Opinion Editorial

By Dennis Polhill

The phony claim that the federal budget is balanced underscores the need to privatize. Congress has conveniently borrowed surpluses from nearly 30 trust funds including $100 billion this year from social security to assert fiscal responsibility. The truth is that the trust funds have been robbed and the national debt continues to soar. Currently at $5.5 trillion, the national debt recently surpassed $20,000 for every person in the U.S. Heavy taxation and public debt fund a too-large government sector. Privatization means shrinking the government sector.

The 20th century has seen a global swing to socialism. Contrary to its utopian ideals, socialism impoverishes the people, despoils the environment, tramples individual rights, suppresses freedom, and fosters the evolution of totalitarian leaders such as Hitler and Stalin. Socialism has murdered more human beings in the name of “good” than have all religious persecutions through all of history. In every case, socialism has collapsed in total failure. Socialism has no redeeming qualities.

When most of the world’s nations became more socialist, the U.S. followed. In 1900, the U.S. government sector (combined federal, state, and local government) consumed 8.1% of U.S. economy. By 1989, it had grown to 35.2%. Estimates currently put it at 50%. The U.S. trend to socialism was comparatively slow. With less socialism than other countries, the U.S. economy grew stronger and Americans become enriched. Its 6% of the world population enjoys 25% of the world economic production. The average American has nearly ten times the wealth as most others.

The desire for economic growth has motivated countries to reverse their socialist policies. Nearly every country in the world is moving to shrink its government sector. This is achieved by various methods of privatization. The three major categories of privatization are divestiture, deregulation, and outsourcing.

The most significant privatization successes in the U.S. have been in bringing competition to various monopoly industries. The previous assumption was that they were “natural monopolies” and could operate more efficiently if protected from competition. The deregulated industries are airlines (1977), trucking (1980), railroads (1980), natural gas (1984), and long distance telephone (1984). Competition brought immediate benefits to consumers. The cost of service in inflation-adjusted-dollars declined 13% after two years, 22% after five years, and 40% after ten years. The Brookings Institute calculates these economic efficiencies as $53.1 billion per year or $200 per person. Estimates are that impending electric power deregulation will add $100 to each persons pocketbook. Most people would have considered these industries “private” before they were “privatized.”

These examples show that the word “privatization” poorly describes this process. Private firms frequently privatize by outsourcing and divesting. Outsourcing is the simple admission that the best computer chip manufacturer may not be equally competent at overseeing janitors. Divestiture is the companys move from a weak to a stronger market. The failure to outsource and divest means that a firms ability to specialize, focus and compete is diminished. Ultimately, the firm cannot capture sufficient revenue and ceases to exist.

With the goal of bringing economic benefits to consumers, governments have a role to play in maximizing competition in both sectors. The economic continuum has socialism and capitalism at opposite extremes with many intermediate gradations. Service is lowest and cost is highest at the socialist extreme. Cost is lowest and service is highest at the competitive extreme.

Some intermediate gradations in order of decreasing efficiency are (1) unrestricted competition, (2) oligopoly (few suppliers), (3) private sector monopoly, (4) government protected private monopoly (utility franchises), (5) government monopoly, (6) government protected government monopoly (mass transit), and (7) socialism. Any step in the direction of more competition holds the promise of benefits to consumers. There are privatization experiences where moving government monopoly functions to private monopolies failed to produce benefits because of the lack of competition. On the other hand, the five utilities discussed illustrate the potential of moving a government protected private sector monopoly to a higher level of competition.

The notion of benefits to consumers brings government cost accounting to the forefront. Thomas Huxley wrote, “Facts do not cease to exist merely because they are ignored.” Government cost accounting defies a Huxley’s law corollary, “Costs do not cease to exist merely because they are hidden.” The privatization dilemma for government is that certain indirect costs are not known, are not properly accounted, or are not directly recoverable.

Politicians and bureaucrats are, at best, disingenuous with their constituents when they claim that privatization does not work, is expensive, or cannot be done.

Dennis Polhill is a Senior Fellow at the Independence Institute.

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