Is the push towards privitization all it's cracked up to be?

I really am not a big fan of the privatization of prisons, which hasn't occured here, but is in the US. It seems reasonable to argue that if growth is a desired aspect of the business endeavor, then the private prison will manifest intentions quite counter to what the community will desire. Would a large corporate entity which owns a number of prisons lobby against reduction of sentence time for possession of marijuana, for example? Would such an entity tend to support 'law and order' policies? One should expect that, I think. But the motive clearly isn't community welfare, it is investment return.

Some things simply do not have a clear ROI in financial terms.

Others have a conflict of interest. The school example is a very relevant one. Privatization of education makes little sense. But it makes equally little sense to oppose privatization of the functions blatham mentions (janitorial, cafeteria) as a matter of principle.

Privatization of prisons is another interesting study. There is simply no profit inherent to incarceration. The monies being spent are taxes, in effect a donation.

So privatization of this does not make much sense to me (though functions can be farmed out, just as they are in schools).

What does make more sense is some of the privatization of services rendered to the citizen that the citizen pays for outside of their taxed and according to their consumption.

Some (though not all) of said services make sense to privatize as they function on the basic precepts of business. Other things like prisons and public education are not inherently a business.

Here's a good piece on this issue, with various notes on where the GAO and other bodies have found privatization more costly and less effective.

http://www.afn.org/~iguana/archives/1998_10/19981005.html

Isn't this also true for the same functions being run by government? How is a corporation lobbying for these things be any different than a government employee's union lobbying for them? Those union members have a vested interest in maintaining their state jobs just like the corporation does.

fishin

The difference is the growth dynamic. It wouldn't be accurate to claim that a union local would push for expansion in the manner of a business. Some businesses, of course, like the local small town hardware store, won't usually be driven to expand and gain market share, but that certainly is likely to be a factor in the plans and strategies of a corporate entity.

Re: Is the push towards privitization all it's cracked up to
Privatization needn't always be a good idea, but not for the reasons given by your political science teacher.


Here your political science teacher is restating what economists call the "lump of labor" fallacy, which has been debunked almost 200 years ago but is still popular among political scientists. For a comprehensive account of both why it's a fallacy and why many intelligent people find it hard to see it's a fallacy, see Paul Krugman's essay "Ricardo's difficult idea".


This application of the Lump of labor fallacy has been debunked long ago as well. See Paul Krugman's Slate essay "The accidental theorist"

Enjoy!

-- Thomas

I don't see how the "dymnamic" affects the issue. The prison unions (and government employees to run the prison systems) still push the "law and order" legislation to keep their positions and then demand greater pay and benefits and in many cases to expand the existing system. With either growth dynamic the end result is the same - an increase in "criminalization" and a larger prison system.

fishin

I don't think these two are even close to being equal in magnitude. Businesses seek growth in a manner which a union membership does not. A union membership can be quite happy with maintenance of status quo, whereas a corporate entity is not likely to be satisfied with that. And I didn't say 'dymnamic', in fact, I've never said it.

Actually, education has all the hallmarks of a private good: it is rival, it is excludable, and it does not generate large externalities. We treat it as a public good because the social and implications of not doing so are enormous.

(I brought up the telephone question because I wanted to know if telephone service has become more or less effective since it was privatized. Lily Tomlin's old "We don't care. We don't have to. We're the phone company.")

Certainly deregulation doesn't seem to have made air travel less efficient, or trucking. And ongoing gov't subsidies haven't made Amtrak any more efficient. But these are all goods that are inherently private, anyway.

Mostly just reading along, though....

patiodog, I had initially typed "education" and then changed it to "public education" because of the reasons you mention.

Thing is, as long as we are going to treat education as a public good then that's changed.

Telephony is a good example. In the last few years I observed a privatization in that sector (Telesp > Telefonica in São Paulo).

There was initially much clamor about the transition, telefonica even ran ads with a baby saying that they were a baby and needed time to grow.

The government had strict rules on employment quotas and efficiency benchmarks they had to meet and the privatization was immensely unpopular.

But within a few years the improvement was undeniable. Anywho, I'm trying to limit my use of anecdotal evidence but I bet telecommunications is a sector whose privatizations have been largely positive.

Methinks you are either not aware or or choosing to ignore things here Bernie.

The Californica Prison Guards Assoc. donated $2.3 million to Gray Davis's campaign and in return found themselves with a 34% pay increase in 2002 in addition to a greatly increased liberalization of sick time benfits which state prison management people were prevented from questioning. In the end all of that ended up costing the state of CA an additional $680 Million in 2002 while the state was in the middle of a huge fiscal crisis.

That's only one example but there are many others as well. Now granted, they didn't "expand thier business" but they certianly used their influence to their advantage.

Er-yep, that's definitely my impression here, too, but it happened when I was a kid, so I don't have much to compare it to.

The main snag I see with keeping those goods that are in the gray area between public and private good in the public realm is the lack of incentive for innovation. (God, I'm about to sound like a capitalist running dog.) Without the possibility for entry into the arena, there is little incentive for technological exploration unless it is predicted and encouraged by the regulatory body.

The technology angle is relevant to my experience. The telecommunications industry that I observed was required to (and succeeded in doing so) modernize very dramatically (e.g. shake off 10 years of stagnation in a year or two).

Telecom is an easy one, though, because the externalities are so small, and the cost of entering the market drops with every satellite that goes up, so it's a more competitive enterprise. Not the case with power. The externalities are obviously enormous, and getting into the game requires enormous capital. The simple fact that the industry is inherently monopolistic may be cause in itself for public administration.

I think with power, a lot depends on how you privatize. For example, the Great New York blackout earlier this year happened because power was deregulated in a way that made power distribution, but not power production, a public good among the various companies involved. So the electrical grid didn't get sufficient investment -- everybody's business is nobody's business. I haven't thought about how to make power distribution a private good again, but I see no reason why it wouldn't be possible.

I think the hardest case for privatization is health insurance, which is ripe with market failure through adverse selection. There's a pretty good economic case, and fairly decent evidence, that America's health insurance sector would benefit from nationalization. Not all economists agree though.

Another hard one is tap water, which is a local natural monopoly. On this one, the empirical evidence is a lot further in favor of privatization than for health insurance.

fishin

I understand that a union leadership can push for wage increases and benefit changes which add to costs of operation. I'll not get into the whole union justification here, but I'm really talking about something else which I think is very important.

While a union's demands (as above) might increase the cost of operating a prison or prison system, that's no unlike any other new financial demand (cost of paper rises, etc).

With corporate ownership of a prison system, the natural tendency will be to expand the profit-making machine (more outlets, bigger populations of prisoners). That's no an unimportant element, I think, as it conflicts with the community's desire to decrease prison populations (unless the community is nuts, that is).

But there's another element here too. And that is local familiarity and local interest. The union fellows looking after the prison will reside locally and will have very personal interests in the crime and incarceration aspects of their community. But a corporate entity, with shareholders from god knows where, will not have such a local interest or familiarity. Their concern will be limited to profit-making. This has much broader relevance than just prisons (perhaps most acutely in the example of a polluting enterprise) but it has relevance here too.

Re: Is the push towards privitization all it's cracked up to


Many economists would beg to differ. Argentina followed the principles espoused by the likes of the World Bank and IMF with some success for many years, followed by a complete collapse. Admittedly, I have not studied the issue in depth, but the evidence speaks for itself and it is only one example of a much broader pattern being played out all accross the developing world.



The fact that higher water prices in developing countries often means people can no longer afford to acccess clean water. Death, disease, etc.



I never said that in all cases the lower price was the ideal.

I also never said that in all cases privatization is the ideal.

The correct answer is that privatization is good in some areas and not in others.

Re: Is the push towards privitization all it's cracked up to
Ima goan start with the end, because besides it being the most relevant point it's also the place where we agree:



Emphasis mine.

I agree wholeheartedly and have perhaps misunderstood and mischaracterized your position.


But now that that's out of the way we can disagree.



I agree, but the flip side is also important to consider. While in one such developing country (Brazil) I experienced first-hand what this means.

While it's true that pricing water outside of the reach of the average citizen can be dangerous I'd note that this is usually combatted by said citizens simply stealing the water and no reasonable person wishes to punish them.

In Brazil, turning off someone;s water supply is illegal. If you don't pay your bill there are fines etc that can be meted out but your water is a legal right regardless of whether you pay.

Many people simply "steal" it.

But the artificially low prices also hurt. In Brazil the sanitation of the water is such that one dare not drink it because cheap water is unhealthy water.

In Brazil the dought and underfunded infrastructure has sometimes meant no water at all. In São Paulo I had to spend a few days a week with no water while it was being rationed.

I also experienced the same with electricity. Brazil had a huge energy crisis due to lack of investment and electricity for all was rationed. Prices had to be raised and everyone was given a limit. Exceed the limit and they would cut off your electricity.

Even though I paid the increased price my limit was based on an average useage period that included months in which the apartment was vacant, so my quota was unrealistically low.

So my electricity was shut off 4 times (I simply reconnected it).

So while I agree that affordable utilities are important in a developing nation my experience with artificially low prices and failure to invest in the infrastructure has shown that it can also cause the total cessation of said services.



Ok, I must admit that it was unfair to state my position as if it weren't subjective issue. You are right to say that many wise people disagree.

But I do have a lot with which to base that opinion on, once again from close observation.

Argentina's problems can't easily be summarized but their dramatic collapse isn't something that can easily be pinned on IMF policy either.

I'm no fan of the IMF, they are too willing to loan and too unwilling to restructure (for developing countries, though this is slowly changing).

And it's true that the IMF tries to push certain financial policies that many disagree with. Especially so in South America.

But Argentina is an interesting case study, because Argentina has traditionally ignored the IMF demands.

The US/IMF has long demanded that Argentina slash expenditures drastically. Another crucial demand was to unpeg their currency.

Argentina resisted these changes and thier pegged currency was a ticking time bomb. They cultivated foreign investment but all said investors did so with the knowledge that the money was artificially overvalued and should that change the money would make a hasty exodus.

The US/IMF did indeed deal a nasty blow by getting impatient and Bush entered the White House with a "No bail out" policy and in essense pulled the rug out from under Argentina.

No further loans were forthcoming and since Argentina had yet to move toward fiscal responsibility they could not survive without said loans.

So Argentine rushed to comply with the demands. While it's true that they were following some IMF demands prior to their collapse it's also true that their disregard to some real key ones (like having a floating currency) helped toward their demise.

Thei big mistake was in trying to be part of a free market while having an artificial market. Pegging to the dollar helped ward off the demon of hyper-inflation but also made their trade with South American trading parters hard on their economy.

Their cultivation of foreign investment was silly, given that all the investors knew they were buying overvalued currency, and when the value changed an economy-breaking exodus was inevitable.

So when Argentina was refused loans they collapsed. They unpegged from the dollar and watched their currency plummet like a stone. The foreign investment beat a hasty retreat and the people made a run on the banks.

They were used to being guaranteed the value of their money in dollars, but when the inevitable unpegging occured everyone suddenly lost much of their money (as the plummeting value made their money worthless).

To counter this they had to put a limit on bank withdrawals, as very soon the banks were going to go under.

This drove the people nuts as the limit was basically ensuring that their money would continue to devalue while they could not pull it and buy dollars.

Those who did buy dollars helped contribute toward the devaluation and the country collapsed. The people went to the streets banging pots and pans and the government collapsed several times.

After several governments and multiple tries they got their loan. But even after their collapse their proposed measured for fiscal sanity took several runs by the IMF.

In short, Bush's sudden policy shift was a blow, and ideological arguments about IMF policy might, indeed, have merit. But it's also realistic to assert that Argentina only started to really follow IMF proposed policy after all of that happened.

And it's also true that their avoidance of a balanced budget and their insistence on a pegged currency in a floating market contributed great;y to their fall.

I consider the pegged currency their greatest mistake, and it's something the IMF had long cautioned about and a lesson they should have learned from neighbours (Brazil had killed hyper-inflation by changing a bank law and pegging to the dollar, but they unpegged in time and have been making progress within IMF's general guidelines).

Re: Is the push towards privitization all it's cracked up to
One thing to remember about the IMF and the World Bank is that they can't impose anything the country hasn't agreed to have imposed on it when it asked them for credit. Argentina didn't get ruined because the IMF gave it money. The IMF gave it money because Argentina was on its way to ruin and asked for it.

Also, whether Argentina is a total failure depends on when you let your story end. They're in the middle of an impressive rebound right now. And while Argentina's presidents have uttered a lot of anti-neoliberal rhetoric, they have kept most of their neoliberal policies intact -- or replaced them with other neoliberal policies, like letting their currency float.

It's obvious why any telecommunications should never be government run but government oversight is definitely necessary. I was debunking the idea that corporations (or big business, if you will) is not always a model of efficiency no more so than the government. So that is a poor reason to privitaize. The privitization of the the electrical grid in California was propagandized by the perveyors (notably Enron) and the government as money saving for consumers. False. Corporations may find ways to save money by cutting employment, an obvious course that in the long run often backfires, but their ideas of efficiency don't hold up over careful scrutiny. Sorry, you'll never convince me that there is a different kind of worker in government than in corporations or that corporations haven't been proven to be equally adept at finding ways to waste money. Boeing is now a prime classic example. The principals laughed at the Airbus topping their revenues and a year later, guess what -- it happened. All the smart business brains are unique to the U.S.
Not.