Yesterday I addressed a specific example of how “privatizing” a public resource can be compared to money laundering. Today I’ll try to address the more general case. First, I’ll offer another crime-oriented analogy. Searching for “faux privatization” rapidly led me to some old friends over at Mutualist Blog, who in turn pointed me toward Brad Spangler. I’m sure there are areas where we’d all disagree, but I do think this comparison is apt.

Let’s postulate two sorts of robbery scenarios.

In one, a lone robber points a gun at you and takes your cash. All libertarians would recognize this as a micro-example of any kind of government at work, resembling most closely State Socialism.

In the second, depicting State Capitalism, one robber (the literal apparatus of government) keeps you covered with a pistol while the second (representing State-allied corporations) just holds the bag that you have to drop your wristwatch, wallet and car keys in. To say that your interaction with the bagman was a “voluntary transaction” is an absurdity. Such nonsense should be condemned by all libertarians. Both gunman and bagman together are the true State.

Both gunman and bagman together are the true State. Keep that in mind as we consider the general case of taking some function that the government provides directly and outsourcing it to the so-called private sector. The first thing we might notice is that the potential for fraud remains unchanged. Either way, someone might take the government’s – actually the taxpayers’ – money and use it for something besides its intended purpose. Let’s take fraud out of the equation, then, and consider what might be different when something’s privatized. This time, Exhibit A is corruption. The recipients of small individual grants from the government cannot use them to make a bribe that matters; the per-person amount is too small, and collusion might be anywhere from difficult to impossible. However, the recipient of a multi-million-dollar contract to provide that service darn sure can turn a fraction into a bribe that will turn even a legislator’s or cabinet member’s head – let alone that of some flunky in a procurement agency. This leads to the spectre of competition – supposedly the raison d’etre for privatization – being notably absent from the privatization process. Even if the competition isn’t effectively bought instead of being awarded on merit, all competition effectively stops the moment the contract is awarded . . . but wait, that’s my next point.

My next point is that the incentives are all different, and not in a good way. With individual grants or provision of service directly from the government, e.g. for healthcare or education, the administrators have a very strong incentive to root out fraud and inefficiency. It’s often how their job performance is measured, and how their prospects for promotion are determined. Once the service is privatized, though, that picture changes. Now there’s an incentive for the government administrators to vindicate both the choice to privatize and the choice of contractor. That means sweeping fraud and inefficiency under the rug. Meanwhile, the contractor has a strong incentive to deny services to those who need them. Now every such denial translates not into some unmeasurable improvement in a performance review but into cold hard cash. This is usually portrayed as an improvement in efficiency, but it’s not true efficiency. Efficiency is outputs over inputs, and decreasing outputs does not increase efficiency. This is a purely financial kind of efficiency, and more efficient transport of taxpayer dollars into contractor pockets is not a good thing. The last perverse incentive involved here is the political one. At the political level, i.e. the level of the people writing the procurers’ performance reviews and potentially offering them patronage jobs at the World Bank or some such, the appearance – not the reality – of smaller government is important. Size of government is often measured by comparing the relevant government’s budget to national GDP, so what happens when government functions are outsourced? The government budget remains unchanged; they’re still paying for this out of citizens’ taxes. However, now the same money is counted again as income for the contractor and thus as part of GDP. That’s right, GDP went up even though no new value was created, because of the double-counting. (I think it’s sick that GDP counts non-value-creating transactions, including many other kinds besides this one, but that’s a whole other post in the making.) More importantly, as GDP goes up, federal budget as a percentage of GDP goes down. That’s insignificant for a single program, but add it up over many programs ranging from millions to billions and you get something that the WSJ editorial page will compliantly point to as evidence of shrinking government and a correspondingly improved economy.

So, are taxpayers better off? No; they’re paying the same as ever. Are the recipients of benefits better off? No again; the privatized “service provider” (really a denial-of-service provider) is probably trying even harder than the government agency ever did to find excuses for providing an absolute minimum of service, or no service at all, in the name of efficiency. Who is better off? The contractors, of course, and their in-government cronies in the procurement agencies (especially the military ones), and the political class who get to bray about how “fiscally responsible” and “pro-market” they are. Do you remember what Brad Spangler said, back at the beginning? Don’t be fooled; the feeders at the public trough, though they portray themselves and are portrayed by politicians as part of the private sector, are really part of the state. The true private sector, consisting of those who might provide the same service (or find alternatives) directly to consumers without involving the government in any way, is still excluded.

Real privatization exists too, and is often beneficial, but it means getting the government out of something entirely. Merely having a “private” company do something, still at taxpayer expense, is not privatization. If the government has to be involved at all in providing a service, it should provide that service directly. Adding middlemen just turns public money into private profit. Most privatization of this form is designed to change the apparent status of some money from “government handout” to “private-sector stimulus” without actually having any other effect. It therefore fits our definition of money laundering as a transaction intended solely for such effect. Our so-called public servants are trying to pull the same trick as drug dealers and common thieves, only on a much grander scale, and it’s unfortunate that so many “smaller is better” pundits let them get away with it.