by Linda Beale
The fallacy of privatization: anti-government screeds and the Romney agenda
As a prominent tax professor points out, Mitt Romney accumulated most of his additional wealth in a business that generally doesn’t do anything to increase national wealth.
Mitt Romney accumulated his wealth as managing director of Bain Capital, a leveraged buyout fund (LBO). LBOs are driven by tax savings. Tax savings are transfers from other people to LOBs without any increase in GDP or national wealth. An LOB replaces the stock of established companies with debt. Johnson argues that because interest is deductible, the replacement can increase the value of the surviving stock by two to six times without any improvement in operating income. The increase in debt harms the private economy because the companies become very fragile and the leverage encourages the owner to bet the company. Calvin Johnson, The Tax Explanation for the Romney Leveraged Buyouts, Tax Notes (July 30, 2012), at 579
Romney’s activities at Bain Capital are just one example of how the private economy can generate wealth for a few people at the top without doing anything to help the overall economy, GDP, or national wealth–or ordinary workers. With that in mind, we should then be rightly skeptical about the typical claims from the right that the private economy can always do a better job of any given task than government (the public economy). Yet if you asked that as a question of Romney, you’d get a canned “yes.”
For Romney, efficiency and competition are gods that only the private marketplace can worship and therefore all government functions would be better handled by private rather than public forces. That seems to be the gist of his statement in a recent interview, highlighted by Mark Thoma’s post on Outsourcing Government: What is Mitt Romney Talking About, at Economist’s View, that builds on Brad Delong’s post. Here’s the most relevant language from Romney on the idea that private is always better than public:
MITT ROMNEY: Well, clearly you don’t like to hear [about] anyone losing a job. At the same time, government is the least productive—the federal government is the least productive of our economic sectors. The most productive is the private sector. The next most productive is the not-for-profit sector, then comes state and local governments, and finally the federal government. And so moving responsibilities from the federal government to the states or to the private sector will increase productivity.
But that’s simply wrong. It is empirically wrong. It is theoretically wrong. And it is wrong-headed policy for America.
Mark Thoma also pointed out Paul Krugman’s earlier post, Outsourcer in Chief, New York Times (Dec. 11, 2006), providing a range of examples where privatization of public functions results in terribly incompetent performance.
[O]utsourcing of the government’s responsibilities — not to panels of supposed wise men, but to private companies with the right connections — has been one of the hallmarks of [George W. Bush’s] administration. And privatization through outsourcing is one reason the administration has failed on so many fronts.
Krugman lists, among others, the Coast Guard’s overrun for its privatized modernization program; the generalized outsourcing of Iraqi reconstruction to private contractors “with hardly any oversight,” with the unsurprising poor results; and Bush’s buddy at FEMA’s outsourcing of disaster evacuations to Landstar Express, which “didn’t even know where to get buses” when Katrina hit. As Krugman notes, outsourcing is an “antigovernment ideology” of today’s neocons, and it is one that leads to poor results in many cases.
Conservatives look at the virtues of market competition and leap to the conclusion that private ownership, in itself, is some kind of magic elixir. But there’s no reason to assume that a private company hired to perform a public service will do better than people employed directly by the government. In fact, the private company will almost surely do a worse job if its political connections insulate it from accountability. Id. (formatting changed)
Now, mix privatization = poor performance because of crony capitalism/lack of oversight with the tendency these days of businesses to exploit workers in order to harness all productivity gains they do achieve for the big bosses at the top.
(If you need information on the latter, look at the way workers’ wages have stagnated or plummeted while managers have skyrocketed. Or just Google Caterpillar to see how it is negotiating with its unions for cuts for ordinary workers’ wages and benefits, when it is nonetheless already making an enormous profit.)
What you get from this naive, jaundiced view of private versus public is a formula for a disastrous economy. Obama’s stimulus was somewhat less than it should have been, but it saved the U.S. economy from the worst we might well have expected from Bush’s disastrous reaganomics policies. Bush’s preemptive war costs combined with deregulation and tax cuts for the rich and for corporations resulted in huge deficits and ultimately caused the financial crisis, necessitating unprecedented borrowing that left an economy spiralling in free fall when Obama took office.
What Romney promises, then, is a return to the winner-take-all, failed economic ideas of the neocon right.
cross posted with ataxingmatter