The Other Side of Privatization

Between April and June of this year, 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. That’s exactly the sort of general, overarching claim that we on The Other Side are compelled to question.

Fair warning: 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.

To the extent that we can, let’s apply our collective intellect to examining (in five easy steps) the claim that 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 government management 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. We argued about the numbers among ourselves, 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, well-managed ones do.

Step 5: Over the course of our career, we worked with or directly for twelve high-tech CEOs. Half were corrupt, meaning they manipulated the books for personal gain. Despite our experience, we have no data from credible sources which suggests that private-sector companies are more corrupt than public-sector agencies. So let’s call it a tie.

By definition, the act of outsourcing means that two entities are involved in service provision, which doubles the odds that at least one of them is corrupt. Case in point: The reconstruction of Puerto Rico’s electrical grid after Hurricane Maria was originally outsourced to a one-horse company from Montana.

We on The Other Side are left with four questions:

1) Who wins when provision of services is subordinated to profit? Hint: It’s a three-syllable synonym for owners that starts and ends with the letter “s.”

2) If some private-sector service providers are indeed 35% (or so) more efficient than their public-sector counterparts, is it a structural problem or a management problem? Hint: It can’t be a structural problem. See the above.

3) Does the probability of corruption increase or decrease with outsourcing? Hint: One plus one cannot equal one. See the Principia Mathematica.

4) Where do we draw the line? Should education, diplomacy, law enforcement, and tax collection be privatized, too? Hint: The answer isn’t “yes.”

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 may be exceptions, but they’re few and far between.

Full disclosure: As of this writing, we own shares or equivalents in seven for-profit companies and partnerships. We think privatization is a dumb idea anyway.

Notes:

1) We’re fully aware of the contention that for-profit companies provide higher-quality services than their public-sector counterparts. In the absence of relevant surveys of customer satisfaction, however, service quality is wholly subjective.

2) We’re also aware that service quality is correlated with funding. If, in their collective wisdom, Congress and the president elect to underfund government services, then that act alone may be responsible for perceived quality deficits.

It’s possible, therefore, that irresponsible governments could create service-quality deficits by underfunding agency providers—for the sole purpose of (eventually) outsourcing those services to “more efficient” for-profit corporations. But our government would never contemplate such a thing, right?

 

The Ban on AR-15’s: By the Numbers

Lately, in the wake of the Parkland high school massacre, there’s been a lot of talk in the nation’s capitals about limiting the sale of the killer’s weapon—a modified AR-15 type assault rifle––to buyers 21 and over who can pass background checks. The objective, presumably, is something that Democrats and Republicans can agree on: to minimize the number of innocent Americans murdered by AR-15 wielding gunmen.

According to ABC News, there were 345 mass murders in the US in 2017, or nearly one per day, so it’s nigh on impossible to argue with the objective. (The definition of a mass shooting varies, but in general it means that three or more people were killed or at least two were killed and two were wounded in the same attack.) The general, politically acceptable and supposedly bipartisan proposal is to limit sales of semiautomatic weapons to sane adults who can pass a background check.

We on The Other Side feel safer already, but we’re skeptical about any solution, or rather semi-solution, that gets bandied about in the halls of Congress. We’d rather examine its efficacy through the lens of the most reliable numbers extant.

According to the National Shooting Sports Foundation, somewhere between five and ten million AR-15 type firearms are owned by American citizens. We can’t speak for you, but our confidence doesn’t soar when the range of informed estimates is two to one. Regardless, let’s settle on the midpoint: 7.5 million rifles capable of being converted into semi-automatic weapons. The population of the US is around 323 million, which means that one in 43 Americans owns an AR-15 or similar weapon.

Now that we’re equipped with best-source data, let’s revisit a few massacres where the killers were equipped with AR-15 type firearms:

  • The population of Sutherland Springs, Texas, where 26 worshippers were murdered and ten were wounded, is around 600. If the averages hold, then the town’s residents owned 14 AR-15 type weapons at the time of the massacre.
  • The population of Parkland, Florida, where 17 high-school students and teachers were murdered and 14 were wounded, is about 31,000. If the averages hold, then the city’s residents owned 738 AR-15’s or equivalents at the time of the massacre.
  • The population of the Las Vegas metropolitan area, where 58 concert goers were murdered and 851 were wounded, is approximately 1,950,000. If the averages hold, then area residents owned 45,000 AR-15 type rifles at the time of the massacre.

Banning the sale of AR-15 or similar firearms to Americans under the age of 21, whether they can pass background checks or not, will have zero effect on the millions of guns already in circulation. Moreover, the banning of all future sales of AR-15’s will hardly contain the supply for those bent on murdering scores of innocents.

Notably, civilian ownership of AR-15 type semiautomatic rifles was prohibited until 2004, when the ban was lifted by a Republican-controlled Congress. By the numbers, it’s inescapably clear that nothing less than reinstatement and enforcement of the ban will make a serious dent in the frequency of mass shootings.

We’re well aware that a significant percentage of AR-15’s would not be turned in if the 2004 ban was reinstated. Many would be locked away in gun safes, and some would disappear into black markets. According to John Maynard Keynes and Milton Friedman, however, price increases when supply is constrained, and that means that all but the well-healed crazies would be forced to brandish less lethal weapons.

We on The Other Side have every hope that the movement started by the students of Marjory Stoneham Douglas High School will cause material, life-saving change, but we’re not holding our breath. Given the current political climate, however, we expect that there will many more massacres before some future Congress has the courage to defy the NRA and protect their constituents––if only from this one, extraordinarily dangerous firearm.