commission, to review the performance of government agencies and to recommend ways to shrink, eliminate, or privatize many of their functions and programs in the name of effectiveness and efficiency.  The Commission operated through a number of sub-committees, each of which reviewed the functions or programs of one agency or a set of related agencies.

I served as the editor-in-chief of the sub-committee reports and, in that capacity, was in frequent communication with the subcommittee chairs.  Almost all complained about pressure from Commission officials to make recommendations to cut functions or programs because of disagreements with policies, not pragmatic considerations of effectiveness or efficiency.  They also complained about officials revising reports to state recommendations which the subcommittees had not approved and did not accept.  When Commission officials tired of hearing me report these complaints from the field, they fired me.  In the end, the Grace Commission produced a report which Congress ignored.  In every instance, its predictions of greater savings or larger deficits were proven wrong, by large margins of error, even as the government continued business as usual.

A few years later, the Republican-dominated Board of Supervisors of Fairfax County, VA, chartered a Blue Ribbon Committee to do for the county what the Grace Commission had tried to do for the country.  It also chartered one committee specifically focused on privatization.  To operate within the requirements of open-government laws but to minimize public observation, the committees gave short and hard-to-find notice, published no agendas, and met on private property.

Nevertheless, I attended every meeting of the privatization committee.  Although I was initially unwelcome and ignored, the chair soon allowed, then invited, me to speak at later meetings.  After many inconclusive deliberations, I offered a rationale for privatization which included a simple framework for calculating when circumstances made privatization sensible; however, the framework also made it unlikely.  The chair appreciated my comments; he acknowledged that my prodding helped him recognize that politics made privatization an undesirable option because, to his and almost every other committee member’s surprise, it was neither effective nor efficient in most cases.  The committee adopted my position but found itself reviled by Republican True Believers at the Committee’s final meeting.  Nevertheless, privatization went nowhere.

The arithmetic of privatization is simple.  It assumes, as noted above, that federal and state governments have budgets so bloated that business can do many of their jobs as well or better for less—and thereby save taxpayer dollars—and make a profit.  But the numbers rarely work out to support the claims of would be privatizers.

Of course, the numbers depend on the goods or services covered by the contract, its scope, and its duration.  In this general discussion, my numbers, all percentages of and in addition to the face value of the contracts, are guesstimates, but my arithmetic is certain.  First, as a purchaser of goods or services in the public interest, the government retains responsibilities and incurs annual costs (staff, equipment, and facilities) of 5 to 10 percent to administer contracts monitor performance.  Second, the government incurs one-time transfer costs for each contract of 3 to 10 percent.  Third, companies expect to make 5 to 12 percent annual profit.  Fourth, a meaningful savings of taxpayer dollars is at least 5 percent.  So, at the extremes, government bloat would have to be between 18 and 37 percent of its budget for the function.

The existence of bloat on this magnitude is easy to claim and hard—indeed, virtually impossible—to prove.  So privatizers usually make unfounded or dishonest claims in expectation of support from those who want smaller government, smaller government budgets, and lower taxes; yet want the same level and quality of services.  However, what privatizers promise to deliver and what the public receives are often two different things.  In the end, privatizers make the public pay a premium for its false hopes of improved government effectiveness and efficiency, without reduction of quality.

Invariably, companies seek to improve profits by cutting costs: short-cuts, less time per task, lower wages, fewer or less capable and motivated employees—thus, a reduced level of effort and a diminished quality of performance.  Many companies manipulate or falsify their records or pressure government officials.  Efforts to influence—the word is “bribe”—government inspectors are commonplace when they assess performance.

Let me close with three instances of privatization which show larger-than-necessary expenses for additional benefit.  The purpose appears largely, if not entirely, political: to put money in the hands of the private sector simply to honor capitalism without regard to economic consequences.

Until recently, the federal government assumed the risks and the attendant costs of providing funds to banks for college loans to students.  The banks in turn administered the loans, at a handsome profit.  The Obama administration analyzed the costs and found that the cost to the government could be greatly reduced by cutting out the banks, who were acting and profiting, as middlemen.  Accordingly, it assumed full responsibility for college loans and used the substantial savings to increase the funds available for Pell Grants.  In short, privatization served profiteers, not the public.

A more remarkable instance is the government’s role, or lack of role, in health care, an industry already privatized.  Until the passage of the Affordable Care Act (ACA), private insurance companies covered the health care of a majority of under-65 Americans in one way or another but excluded about 50 million because of high premium costs or pre-existing conditions.  Nevertheless, despite having a paying and generally healthy clientele, these companies dedicated usually more than 40 percent of every premium dollar to overhead and profit.  Overhead included costs not only for processing claims, but also for finding ways to deny claims and terminate clients.  The new law not only requires coverage for all—thereby eliminating those overhead costs to patients—, but also limits overhead and profit to 20 percent of every dollar of coverage—a significant reduction of waste, fraud, and abuse in private insurance companies.  So “unprivatization” will save—it already is saving—clients’ money.

A third instance of privatization, the Republican proposal to privatize Social Security, I have discussed in a previous blog, “Class Warfare—Who’s Winning?”  I provide the link——and summarize it here.  The results of privatizing Social Security will be increased administrative costs and greater risks.  Aggregate brokers fees will far exceed government administrative costs, and investors’ portfolios are at risk from the ups and downs of the stock market, but beneficiaries are guaranteed their monthly benefits through good times and bad by the full faith and credit of the government.

Privatization does not change the role of government; government responsibilities remain government responsibilities.  It does not reduce, and may increase, the total workforce required by the government function.  It does not reduce, and may increase, the costs to the government: payments for its residual administrative and monitoring duties, and payments to the company for contract costs and profits.  It does not ensure, and may jeopardize, the quality of contract performance because of company profit-enhancing devices.

Bottom line: privatization accomplishes nothing which it purports to accomplish for the benefit of the public.  First, it results in greater expense and poorer performance.  Second, it serves to make private businesses parasites living off the government and, like parasites, doing the government and public no good.  Third, conservatives want privatization to help undermine government functions and programs which serve the public and which the public, by democratic means, has decided what functions and programs government should perform or provide.  When conservatives use privatization to subvert what the public has decided democratically, they make “con” a part of what it means to be “conservative.”

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