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It's Not Always Wise to Privatize

In recent years I have seen this assumption result in a lot of privatization schemes such as privatized prisons, privatized child abuse social workers, the privatization of many of the support and protection functions needed in our wacky war in Iraq , and there was even a costly effort to turn IRS collections over to privatized firms. There was a near miss disaster where former PresiDENT Bush to privatize social security urging that all the money currently going to retirees be placed the stuh-stuh-stuh-stock market.

These privatization ideas first emerged from Libertarian Think Tanks. Privatization is the opposite of nationalization. The point of privatization is to return to the private sector operations that were previously performed by Government.

I was working for Florida ’s Children And Family Services when that state decided to turn over my job to privately contracted companies. What I experienced there was frustration, failure, and increased risk to children.

The state of Florida has commissioned numerous evaluations of this experiment [the privatization of Child Welfare] over the years. These evaluations provide no evidence that the privatized programs work any better than the public system they replaced, despite all the public and private money that has been spent on them. There is also no evidence that they work any better than the publicly operated systems currently in place in many Florida counties. ~ Kathryn Albowicz, MBA

On NPR today I heard a brief story about how the Bush White House pushed to privitze the collections to the IRS . IRS Commissioner Doug Shulman stated that, " after a thorough review " , that it will end the experiment in using private debt collectors when the current contracts with two private debt collection companies expire today (Mar. 6). Why? Because they found out that it was cheaper and more effective to let IRS employees collect the money and more costly and less effective to allow private companies to collect the money. Actually the private collection companies were keeping $1 out of every $4 dollars they recovered. It turns out that the Bush White House knew the privatized companies were less effective but they didn’t care. Why? Because the goal was to privatize as many government functions as possible regardless of any cost benefit data.

The assumption of many is that business is always more effective, more efficient, and more innovative than government run entities. The widely held belief is that competition has a magical power to force the business to be cheaper, and better than a government monopoly. The truth is that sometimes this is true. Sometimes competition does have the magical effect of forcing the business to be cheap, effective, and innovative. Private business gets innovative because they have to find better, easier, faster, less labor intensive ways to provide services so they can maximize profits, and cut costs. Unfortunately, this is not ALWAYS true.

Consider Child Welfare. My job was to check on abused children, to assess their safety, to identify risks, and to provide a safe placement to keep them safe. I also created a plan to find long term permanency for that child, preferably with their parents, or close family members; however, this required me to develop a plan for the caregivers that would eliminate their behaviors or living conditions that threatened the safety of their children.

For private businesses, well, they would be contracted by the government to do these things, but their goal is to meet the minimal requirements of the contract as cheaply as possible so that the business will not only have provided the service, but also earned a profit. The goal has shifted from assessing risk to meeting the minimal requirements of the contract. The motivation for the business has changed from the safety to children to earning a profit.

When a business wants to provide contracted services, they are highly motivated to do that as cheaply and quickly as possible. When I did the job within the government run Child Welfare System, my goal was the safety of the child. Getting my case closed fast was not the goal, and was not smart, because bad parents can hold it together for a short period of time, but to be sure your parents will not relapse into the behaviors that threatened their children, you need to know they aren’t just complying with the Child Welfare case manager until they go away, you want these changes to be real changes.

If you believe that business cares about the cost effective use of time, people, and supplies while the government entity could care less, well, you would be wrong. Supply and demand does not work for the government entity.

When there is a sudden surge in demand for a product or service, a private business can [or could until recently] go to the bank and borrow money to invest in itself, and increase it’s inventory or increase it’s personnel. If there is a sudden surge in demand for a government run provider, the need for more inventory or personnel is constrained by the budget. Government workers are forced to be innovative, and to work smart, making maximum use of time and people. Funds may increase, but those increases come slowly, in future budgeting cycles, and the work has to be done regardless of available sources. In business you can work harder and have some expectation that you will earn more money. In government, you can work smarter, harder, and longer, and instead of increased income you are more likely to face a salary freeze.

Here is where the privatization myth blooms. You see, with government services are provided they are always financed by tax dollars, not consumer spending. This means that both the private company AND the government entity are getting paid by tax dollars, and tax payers want the most bang for their buck. When a private company can’t earn their profit their reaction is always to cut back on their services. If your job is to scrutinize, then you scrutinize faster. If your job is to assess risk, then you assess faster. The thing about scrutiny and assessment is that these are functions best performed slowly. If you work faster and your job is to ensure the safety of children, then you are likely to miss things. If you miss things in assessing safety you can place a child at risk and not even know it.

I have never understood how anyone could believe that an organization that exists only to perform a government function is going to be more expensive than a private company that only performs the government function while making a profit.

Natural monopolies exist because certain inherent limitations of technology or circumstance exist. Natural monopolies on the national level would include things like defense, disaster relief and highway construction. Natural monopolies at the state and local level would include law enforcement, fire protection, electric utilities, and so on. If we have three or four competing electric companies, we could end up with three or four times the number of wires strung over our heads, and there would be three or four times more utility poles. Some stuff just begs for a monopoly. But a monopoly in the private sector gives too much power to an entity whose sole goal is to make money. A privately run company with a monopoly will stick it to the consumers. “If you don’t like it, you can take your business elsewhere,” knowing all the time that there is no other place you can go to get the service. Private sector monopolies tend to become less innovative, because why pay for updates when you can make plenty of money without changing a thing? Private monopolies are less efficient, because they can be slow, and frustrating, and they don’t lose a dime. When a monopoly is held by the private sector the consumer is held hostage.

For this reason these natural monopolies, like utilities, child welfare, fire protection, law enforcement, etc. are run by a government entity. Now the consumers are protected from exploitation because the government entity is not there to get as much money as possible from you, but solely to provide the service. Obviously, when you have hundreds of thousands of employees, a percentage of them will be gnat-brained rude-nicks, and inefficient jerks. These inefficiencies and flaws in service delivery are addressed by electing the overseers, and by bringing your criticism to the attention of governing boards. Yes, this takes more time than it should, and changes are slower than they should be, but having three times as many pipes being laid across our roads would be worse.

We actually have an example of what happens when the government turns over these natural monopolies to the private sector. It happened in England , under the authority of Great Britain ’s Prime Minister, Margaret Thatcher. Ms Thatcher decided to privatize public utilities and her experiment was a disaster. The first government services to be privatized were telecommunications, followed quickly by gas, electricity came next, and finally Ms. Thatcher privatized water. What followed was sky rocketing price increases by these privately held public services. It was not just rate increases that caused a stir it was a dramatic drop in quality Each service had its problems, but the worse was probably the privatization of electrical services. The Thatcher government allowed privately owned power providers to compete with each other. Competition is good, right? Competition has the magical power to force the businesses to be cheaper, and more efficient, right? Well, that may work if you make hoola-hoops, but it didn’t work for the electric companies in Britain . While there was plenty of power sources in Britain , these privately run electric companies opted to build more power generators. Why did these companies want to build more generating facilities? Because they wanted to compete with each privately owned electric companies. The theory was, I guess, that the more generators in your arsenal, the easier it would be to OVER POWER your competition. When it was a government run monopoly the generators were owned by everyone, and so they could cooperate, and coordinate their activities. This cooperation and coordination just doesn’t happen when you are competing. The results of building too many electrical generating plants were a 70 percent over production of electricity. That’s inefficient, isn’t it? The privatization of natural monopolies turned out to be a failure for Great Britain .

Here is the point: privatization works when competition can be effective within the market place. IF competition is not possible, or practical (as in utilities, national defense, etc.) then government services will be more effective than privatization.

» left by J. Forrest Young from Bartow, FL (3 years 364 days ago.)

Tex Norman is right on in this regard. The privatization of Child Welfare in Florida is costing four times as much as it should. (Mostly due to duplicative management infrastructure within the Community Based Care (private)Agencies.

 

Jfy

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» left by Anonymous (3 years 363 days ago.)

Thanks Forest.  I'm pretty sure you're the same Forest I worked with, so howdy.  I send out a poem of the day every morning, so, if you want me to add you to my mailing list just email me and let me know.  Peace.  tex

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» left by Anonymous (2 years ago.)

Honestly this isn't even really that controversial in world academia (professional economists).

 

The inefficiencies associated with natural monopoly and monopolies in general. Its basic, entry level, neoclassical microeconomics.

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