Faux Privatization of Government Services

Pike Place Market, Seattle

Pike Place Market, Seattle

“Privatization” of government programs has been going on for a long time; it has accelerated in the last decade. The main (real) purpose of “privatizing” government programs is to:  (a) Remove the employees (the “full time equivalents,” or FTEs) from the government payroll, so the government looks smaller; (b)  Save government the costs of pensions, workers compensation, unemployment insurance, and other benefits; and (c)  Enable politicians to argue that more of the total economy is in private hands; and there are now more “real jobs” in the economy than before.

In most forms of “privatization,” the government is still paying a contractor to provide the services. The program cost remains in the government budget, but it’s hard to find in the 1000 page budget document.  Look under “vendors,” “contracting,” “consulting,” in the back of the budget. Good luck in finding it.

Often, the contractor is not unionized, so the government pays less for the workers’ services. Yes, sometimes the program is run more efficiently by the private contractor. Many times it is not.  In many cases, the workers laid off by “privatization” are immediately hired by the contractor (though at lower wages and with less benefits).  That is often part of a deal between the government and the public sector union, which is willing to make the deal to cut its losses, and help the workers stay employed.

The Page Seven buried story which prompted this blog post is a Wall Street Journal article about Detroit seeking proposals from private companies to run and potentially buy its regional water and sewer system. In this case, the sale of assets along with the shift in operations, to a private entity, helps Detroit pay off some of its debt.

At the federal level, the poster child for privatization is the Blackwater Corporation,  which has provided training, security, transport, and logistic services to the U.S. military, most notably in the Middle East.  Nearly all of the jobs (the exact number is undisclosed for “security reasons”) are ones which have been performed by soldiers or civilian Defense Department employees in the past.  Whatever the other benefits of massive contracting with Blackwater,  having the company do the work makes our armed services look smaller.  (That isn’t all good).  It probably also makes it easier to recruit, because Blackwater’s standards for employment are not as stringent for many jobs as those of the U.S. Armed Services.

The type of “privatization” I’ve talked about thus far is not at all what economists and free market capitalists intend when they argue that more economic decisions need to be shifted back to the private sector.  This argument is at the core of classic, capitalist economic theory, which says that in the long run businesses and individuals make better spending decisions than government; and that the economy is more efficient when demand is generated privately. (I buy a lot of that, but with caveats).

What would real privatization look like?  Lets imagine that welfare grants and services to poor people shifted to the private sector. There would, of course, have to be a profit in it for entrepreneurs.  And (poor) customers would have to find a way pay for it. That seems oxymoronic, but one could envision an arrangement like this:

A private firm calling itself  “Investments in Human Capital” (ugh!), advertises that it is willing to house, feed and provide other basic daily living assistance to a single parent household (in housing maintained by the business), and pay for childcare while mom is in training (with tuition paid by the business).  The child is enrolled in a local charter school (which is presumed to be better and safer than the public school).  The family is assigned an account executive (a.k.a,,  social worker) to help with bumps in the road.

Ten to fifteen years down this bumpy road (sooner in the case of the mother), when everyone in the family is employed in a good job, the company receives 15% of the family wages, forever, or at least until each person reaches AARP age.

This is of course a very risky and tricky business, but if the company does effective profiling at the front end (using Money Ball type data mining),  they can perhaps make money down the road.  Many customers would find this attractive compared with their current, hopeless situation under Aid to Families with Dependent Children (AFDC), even if it meant some form of indentured servitude.

Lots of people currently receiving “welfare” would not be served; so some form of government welfare would still be required.  It’s not likely any entrepreneur would give this a try; but the thought experiment illustrates what true privatization means, and why certain services can’t (realistically) be provided by the market. (Perhaps there is some future for this type of arrangement using internet crowd funding, aided by the Money Ball guys and gals, and Adam Silver.  Jerry Springer or Donald Trump could host some sort of reality TV show to help out).

A more realistic example of genuine privatization, one of the few with actual, working, models, involves the government “employment service.”  All states have an Employment (or Unemployment) Office, where people who have lost jobs register for unemployment insurance benefits. Those offices typically also provide a job search and placement services.

The government run “job service” could, in theory, be terminated, and shifted to the private sector, without government paying anything for it.  Some of the unemployed people would go to a private employment “agency” like Kelly Services, Labor Ready, or Manpower Associates, especially if receipt of the state’s unemployment checks hinged on proof the worker is registered with one of the companies. That privatization arrangement has in fact happened in some states, with mixed results. Debates over the wisdom and efficacy of privatizing the employment service have raged for at least forty years.

The private employment agency, as we know, is paid, not by the government, but by the employer and the worker who, when placed, surrenders a portion of his salary to the agency for a period of time. (Not for as many years as the people in my imaginary private welfare system). This comes close to real privatization, even though many unemployed people are not served well (if at all) by the private agencies. Many others may get better service than the government provided.

There are also prominent examples in this field that are clearly faux privatization, like state governments paying a Snelling and Snelling type business to find jobs for clients.  The program is still in the government’s budget, though buried.  And the Governor can claim he cut FTEs in his reelection campaign commercials.

The arrangement being sought in the Detroit story, which prompted this article, appears to be a mixture of fauz and real privatization. Its gets FTEs off the books and enables the politicians – in this case, the Michigan Governor and emergency Czar appointed to run Detroit — to boast that the City works better with less government.  Maybe it does. In this case, the government is also selling capital assets to help pay down its debt; and recipients of the water and sewer service would pay some of the bills to the company.

In a decade or two, Detroit will be in better shape, with or without faux privatization. We will never really find out if the “private” approach worked better, because by then all of the scientific evaluation programs designed to study whether or not government programs work well, will have been eliminated.  Most have already been dumped to save money, because the ideologues don’t read or believe the studies anyway, especially if they conclude the government program has worked well.

Like a friend of mine working for the old Comprehensive Employment and Training Act (CETA) program said when I called him at home one evening in the late 1970s:  “I can’t talk now because I have to finish the CETA evaluation study before next week, when the program terminates.”  That’s a true story.


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