Tuesday, December 13, 2016

The Point of Privatization

It has always been curious to me why it is that under-funded government functions get privatized. Outsourcing anything adds complexity which theoretically adds cost. Of course this is part of a broader picture of the never ending economic troubles caused by the decline of EROI, or the increased costs of obtaining energy.
To answer this question it helps to understand the constraints placed upon any government business. First, there are statutes and regulations. Also, there are the expenses involved with making people government employees. The aim of a government enterprise is not to make money, but to provide a public service, and to provide it the way people expect. Finally, government can be held accountable in a way private business cannot.
Below a certain level of funding, government services become dysfunctional. This is because of regulations, expectations, and government employee costs that were set in better economic times. Whereas a private company can choose to cut corners, lower pay and benefits, and substantially change their product offering, government cannot, absent significant legislative change.
Here in America we are in a period now (2016) where under funding of government services is a chronic problem, whether than be Medicaid, public schools, or something else. There are two solutions to the problem: 1) increase taxes or 2) cut government services. The problem with the first is that it's not just government--Americans themselves are "underfunded" and not making enough money. The problem with the second is that the people who need these services the most will get less.
So complain about government all you want but it's a problem either way.
This is where privatization comes in. It so happens that government can fulfill their duties AND get around a fair bit of costly regulation by privatizing government services. If the government isn't directly providing the service or hiring people to perform the service then some of the regulation that would apply no longer does. This especially saves money as far as employee pay and benefits. This also provides ongoing cost control as the private provider is now responsible for making sure the "public" services in question can be provided at whatever contract rate the government is willing to pay.
Of course, this often results in spotty service as the private provider stretches resources farther than the government themselves would ever do. Here in my city, the private company providing ambulance service for the city has been in the news quite a bit for poor response times. After the city fined them for it, it got "fixed". What was the provider's solution? When the number of available units gets to zero, they radio out to all the crews and tell them to hurry up. No kidding! Now an ex-employee is bringing this to light and both the provider and the city are saying that the frequency of having no available units is not something they track, and response time is what they really care about.
Some would say that the solution is to bring these services back in house, run and staffed by the city. I used to think this. However, such a view is ignorant of the cost pressures that drove privatization in the first place. Simply put, if the city could get away with doing things as cheaply as the private provider they would, but statute and regulation mean that they can't, so they privatize.
In these cases, government can't afford historical levels of service quality so they privatize and then excuse themselves of immediate responsibility for performance because they have an arm's length relationship with the private provider who is under no direct obligation to the public, and only a contractual obligation to the city.
It is much the same scenario with public schools. Underfunded public schools have been turned into basket cases that, in many cases, make it their mission to comply with statute and regulation because they can barely afford to do that. If your kid happens to get a good education then you are lucky. I saw this firsthand with my oldest child in Kindergarten. He struggled in the classroom and anytime we would ask for anything the school's response was always along the lines of whether or not they were obligated by the state education code to do what we asked. In several cases they even lied about not being obligated. I've had to become my own lawyer and arm myself with relevant portions of the state education code in all of my dealings with them. State ed code such-and-such and exhibit A, B, and C, and I'll be down to talk to you in person if you don't get it! The school cares less about helping children than they do with "complying" with state ed code.
Why is this? Are they bad people? Maybe there is a bit of coldness, of hardness. But the primary driver is funding. They can only afford to do so much so they do what they are legally obligated to do and if they can do more then fine but if not then oh, well! Charter schools are now stepping into this void as the primary vehicle of privatization for public schooling. Of course, charter schools are under less regulation than public schools (government-run schools) including regarding employee pay and benefits. As parents leave paralyzed public schools for charter schools it only makes the public school funding issue worse.
Of course the public tends to be split on the issue, with conservatives correctly identifying that public pensions and regulation are part of the problem, and liberals correctly identifying that under funding is part of the problem. But we so easily forget that the system which is now broken worked, once upon a time, and it was well funded, once upon a time. It remains an ideal system in many ways. We'd like to good public schools back, we'd like to have city-run ambulance services back. It would be great to have more government workers with money and pensions to put into the economy.
But it's not going to happen anytime in the foreseeable future. We can't properly fund such levels of public service without broader economic activity to match, which is not forthcoming, and will not be forthcoming. Since we can't solve the under funding problem, we have no choice but to cut public pensions and regulation. It will happen. Already public pension funds are only holding on because we actually believe them when they say they will generate annual returns of 7% in a market that, since the Great Recession, has been returning much less. Pensions will be ended, and current beneficiaries will take a major haircut, and even that will require a significant bail-out from public funds.

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