The Privatization Myth

Between April and June of 2019, more than 2,000 immigrant children were sent to internment camps without due process because their parent or parents purportedly entered the country illegally, which, by the way, is a misdemeanor. Some of the camps were hastily constructed by private-sector firms, which has again raised the question of whether some government services—no matter how reprehensible—should be outsourced to for-profit corporations.

The justification for outsourcing, typically made from the right side of the aisle, is that capitalism is inherently more efficient than bureaucracy, therefore less costly. Our politicians are rarely if ever wrong, but let’s test the assertion anyway. To the extent we can, let’s apply our collective intellect to examining (in four easy steps) whether outsourcing government services to privately-owned companies is more cost efficient than continuing down the old-school, “deep-state” bureaucratic path.

Step 1: The classic motive for creating profitable companies is maximization of shareholder wealth. Profits vary from industry to industry, but, in our (lengthy) experience, a pretax profit of 15% per annum is generally considered healthy, therefore a workable assumption.

For those of you who forgot to take accounting in college, that means that fifteen cents out of every dollar a private company makes are set aside for profit and taxes.  Government agencies don’t make profits and don’t pay taxes.

Step 2: By definition, efficient markets are competitive, which in turn requires privately-owned companies to promote and sell their services. The cost varies from as little 10% of revenue to as much as 30%, again depending on the industry. Since we’re a conservative bunch, let’s assume that the average cost of promoting and selling services in competitive markets is circa 15% of revenues on an ongoing basis.

In other words, fifteen cents of every dollar a private company earns are used to pay for a sales force, advertising, media relations, and similar functions. Some government offices, the US Army for instance, also advertise, and they have sales forces (called recruiting offices), but the cost in minuscule in comparison. As far as we know, no one in Washington is considering the privatization of the US Army, although mercenaries were used in Iraq—at a cost of as much as $1,500 per day.  In comparison, an Army captain makes about $180 per day.

Step 3: Outsourcing isn’t free. In order to ensure delivery of quality, low-cost services to the public, government agencies are required to manage their for-profit service providers. Since everything the government does is inefficient, let’s assume for our purposes that the cost of oversight is about 5% of the overall cost to the taxpayer.

To summarize: We’ve estimated so far that private service providers have to be about 35% more efficient (15% + 15% + 5% = 35%) than government agencies, just to break even on a cost basis. We can argue about the numbers all day, but the logic is indisputable.

Step 4: Since private companies exist to maximize shareholder returns, the provision of services can be no more than a means to an end. In other words, the act of privatization subordinates the provision of service to the production of wealth. Government agencies are intended to make service provision their top priority, and the conscientious, properly funded ones do.

The bottom line: Privatization of public-sector services is a structurally inefficient and counterproductive way to put tax dollars in the pockets of private-sector shareholders. There are exceptions—Elon’s Musk’s Spacex for one—but they’re few and far between.

Disclaimer: We believe that capitalism is more than just a good thing; it’s essential to the well-being of the planet and its inhabitants. Before those of you on the left collapse into foaming-at-the-mouth fits of apoplexy, here’s the but: We doubt that capitalism is good for everything, just as we doubt that everything tastes better with ketchup.

 

The Wage Gap

One of the Democratic Party’s top priorities in 2020 will be to reduce the pay gap between lower-income workers and America’s CEOs, hedge-fund managers, famous entertainers, and cosmetic surgeons (to name a few). In all fairness, but let’s test the thesis before we jump on any bandwagon.

For illustrative purposes, let’s assume that our low-end wage earner is a retail salesperson who makes $20 per hour (circa twice the minimum wage depending on the state), and our high-end wage earner is a large-company CEO who makes $100 million per year. (See Notes below.) If our exemplary CEO works 80 hours per week 50 weeks per year, then he or she makes $25,000 per hour.

That’s a pretty big gap, so let’s grow a conscience and fix it. Because we’re politically aware, therefore incrementalists, let’s increase the retail salesperson’s hourly wage by 6% per year, or about two times inflation, and the CEO’s by 1.5% per year, or about half the rate of inflation. (That seems awfully unfair to the CEO and is contrary to recent history, but let’s run the numbers anyway, just to see what happens.)

In the first year, the salesperson’s wage increases by $1.20 per hour. The CEO’s income increases by $375 per hour, so the wage gap increases by $373.80 per hour. Lest we forget, though, we’re raising the salesperson’s wage four times faster than the CEO’s, so the gap will eventually begin to close. In this instance, it takes 134 years.

Fortunately, there are other ways to close the gap. We could, for instance:

• Pay everyone the same wage, which sounds a lot like communism before the usual corruption sets in.
• Freeze CEO wages until retail salespeople catch up, or for about 123 years (using same-case assumptions).
• Replace inflation with deflation. (Ask your local economist about that idea!)
• Increase taxes on the one percent, which has been politically impossible in this country since the rich were rebranded the “Donor Class.”
• Declare war on a well-armed sh*thole country, draft the rich, and send them to the front lines in orange jump suits.

The bottom line: We’re not going to close the wage gap, so…

Let’s stop raging about the wage gap and focus on what matters, which is raising the incomes of workers on the lower rungs of the ladder. If we can find a workable solution, they’ll be healthier, more productive, and less dependent on Medicaid, SNAP, and other government programs––and a handful of CEOs may feel less guilty about the fact that they earn 2,000 times more than some of their less fortunate employees.

Notes:
1) The top 200 hundred wage earners in the US had an average income of slightly less than $97 million in 2017.
2) Also in 2017, top 1% incomes grew 4 times faster than bottom 90% incomes. That’s not counting the tax break.
3) We checked the dictionary. Incrementalist is not a word, but it seemed to fit the bill, so to speak.
4) SNAP stands for Supplemental Nutritional Assistance Program, formerly known as food stamps. About 1 in 8 American workers qualify for the program.

A Little Faith

Most Americans believe they’re smart enough to handle the average, everyday salesperson. Salespeople make a living proving them wrong, or so they claim. Rather than play the referee, let’s see how an average shopper—let’s call him Ernest Mann—might acquit himself in the battle of the prattle.

Ernest Mann lives in a community where public transportation is inconvenient, so he commutes to work. Sadly, his SUV is getting long in the tooth. It has 180,000 miles on the odometer, and it lacks the latest infotainment and safety features.

Ernest would like to listen to Pandora on the way to work, and he’d like to have blind-spot monitoring, too. So, on a fine weekend day, he decides to visit a local dealership. An experienced salesmen named Rob Byers meets Ernest before he’s halfway to the showroom floor and begins to ask him about the type of vehicle he’s looking for, what features he wants, and how much money he’s willing to spend. Ernest is the embodiment of his name. He answers Rob’s questions honestly but warily, because salesmen are slippery creatures with forked tongues.

The tête-à-tête continues until Rob rubs his hands together like Danny DeVito in Get Shorty and says: “Okay, Mister Mann. I’ll tell you what I can do, just for you. I’ll take your SUV in trade today, right this minute. Then, at some future point in time, I’ll bring you a safer, less-expensive SUV that checks every box on your infotainment wish list.”

Ernest is not the kind of man who can be taken for a ride. He responds, “I need my SUV to get to work. If I hand over my keys today, when will I get my new one?”

“I can’t say right now,” Rob replies. “We’ve never made an offer like this before, so we’ve got a few wrinkles to iron out. But I gotta tell ya, nobody’s ever made an offer like this, and nobody ever will, ‘cause we’re the best in the business, bar none.”

“Okay, but how much will my new SUV cost?”

“I love to give you an answer, Ernie, but I can’t. Like I said, this is a new program. We’ve never had a promotion like this before, but it’ll be great. You can take that to the bank.”

“Can you at least tell me what new features my new SUV will have?”

“Here’s the deal, pal: If you want the safest, best SUV ever made for pennies on the dollar, you gotta have faith. Your transportation dreams are about to come true.”

Ernest was taught in sophomore English class to summarize. “Just to make sure I understand: You want me to give you my SUV today, and later, at an unknowable date, you’re going to give me a new, safer, and less expensive SUV.”

“Can you believe how incredible this deal is? I get giddy just thinkin’ about it.”

We have to bring our little allegory to a halt at this point because there are three possible endings:

  • If Ernest is a Republican, he hands his keys to Rob and walks home.
  • If Ernest is a left-wing Democrat, he calls his Congressman and asks for a free SUV.
  • If Ernest is an Independent, he goes home and sulks because he didn’t get the deal he was hoping for.

As a matter of public record, the Republicans have tried to repeal Obamacare more than sixty times, but Agent Orange (aka The Donald, aka President Trump) is now promising to provide better healthcare for less cost at some unspecified time in the future.

Left-wing Democrats, on the other hand, want “Medicare for All,” like Canada, Australia, the UK, and other countries that we used to call allies. Our former friends can afford to offer nationalized health plans to their citizens in part because:

  • Their healthcare is about half as costly as ours, or less.
  • They don’t pay for half the free world’s defense. We do.
  • They have marginal income-tax rates that run as high as 70%. We don’t.

Have you been to Switzerland? Their national debt is tiny (23% of GDP!) compared to the rest of the western world, which means they’re the gold standard for minimizing the cost of government, yet they can afford to provide universal healthcare—through mandatory participation in privately managed insurance plans.

Sound familiar?

The Cost of Corruption

Senator Elizabeth Warren has made reduction of corruption a central plank of her 2020 presidential campaign. Whether or not we believe that she’s a girly reincarnation of Mark Twain, Albert Einstein, or Nelson Mandela, all of whom were avowed socialists, it’s hard to argue the point. The problem is that all but the corrupt agree that corruption is bad, but, apparently, it’s impossible to measure how bad.

We on The Other Side are inexorably drawn to unquantifiable problems; we cannot turn away. In this particular case, we decided to put one set of expert data side by side with another to see if we could find a way of estimating the cost of corruption.

The first of our datasets is published by Transparency International (TI), a not-for-profit organization devoted to the reduction of corruption worldwide. TI maintains an Anti-Corruption Hub that aggregates their research, authoritative studies, and statistically sound surveys on the topic of corruption. On an annual basis, they produce a Corruption Perception Index that ranks 170 nations around the world on a scale from 0 (purely corrupt) to 100 (breathtakingly honest).

In 2017, New Zealand was the world’s least-corrupt country with a score of 89 out of 100. The US tied Austria and Belgium for 16th with a score of 75. Other notables: Canada and the United Kingdom were tied for 8th with a score of 82, China was 77th with a score of 41, and our new pal Russia was 135th with a score of 29. (We can trust Vladimir Putin more than the sum of our intelligence agencies, right?)

If you peruse the Transparency International list from top to bottom, you’ll find that your wallet is less likely to be stolen in Chile than Mexico, your subsidiary’s managing director is less likely to be extorted by local police in Botswana than South Africa, and US envoys are less likely to be deceived by Iranian mullahs than Russian oligarchs. But the problem remains: Using TI data alone, there’s no way to estimate the cost of corruption. However, when TI’s corruption scores are aligned with the World Bank’s per capita income (PPP) data, a clear correlation jumps off the page. (See Note 1.)

The 20 nations with the lowest corruption (highest Transparency International scores) generated an average per capita income of $57,155 in 2016. The second 20 generated an average of $36,000, or 37% less than the top 20 nations, et cetera, as follows:

  • Top 20:   Average TI score: 81; average per capita income: $57,155
  • 21-40:     Average TI score: 64; average per capita income:  $36,000
  • 41-60:     Average TI score: 53; average per capita income:  $23,329
  • 61-80:     Average TI score: 42; average per capita income:  $15,236
  • 81-100:   Average TI score: 38; average per capita income:  $13,327
  • 101-120: Average TI score: 33; average per capita income:    $9,946
  • 121-140: Average TI score: 29; average per capita income:    $8,909
  • 141-160: Average TI score: 23; average per capita income:    $3,711

According to the best data extant, there is a palpable cost of corruption, it is plainly visible, and it is huge. Maybe we should care about how corrupt our nation has become in the last generation or so—and what’s going on in Washington right now.

Notes:

1) Gross National Product (GNP) is an estimate of the value of all final products and services turned out by a nation’s residents over a given period of time.

2) We urge you to visit the Transparency International website, especially if you’re planning to travel outside the US.

An Off-the-Wall Idea

The government shutdown rages on, but the wall or no-wall deadlock will surely be resolved before the number of federal-employee bankruptcies reaches 100,000. In the meantime, we on The Other Side thought we’d step back from the logic-free invective that passes for political discourse these days and take an off-the-wall look at the source of the problem: immigration overload.

Over the last 30 years, the demographics of Hispanic immigration to the United States have changed. Back in the 1980’s, the majority were young men seeking opportunity, legal or otherwise. Today, the majority of Hispanics at our southern border are families seeking asylum from corrupt, fiercely violent regimes in Central America. Some are so desperate that they’re willing to walk 2,000 miles to get here, with children in tow, with little or no money to pay for food and shelter along the way, and with no assurance that they’ll be admitted when they arrive.

In our books, that’s the Outer Ring of the Seventh Circle of Hell. (See Dante’s Inferno.)

It seems to us that two significant things have changed since the eighties. First, the violence and corruption in Guatemala, Nicaragua, El Salvador, and Honduras have gotten worse. Second, smart phones have enabled their victims to see that there’s a better, safer place to raise their children, a “shining city on a hill” that happens from their perspective to be halfway to the Arctic Circle.

From the US government’s perspective, of late anyway, this looks like “The Invasion of the Immigrants.” Our border defenses have been overrun. Our visa application processes and asylum courts are overloaded. Our refugee integration agencies are so overwhelmed that imprisoning thousands of children didn’t make a dent.

Plainly, our system isn’t working, so let’s ask an off-the-wall question: Is there a more humane, passably affordable alternative to shutting our borders?

Our off-the-wall idea: Develop a second haven that’s less violent, less corrupt, and more closely resembles a democracy than Nicaragua, Guatemala, El Salvador, and Honduras. Our candidate: Panama! It’s a lot closer; it’s a representative democracy with actual elections; and Panamanians speak the same language. The country is larger than West Virginia and sparsely populated, so there’s plenty of room.

Panama is hardly Denmark, of course, and there would be challenges, but let’s be solution–oriented. Let’s channel billions in foreign aid to Panama that we normally shower on our staunchest allies like Pakistan, Iran, Nigeria, and Venezuela. Let’s motivate US corporations to invest in Panama, and let’s subsidize the establishment of Panamanian immigration and assimilation systems. In other words, let’s pay Panama to help us stem the tide by creating a second haven.

Maybe $5.7 billion would be enough to get the ball rolling. Or we can wall off 2,000 miles of border (not counting Canada), mine 12,000 miles of coastline, and litigate this issue until the next Ice Age.

NOTES

1. The right of asylum was formalized by the United Nations Universal Declaration of Human Rights in 1948. The US government routinely ignores it.

2. Rene Descartes fled to the Netherlands, Voltaire fled to England, and Thomas Hobbes fled to France because the sovereign nations above provided asylum to persecuted foreigners. We got Ivana and Melania.

3. Circa 39 million people live in Nicaragua, El Salvador, Guatemala and Honduras. If 100,000 flee every year to the US or Panama or Uruguay or wherever, it will take more than 500 years for the four countries to empty out. (Their populations are still growing.)

4. If we were European, we’d be talking to Jordan and Botswana.