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—
http://firstimpressionssecondthoughts.blogspot.com/2012/09/class-warfare-whos-winning.html—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.”