A Philosopher's Blog

Privatizing

Posted in Business, Ethics, Philosophy, Politics by Michael LaBossiere on July 18, 2012

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.

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51 Responses

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  1. T. J. Babson said, on July 18, 2012 at 7:21 am

    Mike, let’s start with private vs. public universities. What is your experience? Why are nearly all the best universities private?

    • Anonymous said, on July 18, 2012 at 12:19 pm

      Make all universities private universities. All secondary schools, elementary and pre-schools should be private. Eliminate the controversy. :)

    • Michael LaBossiere said, on July 18, 2012 at 2:28 pm

      In many ways, the idea of the private university is something of a delusion. After all, even private schools receive considerable support from the public. However, sticking with the general notion of private versus public, it varies quite a bit. There are some rather bad private schools and some exceptional public universities.

      Private schools do have some advantages in that they are not as subject to the political machinations of whoever happens to control the legislature of the state. So, for example, Harvard does not have to worry as much about the budget cuts in education while FAMU, FSU, and such need to do so.

      Public schools are also “burdened” with the mission of educating the public. That is, they take in people who are not rich and lack connections. As such, the public schools tend to rely more on public support and tend to accept a broader range of people, thus making them more democratic and less aristocratic.

  2. T. J. Babson said, on July 18, 2012 at 7:31 am

    Next let’s look at the Post Office. If you are at a restaurant and there is a long line, the manager will often pitch in to make the line move faster. At the Post Office if there is a long line, you can almost bet that one of the workers will shut down their station and go on break, making the line move even slower.

    • Anonymous said, on July 18, 2012 at 12:27 pm

      I haven’t experienced that. The US Postal Service has always been very good to me. My mail —even the bills I don’t want to see—always arrives in my mailbox in a timely fashion.
      Note: I have no affiliations whatsoever with any person in the postal service.

      • Anonymous said, on July 18, 2012 at 2:58 pm

        What? We get a thumbs down on here for providing a positive personal experience about the postal service? I’m shocked!! It’s every bit as valid as TJ’s negative example isn’t it? , But TJ doesn’t get a thumbs down. . . :( Could it be because your opinions agree with TJ’s and that you don’t like input from those who disagree with you.

        • magus71 said, on July 18, 2012 at 6:25 pm

          Not sure who committed the thumbs-down raid. Seems someone hates all of our opinions. Even when they show opposing view points.

    • magus71 said, on July 18, 2012 at 1:58 pm

      And let’s not forget that the US Postal Service is a failing venture. It had to compete with agile private services like Fed Ex and UPS and is losing the battle badly. The difference is the Postal Service has the pockets of tax-payers to make up for its blunders.

      People have blamed the internet for falling USP revenue and business, however, FedEX and UPS are doing very well. Why is that?

      http://www.blueridgenow.com/article/20111218/ARTICLES/112181001

      I worked for Fed Ex as a fill in job before going to the police department. I was and still am very impressed with the way they did business–all without unions. I consider Fed Ex a model company and others should look to that model.

      When I entered the military, I was still under the illusion that “military efficiency” meant something. Instead, I have witnessed the soul-crushing power of bureaucracy. How it creates friction in every aspect of one’s daily activity. It is difficult to explain. In defense of those people that shut down the lines early, TJ, they are familiar with the bureaucratic grind also, and it’s why they can’t wait to go on break.

      • Michael LaBossiere said, on July 18, 2012 at 2:39 pm

        The Post Office has to comply with the 2006 Postal Accountability and Enhancement Act requiring it to prefund its Retiree Health Benefits Fund at about $5.6 billion a year from 2007 to 2016. This is a bit of a burden for them.

        FEDEX and UPS are not actually good comparisons for the post office: they do not do daily delivery to everyone 6 days a week, rather they focus on higher profit operations. If the UPS gave up being the post office and just focused on delivering packages and premium services, they’d be leaner and more profitable. But we’d have to give up regular mail-which might be an option.

        That said, the post office does have problems that need to be addressed.

        Here is an analysis of the Post Offices woes (woe #1 is congress): http://www.dailyfinance.com/2010/03/02/losing-money-isnt-the-u-s-postal-services-only-problem/

        • magus71 said, on July 18, 2012 at 2:48 pm

          They’re very good comparisons, Mike. As I stated about Fed Ex and USP, they are “agile”. They are able to make adjustments that enable their viability. But the USP is bound by its own chains. No, they don’t do business in the same way–because UPS and Fed Ex don’t want to end up like the USP: A dying business.

          • magus71 said, on July 18, 2012 at 2:49 pm

            “As I stated about Fed Ex and USP”

            I meant UPS.

          • Michael LaBossiere said, on July 18, 2012 at 6:13 pm

            One factor worth considering is the volume that the USPS handles. Being huge often reduces nimbleness.

            But, I would agree that the USPS needs to be unchained from Congress in many key ways.

    • Michael LaBossiere said, on July 18, 2012 at 2:30 pm

      I could spend hours writing about crappy service I have received at private businesses over the years. I could also do the same for good service I have received. As such, I would not say that the private sector has a great virtue over the public sector.

      • magus71 said, on July 18, 2012 at 2:50 pm

        Been to a DMV lately?

        • Michael LaBossiere said, on July 18, 2012 at 6:14 pm

          Yes-just renewed my license in the fall. I made an appointment and was in and out in about 15 minutes.

            • WTP said, on July 18, 2012 at 8:31 pm

              My only experience with the VA was far from satisfactory. Fortunately we only needed the VA to get their redundant approval to cover the cancer meds my father had already been prescribed by his regular physician. Getting hold of his VA oncologist was quite the challenge. She spent far more time away at conferences than available at the clinic. Never saw her once. Made one trip to the VA clinic and discovered why Dad never wanted to take advantage of the “free” care there. Long waits in ugly, uncomfortable waiting rooms and surly staff. And many of the clientele were dirty and unshaven. It amazed me that some of the had ever been in the military at all.

            • magus71 said, on July 18, 2012 at 9:04 pm

              Sounds just like what I’ve seen. I wonder if it’s a cost cutting measure since dealing with the medical clinic is so painful here I don’t go for anything but a severed limb. I’ve resigned myself to riding out my time until I’m done and know the limits of doctors anyway, so I take an aspirin and run some dirt on it and call it good.

            • Michael LaBossiere said, on July 19, 2012 at 10:53 am

              A lot depends on the people. A friend of mine is a general counsel for the VA-he is a man of conscience and works hard to ensure that things are done right. As you might imagine, this is quite an epic challenge.

            • magus71 said, on July 18, 2012 at 9:05 pm

              Oh, and can we imagine a private hospital ever getting to the level of Walter Reed?

            • Michael LaBossiere said, on July 19, 2012 at 10:58 am

              Private hospitals do have some problems, but Walter Reed certainly sets a bar of its own. What is rather interesting is that the problems seem to have arisen from the privatization of services.

              As such, the Walter Reed case is not so much a horror story about government, but a horror story about privatization and government.

            • WTP said, on July 19, 2012 at 10:37 am

              One thing I did learn from sitting in the VA waiting room with the VA “lifers” who knew the system in and out was that before you exit service, I presume there is still some sort of medical check-out? If so, make sure you document every problem or concievable problem as a result of your service. Aches, pains, and especially any possible chemical exposure. Don’t be shy about it. FWIU, it doesn’t mean you have to take any compensation at the time, but it makes it much harder to get compensation further down the road if it becomes a problem. Dad had been shot in the hand in the war and it had healed well and didn’t bother him at all until he was in his late 70′s. Fortunately it was manageable and relative to the cancer he was going through, it was a minor annoyance, but if it had gotten bad enough to be a true disability, it would have taken much longer to get any compensation/help as a result…or so I was told.

            • Michael LaBossiere said, on July 19, 2012 at 10:48 am

              You might find some of the reasons for the problems in the VA surprising. Or maybe not, given your experiences with how systems work. Since top VA positions are politically appointed, they are often handed out as political rewards or used as dumping grounds for people who are too connected to fire but problematic enough that they need to be moved somewhere else.

            • magus71 said, on July 19, 2012 at 6:09 pm

              Not saying that couldn’t happen in a private business, but wouldn’t you say it’s less likely?

            • Michael LaBossiere said, on July 24, 2012 at 11:46 am

              I’d need a lot of data to decide. Based on a rough estimate from what gets in the news, business and state seem to be similar in terms of their problems.

      • T. J. Babson said, on July 18, 2012 at 2:57 pm

        Really, at the end of the day, the only reason private outperforms public is because there is competition. You get bad service at restaurant A, you go to restaurant B. Pretty soon A is out of business, and maybe C takes its place. The cycle continues.

        With public, you get A. If you don’t like it you are SOL.

        • magus71 said, on July 18, 2012 at 5:46 pm

          TJ,

          Why is it, do you think, that government agencies seem so much more complicated than private ones? Why are there a million forms to fill out in government, yet when I worked at Fed Ex, I clocked in to work, scanned each package as I delivered it and noted the delivery on a log, then clocked out of work. That was it. In my job now, most times there is no job. I just spend all day filling out forms.

          • Michael LaBossiere said, on July 18, 2012 at 6:22 pm

            Business also has plenty of forms and paperwork, especially at the management level.

          • T. J. Babson said, on July 18, 2012 at 6:54 pm

            Magus, when Al Gore was assigned the task of reinventing government, he actually did a pretty good job of getting to the root causes of government inefficiency. Something he wrote, but which I can’t find online, basically said that an awful lot of rules, regulations, and effort went simply to avoid any scandals.

            Can you imagine any Democrat talking like this today? Boy have things changed.

            • T. J. Babson said, on July 18, 2012 at 7:07 pm

              Bill Clinton comes on at the 5:08 mark. Dems would call him a Tea Partier now.

            • magus71 said, on July 18, 2012 at 9:01 pm

              Actually, thinking about it, I completely agree with Al Gore on this one. I’ve thought of that as a possibility before. In the Army it’s called CYA.

        • WTP said, on July 18, 2012 at 6:00 pm

          Wrong, TJ. With public you get A. If you don’t like A, you can vote for a new representative, senator, governor, and/or president and they will introduce new regulations that will fix A for you. Hopefully. Some day. Top-down, that’s the only proper way.

        • Michael LaBossiere said, on July 18, 2012 at 6:17 pm

          Unfortunately that is not true. You should talk to my friend Ron. He takes bad service very seriously and has a plethora of stories about this. Amazingly, almost every place that has crappy service just keeps on going. One reason, as Ron will say, is that chains tend to be the only game in town. So if the nearby fast food places have crappy service and you want fast food (as most people do) you get your crappy burger with the crappy wilted lettuce and crappy service. And you likez itz.But not really-but what are you going to do? Cook it yourself? :)

          • magus71 said, on July 18, 2012 at 6:23 pm

            Government has the ability to make laws that force me to use their crappy service.

            • Michael LaBossiere said, on July 19, 2012 at 10:43 am

              The state has a legitimate monopoly on some services, such as police and licensing.

          • magus71 said, on July 18, 2012 at 6:28 pm

            Tell Ron I said hello, by the way. We shall meet again at the wood chipper.

            • Michael LaBossiere said, on July 19, 2012 at 10:44 am

              Dave is still scarred by those incidents. Ron still insists that killing an angel was not an evil act-technically, the angel did get in his way.

            • magus71 said, on July 19, 2012 at 6:10 pm

              My character was roughly based on Vladimir Putin. I’m pretty sure the Sword of the Blood Prince was made out of Polonium.

            • Michael LaBossiere said, on July 24, 2012 at 11:46 am

              Well, it did hurt everything-even the wielder.

            • magus71 said, on July 19, 2012 at 11:33 am

              At least Dave came to his senses before he got in Ron’s way. Otherwise he may have met the paladin’s fate.

            • Michael LaBossiere said, on July 19, 2012 at 2:58 pm

              Dave knows well not to face such tweaking.

      • WTP said, on July 18, 2012 at 5:57 pm

        Relax, guys. Isn’t it obvious this is his famous sarcasm manifesting itself again. Even I get that, and I’m WTP.

  3. T. J. Babson said, on July 18, 2012 at 9:52 am

    I am actually not surprised that government contracts to privately managed companies do not save money. Why would they? It is like having the worst of both worlds–all the red tape of government, and all the profits going to the mother corporation.

    The reason the government likes these contracts is that it provides great flexibility in the labor force. The people working for the contractors are not government employees, and can easily be fired. Contractors can be changed, etc.

  4. T. J. Babson said, on July 18, 2012 at 7:25 pm

    Wal-Mart at Forefront of Hurricane Relief

    By Michael Barbaro and Justin Gillis
    Washington Post Staff Writers
    Tuesday, September 6, 2005

    At 8 a.m. on Wednesday, as New Orleans filled with water, Wal-Mart chief executive H. Lee Scott Jr. called an emergency meeting of his top lieutenants and warned them he did not want a “measured response” to the hurricane.

    “I want us to respond in a way appropriate to our size and the impact we can have,” he said, according to an executive who attended the meeting. At the time, Wal-Mart had pledged $2 million to the relief efforts. “Should it be $10 million?” Scott asked.

    Over the next few days, Wal-Mart’s response to Katrina — an unrivaled $20 million in cash donations, 1,500 truckloads of free merchandise, food for 100,000 meals and the promise of a job for every one of its displaced workers — has turned the chain into an unexpected lifeline for much of the Southeast and earned it near-universal praise at a time when the company is struggling to burnish its image.

    While state and federal officials have come under harsh criticism for their handling of the storm’s aftermath, Wal-Mart is being held up as a model for logistical efficiency and nimble disaster planning, which have allowed it to quickly deliver staples such as water, fuel and toilet paper to thousands of evacuees.

    http://www.washingtonpost.com/wp-dyn/content/article/2005/09/05/AR2005090501598.html

    • Michael LaBossiere said, on July 19, 2012 at 10:52 am

      True-Katrina was a model of government inefficiency. If only the Republicans had been in office then-things would have been different.

      • T. J. Babson said, on July 19, 2012 at 11:03 am

        Always remember Babson’s first rule: in politics, there is no good–only bad, and worse. Today the Dems are worse, tomorrow it could be the GOP.

      • T. J. Babson said, on July 19, 2012 at 11:33 am

        Actually, the studies indicated that FEMA performed about average during Katrina.


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