Apr 16, 2011

Sandy Springs, GA: Privatization of Government Services

A few days ago I posted a new Reason video on the city of Sandy Springs, GA. I have been following Sandy Springs since about 2008. If you don’t know the story, Sandy Springs was newly incorporated in 2005, and the committee chose to outsource the majority of services to private enterprises. If you know little about it, the video is here:

Long story, short: I posted the video on one of my County Commissioners FaceBook wall. Popular response was ok, mostly for the idea. One person, spoke out strongly against it, with a cautionary story about the potential problems implicit in outsourcing. A link which I hope will work to the whole thread is here: http://www.facebook.com/marksharpe/posts/208112665880192

The same individual posted an article that spoke of the theoretical flaws in ‘privatization’. See it here: http://www.huppi.com/kangaroo/Privatization.htm

So, if you have watched the video, and read the above article, here is my response.

Interesting article. I do have a couple of problems with some of the arguments, however. They just don't seem to hold up. For example, the author tries to show that government and business are
substitutes for one another. That makes no sense: From the consumer perspective, if business offers
a product or service, the customer can choose from business A (Dell, for example), business B (HP), etc. But government is by definition a monopoly. There is only one DMV. It is the competition to best satisfy the consumer (thus maximizing profit) that drives business. Government has no competition. The consumer has no way to compare the product or service provided, and government has no incentive to best satisfy the consumer.

Second, the author assumes that the incentives (satisfy the consumer/voter) are the same for business and government. But a whole school of economics--Public Choice http://www.econlib.org/library/Enc/PublicChoice.html --has arisen that deals with the huge differences in incentives between the public and private sectors.

Third, the author states that "both must obey the will of the people, because the people vote with their ballots in one case and with their dollars in the other." But that is a false analogy. In the private sector, decisions are individual--each party choses to engage or not to engage in a transaction, and both feel at lease somewhat better off after concluding the transaction. Voting is collective--the minority gets exactly what it did not want.

Fourth, a good bit of the article hinges on 'natural monopoly' theory, and literally falls apart without it. It has been rather thoroughly debunked in that a natural monopoly is highly unlikely in the real world, and none has been found to date. What is often confused with natural monopoly is a government-enforced monopoly. These occur everywhere and businesses spend billions a year getting them set up. Businesses love them because they keep competition out, and politicians love them because it gets them campaign contributions. Dr DiLorenzo, Professor of Economics, Loyola College, did one of the more succinct papers rebutting 'Natural Monopoly' http://mises.org/journals/rae/pdf/rae9_2_3.pdf

Finally, a note about Thatcher's 'privatization'. The way it is presented in the article "The abuse of natural monopolies is what happened to Great Britain after Margaret Thatcher sought to privatize public utilities. The experience was a disaster. The British government first privatized telecommunications, then gas, then electricity and then water with little thought about how these monopolies would act on the free market." is as if both the government owned facilities and all regulation were eliminated. That is not what happened. First, neither Great Britain nor the United States had then or now a 'free market'. In truth we are both social democracies. We differ only marginally on the Free MarketSocialism continuum.

Second, Thatcher simply sold government-owned companies and the right to compete on the market to private owners. All of the regulation, trade-union requirements, etc. stayed in place. Some of the industries that were never sold actually did better due to other changes--changes which no doubt would have improved the efficiency of those facilities 'privatized' had they too stayed in government hands. The point is that efficiency is not a binary condition: either efficient or not efficient. Efficiency is also on a continuum. It is the competition for the individual consumer's dollars that automatically forces greater and greater efficiencies.
There are definitely things that government currently does which cannot (or should not) be privatized. I think the proper place to look is those few areas which fall under the legitimate government monopoly on the use of force. In a republic, we the people delegate to the state a part of our natural right to use force to protect ourselves, our families and our possessions. Any service which does not require the state's legitimate use of force for its proper execution should be a candidate for privatization.

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