Thursday, December 13, 2007

Is privatization really cheaper?

Buck Naked Politics has a great post exploring the idea that privatization always saves money. A taste:

Why does anyone still blindly assume that corporate employees are more efficient?

Enron employees, for example, thought a corporate art collection would be a fine use of 20-million shareholder dollars. Former Tyco CEO Dennis Kozlowski spent a million shareholder dollars on his wife's weekend birthday bash (he relocated to prison after looting Tyco of $600 million).

Examples such as those, which are hardly uncommon, should cast doubt on the notion that corporate employees are, by nature, more careful than government employees with other people's money.

Moving on to actual government contractors, it continues:

contractor profits -- even reasonable ones -- add to the taxpayers' costs of privatizing government services. Consider Booz Allen Hamilton, a major contractor in intelligence and defense. Booz Allen charged us taxpayers $42 - $383 per hour for its employees to do the same work that government employees would do for about half that pay range.

Blackwater CEO Erik Prince told a congressional committee that about 10% of its roughly $1 billion in State Department security contracts was profit. (See hearing video.) That's $100 million. Blackwater paid its security guards about $600 a day and billed the government about $1,200. Basically, Blackwater acted as an employment agency. If the State Dept. directly hired those same security guards for $600 a day, the taxpayers' costs would drop significantly.

The critique leaves out one main motivation of hiring contractors: when the work goes away, it's easier to dismiss a contractor than to fire government employees. And contracting can give you access to a higher quality of talent than you can sometimes find on a government payroll. In addition, sometimes contractors have a particular expertise that is worth paying for because it's either unavailable within government or saves money in the long run. That's why we hired Red Adair to put out burning oil wells after the end of the first Gulf War. We don't tend to keep Hellfighter teams hanging around the federal services building.

But the overall point is solid. Outsourcing work sometimes makes sense. It can sometimes save money. But it doesn't always. And it certainly isn't true to the extent that some people have fetishized it into a mantra -- along with the idea that the answer to any fiscal problem is to always cut taxes.

The former turns the reasonable principle of "a government only as big as necessary" into the unreasonable "always shrink government." Similarly, the latter turns "taxes only as high as necessary" into "always cut taxes."

Privatize when it makes sense. But make sure it makes sense.

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Anonymous Anonymous said...

Sometimes we shouldn't speak unless we know the truth because we make a fool out of ourselves. Maybe you should read up and find out more about Kozlowski - he should not be in jail. He rightfully deserved all that he made and much, much more!

12/14/2007 6:59 AM  
Blogger Sean Aqui said...

Uh-huh. Whatever you say.

12/14/2007 9:38 AM  

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