Busting the myth of privatization

There are some things the government can do more efficiently than the private sector.

I'm sure few people reading this blog will find those words shocking, but you wouldn't know that to listen to Republican pundits and the mainstream press. It's often taken as given that the private sector is always more efficient than big, clumsy old government -- so much so that it's rare for anyone to actually look back and see if privatization has provided any of the savings it promises. Hence, when a counterexample comes along, I think it's important to point it out.

James Surowiecki points out just such an example in the New Yorker. He writes that private student loans cost the government four times as much as the government-run Direct Loan program. Effectively, the government is subsidizing a whole industry that makes money off students and taxpayers while taking on very little risk.

Similarly, the much heralded Medicare Modernization Act, which partially privatized Medicare, has failed to create any cost savings for the government. The private plans are subsidized to the point where they cost the government 12% more than just providing the same services directly.

The lesson here is that privatization is not a cure-all, and it needs to be looked at very skeptically whenever it's proposed. It can work, but only in circumstances where there really is the potential for a true free market -- and generally the lack of an effective free market is why the government started providing these services to begin with. Student loans, for example, are not something a free market provides well, because in a truly free, unsubsidized lending market, no one would lend anything to students -- they have no credit history and no collateral.

When private industry is brought into an area where market forces don't work well, the government is forced to heavily subsidize it. When this happens, two things occur -- the government ends up paying for shareholder profits, as well as services rendered; and the industry becomes a powerful lobby for maintaining the new, inefficient status quo. This has happened over and over, and we can't afford to continue to let the myth of guaranteed cost savings from privatization go unchallenged.