❄ This post, and other ‘PLAIN TALK’ posts on this blog, describe in plain language the current Republican Party aims and methods, which I consider a perverse exercise in political design. ❄

Once upon a time we took it for granted—an historical fact—that key services, including schools, hospitals, libraries, postal delivery, municipal utilities, and meteorology, were provided either by the State or by charities (or in today’s argot, ‘non-profits’). There were major exceptions (railroads, telephone, housing, the food system) though there was also public housing and the Food Stamp system. Hybrid systems, such as health insurance sold by for-profit companies but simultaneously Medicare, had also taken shape.

One mantra of the Republican Party is that economic life should be in private hands. Whenever there is a choice, or a choice can be created by government diktat, lodge resources and approvals in ‘the private sector’. Never speak of, never celebrate, never acknowledge ‘the public sector’. Characterize the‘ public sector’ as activity marked by “waste, fraud, and abuse” and those who work in the public sector as parasites on real Americans, time-servers, incompetents. Not ‘hard workers like us’.

What are the differences between the ‘private’ and ‘public’ sectors? They appear to be these:

[1]  Access to jobs in the public sector is via the civil service, marked by objective criteria and subject to rules against nepotism and any quid pro quo (consider Blagojevich). Access to private sector jobs is unregulated, except insofar as there are legal provisions against discrimination.

[2]  Private sector corporations are legally bound to seek profit, but efficiency only insofar as it contributes to profit. The public sector is subject to spending oversight, and to strive for efficiency (if that is equivalent to ‘doing more with less’).

[3]  Activities undertaken in the public sector are those chosen by government. Some deliberation as to merits must precede the decision to ‘go’. Therefore they are subject to tests, which may be well devised: does this activity enhance the general welfare? does it make for fairness? can it be performed efficiently? does it preclude other measures that better meet agreed criteria? Of course, they may also be ill-devised (see the note below about government and ‘interests’). By contrast, the only standard required of private sector firms is that they make a profit: it does not matter whether they do so by designing life-saving pharmaceuticals, or pornographic films.

[4]  A private sector firm pays salaries, offers investors a quid pro quo, and—if it is traded and its shares rise in the market—enables shareholder participation in capital gains. The firm may sell itself, passing value to the private owners or shareholders. The ‘business plan’ of the firm shows how its leadership proposes to conduct a profitable activity. In the public sector salaries are paid, but there are no individual investors or shareholders. Start-up and operating costs required to conduct an activity are provided by government, perhaps offset in part by fees. The availability of the service performed has been deemed in the public interest. The activity, budgets, and management are subject to public scrutiny, including ongoing government audit and Congressional oversight.

[5]  A firm which consistently loses money will go out of existence. In that sense, it is dependent on maintaining its clientele. By analogy, a public service is more likely to be rendered—agreed by Congress and the Executive—if it responds to an interest which will reward the activities being undertaken by offering political support (such as mobilizing voters and, in today’s practices, direct campaign money).

[6]  The distinction between ‘public sector’ and ‘private sector’ is muddied whenever government adopts a measure which is (a) not in the general ‘public interest’ but (b) puts tax dollars into the coffers of private firms, directly or indirectly. The ethanol-from-corn scheme is a fine example. Many cite defense procurement as a rich source of examples. The problem is evident: we can disagree about whether a given expenditure or policy change is ‘in the public interest’ and endeavor to bring reason to a choice.

The health insurance debate points to another useful distinction. We learned that in some European countries health insurance is required, but is purchased from non-profit insurance vendors. [Note 1] The systems take many forms. For example, terms and practices may be subject to regulation.

It is frequently observed by critics of US systems that the insured are paying for administrative costs that have nothing to do with medical care. Consider an exemplary for-profit insurer. It performs best if it insures only the healthy. It tries to figure out who is ‘unhealthy’ and how to avoid insuring them. It narrowly defines what it covers, and in ambiguous cases refuses payment.The not-for-profit insurer, on the other hand, performs best by supporting the ‘best outcomes for the insured’. Its terms, conditions, payment practices and reimbursement rates may be regulated by a public or quasi-public body. These are radically different structures. In for-profit insurers, managers are guided by perverse incentives to deny insurance, and deny medical care, when they can. Managers of non-profit medical facilities, by contrast, have a positive incentive to achieve the best medical outcomes for their clients, given their funds and competing demands.

Perverse incentives can be seen at work elsewhere. There is a growing literature critical of for-profit prisons [Note 2] and, especially during the GW Bush period, growing reliance on US contractors to perform war tasks which in the past were performed by military personnel or civilian federal employees. [Note 3]


Is the claim sound that ‘private sector’ for-profit companies are superior to government in supplying a service? Some services? What of hybrid systems?

Design Problem

Devise an experiment to compare tax-funded (government) and private (‘market’) approaches to a significant issue, such as health care, incarceration, transport, or the custody of nuclear weapons.

[Note 1]:   See Richard B. Saltman, Reinhard Busse, and Josep Figueras [eds.], Social Health Insurance Systems in Western Europe, (Maidenhead, Berkshire, England: Open University Press, 2004), and Saltman, Busse, and Elias Mossialos [eds], Regulating Entrepreneurial Behaviour in European Health Care Systems (Open University Press, 2002), both volumes in the European Observatory on Health Care Systems Series.

[Note 2]: For example, see Richard A. Oppel, Jr., “Private Prisons Found to Offer Little in Savings,” The New York Times, 18 May 2011.

[Note 3]:  Peter W. Singer, “Outsourcing the Fight”, The Brookings Institution, 5 June 2008. [Originally in Forbes.]

[Political Design 2011.07.01. Revised 2011.07.06. Post A28. http://www.learnworld.com/blog/design.html or http://design.learnworld.com]

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