Revisiting Privatization Of Government Services And Products (warning: very dry subject)

I need to rethink my position on privatization of governmental services or at least some types of services.

The Wall Street Journal reports on Indiana's efforts with privatizing social services. In 2007 the state contracted to pay a group of businesses roughly $1.34 billion to run social services programs for ten years. Unfortunately, there were many problems running essential programs. An example in the Journal article, "Naomi Mundy, a 59-year-old homemaker, said it took 15 months after she developed melanoma to get Indiana to pay her health-care benefits under Medicaid because of outsourcing snafus." Also, children were not enrolled in early child health care for up to six months. These are real problems.

There is generally two types of privatization of government services. The first is the one described above where municipalities pay firms to handle the delivery of services or the processing of recording keeping tasks among other functions. A primary benefit of this type of outsourcing is that the governments can't afford to upgrade the technology used to make tasks more efficient therefore missing out on the economies of scale resulting from automation and other technological processing. The cost of upgrading and training of staff to use the new technology is often much greater than the lowest bid price from privatization. The outcomes described in the Indiana experience is too great a problem to be offset by these fiscal savings. Critics of privatization, as the Journal reports, may be correct, these "problems show why government functions, particularly human services, shouldn't be turned over to private contractors."

The second form of privatization provides government with funds from firms that run government services but the firms retain the profit from the operating the service. For example, there has been much debate over the proposed plan to privatize state lotteries. In 2007 California lottery operation privatization could have brought the state nearly $37 billion dollars in exchange for leasing the operations to a private firm for forty years. After the firm pays the state $37 billion any revenue after other operating expense is the firm's to keep (they will be taxed of course). There are proposals to privatize tolls road, airports and other revenue generating government operations. This is an attractive option for state and local governments due to the massive deficits they face in the current economy. There are social problems that could arise from some of these proposals. There are associated social problems that can arise from lottery privatization. For instance, the incidence of lottery participation is highly concentrated in low income communities. The operating firm in its drive to increase revenue can target with advertising and increased number of vendors such communities and thereby create a disproportionate negative impact on that community. But there is also the long term fiscal problems created from this type of privatization. How much revenue is the state giving up over the 40 years. In the California proposal Lehman Brothers was a firm vying for the lease. If the net present value calculation was so advantageous that Lehman was willing to spend $37 billion how much revenue would California not receive over the forty years. I am pretty sure California is glad they did not deal with Lehman, or maybe not?

Privatization can be good and it can be bad. So can government, but we should probably leave vital social services in the hands of the people who may do it bad, but at least do it better. Sphere: Related Content