CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press When Going Private Costs More

When Going Private Costs More

Wednesday, 16 January 2013 05:47

Eduardo Porter had a nice piece in the NYT making the point that privatized services will often be less efficient than publicly provided services. Porter notes research that argues that when the service in question is not well-defined and easily measured it is likely to better provided directly by the public sector. This would be the case with education, health care and other major services that are largely provided by the government.

Comments (12)Add Comment
written by Chris Engel, January 16, 2013 5:03
"We're all democratic socialists now"

"Privatization" is About Privatized Gains and Socialized Losses - Not Efficiency
written by Last Mover, January 16, 2013 6:28
Exactly. A primary driver behind todays massive private and government failure in general, is the line between private and public is intentionally, carefully blurred in order to privatize gains and socialize losses.

This opens the door to private marketeers peddling privatization of what should be public goods, as well as publically elected stewards who openly invite corruption of public goods from the private sector, allowing both sides to slip back and forth between the public and private dimension to skim off gains, then dump losses onto the public side. Works every time.

A key solution rarely applied is to draw a bright line between public and private goods, then regulate the hell out of the public side and deregulate the private side enough to allow true, free market competition to actually work, rather than mash the two sides together into an unrecognizable economic entity with no clear public or private side.

Both public and private goods have come to be exploited through a carefully designed morass of market and government failure, intentionally crippled by too much regulation on one side and not enough deregulation on the other - all designed to favor owners of concentrated wealth and government power, at the expense of consumers and taxpayers.
written by Art Perlo, January 16, 2013 8:34
Porter cites, positively, Argentina's privatization of water in the 1990s. It would have been worth noting that privatization of water has become a major issue worldwide, that the popular anger at privatization was a major contributor to the movement that elected Eco Morales President in Bolivia, and the public-owned water supplies work pretty well in the US.

Public-owned services can be bad. But the public has more possibility to control and change policy in a public-owned service than a private-owned one.

There are instances in which privatization can help achieve broad social goals. After Argentina privatized many of its municipal water supply systems in the 1990s, investment soared, the network expanded into previously underserved poor areas and the number of children dying of infectious and parasitic diseases tumbled. (Most water companies were nonetheless renationalized by a later government.)
written by dick c, January 16, 2013 9:55
This is probably why the founding fathers put roads and the postal service in the public sector. I wonder ... was there a contentious debate over that, or was it a no-brainer?
written by PeonInChief, January 16, 2013 10:10
It's often the case that a privatization that works is idiosyncratic--it works for reasons no one understands, and can't be replicated anywhere else. And it's easy to see why it won't work for a lot of government services.

For instance, many cities operate summer day camps for kids as a form of subsidized daycare. It's the cheapest thing around, so every slot will be taken. But the right measure isn't its popularity, but the quality of the program. Did the kids have a good time? Were the activities fun, and maybe educational as well? Did the kids look forward to it, or think they were being warehoused? That can't be measured by counting.
About that Argentinian water story...
written by David M, January 16, 2013 12:21
I was wondering, too, about the story of water privatization's success in Argentina. Here's a look back on their experience: http://www.corpwatch.org/article.php?id=10088

and a choice quote:
residential water rates increased 88.2% between May 1993 and January 2002 although there was "no relationship between this rate and the consumer price index (inflation rate), which was 7.3% for the same period."

Azpiazu says this provided the company with net profits of 20%, which he says is far higher than is "acceptable or normal" for the water industry in other countries: "In the United States, for example, water companies earned between 6-12.5% profits in 1991. In the United Kingdom a reasonable rate of profit for the sector is between 6-7%. In France, 6% is considered a very reasonable return on investment."

Yet this rate increase did not translate into higher quality or quantity of service. In 1997, the company was found to have failed to honor 45% of its contract commitments for improvement and expansion of services, resulting in massive pollution.

David Cay Johnston describes similar scenarios in the US in his great new book, The Fine Print. And I swear I'm not shilling for DCJ!
written by Kat, January 16, 2013 12:45
I was wondering about that too. I know that I approach such a question already prejudiced (especially when the privatized service is something as vital as water) but could not imagine that privatization would bring lower rates in the long run.
Porter makes a good case, but the article is flawed by the premise that one of the main goals of privatization advocates is increased efficiency. Who can believe this in 2013? I am not saying this simply to be glib.
As far as I'm concerned everyone and their cousin should shill for David Cay Johnston, btw.
Bankruptcy of the Commons
written by Benedict@Large, January 16, 2013 1:41
Imagine you are a corporation declaring bankruptcy because your customers have refused to pay for all the goods and services you've provided them. The judge tells you that you have to liquidate your assets to raise funds to meet your own payment obligations, and you reluctantly agree, knowing that forced asset sales result in firesale prices. Imagine your outrage when the auction begins, and all of the bidders for your assets are the very same customers who earlier stiffed you.

Welcome to privatization.
health care provided by the government?
written by pete, January 16, 2013 2:20
Do you mean county hospitals? The VA? Most health care is provided by private hospitals and doctors and nurses. Not true all over the world, of course. This is a silly argument.

Public education clearly sucks....its certainly not good enough for the Obamas, or the Gores, or the Carters, or the Kennedys. And clearly private institutions at the college level are doing pretty well. Duke, Stanford, Harvard, Yale, Chicago, Northwestern, Rice, Emory, hell all the schools in Boston, and all the excellent 4 year schools.

written by jennifer, January 16, 2013 4:02
Yes it is amazing in this day and age people could really claim privatizing is for increased efficiency. Everywhere I have seen it happen it means a private company takes over and pays the workers less/makes union contracts void (as a recent private takeover in Chicago did with an O'Hare service--thanks to the mayor) and gives them less benefits. On paper this is "cheaper" but really in the long run the city/county/state just has poorer residents who will most likely use more services.
Pete proves the case
written by LifeFreeOrWatchTV, January 16, 2013 4:06
The US fascination with privatization is exactly what has led to the poor quality of American public education, health care, etc.--by inappropriately diverting funding and attention. On might throw in a caveat such as "Not true all over the world, of course," but in fact it's not true ANYWHERE in the industrialized world where advanced societies have kept the public sector public. It's no accident that the public health care, education, quality of life, etc is so much better in so many other countries.
written by Union Member, January 17, 2013 8:11

"But if the objectives are complex and diffuse — making it difficult to align profit with goals without undermining some other desirable outcome..."

Journalism, like healthcare and education, is an "org" that could best be run as a public service .

The Media seems to be run a lot like the Baltimore Police Department: they don't seem to want to cover important stories, issues that truly matter to the public - to the point where the public does not know what's important or what their interests even are.

"... the profit motive could well make conflicts more difficult to manage."

Guess we'll have to read the book to see if these are armed conflicts that are difficult for BP manage.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.