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Privatization Tue Jun 26 2012

Privatization, Non-Profits, and Disinheriting the Public

Privatization has been accelerating at break-neck speed (and in ludicrous ways) the last thirty years or so, in part because of the decline in government revenues and the general growth of the neoliberal consensus that assumes the profit motive brings with it ideal efficiency. It is also an efficient means of weakening the labor movement, because employees of a government contractor are covered by a different, considerably weaker, set of labor laws than employees of a state actor.

But privatization isn't new; in fact, privatization of public services was quite common back in the day, and by back in the day I mean ancient Rome.

The late Roman Republic grew quickly as a result of conquests and voluntary ceding. There was no time to inculcate Roman civic values and grow the necessary institutions to ensure administration along Roman lines. Instead, what the Roman Senate, Consuls, and other governing bodies did to guarantee the provisioning of necessary public services and the gathering of taxes was to contract powerful local men, called Publicans, to provide these services and gather these taxes.

The Publicans in turn grew immensely wealthy with these government contracts, and thus were able to flex significant political muscle in Rome itself, through the buying of tribal leaders in elections and the funding of foreign adventures for ambitious soldiers and politicians. It was a textbook rent-seeking loop.

The privatization craze may be leading to similar results in the U.S. (hopefully without the foreign adventures, although, you know; military-industrial complex). Stories have been popping up with increasing frequency indicating that privatizing the provisioning of public goods is creating wealth, but not, as it were, provisioning public goods any more efficiently.

First, here's Paul Krugman on the privatization of the prison industry--he touches on several of the key points, so I'm quoting at length:

Over the past few days, The New York Times has published several terrifying reports about New Jersey's system of halfway houses -- privately run adjuncts to the regular system of prisons. The series is a model of investigative reporting, which everyone should read. But it should also be seen in context. The horrors described are part of a broader pattern in which essential functions of government are being both privatized and degraded....It's a terrible story. But, as I said, you really need to see it in the broader context of a nationwide privatize government functions, very much including the operation of prisons. What's behind this drive?

You might be tempted to say that it reflects conservative belief in the magic of the marketplace, in the superiority of free-market competition over government planning. And that's certainly the way right-wing politicians like to frame the issue.

But if you think about it even for a minute, you realize that the one thing the companies that make up the prison-industrial complex -- companies like Community Education or the private-prison giant Corrections Corporation of America -- are definitely not doing is competing in a free market. They are, instead, living off government contracts. There isn't any market here, and there is, therefore, no reason to expect any magical gains in efficiency.

And, sure enough, despite many promises that prison privatization will lead to big cost savings, such savings -- as a comprehensive study by the Bureau of Justice Assistance, part of the U.S. Department of Justice, concluded -- "have simply not materialized." To the extent that private prison operators do manage to save money, they do so through "reductions in staffing patterns, fringe benefits, and other labor-related costs."

So let's see: Privatized prisons save money by employing fewer guards and other workers, and by paying them badly. And then we get horror stories about how these prisons are run. What a surprise!


[T]he main answer, surely, is to follow the money. Never mind what privatization does or doesn't do to state budgets; think instead of what it does for both the campaign coffers and the personal finances of politicians and their friends. As more and more government functions get privatized, states become pay-to-play paradises, in which both political contributions and contracts for friends and relatives become a quid pro quo for getting government business. Are the corporations capturing the politicians, or the politicians capturing the corporations? Does it matter?

Now, someone will surely point out that nonprivatized government has its own problems of undue influence, that prison guards and teachers' unions also have political clout, and this clout sometimes distorts public policy. Fair enough. But such influence tends to be relatively transparent. Everyone knows about those arguably excessive public pensions; it took an investigation by The Times over several months to bring the account of New Jersey's halfway-house-hell to light.

This last part is really important. The legal regimes that surround private property in our country put oversight of these privatized services at a remove that makes them hard to truly oversee. And the internal dynamics and incentives of for-profit or private enterprises requires more, not less oversight. It is precisely because there is a profit motive, or even at non-profits, there is private ownership of the enterprises that allows management to act more or less arbitrarily within often nebulously-defined standards, that the public needs to closely monitor how privatized services--which are supposed to be providing a public good, not generating a profit--are operating.

Then this story popped up in Rich Miller's Capitol Fax, quoting the Tribune:

Illinois pays a lot of money to these not-for-profits because it's cheaper than doing the job itself. But doing so has created a large lobby that works to perpetuate itself...

•James Hogan, with Cornerstone Services Inc. The nonprofit serves the physically and mentally disabled in Will and Kankakee counties. He received a 1 percent raise in 2009 and a 25 percent raise in 2010, taking his total pay to in excess of $244,000. Those raises came during a time when Cornerstone publicly lamented the difficult fiscal climate of nonprofits, particularly those receiving government grants. [...]

•Mary Hollie, with Lawrence Hall Youth Services. The organization provides residential care and other services to at-risk youths in the Chicago area. Hollie received a 7 percent raise in 2009 and a 9 percent raise in 2010, ending the year with nearly $284,000 in total pay.

This is the criticism opponents of public sector unions, like the Illinois Policy Institute and Mayor Emanuel, often make. Public sector unions, undoubtedly powerful lobbies, operate to benefit tens of thousands of middle class (often lower-middle-class) members. The heads of these non-profit and for-profit service providers grow immensely wealthy not only through salaries but also through the relationships they develop as a result of their ability to spend enormous sums on subcontractors and consultants.

Consider this story from the Village Voice, detailing the "non-profit 1%" that thrive on public money, focusing on The Guild for the Blind that provides services for the elderly:

There's also the issue that the Guild gets a great deal of its money from tax dollars. Might it make sense to compare pay of CEOs of government-bankrolled nonprofits to government salaries? Like Homes for the Homeless, the Guild is largely in the business of processing government funds to provide social services. It is, in essence, a government contractor. And the point of contractors, we're always hearing (even though it's often shown to be untrue), is that they'll lower costs by introducing competition.

So how are they successfully lowering costs for taxpayers when their CEOs are earning more than "government CEOs" like Mayor Bloomberg ($225,000, though Bloomberg only accepts $1 of that), Governor Cuomo ($170,000), and the president of the United States?

It's an excellent question. The media loves beating up on so-called "union bosses" (an absurd phrase in itself) who make supposedly immense salaries. But take as an example one of the most besieged public sector unions, the American Federation of State, County and Municipal Employees (AFSCME) Council 31. Council 31 is made up of 60,000 members across the state, which the organization must service. It is responsible for more than $30,000,000 in assets, and directly employs more than 200 people. In other words, it is an immense organization, much, much larger and with more rigid statutorily-defined duties to its constituencies than either of two non-profits mentioned in that Tribune article.

Each of the two non-profit CEOs described in the Tribune article up there makes almost twice what the Executive Director of the Council earns.

Where are the Illinois Policy Institute, the Civic Federation, and Commercial Club on this one? Why aren't they decrying privatization? Why aren't they beating up on these non-profits in breathless reports?

Because privatization isn't about efficiency, not in most cases; it is about neoliberal accumulation through dispossession--disinheriting the public of a good in order to concentrate more wealth. The idea that privatization brings more efficiency may be sincerely held by those politicians who support it and the advocates who argue for it; but the social dynamics that put such immense pressure on the state to privatize itself is a function not of reasoned debate on public policy, but the neoliberal drive to dispossession. The potential wealth to be extracted by assuming public services and operating them to generate wealth--holding costs as low as possible--is too great to be ignored. The commonweal simply cannot withstand that pressure, particularly because those services most rapidly privatized are those needed by the most powerless.

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