US Privatization Lag

https://www.downsizinggovernment.org/privatization

The same problems of run-down public infrastructure are apparent in the United States today. The National Park Service has many poorly maintained facilities and billions of dollars of deferred maintenance. Urban subway and light rail systems across the nation have tens of billions of dollars of maintenance backlogs. Politicians enjoy launching new parks and rail systems, but they put little effort into maintaining what the government already owns.

Federal agencies cannot count on Congress for funding. Consider the air traffic control system, which is run by the Federal Aviation Administration (FAA). The system needs billions of dollars in investment to meet rising passenger demands, but the FAA has not secured stable long-term funding from Congress. Furthermore, the FAA mismanages its capital investment projects, which often experience delays and cost overruns.

Amtrak's investment budget is also mismanaged. Because of politics, the company invests in rural routes that have few passengers instead of higher-demand routes in the Northeast. In his book on Amtrak, rail expert Joseph Vranich argued, "Congressional requirements that Amtrak spend money on capital improvements to lightly used routes are outrageous. . . . Throughout Amtrak's history, it has devoted too much of its budget to where it is not needed, and not enough to where it is."

Privatization solves these sorts of problems. Privatized businesses use customer revenues and capital markets to finance upgrades. They do not have to lobby Congress to receive needed funding. And they have strong incentives to invest where the actual demand is, free from political pressures that plague government-owned businesses.

4. Expands Entrepreneurship and Competition
5. Increases Transparency
6. Ensures Efficient Pricing
7. Enhances Customer Service
8. Removes Politics from Decision making
9. Attracts Foreign Investment
10. Boosts Exports
11. Deepens and Broadens Equity Markets
12. Benefits the Government Budget

When the government produces goods and services, it tends to squelch competition, either directly by enforcing a monopoly, or indirectly by deterring entrants unwilling to compete with a subsidized government producer.

Devoid of competition, government organizations resist change and are slow to adopt better ways of doing things. The FAA runs the air traffic control system with outdated technology. The USPS is being undermined by email, but it does not have the flexibility to adapt. Airlines and intercity buses have improved their efficiencies and reduced costs under competitive pressures, but Amtrak's costs remain high.

In the economy, major innovations often come from upstarts, not industry-dominant firms. Big advances in industries, from computers to retail, have come from new firms doing things in new ways. So economic progress depends on open entry, on the ability of entrepreneurs to challenge existing providers. That is hard to do when the existing provider is the government.

Privatization abroad has often been paired with the removal of entry barriers. The European Union has urged member countries to open their markets as they privatize their airline, energy, telecommunications, transportation, and postal companies. British postal markets were opened for competition, and then Royal Mail was privatized. The privatization of British Telecom was followed by deregulation and then the rise of competitors such as Vodaphone, which is now one of the largest telecommunications firms in the world.

U.S. policymakers should use privatization as a catalyst for pro-competition reforms. The government should privatize USPS, Amtrak, and other companies, and at the same time open industries to new entrants. Open entry attracts people with new ideas and encourages the dissemination of new production techniques. The best and the brightest do not want to work for moribund bureaucracies such as the USPS and Amtrak. As a result, those companies today are essentially closed to external know-how and global best practices.

The American economy is rapidly evolving, driven by globalization and new technologies. We can keep up with all the changes by making our economy as flexible and open to new ideas as possible, and privatization and competition are the best ways to do that. If America opened its postal industry to competition, there would likely be many entrepreneurs ready to revolutionize it.

Citizens have difficulty monitoring the activities of government agencies. The goals of agencies are often vague, and their finances are difficult to understand. Government officials are protected by civil service rules and can be secretive in their activities. Even members of Congress have difficulty squeezing information out of agency leaders, as we often see at congressional hearings.

By contrast, private companies have clear goals such as earning profits and expanding sales. Performance is monitored by auditors, shareholders, and creditors. And consumers monitor companies in the marketplace, giving feedback with their purchasing behavior.

Moving government activities to the private sector would make them more "public." Economist John Blundell said that, where he grew up in England, a government water facility had posted a sign, Public Property: Keep Out. But after the facility was privatized, a new sign went up: Private Property: Public Welcome. Private businesses have an incentive to be transparent and promote good community relations.

British privatizations revealed problems that had been hidden inside government businesses, such as unknown debts, pension liabilities, and performance issues. With the privatization of the British nuclear industry, the large size of its financial problems was revealed. In preparing British Telecom for privatization, the Thatcher government found that the company "had not the faintest idea which of its activities were profitable and which were not." For British Airways, the government found undisclosed losses of hundreds of millions of British pounds as the company was being readied for privatization.

In the U.S. government, the National Park Service provides few public details about the budgets of its individual parks and sites. By contrast, the private, nonprofit Mount Vernon estate in Virginia — home of George Washington — publishes audited financial statements showing how money is raised and spent.

Or consider the USPS's accounting. The postal company provides some services in its legal monopoly and other services in competitive markets, but its financial statements make it difficult to determine how much it earns or loses on each. The company attributes a large share of costs to overhead, which hides internal cross-subsidies. Economist Robert Shapiro found that the USPS manipulates its accounting to raise prices on letters, and then uses the extra revenues to subsidize its express mail and package delivery.

Amtrak similarly hides cross-subsidies behind its opaque accounting, so it is difficult to determine the profits or losses on each of its routes. Amtrak also has a history of hiding information from investigators and of presenting unrealistic projections to Congress.

The Tennessee Valley Authority (TVA) has long been a secretive organization and immune from outside criticism, particularly with respect to its safety and environmental record. Failures at its Kingston Fossil Plant in 2008 led to the largest coal ash spill in U.S. history. The TVA had been aware of the risk but failed to take needed steps to avert it. Why? Federal auditors blamed TVA's management culture, which focuses on covering up mistakes. At the TVA, a "litigation strategy seems to have prevailed over transparency and accountability," said the auditors.

A final transparency issue is that federal agencies that operate services are often the same agencies that regulate them. The FAA operates air traffic control and regulates aviation safety. The Transportation Security Administration operates airport security and also regulates it. In such cases, privatizing the operations would eliminate the conflict of interest, and agency decisions that are now made internally would be made externally and publicly. This transparency issue is one reason the Thatcher government figured that — even if an industry had monopoly elements — privatizing that industry would improve it because the government regulator would be split off from the entity being regulated. Privatization and transparency go hand in hand.

Economic theory indicates that general welfare is maximized when prices for goods and services are set by supply and demand in competitive markets. With government goods and services, however, prices are often set too high or too low. Setting prices too high induces people to reduce their purchases, and they gain fewer benefits than optimal. Setting prices too low induces wasteful overconsumption.

The government tends to set prices based on political and bureaucratic factors, not market supplies and demands. That results in misallocating resources, meaning that capital, labor, land, and commodities are used in low-value ways that reduce overall welfare in society.

Government-owned resources are often underpriced. Irrigation water from federal dams in the western United States is subsidized, which reduces incentives for conservation. The use of federal lands is also subsidized in many cases. Some government agencies, such as the USPS, underprice some services and overprice others — they cross-subsidize.

An advantage of privatizing water, land, postal services, and other items is that private and unsubsidized providers set prices on the basis of supply and demand. Market pricing is efficient and fair. It is also environmentally friendly because it creates incentives to minimize waste. Privatizing water and opening water markets in the western states would ensure that water is not wasted on low-value crops when the rivers could produce more value by supporting recreation and wildlife. Privatizing Amtrak and ending rail subsidies would discourage the company from wasting energy running trains on low-value routes.

When the United Kingdom privatized its regional water utilities in the 1990s, people criticized the subsequent price increases. But water prices had been too low under government ownership, which encouraged overconsumption and wasteful leaks. Under privatization, leaks have fallen one-third over the past two decades. Privatization improves both efficiency and environmental stewardship.

Governments are often the butt of jokes for their poor customer service. Not all government agencies provide poor service, and people have bad experiences with private companies, of course. But public polling shows that Americans have a dim view of the service they receive from federal agencies. One poll found that just one-third of the public thinks that the government gives competent service. And an annual survey of the public's "customer satisfaction" with various public and private services found that satisfaction with federal services is lower than with virtually all private services.

The problem is one of incentives. Government employees usually receive no tips, promotions, or other benefits for providing good service. Unlike sales people in private companies, they do not have to compete to find customers, so they have free rein to be unfriendly and slow.

A British Treasury study found that "most indicators of service quality have improved" in the privatized industries in that nation. When British Telecom was privatized and opened to competition, the wait time for a new phone line fell from many months to two weeks.

With British passenger rail privatization, on-time performance improved and customer satisfaction has been quite high, despite a huge increase in ridership. With Japanese rail privatization, fares dipped modestly, accident rates plunged, and ridership increased.

In the United Kingdom's privatized water industry, supply interruptions are down, the number of customers with low water pressure has fallen, and water quality has improved. Privatization is not just about efficiency, it is also about better serving public needs.

Decisions in government organizations often reflect political factors that raise costs and misallocate spending. Comparing government and private ownership in the Journal of Economic Perspectives, economist Andrei Shleifer argued, "Elimination of politically motivated resource allocation has unquestionably been the principal benefit of privatization around the world."

A British finance expert said that in the years before Thatcher, "there had been frequent interference in running the nationalized industries," with politicians often making conflicting demands of companies, such as favoring higher prices one day and lower prices the next. Before Thatcher, many coal mines were kept open, not because they made economic or environmental sense, but because the coal mining unions had political power.

In America, federal businesses are unable to end unneeded spending because members of Congress defend activities in their districts. To please politicians, Amtrak runs low-value routes that lose hundreds of dollars per passenger. And Congress blocks the USPS from consolidating mail processing centers and closing low-volume post offices. The agency's least-used 4,500 rural post offices average just 4.4 customer visits a day.

The story of the FAA is similar. Politicians prevent the agency from closing unneeded air traffic control (ATC) facilities, and they prevent the elimination of jobs in FAA facilities in their districts. They have even required the FAA "to procure certain hardware and encouraged it to select certain contractors."

Then there is the problem of "zombie" ATC towers: More than 100 U.S. airport towers and radar rooms have so few flights that they should be shut down late at night under the government's own guidelines, a move that would save taxpayers $10 million a year. Air-traffic controllers, who make a median $108,000 annual wage, have little to do overnight at those locations, which remain open because of pressure from lawmakers who control the Federal Aviation Administration's budget. Members of Congress from both parties have blocked attempts to cut tower hours or merge radar rooms, according to interviews and documents.

Such pork barrel politics make us all poorer by raising the costs of services. The environment also suffers because it is wasteful to run low-value trains and to keep open low-value ATC facilities and post offices.

One reason nations have pursued privatization has been to attract foreign investment. By selling equity in postal or energy companies, a country can attract foreign capital to help build its economy. A substantial share of privatization proceeds in OECD nations has come from foreign buyers.

The British were the pioneers. The British Telecom privatization in 1984 was the largest IPO in world history to that date, and it was the first truly global share offering. The government set aside tranches of shares for international investors.

New Zealand pursued a large amount of privatization in 2013 and raised billions of dollars by floating shares in numerous companies. Commenting on the sales, a New Zealand finance expert said, "Privatizations help the development of capital markets in terms of liquidity by attracting greater offshore and domestic participation and encouraging other unrelated listings."

Foreign investment is not just about attracting money. Capital inflows often come with inflows of foreign technology and management skills. An analysis of European privatization by Deutsche Bank said, "When foreign investors acquire stakes in companies, the influx of capital is in many cases also accompanied by an inflow of important expertise."

Government monopoly companies tend to be cut off from industry innovations occurring abroad. If European postal services adopt new and better practices, the current monopoly USPS could simply ignore them. By contrast, private postal companies would have incentives to adopt innovations from anywhere in the world. They could also hire foreign executives who have unique talents. The executive who led British postal reforms, for example, is a Canadian with experience in both privatization and the postal industry. Privatization helps an economy take advantage of globalization.

Typically, federal government businesses do not export their goods and services. They have no incentive to do so. They are content to quietly fulfill their domestic roles. But that artificially restricts growth opportunities in our economy.

Private businesses that develop specialized products and expertise often pursue sales in both domestic and foreign markets. Those earnings are plowed back into the company, which encourages further research and product development.

Canada privatized its ATC system in 1996. The new company, Nav Canada, has become a leader in ATC innovation and has developed numerous technologies that it exports abroad. One expert noted, "The technical expertise at Nav Canada has led to a thriving business marketing innovative ATC hardware and software and advising other air navigation service providers on modernization." Nav Canada earns income from foreign contracts and royalties, which help fund its research program and benefit its domestic services.

There are other export successes from Canadian privatization. In 1986 the government privatized Canadian Arsenals, which was the entity that manufactured large-caliber ammunition for Canada's military. Today, the company is owned by General Dynamics; its manufacturing facilities supply not only Canada's military, but also the militaries of a dozen other countries. The company has developed a range of products that it sells internationally.

Canada also has an interesting history with its bank notes and postage stamps. The government has long contracted the printing of those products to the private Canadian Bank Note Company. The company has used its domestic expertise as a base to go global, and today it prints stamps, bank notes, and various high-end security products for more than 60 nations. By contrast, bank note printing in the United States is a government monopoly carried out by the U.S. Bureau of Engraving and Printing, an agency that supplies only the domestic market.

The lesson is that we waste the talents of American workers when we keep business activities trapped inside the federal government. Moving in-house government activities to the private sector opens the door for workers to capitalize on their skills and sell their innovations worldwide.

An important goal of privatization in many countries has been to deepen equity markets and widen share ownership. Most privatizations include public share offerings, and many of the largest companies on exchanges around the world are formerly state-owned firms. By 2010, about half of the global stock market value outside of the United States was from companies that have been privatized in recent decades.

William Megginson found that privatization has "massively increased stock market capitalization and trading volume in many developing (and more than a few developed) countries." The number of people who own common stock has increased in countries that have had major privatization programs. That point is important because larger and more efficient capital markets promote overall economic growth.

As a result of British privatizations, the share of British citizens owning equities soared from 7 percent to 25 percent during the 1980s. British efforts to broaden share ownership with privatization influenced other countries. Germany, for example, heavily advertised its 1996 privatization of Deutsche Telekom and convinced two million citizens to buy shares.

Privatizations have created new opportunities for households to save and allowed more people to benefit from economic growth. Investors around the globe have generally earned solid returns from share issue privatizations. That benefit of privatization is less relevant to the United States, which already has deep equity markets. Still, it was this "popular capitalism" aspect of Thatcher's program that helped inspire President Reagan to push for privatization in the United States.

America's economy would gain from federal privatization, and so would the government. The federal budget would benefit in three ways.

First, sales of federal businesses and assets would raise revenues, which has been an important political motivator in many countries. As noted, privatizations have raised $3.3 trillion for governments over the past three decades.

Second, subsidies to government businesses could be cut with privatization. Privatizing Amtrak, for example, would allow the rail system to run more efficiently. Money-losing routes could be eliminated, bloat could be reduced, and the government could end its more than $1 billion in annual aid to the company. Similarly, privatizing the air traffic control system would allow it to be fully self-funded without the need for taxpayer subsidies.

Third, privatization would raise money for governments over time as newly privatized entities paid income, property, and other taxes from which they are currently exempt.

Government businesses and facilities do not pay federal or state income taxes, and generally they do not pay property taxes to local governments. Privatization would allow governments to broaden their tax bases, thus generating revenues that could be used to reduce overall tax rates.

Without major reforms, the federal government faces a financial crisis down the road as spending on entitlement programs soars in coming decades. Annual budget deficits are expected to rise from more than $500 billion this year to more than $1 trillion by 2022 — and keep on rising after that. Policymakers should cut programs in every federal department. The main focus of reforms should be the major entitlements, such as Medicare and Medicaid, but privatization can make a modest positive contribution to fixing the government's fiscal woes as well.

https://www.downsizinggovernment.org/privatization

Norb Leahy, Dunwoody GA Tea Party Leader