Government privatization of services doesn’t only fail in the United States as experience of Great Britain is demonstrating

By Marc Jampole

The New York Times is giving us new evidence that privatization of government services is a failed concept. The Times reports that Great Britain’s decades-old experiment with privatizing government services is failing. Privatized facilities for the elderly and the disabled have run into a slew of abuse charges in the recent past. Moreover, a report by the British government found that over the next 25 years schools could cost 40 percent more, and hospitals 70 percent more, if run by private firms instead of through the government. Sounds like a typical privatized American prison, which costs more to operate than the government facility it replaced.

Why anyone ever thought that privatization of government services would lower costs and improve quality is beyond comprehension. When the government does something, its chief concerns are quality of service and cost to taxpayers. But once a private company gets involved, another factor enters the decision-making process: profit, which in the private sector is primarily split between owners and senior management. That profit has to come from somewhere, and it does: from the total pool available for providing the service—from salaries, equipment, supplies, transportation and facilities. Whatever the money set aside to provide the services, the cut given to profit will diminish it.

But wait, privatizers say. The private sector will run things more efficiently.

But how? Through economies of scale, which assumes that many companies will have the purchasing power of the federal government or most states. For the most part, that’s just not true. And in those rare cases in which a large private sector business might have an edge in purchasing supplies or maximizing the productivity of equipment over a local government, that government can always band together with other municipalities to buy supplies or share technology and staff.

As it turns out, it’s not economies of scale on which privatizers depend, it’s cutting the costs of labor. Typically, virtually all employees of privatized government services receive lower compensation than their government paid government. Why? Because privatized employees generally aren’t in unions, while government employees are often unionized. So what, you might ask? Who cares how an organization splits the pie, as long as the service is provided at a high level of quality and costs taxpayers as little as it has to. There are unfortunately two flies in this ointment: 1) Paying lower salaries will attract less qualified employees; 2) Cutting the salaries of large numbers of people—unionized or not—drives down the entire wage scale of an economy, which leads to all the problems that inequality of wealth brings, including an increase in asset bubbles and recessions, a decrease in the possibility of individuals moving up the income ladder and anti-democratic distortions to the political system.

(The exception to the rule that a privatized worker will make less than a government worker is the military, for which privatization brings on other problems such as a lack of loyalty of the mercenary to the values of the U.S. armed forces and pressure by privatizing lobbies to instigate or continue wars so that the profit train keeps running.)

But wait, privatizers say. The private sector is more likely to innovate and those innovations will lead to higher quality and lower costs. That’s not the way it has worked out in real life. In fact, when researchers Christopher Lubienski and Sarah Theule Lubienski ran the numbers, they found that one of the major reasons public schools outperform private schools (when adjusted for poverty and disabilities) is that public schools are more innovative, introducing new teaching techniques and technology than private schools. (The other reason, FYI, is because public school teachers are more experienced and participate in more continuing education classes than private school teachers. Makes sense, since paying more attracts better employees—that’s the American way!—and if private schools can cut teacher professional development, they can produce more profit.) No one has found any innovations at private prisons, except perhaps in the area of information technology which would occur at the governmental level, too. The privatized section of the armed forces has access to all the advanced technology they want—all developed by the U.S. military!

But wait, privatizers say. Privatization ends the special interest group politics surrounding government programs. That assertion is also belied by the facts. What happens in the real world is that the industry offering the privatized services becomes another special interest that finances and influences politicians. Teachers’ unions lobby for higher salaries and smaller classes, both of which lead to better outcomes for students especially in the elementary school years, at least according to the research. The prison industry lobbies for longer prison sentences, high bails and round-ups of undocumented immigrants, all to fill their jails. The defense industries lobby for higher military budgets and more military excursions. For those dear readers who don’t see the painfully obvious difference, let me explain: what the teachers want helps society; what private prisons and military contractors want does not.

But wait, privatizers say. The private sector always does it better than government by definition. Now that’s just a lie, as a landfill’s worth of evidence demonstrates. All we have to do is compare the cost and outcomes from the American system of healthcare insurance and delivery to those of every other western democracy, all of which have one form or another of single-payer healthcare. We rate first in costs and close to last in infant mortality and life expectancy. BTW, some nationalized healthcare systems like Germany’s do find a place for private, highly regulated health insurance companies. Not surprisingly, the most nationalized part of the American system—Medicare, Medicaid, the Veteran’s Administration before Bush II and Republicans gutted its budget—do the best job on costs and quality.

Is it possible that government control or ownership works best for the delivery of all goods and services? Based on the evidence of the Soviet Union and its satellites, it would be hard to make that assertion.

On the other hand, it seems that many types of industries seem suited to government control—certainly education, prisons, the military and probably healthcare. One key similarity of these enterprises is that they require large numbers of people who interact intimately with those served. While a telecommunications company or a solar panel manufacturer may require thousands of employees, technology, facilities and equipment are at least as important to the business as people. A phone company sells phone service using phones over landlines or on wireless frequencies. A school may use computers and science labs, but it sells teachers and teaching. A military sells armed forces (although modern warfare has increased the military’s dependence on capital goods more).

Another similarity of the industries that have seen disastrous results in privatization (or in the case of education, merely mediocre results) is that they all involve the entire public and the public good. No society since about 1850 can survive without universal education and literacy. Everyone needs healthcare. We build prisons and maintain armies to protect everyone. One can make a case that everyone needs electrical, telephone, water and natural gas service, too. Evidence is mixed as to whether government or the public sector most efficiently delivers these capital-intensive utilities, but we do know that when privatized they always require a lot of regulation to make sure that everyone has cheap, ubiquitous and reliable access to them.

A final similarity I see in the industries for which past experience demonstrates that government control beats privatization is that they are either mature industries, meaning that the market will not increase for their services except through population growth; or industries that it is the public interest not to grow. We are certainly better off when we have less need for prisons and the military.

I suspect that a whole lot of industries would be better off if they were nationalized. Of course I do, I’m a democratic socialist. But the experience in the United States and elsewhere else suggests that even the most extreme free-market conservative should see the benefit of centralized public education, prisons, healthcare, military, mass transit, roads and other services that governments routinely provide in most western nations. Except, of course, those right-wingers who hope to profit from privatization; or do not believe that rich folk should be taxed so that everyone can enjoy the service in question, e.g., affordable and high quality education and health care, and hope to use privatization as a Trojan horse to achieve that end.