Privatization vs. Nationalization – how do we decide the best mix?

Les pointed to this article over at AMERICAblog about how privatization has had poor results in Thatcher and Blair’s England.

Privatization fails over and over in the UK 

The Margaret Thatcher Tony Blair privatization plans all sounded so wonderful. Basic services such as public transportation and the mail could be spun off and the free market would save everyone lots of money! Hooray! Except it didn’t quite work out that way. Public transportation privatization has been a fiasco and costs to consumers have hardly decreased. As a regular consumer of public transportation in France I’m horrified with the outrageously high costs when I travel to the UK. It’s very expensive and the quality is generally sub-standard.

The rail privatization took a hit as another rail operator notified the government that it has had enough. Like many business ideas from the recent past, what sounded impressive during the credit boom suddenly looks like a very bad idea. Politicians such as Blair and “modern” lefties all bought into the idea that government services could become sexy and profitable if only they had a bit of faux capitalism. Only a politician who spent their life working in government could have viewed this as a good idea.

The point is rather breathlessly made, but it raises an interesting point, both as Britain’s rail privatization and post office privatization efforts have run into serious problems.

There are times when privatization is a good idea. The government is not automatically the best provider of any given service. As with most things, there is an optimal mean in an overall economy and society between services/goods that are organized and owned by the government and ones that are organized and owned privately.

Private ownership has many advantages. A competitive marketplace encourages new ideas, which succeed through a combination of pricing and quality of service. The Darwinian model does tend to promote, through trial and error, fitness.

Of course, the “trial and error” part can be hard. Species do die. Disasters do wipe out even the fit sometimes. But for experimentation and a vigorous promotion of lower costs and/or better service (or multiple options for both), a distributed and competitive model is generally best.

That said … is it ever appropriate to vest a service in the hands of the government, rather than private enterprise? Does everything the government do actually benefit from privitization? When is privatization (vs., in the opposite direction, nationalization) a good idea?

Some thoughts:

1. When you are replacing a government monopoly with true competition, not with a private monopoly (or duopoly). If the advantage of privatization is competition, you need, well, competition — in ideas, services, price points, etc. Giving over your government service provider for a private service provider who’s just as prone to get stuck in a rut isn’t a good way to change. The best thing that ever happened to the telecommunication world was the break-up of Ma Bell, if only because it promoted competition (it would have been still better if it hadn’t been simply broken up into regional monopolies).
2. When it’s a buyer’s market, not a seller’s market.  If someone doesn’t have a choice as to whether or not to acquire a service or product, then it’s better to leave that service provision to an entity that is, at least in theory, beholden to the public as a whole, rather than to an entity that is beholden to stockholders to generate a profit. This is a key element in the health care area, where, as noted elsewhere, people don’t generally choose whether they need treatment for pneumonia or get their breast cancer treated. Government bureaucrats can be tyrannical, but so can industry bureaucrats.
3. When society can afford for it to fail. If the government owns its own print shop for government publications and privatizes it, then if it financially fails the government can go to a different printer. Society doesn’t crumble. If the service provided is more crucial, then financial failure is correspondingly more of a risk. If a town is served by a private security company instead of government (city) police, then if they close up shop, the town is in real trouble (which is why public workers are generally not allowed to go on strike). Ditto if a privatized company must be supported by a bail-out if it fails, in which case we’ve simply split the profits of success to the private side and the costs of failure to the public side, which is hardly competitive or a free market. Now, governments can financially fail, too but have ways, if unpleasant, to mitigate that. The point is, if we as a society can’t afford for a company to go under, then maybe we as a society should own it and consider it an essential service.
4. When we don’t want the government to know what we’re doing. As a generalization from my international software development expertise, Europeans have high privacy barriers against companies, low ones against governments; in the US, it’s the reverse, as we resist giving the government any information, but freely hand out all our personal particulars toany company that tells us we should. So, in this case, I wouldn’t want the government to own the banks, or the credit card companies, such that they knew all that I was spending my money on. Similarly, a government monopoly on porn is scary on a number of levels, not least of which is that I don’t want the government to know whether or what kind of porn I enjoy.
5. When standards are less important than innovation. Competition and differing ideas make for different solutions. The government, on the other hand, tends to do thing One Size Fits All. Sometimes that’s good. Sometimes not so much.

The important (well, one important) thing  about government ownership, is that it’s not about the money. It’s not about making money. It’s not about saving money. It’s about spending money for (ideally) the betterment of society. Governments can change the laws of physics, and the laws of finance are not costlessly broken, either, so the government simply cannot spend our way to happiness — but that doesn’t mean that every government program should be evaluated solely on the basis of whether it is profitable to the government or to some individual, at least not just profitable from a monetary standpoing.

So consider some businesses that might be privatized, or might be nationalized, in light of the above, should they be made (or have been made, or be left) private.

The Post Office: An ideal example of how not to do privatization, the USPS is a quasi-governmental organization that enjoys a government monopoly on the least efficient and most costly sort of physical mail delivery. FedEx is much better than the USPS (competition!) but for all it bitches over the Post Office’s preferred status for mail delivery (and public buildings), it really doesn’t want to have to get into that biz. 

1. True Competition? That mixture of monopoly and competition makes #1 a No, Sorta. 
2. Buyer’s Market? No, at the time of the semi-privatization; now it would be a Yes, since physical snail mail is so much less important.
3. Affordable Failure? No now turned Yes, since physical snail-mail has become less essential.
4. Better Privacy? Yes, probably good that some massive database can’t be as easily created now to track everyone’s mail.
5. Innovation better than standards: Yes and no. The package shipment world has shown flexibility and innovation in different types of shipping. But imagine the chaos if first class letters were treated (and charged, and delivered) differently by different mail vendors, up to and including how you address things, addresses themselves (or at least ZIP codes), etc.

So net, divesting the Post Office at the time was probably not all that good of an idea, but now it would have made more sense. I’m not sure why the Royal Mail privatization has gone wrong. It may be that without the remaining monopolistic protections the USPS enjoys, it’s not economically viable as a for-profit organization. The question, then, becomes whether the cost of offering such a service publicly exceeds the cost of not having it available.

Automobile Manufacturers: We’ve had car companies as private industries in this company since their creation. But the Chrysler bail-out a few decades back was a warning sign, and the government’s bail-out (and forced restructuring) of GM and Chrysler (again) raise the issue of whether they might not be better off nationalized for good. Should auto companies be private concerns?

1. True Competition? A big Yes here, since there’s plenty of competition in the auto world (and in the world, for autos). 
2. Buyer’s Market? Yes. Buying a car (or a particular car at a particular time) is pretty much considered optional for many.
3. Affordable Failure? Sorta. Here’s the rub. The Big Three are so big (with so many dependent industries), the government has deemed it politically and economically unfeasible to let them just collapse. So some measure of government intervention and oversight remains necessary — or else a break-up of the auto industry giants like GM to make them individually less critical to employment and supply streams within the country.
4. Better Privacy? The government already knows what sort of car you own. No, no advantage here.
5. Innovation better than standards? The auto industry has found a reasonable set of standards to work with (or to have imposed on them through regulation). The disparity between English vs Metric tools, or the fact that parts for a Honda Civic don’t necessarily work with parts for a Ford F150 (except for key components like batteries and tire standards and gasoline) indicates that the industry is reasonably self-regulating between innovation and standardization.

So, net-net, there’s not much of a reason to nationalize the auto industry, and plenty of reason to leave it in private hands … with some precautions and regulation.

Law Enforcement: Businesses use private security; why not the public? Sign up for your local security patrol. How much police protection can you afford?

1. True Competition? It’s an untested model, so it’s tough to say. Certainly there are notIt’s most likely that municipalities, rather than individual houses or blocks, would band together for such contract, giving a local monopoly on service. Leave this one uncertain. 
2. Buyer’s Market? No. When you need the police, you need them now. That gives the vendor way too much power (“Oh, sorry, we’ve imposed a fee for rolling a unit after 8 p.m. … will that be MasterCard or Visa?”).
3. Affordable Failure? No. If your security firm goes out of business, whether it’s for your town or for your house, you are potentially in deep doo-doo.
4. Better Privacy? “Yes, but …” Various levels of law enforcement share a lot of data. That can invade privacy … but is also pretty important in catching criminals. I’m not sure I wouldn’t want my local city traffic cop to be able to find out that a particular car was reported stolen in another state.
5. Innovation better than standards? It’s not clear that innovation plays a huge part in policing — it’s more tactical than strategic in importance. On the other hand, knowing that local and state and federal law enforcement operate on certain common, identifiable laws is actually a benefit. So, no.

Net-net, we should probably stick with local police. Arguably we could make a case for state or even national police, but that isn’t highly compelling.

Schools: We have a universal public education system — locally administered, but still univeral. We also have a fairly healthy private education infrastructure alongside it. Is there a reason to push things one way or the other? Should we privatize all education?

1. True Competition? Yes. While I can imagine educational industries growing up in the wake of privatizing all public schools, at the moment (capacity issues aside) it appears there are plenty of companies in the ed biz.
2. Buyer’s Market? This one comes up a No. Unless you’re home-schooling, when your kids if of school age, they need to go to a school. Discovering they’re all wildly expensive doesn’t change that decision.
3. Affordable Failure? Maybe. Private schools do, I imagine, fail. I’m not sure how families handle that (what happens to the records? are there other schools in the area to go to?); in part, this is a case where having a “public option” backstop is valuable.
4. Better Privacy? Privacy issues with public vs. private schools seem to be non-existent, so No.
5. Innovation better than standards? The nature of our public school systems, locally controlled, is such that experimentation and innovation exist, while still maintaining an accepted infrastructure of grades, test measures, curricula, and educational policy on a local, state, and federal level. Such a setup would be probable in an all-private school world, but more prone to variation. I’m going to call this a No.

So there’s no great advantage to fully privatizing our schools — but the co-existence of both private schools and public schools demonstrates that both can co-exist without one overwhelming the other.

Health Insurance: Yeah, you know it was coming here. Is this best privatized, made a public/government function, or what?

1. True Competition? Sorta. Lots of insurance companies out there, with lots of different options.  That’s reduced by some individuals being unable to afford health insurance, or being stuck with whatever their company provides.
2. Buyer’s Market? No. For most medical care, you need it when you need it. It’s not cosmetic surgery, it’s appendicitis or cancer or pneumonia or the measles. That puts the insurance companies in an unconscionably powerful position.
3. Affordable Failure? Yes. Blue Shield or Prudential or Kaiser failing would be a serious inconvenience, even disruption, but alternatives would fill in the gap.
4. Better Privacy? I suppose some folks worry about the government knowing about their medical conditions. Of course, VA and Medicaid and Medicare already run that risk.
5. Innovation better than standards? A one-size-fits-all setup for health insurance is probably not ideal. On the other hand, some standard baselines of what is covered for whom has some societal (and individual) advantages. Call this one a wash.

So there’s not a compelling case to have health insurance fully private (#2), but not a compelling case to make it a national health care system, a la the UK (#3, #4), and some reasons why a mixed model has something to recommend it (#1, #5). That might be, as proposed by the Obama Adminstration, a combination of current private insurance with a public insurance option (similar to the present mix of private and public schools). It might be a system like Canada, where the government is the single payer, but does so through private plans which can provide optional benefits beyond the baseline. 

This thought experiment can be run on other industries, everything from supermarkets to the armed forces to railroads (as in the UK, and also in the US) to highways (private toll roads everywhere?) to utilities. At the very least, it’s better to analyze things in this sort of way, then accept “To Each According To His Needs” or “Greed is Good” or similar catchphrases as being anything more than political rhetoric from someone who has something to sell you.