The New Yorker has a short, must read piece that I’ve been intending to post since reading it a week ago, on the privatization of public services and regalian functions of the state in the US. It thus opens
Republicans have been touting the inherent superiority of the private sector over the public at least since the Reagan era, but in the past few years it seems to have congealed into an unassailable mantra: the free market as the ultimate guarantor of good services, low costs, and a free and happy citizenry.
But as author Margaret Talbot argues—and in linking to important investigative reports on the prison industry in Louisiana and a for-profit college—, the notion that the private sector does everything better than the public is a delusion. I’ll go one step further: it is a complete lie. I’ve already posted on the legitimacy issues related to privatizing regalian domains of the state. But privatization cannot even be defended on efficiency grounds, as the private sector does not do it better. It invariably underperforms and not only does not save the taxpayer a penny but imposes costs through hidden externalities. As it happens, Paul Krugman touched on precisely this issue in his last column, on the privatization and degradation of essential functions of government, discussing in particular the horrors of privatized halfway houses in New Jersey, which was the subject of a series of investigative reports in the NYT. It is high time for liberals to stop being wimps on this issue, to oppose privatization, and defend the public sector.
“It invariably underperforms” Well, that is quite probably true for jail management (I also read over that in the French case). And probably for most cases in which the only “customer” (able to receive or refuse the outcomes) is a public authority.
Probably not for farming, building houses or designing coffee machines. And in other cases, such as bus lines management, all systems fail after some years, the best a town can do is to change the system quite often (that’s what I learned at Ecole des Ponts).
There is no need for a claim of overall superiority for the private, or publicly owned, sector; rather, there is a need to investigate the numerous reasons why every sector performs, or fails, in different kinds of industries. And I guess (and hope ?!) there is meaningful academic research on this issue?
Frédéric, my post specifically concerned public services and the regalian domain of the state, not the economy as a whole. The production of goods and services in the competitive sector of the economy is of course better left to private enterprise. In fact, the state has no business being directly involved in this (dirigisme is a thing of the past even in France). It is interesting that you mention public bus systems. It is true that if these are left in private hands, they will inevitably go bankrupt (and as happened in America in the 1960s and 70s). But most cities in France outside the Ile-de-France subcontract public transportation to private companies, or, rather, to a single private company which has a delegation to provide a public service and is heavily regulated. The system seems to work fairly well so far as I’ve read (though I need to read more). I can see the advantage of this arrangement for public authorities, notably in not having to deal with public sector unions.
OK, the issue is about the scope of “public services”: how broad should it be? That changes over time, noteworthy with technologies. Thus, telcos are a vivid example of how different institutional arrangements work — and fail — over time.
The case with buses is really tough. The French delegation system works, indeed, but with major disadvantages too. Basically, a number of mechanisms push the public authority to pay every year more than the previous year, the public to pay every year less, and many buses to run empty whereas, at other places or other hours in the day, there would be a huge demand that will not be served.
In such situations, the typical answer is, to allow private initiative (creation of self-financed lines). But this reduces quickly the operating margins, leads to non-cooperative behaviors between competitors — for example, delaying the departure of your bus until one minute before the departure of the competing bus. And quite soon you get a private, non-transparent arrangement to save the sector and punish the most independent entrepreneurs — that’s to say, you get a mafia control over transport. (The economists will explain that’s because transport is an activity with increasing returns — the classic laws about the advantages of free competition don’t work then).
Then the answer is socialization/nationalization. You get civil peace, a rational organization of bus lines and time tables — and a well organized Union of drivers, able to block all the systems within minutes when it wants to. And the Union does it indeed — there is no ceiling to drivers’ social benefits.
So you cut the public service into regional pieces, find buyers for each line — you transform the rational organization into a set of contracts. It works, Unions have less power, but the owners’ strategy is to maximize returns over time and minimize costs of service. And, etc.