Thursday, May 19, 2011

On Good Privatization and Bad

I have discussed before the fact that privatization is used in two senses. One meaning is where a former service is no longer provided by the government and left to private enterprises to provide. This in my view is good privatization.

Bad privatization is when government continues to control an agency ("own"), but the actual day-to-day operation is in some ways left to non-government firms to operate. This is bad privatization. It does not use the profit and loss signals to adjust the "services". It creates opportunity for cronyism and it is ultimately based on theft, since it is generally supported by tax dollars, and competition is generally limited or completely prevented.

For the bad sense in which the word is used, see Megan McArdle's recent post, When Should Government's Contract Out.

She amazingly discusses privatizing the DMV, buses, and community centers, all in the sense that the government continues to oversee the operations but outsiders are chosen to handle the day-to-day operations. And while doing this she thinks she is discussing free markets. I kid you not. She writes:
If you can't create a good contract that aligns the incentives of the contractor with the incentives of society, then you shouldn't just go ahead and privatize anyway because the free market is awesome. The free market is awesome. But it is not actually a cure-all.
Thus, we have a "Beltway libertarian" who disses the free market under certain circumstances and then thinks she is talking positively about the free market when she is just calling for the outsourcing of government organizations.

In other words, getting IBM to manage the post office, to this Beltway libertarian, is somehow a "free market solution" and she doesn't even consider the real free market solution which would be ending the U.S. post office and allowing free market solutions to develop in any way among any firms or individuals who want to get into the business, without any role for government.

As can be seen, Beltway libertarianism is often not libertarianism at all. It often continues to call for government control of certain properties and operations that are then seasoned with deals that go to favored corporate insiders. This mishmash is then somehow put on the Beltway conveyor belt where the concepts of libertarianism, free markets and privatization are doled out in commentary, when the true concepts on this Beltway conveyor belt should be confusion, obfuscation, the desire to be an apologist for power, and Mussolini economics.

20 comments:

  1. Well put Bob. All the "privatized" prisons still cage people innocent of any harm other than running afoul of some government edict. Private "security" forces in Iraq, et al, are still killing innocents and escaping punishment.

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  2. I have to agree with you on this one, Wenzel.

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  3. Funny. I was just reading this piece about privatizing prisons before I came to this post.

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  4. To me, bad privatization includes selling government assets to connected people for a fraction of their worth. In our present state, I believe this is likely if our government decides to pay down debt in this manner.

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  5. I prefer outsourcing of most things government does if the alternative is government employing the people and performing the service themselves. At least with the outsourced company you can fire them if they suck or start to get too expensive. When government does the job themselves, and especially if there is a union involved (pols love unions since its a great way to buy votes), payrolls get bloated and way out of hand. Where else other then government can a life guard in California earn $200k and retire at 50 or a fireman in Clark County Nevada earn $300k or a teacher in Cook County earn $600,000? Of course, I would prefer that government didn't do most of the things that it does.

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  6. Thanks for this insightful analysis. Not to be nitpicky but the title spelling of 'privatization'...

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  7. bad privatization = happens all around the world, specially in south america and other countries under development. its the government perpetuating oligarchical structures, monopolies

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  8. Government outsourcing "business." That is the definition of fascism.

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  9. The US Postal Service is competing with a lot of businesses like Fedex, UPS, etc. Looks like they are still liked OK by many of their customers.

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  10. Is that last anonymous comment serious? It's a proven fact that the post office has been a losing business venture for pretty much its entire existence. (Add Amtrak to that list, too.)

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  11. "Looks like they are still liked OK by many of their customers."

    You're joking, right? The Post Office recieves billions in subsidies every year, while FedEx and UPS make billions in profits (and pay taxes that fund the Post Office).

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  12. The U.S. Postal Service? That's supposed to be a good example of a gov't service? They've been losing billions each year, along with many other problems. They recently announced another $2.2 billion loss. FedEx and UPS have been cleaning their clock.

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  13. Remember that the post office still has a monopoly on first-class mail, so the playing field is far from level. UPS and FedEx would quickly drive the post office out of business if they were allowed to deliver all types of mail.

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  14. Great blog post, Dr. Wenzel. It seems to me that such "Beltway libertarians" are in fact closer to being market socialists in their views on "privatization". What do you think?

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  15. I don't like the idea of the government selling or licensing things like highways, the drivers license, post office. I'm pretty pessimistic on the public choice problems that could come up under this scenario. What I think should happen is that competition is allowed.

    First the government (post office, etc) is given a hard limit in the amount it can spend over the next couple years. Firms are allowed to set up enterprises that compete against the current government enterprises. Over time, the money going to government enterprises is reduced and then the entity is completely abolished, leaving the private companies in its wake.

    The concept behind this is the hope that it would stop or curtail politically connected interests getting sweetheart deals over the sale of government assets. Private concerns would have to build up their up infrastructure without having to rely on government help. Maybe this is fantasy, but I think it sounds good.

    I agree that the "fake market" that most beltway type propose is weak and full of problems. That said, I think even the fake market solution is a better option than the current non-market one.

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  16. "Over time, the money going to government enterprises is reduced and then the entity is completely abolished, leaving the private companies in its wake."

    To end a federal program that gradually, you'll need a quorum of like-minded reductionists to be elected to federal govt, or surely teh opposition will delay and interfere with it along the way. It would be better to sell an asset like the Post Office, and let the new owner figure out a way to make it profitable, while UPS/FedEx/etc expand to fill the extra need. Chances are, whatever 'connected' entity would buy the Post Office would face hard times trying to convert it to profitability.

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  17. I would end the post office tomorrow as it has become nothing more then a destruction of wealth. If the post office actually ran itself like a business or even an enterprise fund, it would have managed its bottom line by automation, work force reduction and competitive product offerings, but, instead it has become nothing more then a middle class welfare scheme existing only to provide political donations and votes to politicians, fees to its union bosses and compensation and benefits to its members.

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  18. As previously stated, the post office seems very popular. ALL of the mail they deliver could also be delivered by Fedup, UPS, etc but people choose to use the postal service because it costs them a fraction of what it would cost for the private company to deliver the item.

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  19. We don't call tax farming (http://en.wikipedia.org/wiki/Farm_revenue_commutation_) free market.

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