The worker may or may not be better off (trying to figure out what programs you qualify for this month and is the LIEAP payment going to come in time to stop the gas from being shut off is not low-stress), but the taxpayer sure isn’t.
No, I don’t think the employee is always going to be paid more in wages + transfer payments. They may well end up receiving a bit less. However, the cost of the transfer payments and the additional cost of administering those payments are rarely if ever factored into privatization financial projections, which means good numbers on the real outcomes are vanishingly rare. Without good numbers, how can we make informed decisions on the costs and benefits of privatization?
When the large employer is the government, it is indeed a direct outcome of privatization. (And it’s not that unusual, particularly in smaller communities, for the single largest employer to be a state or federal institution–a prison, a military base, a state hospital, etc.)
Evidence for what? That lower wage levels in an area is not a net neutral?
Lower wage levels means people have less money to spend, thus reducing aggregate consumer spending and leading to reduced economic activity.
or that privatization usually doesn’t result in higher-wage people finding similar jobs? This is pretty basic economics: if there were many unfilled higher-wage jobs that require similar skills to what the lower-wage replacements have, there would not be people willing to take lower-wage jobs in the first place.
I don’t know. I think the outcome could fall on either side of the calculus, depending on the fact pattern.
If the employer is the government and they are the ones depressing wages, that’s not privatization. The way I understand privatization is shifting who performs actions from government to private actors.
No. Evidence that it’s usually not the case that the higher-wage people who were laid off find jobs paying similar wages to what they earned before, while the lower-wage replacements are people who were either unemployed or had other lower-wage jobs.
Which means that the individual fact pattern determines whether a given privatization makes financial sense. Meanwhile, this calculus isn’t even considered by most proponents of privatization. Utterly ignoring a calculus doesn’t usually yield well-thought-out plans.
Yes, and we are discussing this in the context of the private entities paying lower wages. For example, a largish prison complex gets privatized and the new private actor pays the guards less–if that prison is the biggest employer in the county, depressing the average wage level in the area will be a direct consequence of privatization. I’m not sure exactly what you are questioning here.
These higher-wage people who were laid off were performing the same jobs as their lower-cost replacements, which means they have similar skill levels. If they can find jobs paying similar wages, then the lower-wage replacements, who have roughly the same skill levels, could have found those higher-wage jobs and would not have needed to accept something paying less.
Otherwise, you are left arguing that people who have the skills to obtain more money in the same area are voluntarily accepting less money and fewer benefits. What’s the economic rationale for that?
(Alternatively, I suppose you can argue that the lower-wage replacements aren’t really up to the same standards and are not in fact doing the same jobs at the same proficiency level, but I don’t see that argument helping buttress claims of efficiency. )
I don’t think it’s too simple. We’re talking about a business taking over the operation of a bridge for profit. Government can cut unnecessary costs anytime, but they can also cut necessary costs knowing a higher level of government will step in to absorb the losses to preserve the need functions. If you don’t want to discuss this in generalities then name a real case and we’ll examine it.
I didn’t follow what you were saying before. This is more clear.
I think in this type of scenario a determination would need to be made whether or not the wages were artificially or unsupportabley high prior to the privatization. Your original statement was that this widespread wage depression and cost shifting to transfer payments was not net neutral. Same comment as the first then, I think the outcome could fall on either side of the calculus, depending on the fact pattern.
Or alternatively, the folks who were higher wage earners and laid off were overpaid. Again, this is fact pattern dependent. Ultimately privatization could save money overall, or not.
You said a business can cut their losses, but a government can’t. That is too simple and it’s just not true. When the city of Vallejo in CA cut 40% of their police force and north of 40% of their firefighters due to budget constraints, which higher level of government stepped in to preserve needed functions?
You said businesses operate on a bottom line basis (without definition) and a government doesn’t. That’s too simple and doesn’t address how do non profits figure into that equation, let alone other businesses.
Look at the stated reason for the bridge handoff:
Lower benefit costs, lower long term retirement costs, and more flexibility in using their key resources in other areas of the department while maintaining similar levels of service.
I think we’re kind of venturing outside of GQ territory. The reason I commented on your posts was that they didn’t present an accurate picture of how or why certain actions can be taken.
In Melbourne, Australia, the trains were privatised in the late 90’s. A decade or so later, they found that the privatisation had cost 3 billion dollars more than if the government had continued to run the trains themselves. Its not hard to see why. Here’s what each party pays for:
Government:
Buying new trains
Maintenance of trains
= An amount, aprox. $300 million dollars per month, made up by paying ~$5 per km travelled per train (which has lead to revenue rorting by the private owner, by splitting trains into shorter ones, and running trains going to stabling yards as passenger taking services, which run express stopping no stations except the first and last)
Here is an example in my area from 2 towns over that happened about 6 - 7 years ago.
This small town was running their own bus service to get kids to and from school. It fell to the highway department to run the school bus service and they did on a contract basis to the school department and the coast was at a million dollars a year, or just over.
A couple new school board members came along with the radical suggestion to put the bus service out to bid. They did and three bids came in and were in the range of 650,000 to 750,000 range.
They made the change and other than a couple 1st week working out the kinks issues no problem at all.
So, where did that extra 350,000 to 250,000 go ? The answer is obvious government waste, or the lining of someone’s pocket that went unnoticed for years.
Lets say you have a prison complex that cost 10 million a year for the government to run. Then a private company then signs a contract for 9 million a year by cutting guard salaries. What happens to the 1 million the government saves? It either goes for new spending which increases the number of jobs in the area or could be used to lower taxes which means people get more money to spend and the million goes into the economy that way. The money does not disappear it is simply shifted from the prison guards to some other government worker or back to the taxpayer.
Not even “obvious government waste” necessarily. Keep in mind that government employees, even for school districts, often get the full panoply of government worker benefits- healthcare, pensions, etc… as well as having wages that are usually legally defined based on years of service and performance.
Private companies don’t have any of that. So where the school district might hire a bus driver or mechanic and have to pay them a defined amount, as well as provide health coverage and a pension and some other stuff, a private company might be able to hire a similar worker at a lower wage, and provide lesser health coverage (or none at all) and no pension, or a 401k plan, all of which nets down to the private company’s employees costing them less.
Also, the school district might have to go through some weird purchasing hurdles, like favoring minority or women-owned businesses, or have to buy OEM parts or something like that. A private company may be able to leverage economies of scale, if they’re running the bus systems of 5-6 school districts. Or they can go to the lowest price competitor, or use aftermarket parts, or what-have-you.
So your example is more of a perfect example of why privatization/outsourcing works in certain situations.
Even in government, such motives exist: the people running the place still have to deal with budgets, taxes, and finite amounts of money to spread across what are often infinite needs.
As bump noted, probably a very significant amount of the “savings” came in the form of lower wages. Are any of the lower-paid workers now eligible for government benefits (food stamps, etc.) that the previous workers were not, and if so, have you accounted for the costs of providing those benefits? For example, if the previous government workers had health insurance included in the cost of the contract, and the new workers are getting their insurance through Medicaid or publicly-subsidized ACA policies, those costs being paid out of a different tax bucket need to be added to the direct cost of the contract to find out whether you are in fact saving anything at all.
There is nothing whatsoever that says the money goes back into the same area. For example, if the money goes back to the taxpayer most of it will go back to the wealthiest and most populous areas of the state. Prisons, meanwhile, tend to be stuck in relatively poorer and more rural areas (NIMBY syndrome). The “good” effects of privatization are diffused across the state; the “bad” effects are concentrated in one relatively narrow geographic area.
But if they were overpaid before, then they’re not going to be able to find new jobs paying those same wages, and we are right back at lowering the average wage levels in the area, with all of the attendant economic effects thereof.
The Solano County Sheriff and the other law enforcement and fire agencies with whom the city has mutual aid agreements remain the backstop, and they bear an extra burden when it becomes more likely that an emergency situation may swell beyond the capacities of the reduced Vallejo forces (and conversely, when the Vallejo departments are less able to respond to mutual aid requests from other agencies). For example, if a major brush fire flares up in Vallejo and the reduced department can’t handle it, the California Office of Emergency Services will have to deploy more of its own resources and more of the mutual aid resources it can call upon. Is that not stepping in to preserve needed functions?
Those effects could be positive. In any case, that could be saving money, net net.
The Sheriff’s office can offer additional support, but they are not staffed to do the same level of policing that the city of Vallejo previously employed. So while a major brush fire or riot is happening emergency services can be deployed, regular day to day police activity is diminished when you reduce the number of officers by 40%. Take a look at some of the impact on local crime.
The idea that a government can’t make cuts is not true.
To those of you talking about all the government benefits low page workers get: you are living in some fairy tale land: the U.S. has a miserable safety net.
When general wage levels decrease, no, positive benefits are slim to none. People with less money have less to spend; that equals decreased retail sales and decreased consumer demand (plus less tax revenue to pay the necessary bills, so the net budgetary impact may be meager or even negative). How do you figure declining wages can be “net net” positive?
I don’t think anybody argued that the government CAN’T make cuts. The argument is that cuts like that are not net savings because the costs are just being redistributed into different buckets. The sheriff’s office taking on an increased burden (even if it is not the entire burden) is one example; the general populace having to endure higher levels of crime is another. [Also, higher crime rates and diminished fire infrastructure tend to translate into increased property insurance rates.]
Around 45 million Americans receive food stamps; around 55 million receive benefits through Medicaid and CHIP (as of 2015). While the benefits aren’t great and many many people fall through the cracks, the costs of these programs are not fairytale: $74 billion in federal spending on food stamps last year and around $475 billion (combined federal/state) on Medicaid. The average SSI payment last year was $526/month; total spending was nearly $60 billion. Add in child care assistance, TANF, LIEAP, Section 8 and other housing benefits, other health programs, etc., and we still spend more than a trillion a year to provide the safety net, miserable as it is.
If people are overpaid in that something is being done inefficiently, lowering those costs and having a more efficient model could free up resources for other productive use.
**TriPolar **did. Here:
So the statement, ‘government can’t do that’ - that’s not true.
The fact that it’s not the entire burden means that it’s more than just redistributing costs. Yes, redistribution of costs happens when other groups like the Sheriff pick up patrol or law enforcement roles within the city. But there is a gap. The gap is the cut. Whether this is cost negative, neutral, or positive depends on many other factors. You identify some of those like crime levels, insurance, etc. but then assume the calculus works to support your position. You may be right in this case or not, but you haven’t shown it to be true.
I think the government cuts, privatization, etc. can be net savings in some circumstances, and not net savings in others. This is what I’ve been saying throughout the thread. It’s fact pattern dependent. The original question was how does privatization save money. That’s clear - by providing the same level of service for a lower cost. Now you can argue that there is no true savings if the service is lower, or the total cost is higher. That may be true in some circumstances, but not in all and because of that it’s no answer to the question in the OP.
Sure. How does that help the immediate economic area?
Consider the example raised upthread of a privatized prison that reduces payroll by $1 million by cutting wages. The government body that runs the prison has an extra million (maybe), but the community that housed the prison has a million less being spent there. Whether or not the guards were overpaid is irrelevant to the economic health of that community.
Except you are ignoring the last clause of TriPolar’s argument: “government can’t do that when providing for the public good.” [emphasis added] By allowing crime rates to rise, people to suffer more fire losses, etc., the public good is no longer being provided to the same standard.
A government is perfectly free to decide not to bother to provide for the public good–it happens. If the public good is seen as important by the population governed, a government that makes such decisions tends not to stay in power very long, but a government can make that decision. TriPolar is not arguing that a government is legally or physically constrained from cutting (which is apparently what you are reading into it); the argument is that a government body can’t simply decide, “oh, we’re getting out of the fire protection business” and expect that life will go on exactly as before for the people served.
A business can. If every single Chinese restaurant in Vallejo closed up tomorrow, life will go on. If the government stops providing a necessary service, however, either life changes for a lot of people or some other agency steps in (or both). Residents of Vallejo suffer higher fire losses, and neighboring jurisdictions and the state of California will be summoned to fight major fires in Vallejo.
No, a gap is just another redistribution. When people pay more for property insurance, that’s a real tangible cost. Property stolen due to higher crime is a cost. There is a dollar value attached to each of these.
The costs redistributed may be higher or lower than the original costs, but they are real costs, and too often they are costs never considered as part of the “privatization success story.”
Privatization CAN save money if it does indeed provide the same service for less money. However, that’s not an answer to the OP’s question, because it is simply restating the question. The OP is asking, “how is it possible for a private entity to provide the same level of service (plus a profit margin) for less money?”
The most common answer, at least from privatization examples in the U.S., is that it’s not possible. Either the private entity doesn’t in fact provide the same level of service, or the private entity is shifting costs.
The next most common answer is that it can happen when the private entity enjoys economies of scale or other competitive advantage not available to the government entity. Payroll processing and some other back-office operations are an example of this–for a smaller government body, developing the infrastructure costs more than the actual job. Work requiring very specialized equipment and/or expertise is another example; it makes no sense to keep an engineer on payroll if you don’t have work for an engineer most of the year, nor is it (usually*) worthwhile to buy a high-dollar machine that you’ll only use once a year. [*The exception is for equipment that when you need it, you need it Right Now, and will suffer significant extra costs/damage/loss-of-life/etc. if you have to wait for it to become available.]
Is that a constraint? I don’t see why it would be, especially given your push to include portions of total federal costs in decision making calculus.
I think you and I are interpreting the quote differently. I understand what you are saying, but that’s kind of a tautology in the way you’ve framed it. I’m going to drop this line of discussion unless it’s clarified.
I agree that there is a redistribution, but not that it is entirely redistributed. Again you are identifying potential costs, but then assuming that the calculus works to support your position. Let me illustrate. Service at Vallejo was formerly 100 units costing $100. Service was reduced to provide 60 units, at a cost of $60. In peak times, the Sheriff supplemented service at a rate of 20 units costing $25. Increases to crime, administrative overhead, general decline in morale cost and all other items cost $10. Net savings $5. But that’s a lot of assumptions - and you are doing the same thing if you assume that it’s **just **redistributing.
Again - this is assuming quite a bit. It could very well be an anthropic principle at work where things that would be more efficient privatized have mostly already done so. I agree with you that all real costs should be considered when making a determination whether or not to privatize.
There’s a benefit that I haven’t seen mentioned (although I may have missed it)- flexibility. It is often much easier for a government agency to cancel or modify a contract than it would be to lay government employees off if there is a decreased need for a service or if the need moves from one geographic area to another. For example, some of the services the services my state agency has been known to contract out are transitional housing and substance abuse treatment. Typically, the contracts are with already existing programs and my agency pays for a specified number of treatment slots. Contracts can be cancelled or modified on 30 days notice. If the agency is paying for 50 slots in NYC and only 30 are filled while more slots are needed in Buffalo , the contract can be modified and the money moved to Buffalo far more easily than it would be to downsize a facility run by the state (laying off the employees no longer needed in NYC -which might involve bumping rights etc and could take a couple of months.) and hire additional staff in Buffalo. And changing needs is an issue with a lot of government functions . A school may need 20 bus routes in 2015-16 but only 14 in 2016-17. If the school district runs the bus service, that’s 6 drivers being laid off (perhaps after being paid for a month or two that they are not needed) and 6 vehicles going idle. But a private company could look for other business from private schools or daycare centers to use the buses and drivers. The city doesn’t operate the school buses here , and the companies all have other contracts during school vacations , when I assume buses operated by school districts are mostly idle.