The Electric Commentary

Thursday, March 29, 2007

When Privatization Fails

When Republicans are running the show they usually push for privatization of certain government functions. When the Walter Reed fiasco came to light, conservatives pushed it as an example of failed nationalized health care, and liberals pushed it as an example of failed privatization. The fact is that both sides are correct, although neither understands why.

While the private sector in undeniably more efficient than the public sector, this is not due to any magical pixie dust. The private sector is efficient because of competition, not because of "privatization." Econ 101 teaches that monopolies are lousy, inefficient, and exploitative, and the text makes no distinction between government and private monopoly. Most people have to deal with a cable television provider that is basically a monopoly, and most people are unhappy with this company. (Note: I am not a fan of my cable company. I have Comcast and while they have not been as much trouble for me as they have been for my friends, they have not performed well. There is theoretically a competitor of Comcast's called RCN, but they do not serve my area.) Cable providers are private companies, but they always seem like government entities when you are forced to deal with them. I'm not sure that I wouldn't rather deal with the DMV.

Much of government privatization consists of simply replacing a government provider with a private provider which leaves whatever incentives previously existed to motivate the government provider intact. It changes nothing.

If Veterans get free or cheap health care at certain government hospitals, or they get subsidies to use certain select private hospitals, those hospitals will have to perform pretty poorly before Veterans shell out their own money to switch to better hospitals. This provides an incentive for the hospitals to cut corners until they reach that point. After all, the government is going to pay them anyway.

Moreover, government privatization often takes the form of a subsidy. Instead of government handling the job, some connected company will get the job. This is not necessarily less efficient than the government simply running the operation, but neither scenario is desirable.

I don't want to give the impression that I am in favor of government run anything, but it is important to realize that most of the time "privatization" is more of an election-year buzzword than a constructive policy.

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