Recession Underscores the Shallow Limits of Privatizing Government Services

When times are good (or when they just appear to be good because we're taking out loans to make loans), hiring private contractors to deliver public services may look like a bright idea to keep from raising taxes. I insist that there is profoundly less accountability and that the logic of the "free market" is more like that of a confidence game in which the taxpayers are marks who are hooked into long contracts with pledges of lower prices, which eventually go higher than they would have paid if the government had delivered them directly.

But the recession is demonstrating that privatization is a bad idea precisely because when economic times are bad, businesses cannot provide the stability or the dependability that government-backed programs do regardless of the fickle, self-serving market:

All over the country, privatization deals are falling apart due to a lack of capital. In Pennsylvania, government leaders quashed the idea of privatizing a turnpike after a private company said it could only raise $10 billion instead of $30 billion for the project. In Missouri, a plan to privatize bridge repairs fell through after the private company said it would have to rely on more public money than previously planned.

In Texas, the nation’s economic instability has not yet affected any privatization projects, [policy advocate Melissa] Cubria says, but it has government officials thinking twice about going forward with large projects like the Trans-Texas Corridor. Cubria warns that the financial crisis illustrates that private companies are not always better equipped to manage financial risk.

“Financially troubled private toll operators might neglect maintenance and demand a bailout from taxpayers,” she wrote in a recent policy paper for state leaders. “The state would be required to hire expensive lawyers to recoup its losses.”

While the struggling economy puts the brakes on some privatization projects, cash-strapped officials may still be willing to take the bait, says Phineas Baxandall, a senior analyst for the U.S. Public Interest Research Group. Investment banks like Goldman Sachs will continue sending envoys to cash-strapped states in an effort to ink privatization deals, Baxandall says, because investment in public infrastructure is still considered a safe investment during these financially murky times.

Banks seem to move around this country like they were gambling house floor bosses making sure government leaders are comfortable and generous at the tables, because you see, privatization insures in good times or bad that the house always wins.