The fallacy of privatization: anti-government screeds and the Romney agenda
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
To see how well privatizing the military arsenals and shipyards read the annual report from GAO on weapon system acquisitions, overruns, decision with no knowledge and failed performance.
Latest: http://www.gao.gov/products/GAO-12-400SP
The profitable contracts soon become self sustaining keynesian stimuli, too many good jobs and too much PAC money to get any performance or to cut the waste.
ilsm
Anon: “The profitable contracts soon become self sustaining keynesian stimuli”
What makes them keynesian?
Plus, remember that “profit” is simply the cost to you of an item or service above and beyond its actual cost to the provider.
Sometimes paying this extra is not a problem — doubling the price of penny candy isn’t a big deal. Other times the profit extra is actually the bulk of the price you pay — think cell phone charges, with the cost of a text message is only 2% of what you pay for it. http://www.cbc.ca/marketplace/2010/canadas_worst_cellphone_bill/text_messaging.html
I’m surprised that “profit” and “productivity” are not dirty words, since “profit” is the money you pay for nothing in return, and “productivity” is just shorthand for fewer people working harder for less pay. At its extreme, the most profitable society would be one where most people worked constantly in return for the bare minimum needed for survival. This is not a goal which, baldly stated, would attract much support from ordinary people.
People working together always produce extra. The fight is over who controls that extra.
Noni
ilsm, It is a money laundering scheme resulting in increased funneling of taxpayer dollars to campaign donations from industry. The more money diverted the more advantage in elections. Money is fungible and industries are citizens, right?
Noni, That is why people need to be taught to believe “trickle down” like it was a religious fact of faith rather than a principle of economics. When it doesn’t happen, it still is true. When it still doesn’t happen, it still is true. When everyone loses just about everything, it still is true. The rich gods of commerce said it is so and I believe.
Noni
i think i am in agreement with your intent… but the way you put it leaves you open to this complaint:
suppose someone invented a “pill” that would add ten years to your life. he sells this pill to eveyone for one dollar each.
now he has three hundred million dollars, everyone is going to live ten years longer…. and they all bitch about him having 300 million dollars and want to force him to “share” his money “equitably”.
and if you reply that selling everyone a magic elixer for ten dollars a bottle is The American Way, the elixer “don’t do anything at all (go ask Alice)”, and of course he should be taxed white… i’d agree with you but you are missing the point.
coberly
Dale,
We have such pills — they are called thyroid, insulin, penicillin, etc and they probably sell for double or triple what they cost to make. I don’t hear any whining, do you?
The devil is in the proportions. I don’t mind someone selling a beautiful item, like a painting for instance, for which the materials cost $200 and the painting time perhaps a week, for $30,000 if he can find a buyer. People don’t NEED a painting.
Profiteering is an interplay between necessity, monopoly, and available resources among the buyers. In a wealthy country people can afford a few monopolies because they have enough capital to pay the monopolists and still be comfortable.
But this isn’t a stable situation. We have seen inflexible necessities (medicine, housing, education) suck up more and more of people’s savings and income, while their spending on flexible things (food, clothing, housewares, etc) has shifted from Sears to the Dollar Store.
Any action, whether murder, theft or tyranny, can be painted as desirable if you create a specific story around it. But I have to ask, in what situation is it a good thing for the bulk of the population to have the bare return on their efforts needed to survive? Not in a democracy, that’s for sure.
Noni
Giant Hospital Chain Creates a Windfall for Private Equity
HCA’s emergence as a powerful leader in the hospital industry is all the more remarkable because only a decade ago the company was badly shaken by a wide-ranging Medicare fraud investigation that it eventually settled for more than $1.7 billion.
Among the secrets to HCA’s success: It figured out how to get more revenue from private insurance companies, patients and Medicare by billing much more aggressively for its services than ever before; it found ways to reduce emergency room overcrowding and expenses; and it experimented with ways to reduce the cost of medical staff, a move that sometimes led to conflicts with doctors and nurses over concerns about patient care.
In late 2008, for instance, HCA changed the billing codes it assigned to sick and injured patients who came into the emergency rooms. Almost overnight, the numbers of patients who HCA said needed more care, which would be paid for at significantly higher levels by Medicare, surged.
As HCA’s profits and influence grew, strains arose with doctors and nurses over whether the chain’s pursuit of profit may have, at times, come at the expense of patient care.
HCA had put in place a flexible staffing system that allowed it to estimate the number of patients it would have each day in its hospitals and alter the number of nurses it needed accordingly.
Several nurses interviewed said they were concerned that the system sometimes had led to inadequate staffing in important areas like critical care. In one measure of adequate staffing — the prevalence of bedsores in patients bedridden for long periods of time — HCA clearly struggled. Some of its hospitals fended off lawsuits over the problem in recent years, and were admonished by regulators over staffing issues more than once.
Many doctors interviewed at various HCA facilities said they had felt increased pressure to focus on profits under the private equity ownership.
But some of HCA’s tactics are now under scrutiny by the Justice Department. Last week, HCA disclosed that the United States attorney’s office in Miami has requested information about cardiac procedures at 10 of its hospitals in Florida and elsewhere.
HCA’s cardiac business is extremely lucrative, and the Justice Department has requested reviews that HCA conducted that indicate some of the heart procedures at some of its hospitals might not have been necessary and resulted in unjustified reimbursements from Medicare and other insurers.
The Merrill bankers found a receptive audience. Thomas F. Frist Jr., a board member, co-founder and brother of Senator Frist, had been a longtime investor in Bain Capital’s buyout funds and contacted the firm to gauge its interest in acquiring HCA through a leveraged buyout and taking it private again, according to S.E.C. documents.
The 40 percent stake in HCA still held by K.K.R. and Bain is worth about $4.8 billion at current levels, giving them a potential profit, with the dividends they have received, of three and a half times their initial investment of $1.2 billion each.
Those returns caught the attention of other buyout firms. In 2010, Steward Health Care System, controlled by Cerberus Capital Management and based in Boston, bought the second-largest hospital group in Massachusetts, converting it to a profit-making system. That same year, Vanguard Health Systems, which is run for profit and still has Blackstone Group as its largest shareholder after going public in 2011, bought eight hospitals in Detroit.
Nearly overnight, HCA’s patients appeared to be much, much sicker. By 2010, HCA had surpassed other hospitals, with 76 percent of its payments coming from the two most expensive classifications, versus 74 percent for other hospitals.
http://finance.yahoo.com/news/giant-hospital-chain-creates-windfall-194605518.html
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Noni
we are talking past each other. i don’t disagree with you on the facts. i disagree on the presentation.
in my world at least there are people who “produce” and people who don’t. i am not yet ready to watch the non producers die in a ditch. and i am not ready to buy the Republican argument that everyone with money is a “producer” and should therefore not be taxes.
but i do think the liberal argument that the answer to “inequality” is just to tax the rich and give to the poor… is inadequate, counterproductive, and an offense to working people.
now, god help me, i can see “you” taking this to mean i am an insensitive racist republican who want to suck up to the rich by hating the poor. i am in fact none of those things, but it seems that you can’t talk to people without them running off on their own tangents of hysterical free association. like i am doing now.