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Monday, August 06, 2007
Good, But Not Perfect, Article On Privatization
There's a thin line between being a whiner and having high expectations. So at risk of sounding like a whiner, here's quick examination of what was otherwise an enlightening article in the New Yorker on student loans. In the following paragraph, the author is attempting to explain the causes of waste and graft in the student loan industry, which is basically a privatization scheme, with government providing money and loan guarantees, and private lenders doing the business.
In part, it's ideology, and the dominance of what you might call the privatization mystique—the idea that anything the government can do, the private sector can do better.
Well put.
Often, this makes sense: the free market is more likely to come up with efficient ways of creating and distributing products and services than the government is.
That's called an unjustified assertion of fact. And an unnecessary one- is someone trying to make sure they don't sound like a commie?
But the student-loan market isn't a free market in any meaningful sense of the term, because the government effectively determines prices, insures against losses, and subsidizes volume.
Also because of the market's failure to provide a useful good with positive externalities, but that's ok.
In this environment, most of the competition among private companies is really just squabbling over how to split up the spoils.
The subtext is that this wasteful environment is the government's fault, when mostly it's trying to correct a market failure, and most likely the private market is just as inhospitable to competition as governmental policy.
Economists call this behavior—when a company seeks to manipulate economic conditions rather than actually create value—"rent-seeking." It's common in areas where the fetish for privatization has taken hold, such as the outsourcing of homeland security to private contractors and the boom in private Medicare insurers. (The private insurers are less efficient than Medicare and receive billions in subsidies from the government.)
Ok, that was fine.
Outsourcing tasks to private companies is supposed to let government reap the benefits of the free market. But sometimes it just ends up uniting the worst of government and the worst of the private sector into one expensive mess.
There's an important abstract distinction that needs to be made here, since we're dealing with "privatization" in principle. Policymakers can fix much of what the government does wrong in contracting. But they can't create a market where there just isn't going to be one. The worst of the private sector is likely inevitable- the worst of government, not so much, when it comes to privatization.
For example: Corruption and waste that's caused by governmental failures can be corrected, to a reasonable extent. Contracting procedures and administration could function pretty well, given enough resources, training, and authority. But you're not going to foster true market competition, when, say, there's only one company that can do the job, or when it's too hard to keep tabs on the company that's gotten the contract. This paper makes that argument, partly (we link, you decide).
Ok, other than that, it's a good article.
Posted by Matt Lewis
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