Privatizing

In times of tight budgets, states endeavor to cut spending. While one approach is to fire state workers directly and eliminate positions, another is to privatize something the state used to handle (such as a prison or school busing).

The reasons given for privatizing are, of course, intended to be sensible. Privatizing is supposed to save money. It is supposed to result in higher quality service. It is supposed to reduce red tape. If privatizing did these things, then it would be a good idea. After all, getting better service for less cost and less red tape would be great. In fact, even if privatizing only improved one area (cost, quality, or bureaucracy) then it would be a good thing (assuming it did not make things worse otherwise). However, there is the obvious question of whether privatizing can deliver these alleged goods.

While it is commonly an article of faith that privatizing saves money, this does not seem to be the case. While the matter has not been extensively studied, the evidence indicates that privatization generally increases costs rather than saving money. While it might be objected that the matter has not been well studied, this would obviously not serve as evidence that privatization would save money. At best, this objection would have as its main impact that it is reasonable to be uncertain about what impact privatization would have-although it clearly did not have a positive impact in the vast majority of cases examined in the study.

Intuitively, it simply seems unlikely that privatizing would save money. After all, there is no private sector magic that enables it to do things that simply cannot be done by the state. As such, the state could save money by doing whatever it is that would be done by the contractors to save money. This would, of course, save the state even more money than privatizing. After all, the private contractors need to make a profit on top of what it costs them to provide the service-something the state obviously does not need to do.

In order for the privatizing of a service to save the state money, the costs incurred by the contractor plus the profit must be less than what it would cost the state to do it. It is not clear how this would be possible without the assumption that the state, as a matter of necessity, must always pay higher costs than the private contractor.

It could, of course, be countered that the state simply must do things inefficiently and in a costly manner. That is, the private sector is simply better than the public sector and hence privatizing can save money.

One obvious reply is that this seems to simply beg the question by assuming that the private sector will do things more cost effectively than could possibly be done by the state and thus be able to save the state money while also making an adequate profit. What is needed, of course, is evidence that this can be done. Ideology is, of course, not evidence. As noted above, the existing (albeit limited) evidence is that privatizing is not a money saver.

This is, of course, a factual matter. I have no objection to privatization in principle—my objection is based on the evidence that it does not save money. If it can be shown that privatizing a service would save money and that it would not be possible for the state to engage in the money saving practices that enable the private contractor to save money (that is, the only way to save is to go private), then I would be for that privatization. If, however, the state can save more money by adopting effective cost savings measures, then that would be the better option. After all, if the goal is to save money, then the greater savings wins. That said, it is also important to take into account the quality of the services.

As far as quality goes, a stock argument is that privatization is a good idea because it will improve quality.  It is often argued that the state is bad at doing things and hence provides low quality services. In contrast, the private sector is supposed to provide higher quality services (at a lower cost).  While higher quality (at a lower cost) is appealing, there is the obvious question of whether this is true or merely a claim based in ideological faith. As with the matter of saving money, this is a factual matter.

While people do point to problems with the quality of state services, it is also easy to point to quality problems with privatized services. These can be rather horrible, as shown by rather serious problems involving the way the privatized half way houses in New Jersey have been run.  Paul Krugman provides an interesting analysis of this problem that is well worth reading. As such, the idea that the private sector will simply be better because it is private does not seem to be true.

As I argued with the case of savings, unless it is assumed that the state is incapable of providing quality services it would seem that there is nothing that a private contractor could do in terms of quality that the state could not do. After all, there does not seem to be a private sector magic that enhances quality.

There is also the obvious point that the private contractor has to make a profit and this can lead to cutting corners. After all, lowering costs is a rather effective way of increasing profits. However, cost cutting often involves cutting quality and this practice is common fodder for news stories about the horrors of quality cutting to save money.

It might be replied that the private sector has to have better quality because the contractor must keep the customer happy. However, the people they have to keep happy are the same people who would be “customers” of the state. So, if a need to keep people happy leads to good quality, then the state should be subject to this as well. After all, just as unhappy people would change companies, they would also presumably vote to change the people running the state.

I am, of course, in favor of what would provide the highest quality services for a reasonable cost. If privatization would do this better than the state, then that would be the sensible thing to do. However, this must be based on evidence rather than an ideological commitment that simply favors the private (or public) sector.

In regards to the reduction of red tape, privatization clearly does not do that. In fact, it adds more bureaucracy.  Instead of two levels (state and state employees) there are now three levels (state, contractor, and employees).

It might be countered that there will be less bureaucracy at the state level because most of it will be privatized. While this would be true, it does not actually reduce the bureaucracy—it just moves it.

It might then be countered that the private sector is just less bureaucratic than the state and hence it will be able to do the same with less bureaucracy.

One obvious reply is that the private sector seems to have plenty of bureaucracy. Another is that if the contractor can do the job as well with less bureaucracy, then it would make sense that the state could simply follow the same approach—unless, of course, there is a contractor magic that must of necessity be denied to the state.

As with cost and quality, the bureaucracy reduction is a factual matter. If privatization did reduce the overall bureaucracy (rather than shift it) while still being able to provide the same (or better) management, then this would be a gain. However, this is something that must be shown rather being assumed on the basis of ideology.

Overall, if privatization could save money, reduce bureaucracy and increase quality, then it would be a good idea. However, this is not something that should be accepted (or rejected) merely on ideological faith. As it stands, the evidence seems to be that privatization is no magic bullet.