Reich’s Rules

What American politicians call privatization has been a focus of much my academic work.(If you go to the “Academic papers” section of this blog and search for privatization, you’ll find a lot of entries.)

I phrase it as “what American politicians call privatization” because–as Morton Marcus pointed out to me years ago– genuine privatization is what Margaret Thatcher did in England. She sold off government-owned assets like railroads and steel mills to the private sector, after which they were private. They paid taxes, and either prospered or failed, but government no longer had much to do with them.

What Americans call “privatization” is very different. The accurate term is “contracting out” –and it refers to the decision by government agencies to provide government services through for-profit or non-profit surrogates. That process should not be confused with procurement–no one expects city hall to manufacture its own computers or the myriad other items it requires in order to function. (Admittedly, the line can get blurry: contracting with a private paving company to fill potholes, for example. But few privatization critics are troubled by those long-standing practices.)

It is important to recognize that when a government agency contracts with a surrogate to provide services that the agency is legally required to provide, government remains legally responsible for the proper delivery of those services.

Robert Reich recently enumerated five rules that should govern these decisions. His rules are very similar to those on my class lecture on the subject.  It should be obvious, for example, that government shouldn’t contract out when keeping a service in-house will be more efficient and cost-effective.

Other rules are less obvious, but no less important.

  • Don’t privatize when the purpose of the service is to bring us together – reinforcing our communities, helping us connect with one another across class and race, linking up Americans who’d otherwise be isolated or marginalized.

 This is why we have a public postal service that serves everyone, even small rural communities where for-profit private carriers often won’t go. This is why we value public education and need to be very careful that charter schools and other forms of so-called school choice don’t end up dividing our children and our communities rather than pulling them together.

  • Don’t privatize when the people who are supposed to get the service have no power to complain when services are poor.

 This is why for-profit prison corporations have proven again and again to violate the constitutional rights of prisoners, and why for-profit detention centers for refugee children at the border pose such grave risks.

  • Don’t privatize when those who are getting the service have no way to know they’re receiving poor quality.

 The marketers of for-profit colleges, for example, have every incentive to exploit young people and their parents because the value of the degrees they’re offering can’t easily be known. Which is why non-profit colleges and universities have proven far more trustworthy.

  • Don’t privatize where for-profit corporations face insufficient competition to keep prices under control.

 Giant for-profit defense contractors with power over how contracts are awarded generate notorious cost overruns because they’re accountable mainly to their shareholders, not to the public.

Perhaps the most troubling contracting practices involve the military; contract soldiers are uncomfortably similar to mercenaries, and the growing use of private companies in America’s  various wars and military actions generates a number of very thorny issues, a topic I’ve explored elsewhere.

One of America’s many overdue conversations should address what services we expect  our various levels of government to provide and the nature and extent of the evidence needed to support a decision to outsource service delivery.


  1. I will bring up a side issue, one that has nothing to do with the providing of services but much to do with bringing us together and reinforcing our communities; that is, the privitazation of the singing of the National Anthem at sport events. Rather than we the people gathered singing a song that binds us as a people, we hire someone to do it for us. The singing of the anthem then becomes entertainment rather than an act of solidarity, a service we should be providing ourselves rather than handing to a professional. The Anthem, albeit militaristic, belongs to red and blue, conservative and liberal, old and young. In a sports arena it’s not much; but it used to bring us together and reinforce us as a community. In our current practice the power of this important symbol is diminished. I think we would be a better people were we to return to the older practice of having all of us in a stadium belt this song out loudly and in about four different keys at the same time – discordant but together.

  2. Reich’s rules on privatization are right on target, but they need a companion list of rules for lobbying and campaign financing. Until publicly sanctioned bribery is curtailed all of the rules in the world will not improve government.

  3. “State Street Corporation is an American[2] financial services and bank holding company headquartered at One Lincoln Street in Boston with operations worldwide. It is the 2nd United States bank on the list of oldest banks in continuous operation; its predecessor, Union Bank, was founded in 1792. State Street is ranked 15th on the list of largest banks in the United States by assets. It is one of the largest asset management companies in the world with US$2.78 trillion under management and US$33.12 trillion under custody and administration. It is the largest custodian bank in the world.”

    The above is copied and pasted from Wikipedia; in November 2017, Indiana Public Retirement System (INPRS) sent notification to all public retirees that our retirement checks would be disbursed by State Street Retiree Services. This required a fully new registration for all Indiana public retirees to continue receiving their monthly retirement checks. Is it not a private corporation; call it “privatization” or “contracting out”, they are currently responsible for disbursement of our public retirement funds. When I contacted my State Representative, Dan Forestal regarding this “privatization” of state retirement funds, he “said” he was unaware of this fact and would have someone contact me with information. His Chief Legislative Officer did contact me to say “this is not privatization; they simply changed the disbursement to a new firm”. Why is the state of Indiana not responsible for retirement funds for our public employees, teachers, judges, police officers, firefighters, excise, gaming and conservation officers, prosecutors and legislators?

    “One of America’s many overdue conversations should address what services we expect our various levels of government to provide and the nature and extent of the evidence needed to support a decision to outsource service delivery.”

    I also did some research on Indiana Public Retirement System (INRS) and learned that, at the end of fiscal year 2017 they had $32.0 BILLION in assets. Members have not received a COLA since 2009; this issue goes before the state Legislature each and every year by the Retired Indiana Public Employees Association and each year we are denied a COLA but pays for disbursement of our monthly checks. On this issue, more than “a decision to outsource service delivery” is another “overdue conversation”.

    As an aside at the highest level; someone on Facebook asked why Trump does not simply contract (“privatize” or “outsource”) construction of HIS wall, then simply not pay them as he generally conducts his business contracts.

  4. Bob G,

    Here’s an even better idea. Why don’t we just NOT play the National Anthem before sporting events? Aside from the Olympics, it seems truly unnecessary and unrelated to the events themselves.

  5. A few years ago POGO did a study of government services that are being contracted out. I believe that for 40 of the 43 categories examined, the cost to government was close to twice as high as if government workers were doing the jobs. The difference was due to overhead charges that corporations charge for doing the job.

  6. Another perfect example of “privately owned and operated” services is the health care insurance industry. Ever since Reagan turned to sharks of insurance loose on health care, EVERY cost category of our health care has soared to the point where fully 1/3 of our citizens can’t afford it…the ACA is only a band-aid, while Medicaid still resides in the realm of state-controlled politics.

    The overhead for the Medicare organizations is about 7%. A private insurer’s overhead/profit margin ranges from 20% – 60%. Is it any wonder that the insurance lobby works so hard to prevent single-payer or Medicare for All efforts from succeeding. Worse, these insurers have taken on the mantle of determining what they will cover and won’t cover. They are NOT doctors. They are cost accountants who must answer to the stockholders who are at least three levels removed from the anguish of the insured. No wonder our health care is near the bottom of the top 30 industrialized nations.

  7. Robert Reich rules cited herein are about when “not” to privatize.

    In the same article he laments the explosion of privatization and the accompanying corporate profiteering from the same.

    The problem with the rules are that they are largely intangible and subjective. The more relevant question is when should government privatize at all.

    To me, that larger question should go beyond the simple standard of more cost efficiency and tax revenue because privatization inserts capitalism directly into government affairs.

    And when that proliferates, as it has, we have the widespread corruption in government we are experiencing today.

  8. You could talk all day about the fraudulent healthcare industry as a classic example of why privatization doesn’t work. Exorbitant costs with mediocre results at best. Private companies would be bankrupt in this scenario.

    Education is the next case study and one could make a strong case that K-12 and higher ed have become epic failures with high levels of administrative bloat finance by the users.

    But the real problem is the corporatization of America where power comes from the top and is distributed downward to the people. A democratic republic would be an inverted power hierarchy like we see in our Euro family. The people are at the top of the pyramid and then those who serve the public fall underneath to the varying levels of servants.

    The most important concept is the distribution of power in society.

    How has it AND who doesn’t?

    The greatest mind in the modern world called us an Oligarchy in the 1950s.

    So, how do the people fix something for which they no power? If the problem is lack of power, and the Oligarchs choose not to relinquish the power they’ve accumulated, what’s next?

    When you have two political parties controlled by the same oligarchs who work against the people to ensure the same oligarch remains control, what’s the avenue for the change?

    And then we have the fourth branch of government (an independent and free press) which recently applauded themselves for their statement, “We will not lend a voice to climate deniers.”

    Maybe had they done so in 1980, we wouldn’t be in such dire straits today. But once again, the media is controlled by oligarchs who’ve ensured their critics are shoved to the fringe or censored completely.

    This is why the idea of socialism has become much more accepted by the under 35 crowds but this will take democratizing all institutions so it’s a long drawn out process.

  9. The other problem with out sourcing is the campaign donations the contractor makes to our elected officials. If a contractor makes a political donation to an elected official, what kind of over sight will there be over the contractor??? You also have the revolving door between government and private industry.

    Today, the Wall Street-Security-Military-Industrial Complex has a two wholly owned subsidiaries: the Pentagon and our Federal Elected Officials. Former VP Dick Cheney is an excellent example. Without a draft, the cooks, clerks and bottle washers are now contractors, plus the mercenaries we employ.

  10. You gave me a chuckle this morning, JoAnn, so to expand on your quote >And when the defrauded contractors inevitably sue Trump and the USA for breach of contract, counsel for such defendants would file preliminary motions urging immunity and executive privilege, failing which they could use Chapter 9 of the bankruptcy code in some limited fashion to obtain relief from payment for the USA since the USA does (via its $22 trillion deficit increasing at a rate of a trillion per fiscal year – with interest – due to the Trump/Ryan tax giveaway) in fact owe far more than we have, a primary requirement under most any chapter (other than 11) of the code, and could also deny liability on behalf of Trump in civil court with a plea of mental incompetence, also factually true.

    If I were the judge in bankruptcy and civil court in those cases, I would hold for the petitioner and defendant, respectively, and tell the losing if defrauded contractors from the bench that since they hate taxes they will be pleased to hear that such losses are deductible from income in the year(s) incurred, including their campaign contributions paid to obtain such contracts (since such bribes are an “ordinary and necessary expense” under the code in doing business with Republicans these days). (End of fantasy)

    Back to reality > Politicians (one way or another) are in charge of awarding contracts to private enterprise and as correctly noted by Sheila in re necessary purchases such as procurement of police cruisers and the like as exceptions, use “small government” as an artifice to cover their hatred of public unions, public control, and pension liabilities while giving away taxpayer money to their campaign-contributing friends, which means that you and I, however convoluted the process, are in part paying for the campaigns of those who are stealing our money. I object.

  11. One of the simplistic things that I remember learning in high school so long ago was that the benefits of capitalism could be realized only in the presence of ample competition in any market. It was competition that was what make capitalism work not visa versa. It that condition couldn’t be maintained by regulation than that market was better off socialized. That’s merely the point from Sheila and Robert Reich put into different words.

    Contracting out, as Sheila points out, is not that principle, and should only be employed for long term money saving reasons. For instance if, temporarily, the capacity of social assets can’t keep up with demand it may be less expensive long term to supplement them with private capabilities rather than build unnecessary long term capability in the public capacity. This is also true and practiced freequentlly among corporations.

  12. I hope that the newly elected progressive members of the House are just the beginning of the revolution to take back this country from the profiteers who took ownership of the bulk of the members of Congress.

  13. Privatization is just another way politicians can avoid taking responsibility. Our privatized tollway system is a good example: If government raises tollway fees, they take the blame for essentially raising taxes. If a private company does it, it’s just the cost of dong business. After all, they need to be making a profit (they’re not doing this as a matter of civic pride).
    My question: if a private company can manage something better than the government, where do they find these genius managers? My guess is they don’t come from another type of business (would you hire the owner of a pest control company with no educational background to be headmaster of a private school?). Such companies rehire those who have been managing in the past… but at higher wages. Why not just pay the existing managers better wages?

  14. “If you go to the “Academic papers” section of this blog and search for privatization, you’ll find a lot of entries”

    Some very impressive scholarship, Ms. Kennedy!

  15. dont privatize schools, if the contract to so called charter,says, the superentendant is independant aka,a ceo,and not voted in, they can and will thumb their nose at whats left of any school board. try voting a ceo out in corp america. also, as a former rez of afederal prison, for growing what will be legal soon. i would say keep it in the hands of the gov. first , those guards, are compensated, and have a support plan for,thier health needs and ongoing protection. unlike core civic,geo,who also hold many of the keys on contracts to cage kids. (400 a day per kid)like im suggesting,they are money and profit goons,and human needs literally take a back seat. even the guards will atest, they are,understaffed,money to support the institutions they are allowed to condem people in,both guards and prisoners,barely have sufficiant funds to keep them fed,and operating. (see alabamas issue with private prisons)profit first,at any cost.
    rob reich is a my first go to when i discuss with like minded people,about this countries hidden agenda to privatize. (ALEC) his vids are in step,with dry humor,and easy to digest. there,er,short..
    I have sent many a compliment over the years to his site,and learn far more,in lay terms how to deal with issues,and discussions with other blue collars. As a former secty of labor, obviously,hes had a life long discussion with others on how this all works,and why we need change for the better. his casual style must make right wing con men cringe,when he walks by.
    also,id like to make another comment, theres a bill in the house,written by nazi man steve king r-ia to eliminate the davis-bacon act,,HR743, its a guarenteed wage for construction workers on and some state jobs, ie ,highway construction.called prevailing wages. the soon to be discussed highway,infrastructure talks may vote out this to thrill the private sector looking to invest in roads,you know I-69 south of indy? (bad joke) its been reintroduced again when dump was elected. hence,i see issues. if we allow this to be a give away by the present congress,its a sell out again of the working class. the reason why i bring this up, first off, those people building roads are some of the best, contracts mean on time finish,or fined,sued or never to operate again. those workers come back every year,the money,,and yes,its the job,its has to be done right,the first time. i have no reason to trust a bridge,built by scammed wage workers, or some bright idea by yes boys in goverment on how to cut about you?
    tell the demos,were watching them better than we did the wishes.

  16. Thank you for your years of attention to this problem. The reason government originally provided its services was because the private sector wouldn’t serve everyone needing the service. Private profits are at cross purposes with serving ALL taxpayers. That’s why core functions of government should not be contracted out. Serving costly customers like expensive-to-educate special ed. or other struggling students undermines profit. Likewise, as you noted, serving rural residents with postal services is more expensive than city residents with multiple customers per block. Profiteers will always cherry-pick the profitable portion of the public and abandon some or all of the rest. Unfortunately, the profitable portion of public services is also what subsidizes the government’s obligation to serve the unprofitable portion of public services. So privatization makes government less efficient and more expensive per unit served.

    Unfortunately, those able to make large campaign contributions are those who are profiting from privatization.

  17. Maybe some “do privatize” rules should be created – like do privatize when the organization that will do the work has specialized knowledge of the work to be done and the people being served. An example might be rural medical services delivered by an organization “of, for and by” folks from the area.

    How about adding in for all privatization considerations – is the organization a “B corp”?

  18. this story from Tennessee is absolutely horrifying: a perfect example of privatization gone wrong. No one should be making a million dollars a year just reviewing applications. This is a job that should be done by government workers acting on behalf of the taxpaying public, with appropriate oversight.

  19. I had a conversation with my state senator (Ruckleshaus) about the Medicaid work requirements. I told him my concern that the private entities that manage the Medicaid population would have an incentive to accidentally “lose” or “mishandle” the verification documentation for clients that they have identified as high utilizers of medical services and discontinue their coverage. His response to me “I would hope that won’t happen.” hope, yeah, that’s what our state legislature runs on, for sure.

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