Connecting the Dots–Inequality Edition

I am one of those tiresome academics who has repeatedly criticized the so-called privatization of government functions.

I say “so-called” because what Americans call privatization is no such thing. Actual privatization would require government to sell off or otherwise abandon a particular activity, and let the private sector handle it. (Much like Margaret Thatcher selling England’s steel mills to private-sector interests.)

What Americans call privatization is more accurately described as contracting out; government retains responsibility for a service and the obligation to fund it, but delivers the service through a third-party surrogate, either for-profit or not-for-profit.

There are certainly instances where choosing such a surrogate makes sense; unfortunately, we Americans tend to embrace fads in government as elsewhere. So rather than engaging in analyses of risk and reward for each proposal to contract, too many public entities have accepted the argument that nongovernmental actors will do a better job, or be less expensive, no matter what is to be outsourced.

Research results strongly suggest otherwise. Sometimes, contracting is appropriate; often it is not.

With the publication of a new in-depth report, In the Public Interest has illustrated the often pernicious effects contracting can have on equality. The report centers on five ways in which contracting out exacerbates inequality:

User-funded contracting. Public budgets have tightened all across the country, largely due to the American public’s unwillingness to pay taxes to support services we continue to demand. As a result, some jurisdictions are allowing contractors to charge fees to end-users to subsidize or completely fund an outsourced service.

This is increasingly happening in areas where citizens have little to no political voice. In private probation, for example, offenders are expected to pay for everything from their own drug testing to the costs of ankle-bracelets, despite the fact that as a group they lack the resources to do so.

Rising rates. Residents of places that have privatized critical public services such as water or transit have experienced steep increases in their rates. Some of these increases can be attributed to the profit motive, but in other jurisdictions—like my own—the increases mask desperate, clandestine efforts to shift the costs of public infrastructure from taxpayers to ratepayers. (In Indianapolis, the city sold the water company, which—thanks to deferred maintenance needs—had a negative value of several billion dollars. As part of the deal, the purchasing entity, a nonprofit, “adjusted” its payments in lieu of taxes (PILOT) obligation, upward. That allowed the city to float bonds, repayable from the artificially increased PILOT, and use the proceeds to pave deteriorated streets. The result was to shift the costs of infrastructure repair from general tax revenues to utility ratepayers. It would be hard to think of a more regressive strategy.)

Cutting the social safety net. Programs like Medicaid and food assistance are often subjects to privatization experiments, and the report notes that the impact can be
tragic. Contractors have increasingly taken over critical social services like child foster care services, welfare, the distribution of food assistance, Medicaid, and child support services. But as the report details, the complex social problems faced by families and children who utilize these services are difficult to address using a privatization model, and many social services contracts have financial incentives that inadvertently perpetuate cycles of poverty and divert money from critical programs to corporate profits.

Indiana, again, provides an example. Then-Governor Mitch Daniels attempted to outsource welfare intake; as a result, many recipients were denied benefits to which they were clearly entitled, and others endured long waits and confusing, burdensome processes. The results were so negative that the effort was discontinued, but the ensuing lawsuits cost the state millions of dollars that might otherwise have provided needed services.

A race to the bottom for workers. One of the recurring criticisms of privatization has been that, when private companies take control of a public service, they often slash wages and benefits to cut costs, replacing stable, middle class jobs with poverty-level jobs. The report confirms the criticism.

Similarly, the report underlines increasing recognition that privatizing schools, especially, increases socioeconomic and racial segregation. As the text notes, introducing private interests into things like schools and public parks can—and often does–radically impact access for certain groups.

The report is a sobering reminder that there is a critical difference between procurement—government purchases of such things as street paving or computers—and contracting out delivery of core governmental responsibilities. It turns out that “Weakening democratic control over public goods and services increases economic, political, and racial inequality.”


  1. Thanks Prof K. I would think another aspect of this (and maybe you listed it) would be to replace workers in government unions with workers not represented by a union. That again drives down wages and quality of life. I think Prisons for Profit is a good example of this one.

  2. What came to my mind while reading this was the legal system giving teenagers the right to make decisions regarding their actions without parental consent or involvement. But…when they are arrested for crimes, want to seek birth control or become pregnant, contract STDs, etc., the full responsibility goes back to the parents who had no say in their decision making.

    The government maintains core responsibility for the action/inaction of the “privatized” work which continues to expand. The problems regarding Indiana’s Child Protective Services, Welfare and ISTEP situations are prime examples. Children are still being abused or dying, the welfare system has lost funding under the current administration and the ISTEP situation is still being investigated (trying to unscramble a huge mess still effecting our schools). All of this locally (in Indianapolis and “trickling down” to state districts) began under the Goldsmith administration. You may be sick of my repeated reminder of that person but…you cannot escape the fact that it all began in 1992 during his administration and continues today with his former appointees till working at state level and were active in the Ballard administration.

  3. It’s easy to convince people to privitize when we continue to think of our public servants as lazy and overpaid. Having spent more time in the private sector than in the public sector, I can say with some certainty, that there are many people in the private sector who are lazy and overpaid. I met far fewer of them while working in the public sector. I met many more bright, energetic, and committed people in the public sector as well.

  4. Another worrisome aspect of privatization is that it creates a political constituency with an interest different from the public’s. While civil servants generally cannot politic, and administrative agencies cannot lobby, a corporate contractor has an unlimited right to politic and lobby and some would say a fiduciary obligation to do both to maximize their stockholder value.

  5. A few years ago, POGO published a report that examined the costs of outsourcing federal jobs. For about 90% of the federal job descriptions, outsourcing cost the government as much as twice as much as having the job done by government workers, even thoug the private employees were paid less than government workers. The reason usually involved the overhead costs private firms charged – executive salaries and bonuses and perks, as well as dividends to shareholders.

  6. Us non-Hoosiers got exposed last night to what has been eating Indiana from the inside out. It’s insidious. It’s the battle between tomorrow and yesterday.

    Pence did a very credible job selling yesterday. Polished, earnest, a sincere Christian, good looking, extremely white, and dumb as a box of rocks – Trump’s sock puppet. What white male Christian heterosexual cowboy would not want a return to the nostalgic past where privileged reined.

    Of course that left Tim Kaine to sell tomorrow. Complex, messy, overcrowded, overconnected, climate challanged, energy constrained, diverse, Democratic, global, collaborative vs competitive tomorrow.

    Fantasy vs real.

    The only people who would choose real in that scenario are realists.

    Everyday Sheila reminds us in another way that as difficult as real is we have no choice. Tempus fugits, like it or not.

  7. “and dumb as a box of rocks ” bwahaaa haaa – Pete – tell us how you really feel.
    Thanks for the chuckle, snicker and head nod.

  8. The water company and wastewater operations are well cited examples of how privatization has worked in Indiana and Marion County. Result: politicians dodge the responsibility of raising taxes to support the ever-growing effort required to operate aging infrastructure and comply with clean water regulations; the contractor takes the hit from the public, now powerless to remove them, and raises rates as necessary. The politicians think it’s a bargain.

  9. daleb; the past few years I have been receiving offers for insurance on all utility lines on my property up to my house, stating these lines are MY property and MY responsibility. We are already paying monthly bills for service and used to include maintenance. Utilities are over 50 years old in my neighborhood so many sewer lines from house to city sidewalk have been replaced at homeowner’s expense. When there is a leak in the water line, the water company is responsible for the line from city sidewalk to the cap on the line. The home owner is responsible from the cap to their home. But…I have watched as these leaks appear, most are in the area of utility line, when leaks are repaired the caps are being moved to the edge of city sidewalk, making the owner responsible for the entire line. Just one of out public utility tricks…and of course they all want to raise their rates to cover maintenance, repair and replacement of their equipment. Is this a form of privatization, placing the cost on private citizens? Public utilities are a monopoly; it isn’t as if we can seek less expensive service.

  10. Even more insidious is the concomitant denial of reponsibility – in a contracting-out situation everyone claims, with varying levels of plausibility, that failures are not their fault. No one loses their jobs, perhaps-maybe a company might go bankrupt, leaving its creditors with unpaid invoices. But no one admits it was an ill-conceived idea in the first place, always the mistakes lie with that particular company.

    In most cases contracting-out is merely a way to put public money in private pockets, which is why I always refer to it as white-collar welfare. Some of them probably even drive Cadillacs, completing the meme.

  11. Anytime Wall Street sniffs a pile of money (education, social security etc.), you can be assured that a privatization attempt is en route. Typically such privatizers want a deal where they have no liability but all the say-so. Take social security. Talk about an increase in the capital available to those on the street! Wall Street needs not own the trove; it is enough that the trove serves as security for the streeters to command enormous loans with which to, for instance, buy credit derivatives and Argentine/Greek bonds, as they may do now with FDIC-insured funds thanks to a Republican amendment of Dodd Frank which they hooked to a spending bill which, if vetoed, would shut the government down. Dirty trick legislation, I call it.

  12. “Attempts to limit competition are treated as inimical to liberty. Tax and regulation should be minimised, public services should be privatised. The organisation of labour and collective bargaining by trade unions are portrayed as market distortions that impede the formation of a natural hierarchy of winners and losers. Inequality is recast as virtuous: a reward for utility and a generator of wealth, which trickles down to enrich everyone. Efforts to create a more equal society are both counterproductive and morally corrosive. The market ensures that everyone gets what they deserve.”

  13. Sheila,

    This piece is wrought with inaccuracies.

    –12 years ago Indiana was 1st in child death, last in welfare-to-work, and had a budget deficit. Indiana was spending over $1M a year mailing documents from one welfare office to another; we were spending more on file cabinets than computers.

    –In 2005, Indiana’s welfare enrollment operation was broken. Error rates and the incidence of fraud were high, cases were backlogged and applicants waited weeks for help or appointments. When Governor Daniels took office, Indiana had the worst welfare system in the nation, and the state was facing millions of dollars in federal fines due to the program’s poor performance.

    –Re: employees, after the modernization effort was announced, over 90% of state workers moved over to work for the private company. Their salaries and benefits were almost identical as when they were with the state.

    –There is no need to go into detail, but it was clear the chosen vendor, IBM, didn’t fulfill their contractual obligations and breached the state’s contract deliverables. This isn’t just opinion–this was decided by the IN Supreme Court.

    –In October of 2009, the vendor was fired–but, the state didn’t take the system back over. They used many of the subcontractors to IBM (other private companies) to take control of the system and make the necessary process changes in order to ensure Hoosiers received the benefits they sorely needed. This birthed what was called “the hybrid system.”

    –In 2011, Indiana received a $1.6 M bonus payment for improved performance from FNS–second most improved state in the nation. Note: This was still a modernized, mostly privatized system.

    –Today the system is modernized and standardized. FSSA integrates over 200 safety net programs with dozens of often conflicting standards. Because of the modernization effort, FSSA has been able to bring over 200,000 new recipients into the Healthy Indiana Plan very quickly.

    –Lastly, a state worker always made, and still makes, the final determination of eligibility–not the private company.

    In the interest of intellectual honesty, I hope that you will modify/amend your post.

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