Out of the Woods

The privatization dogma.

It is a pretty universally accepted dogma that privatization of government functions saves money. Unfortunately that dogma is false. Here is one example:

Here is an interesting problem encountered by the Federal Government. The Feds outsource a significant proportion of their checks on new employees to a private firm. A private firm investigates a job applicant's previous employment, criminal records, trustworthiness in financial transactions, etc., instead of the Federal Government itself..

The argument in favor of this outsourcing is simply that private companies are competing with other private companies for the job of vetting the applications of new government employees. As a result of this competition, the private companies are likely to work harder for less money than the government agency might have done. The leaders of the private company have their eye on the bottom line. They must control costs in order to compete successfully with other businesses applying for the same job. In order to control costs, their employees must be exceptionally productive. Stated in plain English, private companies must drive their employees to work hard for as little money as possible. The leadership of a government agency, on the other hand, is not under those kinds of competitive pressures. They are more likely to treat their employees better because it is in their interest to have loyal and content people working for them.

Competition will increase productivity and save money. That is the outsourcing story.

This morning's report, however, suggests that often private companies meet their profit goals not by increasing their employees' productivity but by submitting shoddy work. It turns out that the company that is vetting a large number of employee records in Washington, DC has, for years, submitted reports based on incomplete or even nonexistent investigations.

Notice what happened here. The government sends its job applicants' records to a private company. After a while some government employees begin to be suspicious of the investigative reports they are receiving, and start their own investigations. We now have both a private contractor and a government agency doing the investigating job. Quite obviously that is horrendously inefficient. Privatization has struck out.

Privatization is by no means always more efficient than jobs being done in-house in the government.

But there is more to be said. The private companies can make money only if they lower their costs. A favorite way of lowering costs for businesses is to cut wages of their employees or to cut the number of employees and increase the workload of those remaining. Both will increase the number of citizens seeking, for instance, unemployment benefits, or perhaps medical care for stress and overwork. If we do not focus our consideration of privatization excessively narrowly, we can see that the supposed savings from privatization are going to be, in many cases, illusory.

It has become a dogma in many circles that government outsourcing is more efficient and saves money. Like many dogmas, this one is very often false.