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Friday, August 10, 2012

Outsourcing Government: What Is Mitt Romney Talking About?

Brad DeLong is very puzzled:

Department of "Huh!?": What Is Mitt Romney Talking About?: An interview with Mitt Romney:

QUESTION: One thing that distinguishes this recovery is that public sector jobs, government jobs, have already fallen by 650,000. Given the conservative goal of shrinking government, is this a positive development or a negative one?

MITT ROMNEY: Well, clearly you don’t like to hear [about] anyone losing a job. At the same time, government is the least productive—the federal government is the least productive of our economic sectors. The most productive is the private sector. The next most productive is the not-for-profit sector, then comes state and local governments, and finally the federal government. And so moving responsibilities from the federal government to the states or to the private sector will increase productivity. And higher productivity means higher wages for the American worker. All right? America is the highest productivity nation of major nations in the world, and that results in our having, for instance, an average compensation about 30 percent higher than the average compensation in Europe. A government that becomes more productive, that does more with less, is good for the earnings of the American worker, and ultimately it will mean that our taxes don’t have to go up, that small businesses will find it easier to start and grow, and we will be able to add more private sector jobs. Don’t forget! It’s the private sector jobs that pay for government workers. So if you have fewer government workers doing work more and more productively, that means private sector work will grow.

Nobody can figure out what Mitt Romney is talking about here. He seems to be referring to some aggregate assessment of "productivity" across the four major sectors--private, non-profit, state and local government, and federal government. But nobody can figure out what he is talking about.

Does he really think that we should outsource the army to Blackwater? Or the NIH to Merck? Or the Marine Corps to Marriott? Or the Social Security Administration to Bain Capital?

Certainly our experience with for-profit hospitals and for-profit universities does not support the hypothesis that productivity inevitably goes up when we shift things over to the private sector.

Where is this coming from?

No reason to be puzzled -- Paul Krugman explained "the real motives for turning government functions over to private companies" several years ago (and it wasn't the first time):

Outsourcer in Chief, by Paul Krugman, Commentary, NY Times, December 11, 2006: According to U.S. News & World Report, President Bush has told aides that he won’t respond in detail to the Iraq Study Group’s report because he doesn’t want to “outsource” the role of commander in chief.
That’s pretty ironic. You see, outsourcing of the government’s responsibilities — not to panels of supposed wise men, but to private companies with the right connections — has been one of the hallmarks of his administration. And privatization through outsourcing is one reason the administration has failed on so many fronts.
For example, an article in Saturday’s New York Times describes how the Coast Guard has run a $17 billion modernization program: “Instead of managing the project itself, the Coast Guard hired Lockheed Martin and Northrop Grumman, two of the nation’s largest military contractors, to plan, supervise and deliver the new vessels and helicopters.”
The result? Expensive ships that aren’t seaworthy. The Coast Guard ignored “repeated warnings from its own engineers that the boats and ships were poorly designed and perhaps unsafe,” while “the contractors failed to fulfill their obligation to make sure the government got the best price, frequently steering work to their subsidiaries or business partners instead of competitors.”
In Afghanistan, the job of training a new police force was outsourced to DynCorp International, a private contractor, under very loose supervision: when conducting a recent review, auditors couldn’t even find a copy of DynCorp’s contract to see what it called for. And $1.1 billion later, Afghanistan still doesn’t have an effective police training program.
In July 2004, Government Executive magazine published an article titled “Outsourcing Iraq,” documenting how the U.S. occupation authorities had transferred responsibility for reconstruction to private contractors, with hardly any oversight. “The only plan,” it said, “appears to have been to let the private sector manage nation-building, mostly on their own.” We all know how that turned out.
On the home front, the Bush administration outsourced many responsibilities of the Federal Emergency Management Agency. For example, the job of evacuating people from disaster areas was given to a trucking logistics firm, Landstar Express America. When Hurricane Katrina struck, Landstar didn’t even know where to get buses. According to Carey Limousine, which was eventually hired, Landstar “found us on the Web site.”
It’s now clear that there’s a fundamental error in the antigovernment ideology embraced by today’s conservative movement. Conservatives look at the virtues of market competition and leap to the conclusion that private ownership, in itself, is some kind of magic elixir. But there’s no reason to assume that a private company hired to perform a public service will do better than people employed directly by the government.
In fact, the private company will almost surely do a worse job if its political connections insulate it from accountability — which has, of course, consistently been the case under Mr. Bush. The inspectors’ report on Afghanistan’s police conspicuously avoided assessing DynCorp’s performance; even as government auditors found fault with Landstar, the company received a plaque from the Department of Transportation honoring its hurricane relief efforts.
Underlying this lack of accountability are the real motives for turning government functions over to private companies, which have little to do with efficiency. To say the obvious: when you see a story about failed outsourcing, you can be sure that the company in question is a major contributor to the Republican Party, is run by people with strong G.O.P. connections, or both. ...

Going back to Romney's claims about productivity, we seem to be forgetting that there are some goods that the private sector won't produce at all due to market failures (e.g., the classic example is national defense). In those cases, the government is clearly more efficient than the private sector. The government may not be maximally efficient -- and there may be ways to improve upon that -- but it's certainly better than relying upon a private sector that won't produce the goods in anywhere near sufficient quantities, if they get produced at all.

Here's an interesting example from Shane Greenstein:

...with the benefit of ideological blinders, and a dose of lack of detail, several commentators — most notably, the Wall Street Journal editorial page (which David Warsh nicely summarizes) — recently have begun to argue that government’s investment in the Internet was not essential to its growth. That conclusion arises due from the (again, frightfully) unstated assumption that the Internet would have turned out the same way without government sponsorship at the outset.
Look, somebody can only say such things if they do not know the history of the Internet, and they make a concerted effort not to know the facts. (If you are neophyte, there are many places to start online, but I recommend starting here). There actually were attempts to make networking investments with private firms, and there were privately funded packet switching firms too. Those did not catch on widely, and they remained a niche service. I repeat: Attempts to build a private national packet switching network of the scale and size of the Internet failed to catch on. And it is very clear why it failed: because they were restricted to proprietary interconnection, with restricted rights to users and other firms. Nobody interconnected with anyone else.
But everyone would interconnect with the government sponsored Internet. It came out of universities, who took over funding for network development from the Department of Defense (who originally got into the business because DOD needed better computing for their own purposes). The standards coming from universities were not proprietary. That is actually why it worked.
Look, take the blinders off. Government sponsorship also was not perfect. That setting truncated application development. Private markets were great for exploring new uses, once the network was up and running. ...

There are lots and lots of things that government has no business doing. The private sector, appropriately regulated to ensure competitiveness, can take care of the provision of these goods and services. But there are other things that government must do if they are to be done at all. Sometimes the lines are fuzzy, and there can be legitimate debates about what should and shouldn't be in government hands. I suspect some people will still object to the claim above about the internet, for example. But there are also clear cases on both sides of the fuzzy line, something we seem to have forgotten.

    Posted by on Friday, August 10, 2012 at 12:00 PM in Economics, Market Failure | Permalink  Comments (108)


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