Ill Fares the Land (11 page)

—JOHN MAYNARD KEYNES

 

 

 

 

S
o what have Keynes’s ‘madmen in authority’ done with the ideas they inherited from defunct economists? They have set about dismantling the properly
economic
powers and initiatives of the state. It is important to be clear: this in no way entailed reducing the state
per se.
Margaret Thatcher, like George W. Bush and Tony Blair after her, never hesitated to augment the repressive and information-gathering arms of central government. Thanks to CCTV cameras, wiretapping, Homeland Security, the UK’s Independent Safeguarding Authority and other devices, the panoptic control that the modern state can exercise over its subjects has continued to expand. Whereas Norway, Finland, France, Germany and Austria—all of them ‘cradle-to-grave’ nanny states—have never resorted to such measures except in wartime, it is the liberty-vaunting Anglo-Saxon market societies that have gone farthest in these Orwellian directions.

Meanwhile, if we had to identify just one general consequence of the intellectual shift that marked the last third of the 20th century, it would surely be the worship of the private sector and, in particular, the cult of privatization. Some might say that the enthusiasm for dispensing with publicly-owned goods was purely pragmatic. Why privatize? Because, in an age of budgetary constraints, privatization appears to save money. If the state owns an inefficient factory or a costly service—a waterworks, say, or a railway—it offloads it onto private buyers.

The sale duly earns money for the state. Meanwhile, by entering the private sector, the operation in question becomes more efficient thanks to the workings of the profit motive. Everyone benefits: the service improves, the state rids itself of an inappropriate responsibility, investors profit, and the public sector makes a one-time gain from the sale. On the face of it, then, privatization represents a retreat from dogmatic state-centered preferences and a turn towards straightforwardly economic calculations.

After all, “[t]he performance of nationalized industries in almost every country has not been demonstrably better than that of private or mixed categories.”
¹⁷
And there can be no doubt of the downsides of public ownership. In the UK especially, the Treasury regarded potentially profitable operations as mere cash cows. There was to be a minimum of investment and a maximum of profit-taking to augment the public coffers. Thus railways and coal mines were expected to hold their prices down for social and political reasons; but at the same time, they were required to turn a profit.

In the long run, this made for inefficient operations. Elsewhere, in Sweden for example, the state was less heavy-handed in its economic manipulation, but often regulated wages, conditions, prices and products to deadening effect. And so, in addition to the short-term cash benefits of privatization there was added the hypothetical gain in initiative and efficiency. If noth-ing else, it was reasonably assumed, a business that reverted from public ownership to private hands would surely be run with a view to long-term investment and efficient pricing.

So much for the theory. The practice has been very different. With the advent of the modern state (notably over the course of the past century), transport, hospitals, schools, mails, armies, prisons, police forces and affordable access to culture—essential services not well served by the workings of the profit motive—were taken under public regulation or control. They are now being handed back to private entrepreneurs.

What we have been watching is the steady shift of public responsibility onto the private sector to no discernible collective advantage. Contrary to economic theory and popular myth, privatization is
inefficient
. Most of the things that governments have seen fit to pass into the private sector were operating at a loss: whether they were railway companies, coal mines, postal services, or energy utilities, they cost more to provide and maintain than they could ever hope to attract in revenue.

For just this reason, such public goods were inherently unattractive to private buyers unless offered at a steep discount. But when the state sells cheap, the public takes a loss. It has been calculated that, in the course of the Thatcher-era UK privatizations, the deliberately low price at which long-standing public assets were marketed to the private sector resulted in a net transfer of £14 billion from the taxpaying public to stockholders and other investors.

To this loss should be added a further £3 billion in fees to the bankers who transacted the privatizations. Thus the state in effect paid the private sector some £17 billion ($30 billion) to facilitate the sale of assets for which there would otherwise have been no takers. These are significant sums of money—approximately the endowment of Harvard University, for example, or the annual gross domestic product of Paraguay or Bosnia-Herzegovina. This can hardly be construed as an efficient use of public resources.

One reason that privatization in the United Kingdom appears misleadingly beneficial is that it correlates positively with the end of decades of decline relative to Britain’s European competitors. But this outcome was achieved almost wholly as a result of falling growth rates elsewhere: there was no sudden upturn in British economic performance. The best study of UK privatizations concludes that privatization per se had a decidedly modest impact upon long-term economic growth—while regressively redistributing wealth from taxpayers and consumers to the shareholders of newly privatized companies.
¹⁸

The only reason that private investors are willing to purchase apparently inefficient public goods is because the state eliminates or reduces their exposure to risk. In the case of the London Underground, for example, a ‘Public-Private Partnership’ (PPP) was set up to invite interested investors to buy into the Tube network. The purchasing companies were assured that whatever happened they would be protected against serious loss—thereby undermining the economic case for privatization: the workings of the profit motive. Under these privileged conditions, the private sector will prove at least as inefficient as its public counterpart—creaming off profits and charging losses to the state.

The outcome has been the worst sort of ‘mixed economy’: individual enterprise indefinitely underwritten by public funds. In Britain, newly-privatized National Health Service Hospital Groups periodically fail—typically because they are encouraged to make all manner of profits but forbidden to charge what they think the market might bear. At this point the hospital Trusts (like the London Underground, whose PPP collapsed in 2007) turn back to the government to pick up the bill. When this happens on a serial basis—as it did with the nationalized railways—the effect is creeping
de facto
re-nationalization with none of the benefits of public control.
¹⁹

The result is moral hazard. The popular cliché that the bloated banks which brought international finance to its knees in 2008 were ‘too big to fail’ is of course infinitely extendable. No government could permit its railway system simply to ‘fail’. Privatized electric or gas utilities, or air traffic control networks, cannot be allowed to grind to a halt through mismanagement or financial incompetence. And, of course, their new managers and owners know this.

Curiously, this point escaped the otherwise sharp eye of Friedrich Hayek. In his insistence that monopolistic industries (including railways and utilities) be left in private hands, he neglected to foresee the implications: since such vital national services would never be allowed to collapse, they could take risks, misspend or misappropriate resources at will, and always know that the government would pick up the tab.

Moral hazard even applies in the case of institutions and businesses whose operations are in principle beneficial to the collectivity. Recall the case of Fannie Mae and Freddie Mac, the private agencies responsible for providing mortgages to middle class Americans: a service vital to the wellbeing of a consumer economy founded on property ownership and cheap loans. For some years before the 2008 debacle, Fannie Mae had been borrowing money from the government (at artificially depressed interest rates) and lending it commercially at a very substantial profit.

Since the company was private (though with privileged access to public funds), those profits constituted public monies recycled to the company’s shareholders and executives. The fact that millions of mortgages were made available as a result of these self-interested transactions merely compounds the crime: when Fannie Mae was forced to call in its loans, it spread suffering across a huge swathe of the American middle class.

Americans have privatized less than their British admirers. But the deliberate under-funding of unloved public services like Amtrak has resulted in an inadequate facility doomed sooner or later to be offered at knock-down prices to a private buyer. In New Zealand, where the government privatized its rail and ferry services in the course of the 1990s, their new owners mercilessly stripped away all marketable assets. In July 2008, the government in Wellington reluctantly took the sadly eviscerated and still unprofitable transport operations back into public control—at far greater expense than would have been needed to invest in them properly in the first place.

There are winners as well as losers in the privatization story. In Sweden, following a banking crisis that left the state severely short of revenue, the (conservative) government of the early ’90s re-allocated 14% of the country’s hitherto state-monopolized pension contributions from the public system to private retirement accounts. Predictably, the chief beneficiary of this shift was the country’s insurance companies. In the same way, the terms under which British utilities were sold to the highest bidder included the ‘pre-pensioning’ of tens of thousands of workers. The workers lost their jobs, the state was saddled with an un-funded pension burden—but the shareholders of the new private utility companies were relieved of all responsibility.

Shifting the ownership onto businessmen allows the state to relinquish moral obligations. This was quite deliberate: in the UK between 1979 and 1996 (i.e., in the Thatcher and Major years) the private sector share of personal services contracted out by government rose from 11% to 34%, with the sharpest increase in residential care for the elderly, children and the mentally ill. Newly privatized homes and care centers naturally reduced the quality of service to the minimum in order to increase profits and dividends. In this way, the welfare state was stealthily unwound to the advantage of a handful of entrepreneurs and shareholders.

‘Contracting out’ brings us to the third and perhaps most telling case against privatization. Many of the goods and services that states seek to divest have been badly run: incompetently managed, underinvested, etc. Nevertheless, however poorly run, postal services, railway networks, retirement homes, prisons, and other provisions targeted for privatization cannot be left entirely to the vagaries of the market. They are, in the overwhelming majority of cases, inherently the sort of activity that
someone
has to regulate—that is why they ended up in public hands in the first place.

This semiprivate, semipublic disposition of essentially collective responsibilities returns us to a very old story indeed. If your tax returns are audited in the US today, this is because the
government
has decided to investigate you; but the investigation itself will very likely be conducted by a
private
company. The latter has contracted to perform the service on the state’s behalf, in much the same way that private agents have contracted with Washington to provide security, transportation, and technical know-how (at a profit) in Iraq and Afghanistan.

Governments, in short, now increasingly farm out their responsibilities to private firms that offer to administer them better than the state and at a savings. In the 18th century this was called tax farming. Early modern governments often lacked the means to collect taxes and thus invited bids from private individuals to undertake the task. The highest bidder would get the job, and was free—once he had paid the agreed sum—to collect whatever he could and retain the proceeds. The government took a discount on its anticipated tax revenue, in return for cash up front.

After the fall of the monarchy in France, it was widely conceded that tax farming is absurdly inefficient. In the first place, it discredits the state, represented in the popular mind by a grasping private profiteer. Secondly, it generates considerably less revenue than a well-administered system of government collection, if only because of the profit margin accruing to the private collector. And thirdly, you get disgruntled taxpayers.

In the US and the UK today, we have a discredited state and a glut of grasping private profiteers. Interestingly, we do not (yet) have disgruntled taxpayers—or, at least, they are typically disgruntled for the wrong reasons. Nevertheless, the problem we have created for ourselves is essentially comparable to that which faced the
ancien régime
.

As in the 18th century, so today: by eviscerating the state’s responsibilities and capacities, we have undermined its public standing. Few in England and fewer still in America continue to believe in what was once thought of as a ‘public service mission’: the duty to provide certain sorts of goods and services just because they are in the public interest. A government that acknowledges its reluctance to assume such responsibilities, preferring to shift them to the private sector and leave them to the vagaries of the market, may or may not be contributing to efficiency. But it is abandoning core attributes of the modern state.

In effect, privatization reverses a centuries-long process whereby the state took on things that individuals could not or would not do. The corrosive consequences of this for public life are, as so often, rendered inadvertently explicit in the new ‘policy-speak’. In English higher educational circles today, the market-as-metaphor dominates conversation. Deans and heads of departments are constrained to assess ‘output’ and economic ‘impact’ when judging the quality of someone’s work. When English politicians and civil servants bother to justify the abandonment of traditional public service monopolies, they talk of ‘diversifying providers’. When the UK Work and Pensions Secretary announced plans in June 2008 to privatize social services—including short-term palliative welfare-to-work schemes which enable Whitehall to publish misleadingly low unemployment figures—he described himself as ‘optimizing welfare delivery’.