Privatization and Subsidies Don’t Mix

James Surowiecki says, quite rightly, that the US student-loan

system is one

enormous boondoggle for private lenders to students. And he sees the same

syndrome elsewhere, too:

In part, it’s ideology, and the dominance of what you might call the

privatization mystique—the idea that anything the government can do,

the private sector can do better. Often, this makes sense: the free market

is more likely to come up with efficient ways of creating and distributing

products and services than the government is. But the student-loan market

isn’t a free market in any meaningful sense of the term, because the

government effectively determines prices, insures against losses, and subsidizes

volume. In this environment, most of the competition among private companies

is really just squabbling over how to split up the spoils. Economists call

this behavior—when a company seeks to manipulate economic conditions

rather than actually create value—“rent-seeking.” It’s

common in areas where the fetish for privatization has taken hold, such as

the outsourcing of homeland security to private contractors and the boom in

private Medicare insurers. (The private insurers are less efficient than Medicare

and receive billions in subsidies from the government.) Outsourcing tasks

to private companies is supposed to let government reap the benefits of the

free market. But sometimes it just ends up uniting the worst of government

and the worst of the private sector into one expensive mess.

I think we can be more precise than waving our hands vaguely in the direction

of "areas where the fetish for privatization has taken hold". How’s

this for a theory: Privatization never works when it involves continued subsidies

from the government. That explains why rail privatization in the UK was a disaster,

while the rest of the UK’s privatization efforts were generally successful.

And it explains why privatizing Amtrak wouldn’t work, either, while the privatization

of Germany’s railroads just might succeed.

In general, the government should feel free to sell off, for some large sum,

the right to make lots of money in the future, by doing things such as operating

toll roads or lotteries. But there’s really no reason why it should outsource

the spending of Uncle Sam’s money: the private sector simply hasn’t demonstrated

it can ever do that efficiently.

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