“We want the protection the government provides, and we want freedom. Put those together, and what we really want is for our government, and the whole public sector, from firefighters to voluntary organizations, to be both responsible and responsive.”
I recently finished reading the book The Fox in the Henhouse: How Privatization Threatens Democracy by Si Kahn and Elizabeth Minnich. The book rails against the evils of privatization. As an economist, my default response is to believe that privatization is generally good. While the book does make some compelling arguments against privatization in certain industries, I am not compelled to call for a dismantling of the capitalist system.
I believe that the production of most goods and services should be done by the private sector. Competition between firms ensures that companies will not cheat or injure their customers; if they do, they will not be in business for long. Customer choice between firms acts as a disciplining mechanism to ensure that quality goods are produced at a reasonable price. In some sectors, monopolies form and consumers who wish to purchase a good or service have no choice other than to buy for the monopolist. While this of course is a sub-optimal scenario, it does not necessarily mean that a government takeover would improve the situation. When the government takes over an industry, it itself becomes a monopolists, and production decisions may be made for political rather than economic reasons.
Below, I look at a few different sectors, recounting some of the book’s arguments and adding my own comments.
Prisons
When prisons are privatized, the government outsources care of the prisoners to a private company. Between 1984 and 2005, private companies such as the GEO Group built 120,000 new private prisons. The book argues that private prison companies have lobbied politicians for stricter laws in order to increase the prison population and thus increase their profit. While it is true that private prison companies have an incentive to increase the number of people incarcerated, it seems that this fact could also be used to argue for smaller government which would be less influenced by lobbyists tactics.
I do agree with Kahn and Minnich that prisons should not be privatized. The government is the ones sending individuals to jail and is the ones who should care for them. Prisoners, of course, have no choice of the facility to which they are sent. Thus, if prisoners are abused, they can not switch prisons to one with better conditions. Prisons also have to enforce the prisoners constitutional rights, which is likely done more effectively by a public entity. Despite my agreement with the authors on this issue, I should point out the government run prisons do not have a stellar track record (e.g.: Abu Gharib, Guantánamo Bay, prisons in North Korea, the Gulag of Stalinist Russia).
Schools
The authors argue that education is a public good and thus should be provided by the government. They claim that charter schools preform worse than public schools (there is much debate about this subject).
I believe that everyone should be entitled to a good education. However, people should be able to choose which school they go to and that school can be either public or private. I am a big fan of voucher programs (e.g.: in Milwaukee). If the school you are attending is poor, you can switch schools and attend a better one. The competition for students should raise the quality of schools in the long run.
At the university level, private colleges have been a big success. Many of the most reputable universities are private (Harvard, Yale, Princeton, Penn). The University of Phoenix’s innovative distance learning program has been a rousing success as well. Thus, I conclude that there is a significant need for public financing of K-12 education, but having the government provide education services itself is highly inefficient.
[Disclaimer: I myself attended a public school through high school, but attended a private university (Penn). I am now a grad student at a public university (UC-San Diego)]
Natural Resources
Kahn and Minnich favor nationalizing natural resources, the approach Evo Morales of Bolivia is taking. They argue that these resources could fund many social services for the country. However, any profitable sector could provide significant funds for social services if its profits were expropriated. Why target only national resources? This is one reason why we have taxes, to help decrease income inequality. Taxation creates inefficiencies, but not as much as expropriation.
Using oil or gas for social services profits may be well-intentioned idea, but many leaders who are choking off democracy (see: Saudi Kings, Vladimir Putin, Hugo Chavez) have been using natural resource revenue as a political slush fund.
Healthcare
Healthcare is one area where some government oversight is needed. Governments need to help fund the treatment of diseases with significant externalities. For instance, the book cites a statement from Paul Farmer who claims that after public funding for TB specialist was cut, “TB incidence in Moscow was 27 per 100,000 population; by 1993 it had almost doubled to 50 per 100,000.”
The book also notes that fee-for-service physicians have an incentive to preform unnecessary medical procedures to maximize profits. The book does not mention that salaried government physicians may not have the same incentive to work hard that the FFS system provides.
Kahn and Minnich want health care to be free for everyone, but as anyone with common sense will tell you, “There’s no such thing as a free lunch.” Citizens pay for medical care, whether through insurance premiums, taxes or direct payment. Having free health care will induce individuals to over-use medical services which will then increase the cost to society.
Nevertheless, if redistribution from healthy to sick is as necessary a moral obligation as transferring resources from rich to poor, than some type of government intervention should be necessary. Exactly what form this government intervention should take, I do not know at this time.
Conclusion
Thus, whenever there is competition in a market, I believe private sector production of good and services is optimal. When the private sector has a monopoly in a sector, the evaluation is more opaque and should be treated on a case-by-case basis.