The Privatization Revolution

It means that government officials don't have to be hemmed in by an indiffer ent bureaucracy; instead, they can "shop around," as other consumers do, for the best available buys. State and local governments have rou tinely experienced cost savings of 10 to 40 percent through privatization, and often with improvements in the wayan asset is managed or a service is delivered. When and where assets and services can be put en tirely in private hands-with the middleman of government absent altogether-even greater efficiencies are possible. The most common form of privatizationLawrence W. Reed, economist and author, is president of the Mackinac Center for Public Policy, a free-market research and educational organization headquartered in Midland, Michi gan. This article is adapted from a speech he gave earlier this year at Hillsdale College in Hillsdale, Michigan. Mr. Reed is editor of Private Cures for Public Ills: The Promise of Privatization (The Founda tion for Economic Education, 1996).

by Lawrence W. Reed contracting out to private firms-has be come more than just a trend. With decades of experience, it has become something of a science at the local level in America. We now know what it takes to make this work: open, competitive bidding for contracts that are subject to periodic renewal; careful writing of the contract terms to incorporate clear language and appropriate safeguards; and effective monitoring of performance to ensure the contract is being carried out. Commercialization is another form. That happens when a unit of government simply says, "We're no longer going to do this work with our own workforce. We're not going to contract it out either. We're simply going to get out of this business altogether. The customers we used to serve can take care of the job themselves by contracting with the private provider they choose." This is how, for instance, cities across America have pulled out of the garbage busines.s. Individuals shop among several private, competitive firms that specialize in picking up and properly disposing of gar bage. No middleman, no taxes, no boring city council meetings to sweat through in order to register a complaint. You hire the service and if you're not happy, you fire it and hire a different one. This form of priva tization tends to enhance both our liberties and our pocketbooks.

Other forms of privatization include: • the outright gift or sale by government of a physical asset (a piece of equipment or a building, perhaps) to a private entity; 661 662 THE FREEMAN • OCTOBER 1996 • the sale of stock in a newly privatized company that was formerly state-owned; • the ending of subsidies and all the red tape and regulations that came with them, liberating an industry to produce for the market instead of for the government. In a few places around the world, priva tization is occurring because the enlightened leaders in power are motivated by ideology. They know that free markets work and socialism does not. In most places, however, privatization is occurring for more pragmatic reasons. Countries, states, provinces, or communities have hit the "tax wall." They have no more room to raise taxes. Doing so would either violate some constitutional or statutory limit, or send people and businesses packing for friendlier climes. So, for practical reasons, hard-pressed politicians are exercising the best or only option they have: privatization.

At the federal level in America, little has been privatized but much could be. The power of entrenched bureaucracy and spe cial interests who support the status quo is greater in Washington, as a rule, than it is at the state or local level. Proposals to privatize everything from Social Security to federal lands to the post officeare now on the table, but they probably await a more friendly administration. At the state level, there's much more going on. States are privatizing utilities, prison management, data processing, child foster care, and a long list of other items. It is, however, at the local level of govern ment-counties and cities and schools where the privatization revolution is gaining momentum. Just about any asset or service that a local government owns or provides has been privatized somewhere, in some manner, partially or wholly. That includes fire protection, certain elements of police protection, wastewater treatment, street lighting, tree trimming, snow removal, park ing structures, railroads, hospitals ,jails, and even cemeteries.

Thinking seriously about privatization prompts officialsto open their mindsand think about the role of government services and good stewardship ofthe publicpurse. It forces them to find out, for instance, how much it is actually costing them to provide those ser vices. When they add up all their true costs including hidden ones-they discover how hopelessly inefficientgovernment is. Studies by the dozens verify effectiveness of privatization. Objections, however, are still heard and sometimes loudly. Here are the most common ones, along with a brief response: • Privatization is anti-public employee. We must remember that government should not exist for the benefit of those who work for it; its only legitimate purpose is the protection of everyone's life and property. Governments that employ more people than necessary, or that pay their employees more than the market will bear, are not doing any favors for the citizens-including the poor who are picking up the tab.

• There are instances where it didn't work, so we shouldn't do it anywhere. I have yet to see a case where a failure was really an indictment of privatization itself. Fail ures are almost always arguments for avoid ing such poor practices as noncompetitive bidding, sloppy contract writing, or nonex istent monitoring of performance. • It can breed special interests who will lobby for more contracts and services from government, even when that's not war ranted. Public bureaucracies lobby for more government, too. This is an argument for taxpayers and the press to be vigilant, not an argument against privatization. • Government officials may not do the right thing with the savings. It's true that when privatization generates lower costs, officials may have multiple options for real izing the gain. They may choose to avoid raising taxes or actually cut them, passing on the savings to taxpayers. Or, they may simply take the savings and squander them on some other dubious enterprise of gov ernment. This is, again, an argument for vigilance, not against privatization.

All citizens who value freedom and free markets should be encouraged by the priva tization revolution. Smaller government will leave us a freer, more responsible, and better-served people. D THEFREEMAN IDEASON L1BER1Y A Good Conversation and the Marketplace by Candace A. Allen and Dwight R. Lee E veryone appreciates a good conver sation. Through conversation people get to know one another, sort out their differences, revel in their similarities, and discover ways to cooperate and compro mise to their mutual advantage. The infor mation we obtain through conversation is a major source of human enjoyment and progress. Not everyone appreciates the free mar ket. Yet there are striking similarities be tween the marketplace and a good conver sation, and, if anything, the benefits from the communication, cooperation, and com promise of the marketplace are even greater than those from a good conversation.