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Privatization and rent seeking as upward distribution of wealth

The Scourge of Upward Redistribution

STEVEN M. TELES

America today faces two great challenges. First, the explosion in inequality threatens the public's belief in the justice of our economic system. Second, the slowdown in the formation of new businesses, a key metric of economic dynamism, endangers economic growth and employment. The solutions to these problems are usually in tension with one another - greater inequality is often the price of economic growth - and our politics has been divided according to this tension, with one side playing the role of the party of growth and the other the party of equality.

Historically, conservatives have championed the free market and defended the unequal distribution of wealth that capitalism generates, arguing that income inequality is just so long as it is produced by free exchange. Conservatives certainly have not abandoned their pro-growth position today, but they are increasingly willing to broach the issue of inequality when it comes to the bottom of the income distribution. Conservative Republicans have drawn attention to declining social mobility, the creation of a permanent underclass, and an increasingly fragile working class. For example, Florida senator and presidential candidate Marco Rubio has said, "America is still the land of opportunity for most, but it is not a land of opportunity for all. If we are to remain an exceptional nation, we must close this gap in opportunity."

Although they often strive to avoid it, conservatives have every reason to admit that exploding inequality at the top of the income scale is a major problem, too. To accept this is not to indict market capitalism. Much of the tension between equality and economic dynamism dissolves when we focus on inequality generated by public policies that distort market allocations of resources in favor of the wealthy - what we might call "upward-redistributing rents." These rents are large and growing, produced by inherent flaws in democratic governance that facilitate the use of the state to enrich the already advantaged. If high-end inequality is not diminished by removing the ways the wealthy use the state to extract resources from the rest of society, the inequalities that conservatives believe are just - those that flow from innovation and hard work - will be in danger. In short, inequality will become a threat to free exchange itself.

Any feasible attack on inequality must marry some degree of redistribution with an attack on the state's own role in producing inequality. The rich are getting richer because of some fundamental problems of democratic government, and these problems have been exacerbated by peculiar features of American political institutions and then super-charged by the recycling of high-end rents back into the political process.

Exploding high-end inequality is, in short, a symptom of what Francis Fukuyama calls "political decay," meaning the capture of the state by powerful interests seeking to entrench their social position and the resulting incapacity of the state to solve problems that threaten the public good. Reversing that decay will require creating new institutions to counter the influence of organized interests and rebuilding the autonomy and analytical capacity of the state itself.

THE CAUSES OF INEQUALITY

Most analyses of inequality do not focus on rents. On the left, there is a tendency, lately accelerated by Thomas Piketty's Capital in the Twenty-First Century, to see the expansion of inequality as a natural product of capitalism, a problem that only massive taxes and transfers can remedy. Most mainstream economic accounts of inequality, meanwhile, point to several economy-wide shifts as exacerbating inequality: increasing returns on skills and education, driven by a shift toward cognitively demanding jobs; the replacement of workers performing routine tasks with technology; and the expansion of the scope of the market due to free trade and reduced transaction costs. Based on this analysis, the most important remedy for inequality is improved education, which will allow workers to perform more cognitively skilled work that cannot be replaced by machine labor. Further to the right, authors such as Charles Murray have argued that growing inequality is the fruit of a more meritocratic society, one in which underlying aptitude is more closely measured and rewarded.

While they imply very different policy responses, all of these accounts assume that spiraling incomes at the top are a market-driven phenomenon - an analysis grounded in basic economics. In a classic statement of the tension between equality and efficiency, Arthur Okun claimed that, "[i]n an economy that is based primarily on private enterprise, public efforts to promote equality represent a deliberate interference with the results generated by the marketplace, and they are rarely costless." Okun here merely expresses an economist's common sense that inequality is a natural feature of market economies, that remedying the unequal distribution of income is primarily a matter of redistribution, and that redistribution is subject to familiar problems: reduced incentives to work and invest, and the inefficiencies and waste associated with processing resources through the state.

There is much truth in Okun's framework, but note that Okun begins by assuming the existence of "an economy that is based primarily on private enterprise." Most of our public discourse on political economy assumes that a wave of deregulation and privatization over the last few decades has produced an American economy characterized by "private enterprise." In certain respects, this is true, particularly in areas like airlines and trucking that were deregulated in the 1970s and 1980s. And in some cases, the movement toward a more perfectly free market has undermined the protections for the lower rungs of society, predictably generating more inequality. The most important market rigidities that have been weakened or eliminated in the last few decades, such as labor unions, have been those that protected the middle and working classes.

At the same time, however, we have seen an explosion in regulations that shower benefits on the very top of the income distribution. Economists call these "rents," which we can define for simplicity's sake as legal barriers to entry or other market distortions created by the state that create excess profits for market incumbents. These rents can sometimes include an absence of government action, such as a failure to properly regulate externalities or enforce market rules. Where the destruction of these rents is concerned, Okun's famous tradeoff between equality and efficiency does not apply, since their removal simultaneously allocates social resources more efficiently while also draining the ability of the wealthy to extract wealth from everyone else.

A focus on rents points us to the role that state action plays in the increase in top-end inequality and suggests that preventing the further entrenchment of plutocracy must have a deregulatory component. Progressive deregulation alone will not eliminate inequality, of course, because market rigging mainly benefits the wealthiest. Other factors, like the decline in unionization, the rise in mass incarceration, family disorganization, spatial segregation, and other factors partially explain the sluggish incomes of the middle and bottom of the income distribution. But inequality cannot be remedied just by pulling up the bottom. This suggests that conservatives ought to be more concerned about top-end inequality and that liberals ought to be more supportive of certain kinds of deregulation. Indeed, it suggests some real room for agreement where so far we have tended to see only political conflict.

REGRESSIVE RENTS

While large parts of the top 1% of the income distribution are surely made up of entrepreneurs and innovators, the image of the United States as a free-market paradise is hard to square with the actual composition of the top strata of American earners. Start for simplicity's sake with a widely read breakdown of the occupations of the top percentile done by the New York Times in 2012. What immediately jumps out is the huge over-representation of financial-service providers, doctors, dentists, and lawyers, all of which are professions characterized by large-scale market distortions. A recent study by Jon Bakija, Adam Cole, and Bradley Heim showed that the occupational concentration of the wealthy in rent-suffused sectors is even more dramatic in the top 0.1%.

Doctors, dentists, and lawyers are all licensed professionals, and licenses are an obvious barrier to entry and competition. In addition, the specific regulatory structures of some of these licensed professions (which are almost always functions of state-level regulations) serve to redistribute income upward. Dental hygienists, for instance - often female and more modestly paid - are often required by state law to practice in the offices of, and under the supervision of, a licensed dentist, who is typically male and wealthier. This requirement allows dentists to extract a percentage of their hygienists' income simply because of regulation while also preventing hygienists from competing with them by setting up independent offices.

Medicine displays a similar pattern because the law specifies tasks that only licensed doctors can perform, even though nurses are capable of performing them. Dean Baker, co-director of the Center for Economic and Policy Research, has shown that the incomes of doctors and dentists are artificially inflated by constraints on the number of practitioners trained in any given year, the number of foreign-trained practitioners allowed to practice in the country, and the lack of third-party compensation for services provided abroad. Licensing statutes frequently define "dental practice" or "veterinary practice" very broadly, allowing dentists and veterinarians to swallow up activities that involve none of the risks that justify licensing, such as teeth whitening and animal massage - activities that they can then charge far more for than could non-licensed operators. Finally, as a recent Washington Monthly article shows, doctors play a central role in determining their own compensation through their control of the committees that set prices paid by Medicare. In short, doctors and related professionals in the United States do not earn much more than their counterparts in other advanced countries because of the impersonal workings of the market. They make more because of the rules that govern them - rules that give them far more power than their foreign counterparts.

The bottom of the top 1% is full of owner-proprietors who, in a more deregulated market, would be lower-paid employees of larger, more efficient firms. Car dealers, for instance, have a sizable presence in the top 1% of earners, have a major lobbying presence in almost every state capital, and have made contributions to almost every member of Congress. That should not be surprising, because regulations (again, often at the state level) protect car dealerships from competition by limiting direct sales, restricting the termination of franchises, limiting the entry of new dealers, and preventing manufacturers from offering preferential pricing to larger franchisees. Together, these rules, economists Francine Lafontaine and Fiona Scott Morton found in a 2010 study, "almost guarantee dealership profitability and survival," while simultaneously driving up costs to consumers. Although recent pressure from new firms and economic downturns have challenged the profitability of traditional car dealerships, their powerful coalitions - which include self-proclaimed pro-market Republican governors in states like Michigan - keep even well-resourced policy disrupters like Tesla Motors from threatening their rents.

Similar rules protect other owner-operators, like those in the surprisingly lucrative field of burial services, from consolidation or lower-cost competition. Optometrists in California, like those in many other states, are protected from consolidation by laws that prevent eyeglasses companies from providing on-site examinations. Such artificial market fracturing may be worth the cost in particular sectors where macrostability is a real issue, such as in banking, where the consolidation and securitization of the mortgage market played an important role in the housing bubble and crash. But no such justification applies in most other markets.

A concentration of high incomes also characterizes the field of government contractors, such as private-prison managers, defense contractors, and for-profit colleges. All these industries are characterized by dependence on government as a nearly exclusive source of revenue, by extraordinary levels of lobbying, and by asymmetries of power between firms and their government counterparts. Or consider the field of management consulting, which attracts an extraordinary percentage of Ivy League college graduates. As Christopher McKenna shows in his book, The World's Newest Profession, the outsized incomes of consultants do not come from their ability to recommend innovative practices to firms. Instead, they come from the rent they extract from performing a legally mandated due-diligence ritual for firms or from performing tasks that could otherwise be done at lower cost by public employees. These are not, in short, meaningfully "private" firms at all, despite their high profitability.

At the very highest end of the income spectrum, rents are pervasive in the fields of finance, entertainment, and technology. Regulations subsidize large banks through the implicit insurance of the too-big-to-fail status, the creation of a huge pool of assets for investment managers through a variety of tax-advantaged savings devices, like the 401(k) and IRA, and the construction of a massive and highly liquid securitized finance market.

While the financial industry presents itself as hyper-efficient and technologically sophisticated, the fruits of advances in the field appear to have gone entirely to the producers of financial services rather than their consumers. New York University's Thomas Philippon showed in a study last year that "the unit cost of intermediation," meaning the cost of providing access to the financial system, "does not seem to have decreased significantly in recent years, despite advances in information technology and despite changes in the organization of the finance industry." This helps explain why finance went from the source of 4.4% of the fortunes in the Forbes 400 in 1982 to 20.3% in 2011.

The capture of social resources on this scale can occur only through extraordinary social power rather than simply through direct monetary investments in politics. The financial sector has prevented attacks on its rents through "cultural capture," legal scholar James Kwak has argued, meaning the perception among regulators, legislators, and others that practitioners of financial engineering are unusually intelligent and engage in activities beyond the capacity of ordinary decision-makers to comprehend. And the decline of Congress's internal analytic capacity has rendered policymakers dependent on the financial sector for knowledge of the effects of regulation, as Lee Drutman of the New America Foundation and I have pointed out.

Those who hold intellectual property in the technology, pharmaceutical, and entertainment industries are also a large presence at the very pinnacle of the income distribution. Nearly all returns in these fields result from patents and copyrights because the marginal cost of producing copies in these areas is close to zero. While some intellectual-property protection is necessary to incentivize production in areas like entertainment and the arts, the same does not appear to be the case with pharmaceuticals. Dean Baker has shown that other policy approaches, such as offering prizes for developing drugs, could produce superior medical benefits with vastly superior distributive outcomes.

The increasing importance of intellectual property in generating inequality is not simply a natural outgrowth of the expansion of markets and technology, since legal protection in national and international law has increased substantially over the last third of a century. According to Harvard's Yochai Benkler, this expansion has happened in highly obscure, largely uncontested ways. For instance, the Copyright Term Extension Act of 1998 extended protection of existing copyrights, substantially increasing the wealth of all existing copyright holders. The law drew almost no lobbying among opponents, as economists Michele Boldrin and David Levine have shown - remarkable for a law that redistributed such an enormous amount of wealth.

Even more dramatically, a series of trade deals since the late 1980s extended the reach of American intellectual-property law globally. The Office of the United States Trade Representative provided American technology and content companies with exceptional access to its deliberations and helped frame the issue of intellectual-property protection in quasi-mercantilist terms. By entrenching such rules in trade law, which must be renegotiated multilaterally, the beneficiaries of strict intellectual-property rules have made the destruction of their rents all but impossible.

Finally, rents also play a critical role in the increasing concentration of wealth among the already-wealthy few. In a widely discussed critique of Piketty, economist Matthew Rognlie shows that the real driver of increased wealth at the top end is not returns on industrial or financial capital but housing-price appreciation. Housing is a highly regulated and subsidized sector of the economy, and constraints on housing supply relative to demand are especially severe in the areas with the highest concentrations of high earners, like San Francisco, New York, Washington, Seattle, Boston, and Los Angeles. Estimates by Harvard's Edward Glaeser indicate that constraints on housing supply can increase prices in these markets on the order of 50%.

In other words, by preventing housing supply from equilibrating with housing demand, insiders in these expensive housing markets - necessarily the already wealthy - are able to use regulation to take resources from housing outsiders. The same constraints on supply also generate rents for those in real-estate development with the political connections to acquire permission to build, and a considerable amount of these rents are redistributed back to politicians through political contributions (of which real-estate developers are almost always the largest providers in urban elections).

We do not currently have good estimates of the share of rent in the income or wealth of the top strata of American society, but there is sufficient evidence across these different areas to look to the suppression of competition as a core driver of skyrocketing inequality. Land-use regulation has increased over the last third of a century. Intellectual-property protection is stronger than it once was. Banks are larger, as is the pool of securitized finance and subsidized private savings. We have seen a huge increase in occupational licensing. Contracting and privatization have increased. The last third of a century, in short, has been an era in which inequality has been driven at least as much by an expansion of regulation as by the emancipation of markets.

THE POLITICAL ECONOMY OF RENT-SEEKING

Upward-redistributing rents are pervasive, growing, and rooted in fundamental problems in the American political system. What, if anything, can be done about them? If one consulted only the economists who pioneered the idea of rent-seeking, the answer would be terribly depressing.

Economists from Mancur Olson on have traced the political success of rent-seeking to the unbalanced incentives to organize of rent extractors and those from whom the rents are being extracted. While those with concentrated interests have a strong incentive to invest in political activity and the ability to strategically target their resources, those with diffuse interests do not. Thus, rent extraction is a natural law of democratic political systems, limited only by constitutional constraints.

A broader view actually suggests that the problem extends even further than imbalanced organization. Many of the most powerful forms of upward-redistributing rent-seeking take place in obscure decision-making contexts. Occupational licensing operates through state or municipal licensing boards. Development decisions are made at the state and local level, often by government entities that are almost the definition of low visibility, such as historical preservation commissions. Financial regulation operates through multiple regulatory bodies in highly technical rule-making processes. Intellectual-property decision-making has, for the last couple decades, been pushed into international trade deals that operate under unusually closed rules, which are then controlled by global trade bodies. The regulated entities have strong incentives to monitor the proceedings of these regulators and participate in highly technical and low-visibility decision-making processes, making these institutional venues especially susceptible to capture.

These rent-seeking arrangements are also protected by wealthy rent-seekers' reputations among policymakers for sophistication, intelligence, and responsibility - the "cultural capture" discussed above. The professional status of doctors and dentists comes with a reputation built over decades for serving the public interest. In housing, those opposed to new development in cities draw on the widely accepted (if intellectually backward) belief that development hurts the environment and only serves the interests of developers and wealthy gentrifiers. Defenders of strict intellectual-property rules claim that they are protecting the preconditions for economic and cultural creativity, as well as providing an incentive for the preservation of culture. Real-estate agents spend considerable energy convincing Americans that their very high, collusive fees ensure that American home buyers are well-advised and informed. While these arguments are typically wrong, the evidence for them does not need to be particularly strong if nobody actively seeks to present the other side.

Organizational imbalance, venue control, and protective policy images are all reinforced in their power by the disproportionate wealth of regressive rent-seekers. As Martin Gilens shows in his book Affluence and Influence, the public-policy preferences of the wealthy, and not those of the middle and working classes, are typically what get enacted. Additionally, Gilens finds that this influence is independent of the wealthy class's investment in lobbying and comes from a deeper relationship: Public officials tend to be disproportionately wealthy and have common social and educational experiences with those seeking high-end rents. Thus, when policymakers consider the claims of people like them - financiers, car dealers, undertakers, dentists, and doctors - they are likely to be sympathetic, especially when these claims are made outside of the brightest glare of public attention.

EMPOWERING THE OPPOSITION

The bad news on the politics of regressive rent-seeking is truly bad, mainly because democratic government is inherently vulnerable to capture by wealthy, concentrated interests. This vulnerability can never be entirely removed, but it can be reduced, in most cases by measures that, even in our partisan era, have the potential to attract interest across ideological lines. The place to start is with the severe organizational imbalance that ensures regressive rent-seekers get heard by government while the exploited do not.

An organizational imbalance plays a central role in all of the mechanisms of high-end rent-seeking discussed above. The empirical claims of those receiving rents are almost always weak, but someone has to actually produce the research and find ways of getting it before policymakers if those claims are to be effectively refuted. Exposing the self-interest behind rent-seekers' public-spirited claims is not rocket science, but finding opportunities to damage their reputations requires someone to be constantly, carefully building a case and on the lookout for opportunities. The insulated institutional venues in which rents are extracted are not, in fact, entirely closed to outsiders, but someone needs to show up at agency rule-making hearings, licensing-board meetings, or the sessions in which local land-use decisions are made, both to let policymakers know that they are being watched and to get counterarguments before them. In the absence of such organizational activity, upward redistribution is policymakers' path of least resistance.

Reducing upward redistribution requires, therefore, that we somehow solve the collective-action problem. The only way that we have durably figured out how to do so in the United States over the last half-century is through what the late political scientist Jack Walker called "third-party support" - funding from something other than the affected group itself. The entertainment and pharmaceutical industries will never have a problem raising money to pay for the organizational structure necessary to protect their intellectual property. Car dealers do not face any fundamental organizational problems raising money to make their presence known in every state capital in the United States - their survival is at stake, after all. But because the interests of the other side are so diffuse, the process of organizing a counterforce is far more challenging.

Efforts to claw back upward-redistributing rents depend significantly on the willingness of wealthy individuals and foundations to subsidize that countervailing organization. Thankfully, we have ample precedents for such broad-ranging philanthropic efforts. Two examples, one on the right and one on the left, are sufficient to show how potent a philanthropically subsidized anti-rent-seeking mobilization could be.

Pollution can be usefully understood as a form of rent because it extracts uncompensated benefits from those who pay its costs in the form of despoiled air and water. Polluters had effectively captured government agencies in the years before the institutionalization of the environmental movement, and they possessed a generally positive public image then, too.

Donors in the late 1960s and '70s, especially the Ford Foundation, poured huge sums into getting a broad range of environmental organizations started. That donor-subsidized anti-polluter mobilization helped make agency rule-making more pluralistic and repeatedly damaged the reputations of polluters in the public arena. Environmental organizations eventually took root in almost every state, ensuring that polluter interests would not be opposed by an organizational vacuum in state capitals. Most important, environmental interests were able to use their organization and newfound access to policymakers to switch political venues from states, where extractive industries had exceptional control, to the federal government, where the groups funded by foundations had an organizational advantage. In addition, these philanthropic investments helped shift policy venues from the legislative to the judicial branch, where environmental public-interest law firms had, if anything, an advantage over polluter interests.

The engagement of philanthropists was especially vital at the very beginning, when political entrepreneurs had not yet identified a constituency willing to support them financially or generated successes they could leverage to appeal to potential supporters. In the 1960s and 1970s, foundations were willing to step into this breach, getting environmental organizations over this critical initial hump. The result was a correction in the political marketplace that allowed for a surge in environmental regulation, even in relatively challenging times. In fact, foundations were so successful in seeding the environmental organizational landscape that some analysts, like Northeastern University's Chris Bosso, argue that there may now be too many environmental interest groups for the movement's own good. That would be a problem opponents of rent-seeking would be happy to confront.

Equally potent has been the enormous investment by philanthropists in the cause of education reform over the last two decades. Until recently, teachers' unions dominated education policy in most jurisdictions, as Terry Moe demonstrates in Special Interest. Unions were able to dominate in ways similar to how the wealthy today extract rents, especially those rents that originate at the local level.

First, in most districts teachers' unions faced no countervailing organization whatsoever, so they were the only group capable of monitoring officeholders and generating policy alternatives. Second, teachers had a very attractive professional image, which made it easier for them to claim an alignment between their occupational interest, the public interest, and the interests of children. Third, policymaking was controlled by thousands of localized, specialized institutions, like school boards. While teachers' unions could organize to participate in these relatively obscure venues, what few opponents they had could not. Teachers certainly did not get everything they wanted all the time, but their superior organization and strong image, along with the local venue, gave them a substantial advantage.

In just the last 15 years, the Walton, Gates, Robertson, Arnold, Broad, and Fisher foundations, among others, have invested very large sums of money to increase the number of actors involved in K-12 education policy. Donors have invested heavily in research programs at think tanks like the Brookings Institution, the American Enterprise Institute, and the New America Foundation, making it harder for unions' claims to pass without scrutiny. Foundations have put considerable resources into supporting mayoral control of schools (which has pulled decision-making away from teacher-controlled venues like school boards) and charter schools (which also change the venue of decision-making).

Foundations have actively supported litigation, such as the lawsuit Vergara v. California brought by the advocacy group Students Matter to challenge the protective rules for hiring and firing teachers - the core of teachers' union interests. In just the last few years, these same foundations have put millions of dollars into grassroots organizing and lobbying, funding state-based organizations like 50CAN and Stand for Children, parent organizations such as Families for Excellent Schools, leadership pipelines like Students for Education Reform, and the advocacy efforts of charter-school operators like Success Academy in New York. This broad range of third-party-supported education-reform organizations has at least partially evened the playing field in education policy, to the point where at least some observers are starting to worry that it is the reformers who have captured the political system.

Regardless of whether you favor environmental protection or education reform, these examples show that it is possible to create an organized and effective opposition even in deeply entrenched, rent-addled policy areas. They also suggest, however, the scale of the challenge. These two domains are almost certainly the largest and most sustained examples of philanthropic engagement in building an organizational ecology for policy change in the last 50 years. In both cases, foundation interest was sustained over a long period of time, something that is rarely the case in the philanthropic world. While both initiatives challenged powerful interests, they focused on areas with intrinsic appeal to other wealthy, well-positioned donors.

It will be much harder to generate the same zeal for attacking the rents held by doctors, lawyers, undertakers, financiers, real-estate agents, and wealthy homeowners. But as difficult as it will be, philanthropic investment in these areas is essential.

RENT-PROOFING THE GOVERNMENT

There is one other form of countervailing organization that opponents of rent-seeking should but rarely do look to, and that is the state itself. There are numerous ways in which the way American political institutions are structured makes it easier for the wealthy to extract rents and harder for everyone else to oppose them. To reverse the upward flow of resources will require that we create new institutional arrangements that reverse this bias, while not making it harder for government to perform its basic functions.

One place to start is the pathology of agency capture, in which bureaucracies designed to police firms serve instead to protect them. Many libertarians discuss agency capture as if it were a natural law of government. Recent work by Harvard's Dan Carpenter and David Moss, however, argues that agency capture is less pervasive and more variable than previously assumed. Some agencies maintain their public-interest orientation better than others.

For instance, the architects of the Consumer Financial Protection Bureau consciously attempted to prevent its capture by giving it an independent source of revenue, which reduced its reliance on Congress. The National Science Foundation, while its major priorities are set by Congress, has sought to avoid being captured through the institutionalization of peer review. And, as James Q. Wilson famously argued, many agencies have preserved their public-interest orientation through the creation and perpetuation of a strong bureaucratic culture, as in the Social Security Administration.

Instead of throwing up our hands and deciding that government necessarily falls into the service of wealthy interests, we should focus instead on giving particularly vulnerable and sensitive agencies - like the Securities and Exchange Commission and the Patent Office - greater insulation from the interests they are called upon to regulate. Focusing on recruiting and retaining talented officials is one important way to insulate such agencies, as the constant circulation of individuals between an agency and industry firms brings the cultures of both dangerously close. We should consider giving sensitive agencies additional resources, higher salaries for senior officials, and a strong internal promotion track.

Where national-level rents are concerned, like those in finance and intellectual property, reforms to Congress are even more important for reducing rent-seeking policy changes in the executive branch. As Lee Drutman and I argue in a recent Washington Monthly article, lobbyists have so much power because they control information. Lobbyists for investment banks, pharmaceutical companies, and the entertainment industry simply understand the complex economic and legal contexts involved with governing these industries better than Congress itself does. This is partially a function of the immense resources that these industries have to spend on lobbyists, but it is also increasingly driven by the reduced analytical capacity of Congress. We have dramatically cut Congressional staff over the last few decades while leaving in place the patronage structure of Congressional personnel. As a consequence, Congress has less internal ability to master arcane issues, even as the environment it seeks to govern becomes more complex. This information asymmetry ensures that Congress has to rely for expertise on the lobbyists who represent the regressive rent-seekers themselves.

Congress should moderately increase the number of its permanent, committee-based staff while substantially increasing their pay and providing incentives to remain on Capitol Hill rather than heading to K Street lobbying firms. By providing greater independent capacity to evaluate the merits of highly technical - but very lucrative - legislation, this could go a long way to immunize Congress against the entreaties of regressive rent-seekers.

There are still other changes to governing structures that could cut into some of the more damaging forms of rent-seeking. Yale Law School's David Schleicher has shown that blockages in urban real-estate markets could be broken open by forcing jurisdictions to set overall targets for construction rather than simply making decisions on isolated projects. Mayoral control of schools, which strips the power of school boards, could provide a useful precedent for putting similar institutions, like occupational licensing boards, under the direct control of governors and mayors. The Obama White House has recently shown a surprising interest in the abuses of occupational licensing, which suggests that nationalizing these types of issues could disrupt cozy state policy monopolies. Such nationalization could also give anti-rent public-interest groups more of a fighting chance, since they would find it difficult to organize in all fifty states but could put together a respectable presence in Washington.

More generally, we might think of creating new forms of central policy clearance, of the kind that the Office of Management and Budget already performs for the federal budget and agency regulations. For instance, OMB could add some form of distributive analysis to the cost-benefit analyses it requires for regulations, which would highlight cases where new rules would enrich already powerful interests. Going further, in these pages ("Regulatory Review for the States" in the Summer 2014 issue), Edward Glaeser and Cass Sunstein have argued for extending central review of regulations to the states, where much of the relevant rent-seeking occurs. Creating 50 state Offices of Information and Regulatory Affairs would be harder than Glaeser and Sunstein think, since to serve as more than just a wing of gubernatorial power they would need to build the reputation and organizational culture that it has taken OMB years to generate. But it is very much worth a try.

The complicated forms of American public policy - what I have termed "kludgeocracy" ("Kludgeocracy in America" in the Fall 2013 issue) - also serve the interests of regressive rent-seekers. Complexity is the friend of the organized and well-resourced. The more complex policy mechanisms are, the higher the costs become for opponents to research and explain them or to draw attention to their regressive effects. More complicated policy mechanisms are difficult for legislatures to understand, and they render lawmakers more dependent on lobbyists who specialize in them. Large technology firms, for instance, are better able to master unclear intellectual property doctrines and can then use them to drive smaller innovators into the ground. All things being equal, rules or norms that prioritize simpler policies - such as direct taxing and spending rather than regulation and litigation - and bright-line rules will give opponents of rent-seeking an advantage over the long term.

Most controversially, any serious attack on upward-redistributing rent-seeking will need to enlist the power of the judiciary, especially to take on restrictions at the state and municipal levels. The sheer number of licensing and land-use restrictions in place over thousands of jurisdictions nationwide is more than even a well-resourced anti-rent organizational network could effectively challenge directly. These restrictions are the fruit of a basic defect in democratic government, one that must be answered with some institutional counterbalance.

While organizations like the Institute for Justice have challenged many of these restrictions in court on constitutional grounds, there is a limit to how much support this approach can get on the left as well as from more conservative judges who are hesitant to embrace judicial activism and substantive due process. However, Loyola University New Orleans law professor John Blevins has argued that there are a number of tools in administrative law that, while respecting legislative supremacy, could put local and state rent-seekers on the defensive. Applying a "hard look" doctrine to licensing would require proponents of such restrictions to prove that they do, in fact, serve the public interest. In addition, judges could rule in favor of only a very narrow interpretation of licensing restrictions rather than deferring to (typically captured) licensing boards, forcing legislatures to be explicit when they want to enforce such limits. All of these approaches would have the additional advantage of helping opponents of regressive rent-seeking in their fights, since they amount to a judicially enforced bias in their favor.

POTENTIAL FOR CONSENSUS

None of these devices is likely to do much to slow the upward redistribution of income in the absence of a widespread recognition, on both ends of the political spectrum, of the considerable portion of America's exploding inequality that has been generated by government itself.

State regulation of doctors, Commodity Futures Trading Commission rules for derivatives, and local land-use planning decisions rarely if ever occur to citizens and policymakers as having anything to do with the larger social debate about inequality. If the case is made effectively - if policymakers do start seeing these diverse policies as part of a larger problem - then it would be possible to generate political conflict in arenas that are currently too quiet and uncontested. This happened in the 1970s and 1980s when policymakers connected regulatory capture in areas like trucking and airlines to widespread concern with inflation. It could happen again if policymakers across the spectrum start to believe that rent-seeking, in all its forms, is deeply implicated in the problem of inequality.

Liberals and conservatives will continue to disagree about the sources and solutions for much of our inequality problem. We will fight over the role of unionization and minimum wages, the necessary scope of redistribution, and the funding and structure of public education. It is unlikely, however, that a political system polarized on precisely these issues will do much on any of these sources of inequality, at least until the voters give one of our political parties a definitive mandate to act.

Pruning rents to the wealthy provides a necessary libertarian prong to a larger agenda of reducing inequality, one with some chance of getting traction even in polarized times. Conservatives should embrace this agenda because it allows them to respond to the public's anger about crony capitalism in a market-friendly way. Liberals should support it because it gives them an opportunity to make a real dent in inequality even though they do not control all the branches of government.

The challenge of our time is to find what Madison called a "Republican remedy for the diseases most incident to Republican government." While the state is sometimes the friend of those working to produce a more egalitarian society, it is just as often the tool of those who would entrench inequality. Stopping that upward redistribution is the challenge of our times, one that can be met even while we are gridlocked on so much else.

Steven M. Teles is associate professor of political science at Johns Hopkins University and a fellow at the New America Foundation


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[May 11, 2019] Has Privatization Benefitted the Public? by Jomo Kwame Sundaram

Highly recommended!
Looks like pendulum start swinging against privatization...
Notable quotes:
"... As corporate profits are the private sector's yardstick of success, privatized monopolies are likely to abuse their market power to maximize rents for themselves. Thus, privatization tends to burden the public, e.g., if charges are raised. ..."
"... In most cases, privatization has not closed the governments' fiscal deficits, and may even worsen budgetary problems. Privatization may worsen the fiscal situation due to loss of revenue from privatized SOEs, or tax evasion by the new privatized entity. ..."
"... In most cases, profitable SOEs were privatized as prospective private owners are driven to maximize profits. Fiscal deficits have often been exacerbated as new private owners use creative accounting to avoid tax, secure tax credits and subsidies, and maximize retained earnings. ..."
"... As a rule of thumb, I'd say that any privatisations that require the introduction of convoluted pseudo-market structures or vast new regulatory bureaucracies or which derive most of their ongoing income from the public sector are likely to be contrary to the long-term public interest. In the UK, unfortunately, all these ships sailed a long time ago ..."
"... Chicago is the proving grounds for thirty or so years of the Democrats' surrender to neoliberalism and austerity politics. Let us not forget, brethren and sistren, that Rahm is the Spawn of Bill + Hill as well as dear friend and advisor of Obama. So there is the work of Daley to undo and the work of the Clintonians to undo. It will take more than one term for Lightfoot. ..."
"... Privatization, at any cost, is no longer a choice. We have abused the pension system and now the public must pay for private companies to provide the most basic services. ..."
"... I keep thinking that perhaps an Act could or should be introduced here in UK (same for the States, i suppose), which should ensure that all politicians that enable any type of privatisation of public resources or PFI arrangement (yes that old chesnut), should be made personally responsible for the results therof. ..."
"... And any losses to the public accidentally or "accidentally" occasioned by such commandeering over public resources, to be treated like deliberate misappropriation by the said public officials. With the financial and custodial penalties as may be appropriate. ..."
"... lots of private services that are suspiciously similar to public utilities in terms of natural monopoly, such as cable TV, internet and even railroads. Maybe these should be nationalized and treated more like public services. It can work when they're adequately funded and oversight accountability has teeth; major airports are a good example. ..."
"... Plus the state giveaways includes tens of millions of dollars each year in corporate tax credits in the name of job creation. A report by the nonprofit " Good Jobs First " revealed that over 300 Illinois companies are keeping the state taxes paid by their employees. EDGE- the Economic Development in a Growing Economy is a corporate freebie tax credit, which is partly from the state personal income taxes paid by workers. That's right, the biggest welfare queens are the corporations collecting and keep their employees state income tax payments. ..."
"... Can it get worse? According to the Chicago Trib , "The Chicago Mercantile Exchange (CME), for example, with billions of untaxed contracts worth well over a quadrillion dollars, and whose profit margin in recent years is higher than any of the top 100 companies in the nation, had the hubris to demand an $85 million per year tax break. They got it." The money is there to secure the pensions and budget but has been diverted to the corporate welfare queens for honoring us mere serfs with their presence in the humble fiefdom of Illinois. ..."
"... Michael Hudson, to his immense credit, explains the pernicious effects of privatization of common goods repeatedly throughout his work, and demonstrates that it has been with us at least as long as the ancient practice of land alienation and rural usury. ..."
Apr 07, 2019 | www.nakedcapitalism.com

Posted on April 7, 2019 by Jerri-Lynn Scofield Jerri-Lynn here. Another succinct post by Jomo Kwame Sundaram that makes clear the "benefits" of privatization are not evenly distributed, and in fact, typically, "many are even worse off" when the government chooses to transfer ownership of the family silver.

Note that SOE is the acronym for state owned enterprise.

For those interested in the topic, see also another short post by the same author from last September, debunking other arguments to promote the privatization fairy, Revisiting Privatization's Claims .

By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development. Originally published at Inter Press Service

In most cases of privatization, some outcomes benefit some, which serves to legitimize the change. Nevertheless, overall net welfare improvements are the exception, not the rule.

Never is everyone better off. Rather, some are better off, while others are not, and typically, many are even worse off. The partial gains are typically high, or even negated by overall costs, which may be diffuse, and less directly felt by losers.

Privatized Monopoly Powers

Since many SOEs are public monopolies, privatization has typically transformed them into private monopolies. In turn, abuse of such market monopoly power enables more rents and corporate profits.

As corporate profits are the private sector's yardstick of success, privatized monopolies are likely to abuse their market power to maximize rents for themselves. Thus, privatization tends to burden the public, e.g., if charges are raised.

In most cases, privatization has not closed the governments' fiscal deficits, and may even worsen budgetary problems. Privatization may worsen the fiscal situation due to loss of revenue from privatized SOEs, or tax evasion by the new privatized entity.

Options for cross-subsidization, e.g., to broaden coverage are reduced as the government is usually left with unprofitable activities while the potentially profitable is acquired by the private sector. Thus, governments are often forced to cut essential public services.

In most cases, profitable SOEs were privatized as prospective private owners are driven to maximize profits. Fiscal deficits have often been exacerbated as new private owners use creative accounting to avoid tax, secure tax credits and subsidies, and maximize retained earnings.

Meanwhile, governments lose vital revenue sources due to privatization if SOEs are profitable, and are often obliged to subsidize privatized monopolies to ensure the poor and underserved still have access to the privatized utilities or services.

Privatization Burdens Many

Privatization burdens the public when charges or fees are not reduced, or when the services provided are significantly reduced. Thus, privatization often burdens the public in different ways, depending on how market power is exercised or abused.

Often, instead of trying to provide a public good to all, many are excluded because it is not considered commercially viable or economic to serve them. Consequently, privatization may worsen overall enterprise performance. 'Value for money' may go down despite ostensible improvements used to justify higher user charges.

SOEs are widely presumed to be more likely to be inefficient. The most profitable and potentially profitable are typically the first and most likely to be privatized. This leaves the rest of the public sector even less profitable, and thus considered more inefficient, in turn justifying further privatizations.

Efficiency Elusive

It is often argued that privatization is needed as the government is inherently inefficient and does not know how to run enterprises well. Incredibly, the government is expected to subsidize privatized SOEs, which are presumed to be more efficient, in order to fulfil its obligations to the citizenry.

Such obligations may not involve direct payments or transfers, but rather, lucrative concessions to the privatized SOE. Thus, they may well make far more from these additional concessions than the actual cost of fulfilling government obligations.

Thus, privatization of profitable enterprises or segments not only perpetuates exclusion of the deserving, but also worsens overall public sector performance now encumbered with remaining unprofitable obligations.

One consequence is poorer public sector performance, contributing to what appears to be a self-fulfilling prophecy. To make matters worse, the public sector is then stuck with financing the unprofitable, thus seemingly supporting to the privatization prophecy.

Benefits Accrue to Relatively Few

Privatization typically enriches the politically connected few who secure lucrative rents by sacrificing the national or public interest for private profit, even when privatization may not seem to benefit them.

Privatization in many developing and transition economies has primarily enriched these few as the public interest is sacrificed to such powerful private business interests. This has, in turn, exacerbated corruption, patronage and other related problems.

For example, following Russian voucher privatization and other Western recommended reforms, for which there was a limited domestic constituency then, within three years (1992-1994), the Russian economy had collapsed by half, and adult male life expectancy fell by six years. It was the greatest such recorded catastrophe in the last six millennia of recorded human history.

Soon, a couple of dozen young Russian oligarchs had taken over the commanding heights of the Russian economy; many then monetized their gains and invested abroad, migrating to follow their new wealth. Much of this was celebrated by the Western media as economic progress.


diptherio , April 7, 2019 at 9:11 am

SOE must stand for "state owned enterprise."

caloba , April 7, 2019 at 10:45 am

As a rule of thumb, I'd say that any privatisations that require the introduction of convoluted pseudo-market structures or vast new regulatory bureaucracies or which derive most of their ongoing income from the public sector are likely to be contrary to the long-term public interest. In the UK, unfortunately, all these ships sailed a long time ago

DJG , April 7, 2019 at 11:15 am

After the recent Chicago municipal elections, I wrote up some notes on the reasons for the discontent. This article by Sundaram explains exactly how these schemes work. Further, you can apply his criteria of subsidies for the rich, skimming, and disinheriting the middle class and poor to all of the following instances in Chicago.

If I may–some for instances of how Sundaram's observations turn up in U.S. cities:

Chicago is the proving grounds for thirty or so years of the Democrats' surrender to neoliberalism and austerity politics. Let us not forget, brethren and sistren, that Rahm is the Spawn of Bill + Hill as well as dear friend and advisor of Obama. So there is the work of Daley to undo and the work of the Clintonians to undo. It will take more than one term for Lightfoot.

Consider:
–Parking meters and enforcement have been privatized, starving the city of funds and, more importantly, of its police power.
–Taxes have been privatized in TIFs, where money goes and is never heard from again.
–There have been attempts to privatize the park system in the form of the Lucas museum and the current Obama Theme Park imbroglio, involving some fifty acres of park land.
–The school system has been looted and privatized. The Democrats are big fans of charter schools (right, "Beto"), seeing them as ways to skim money off the middle class and the poor.
–Fare collection on public transit has been privatized using a system so deliberately rudimentary and so deliberately corrupt that it cannot tell you at point of service how much you have paid as fare.
–Boeing was enticed to Chicago with tax breaks. Yes, that Boeing, the one that now deliberately puts bad software in your airplane.
–Property tax assessment has been an opaque system and source of skimming for lawyers.
–Zoning: Eddie Burke, pond scum, is just the top layer of pollution.
–And as we have made our descent, all of these economic dogmata have been enforced by petty harassment of the citizenry (endless tickets) and an ever-brutal police force.

And yet: The current Republican Party also supports all of these policies, so let's not pretend that a bunch of Mitch McConnell lookalikes are headed to Chicago to reform it.

California is no better , April 7, 2019 at 5:16 pm

Providing professional services i.e. architecture, engineering, etc. for a public entity, local or federal, does not yield unreasonable profits. Typically, the public agencies have their own staff to monitor and cost control a project. The professional services provided to private developers yields far more profit- oftentimes twice the profits associated with public agency work. Most professional services companies will transition their work to the public agencies during a recession.

At any rate, especially in Illinois, privatizing the work to avoid pension liabilities is no longer a choice. Michael Madigan pension promises will require the public to maintain a public service budget with no staff to fill potholes. Essentially, these are the no work jobs made popular by the Soprano crew twenty years ago.

Discussion of the downside of the privatization of public services is merely an oscillation from discussing the weather, the Bears or any other kitchen table discussion – nothing more than pleasant small talk to pass the time.

Privatization, at any cost, is no longer a choice. We have abused the pension system and now the public must pay for private companies to provide the most basic services.

stan6565 , April 7, 2019 at 6:36 pm

The question is, what can one do to help arrest this wholesale theft of public resources and their expropriation into the hands of well connected. " Public", as in, it is the working public over the last 100 or 200 years that created (or paid for), the electricity grid, or public schools, or entire armed or police forces

I keep thinking that perhaps an Act could or should be introduced here in UK (same for the States, i suppose), which should ensure that all politicians that enable any type of privatisation of public resources or PFI arrangement (yes that old chesnut), should be made personally responsible for the results therof.

And any losses to the public accidentally or "accidentally" occasioned by such commandeering over public resources, to be treated like deliberate misappropriation by the said public officials. With the financial and custodial penalties as may be appropriate.

Anybody out there with similar thoughts or should i really try harder and give up on drugs?

Tyronius Maximus , April 8, 2019 at 4:13 pm

I vociferously disagree with the assertion that the wrecking of pension funding in the past is the reason we are forced to leave privatization schemes in place today.

In a similar vein, the are lots of private services that are suspiciously similar to public utilities in terms of natural monopoly, such as cable TV, internet and even railroads. Maybe these should be nationalized and treated more like public services. It can work when they're adequately funded and oversight accountability has teeth; major airports are a good example.

rps , April 8, 2019 at 12:08 pm

Let's not forget the privatization of the Chicago Skyway , not once but twice.

Plus the state giveaways includes tens of millions of dollars each year in corporate tax credits in the name of job creation. A report by the nonprofit " Good Jobs First " revealed that over 300 Illinois companies are keeping the state taxes paid by their employees. EDGE- the Economic Development in a Growing Economy is a corporate freebie tax credit, which is partly from the state personal income taxes paid by workers. That's right, the biggest welfare queens are the corporations collecting and keep their employees state income tax payments.

Can it get worse? According to the Chicago Trib , "The Chicago Mercantile Exchange (CME), for example, with billions of untaxed contracts worth well over a quadrillion dollars, and whose profit margin in recent years is higher than any of the top 100 companies in the nation, had the hubris to demand an $85 million per year tax break. They got it." The money is there to secure the pensions and budget but has been diverted to the corporate welfare queens for honoring us mere serfs with their presence in the humble fiefdom of Illinois.

Paging Mike Madigan- The Institute on Taxation and Economic Policy lists Illinois as one of the "Terrible Ten" most tax-regressive states, imposing a much higher rate on poor residents for sales and excise taxes, property taxes and income taxes. Al Capone would be proud of him.

eg , April 7, 2019 at 12:04 pm

Michael Hudson, to his immense credit, explains the pernicious effects of privatization of common goods repeatedly throughout his work, and demonstrates that it has been with us at least as long as the ancient practice of land alienation and rural usury.

Natural monopolies ought to be nationalised, full stop.

Grizziz , April 7, 2019 at 12:39 pm

I support public ownership of natural monopolies, however it would be helpful if these pieces contained data, case studies or footnoted entries providing some empirical evidence of the author's thesis.

Thuto , April 7, 2019 at 1:00 pm

This article comes at a time when the clarion call for privatizing Eskom, SA's electricity utility, is hitting deafening levels. To the private sector, efficiency = maximizing profits by making the "bloated" enterprise lean (aka cutting the workforce) and quite literally mean (aka cutting services to "unprofitable" segments of the market, iow, the poor and vulnerable). When profits soar because the holy grail of efficiency is achieved, the mainstream business press brings out the champagne and toasts this "success" as proof that the previously "moribund" (they always exaggerate the state of things) monopolistic monolith has been given a new lease on life by privatizing it and the template is set for rescuing other "ailing" SOEs.

The drawbacks are never laid out as cleary as they are in this article and the plight of those worst affected, whether laid-off workers or those whose services have been cut, never makes it into the headlines.

PhilB , April 7, 2019 at 2:53 pm

And then there is prison privatization where the burden of operation and maintaining the institution should clearly be on the public so as to be constant reminder of the burden, among others reasons. The motivations by private prison operators to reduce services and costs out of site of the pesky prying eyes of the public are manifold.

RepubAnon , April 7, 2019 at 7:54 pm

Privatization is a great way to avoid having user fees wasted by providing services, and instead put to better use funding the re-election campaigns of politicians supporting privatization. Plus, it provides much-needed consulting fees for former politicians as well as job-creating 7-figure salaries for the CEOs,

(/snark, if you couldn't tell)

On a side note, the Dilbert comic strip is written about private industry ,

Iapetus , April 7, 2019 at 3:39 pm

There was a rudimentary plan put forward last June that recommended some pretty substantial privatizations of U.S. government assets and services which include:

-Privatizing the US Post Office ( through an Initial Public Offering or outright sale to a private entity ).
-Sell off U.S. government owned electricity transmission lines ( U.S. government owns 14% of this nations power transmission lines through TVA, Southwestern Power Administration, Western Area Power Administration, and Bonneville Power Administration ).
-Spin-off the Federal Aviation Administrations air traffic control operations into a private nonprofit entity.
-Spin-off the Department of Transportations operations of the Saint Lawrence Seaways Locks and Channels into a private non-profit entity.
-End the federal conservatorship of Fannie Mae and Freddie Mac, then regulate a new system of private guarantors for their MBS securities.

Not sure if these are still being considered.

Tom Stone , April 7, 2019 at 3:54 pm

There's no way I could ask that question with a straight face.

Jack Parsons , April 7, 2019 at 6:35 pm

At heart, the problem with privatization is that marketing to a government-employed purchaser or "purchase influencer" is ridiculously cheap, due to their poor accountability strictures.

This is abetted by the Katamari Damacy process (self-accretionary tendency) of money and power.

https://youtu.be/-U_Tccwyh70?t=139

The Rev Kev , April 7, 2019 at 7:50 pm

In Oz the electricity grids were privatized as they would be cheaper that way – or so people were told. Instead, the cost of electricity has risen sharply over the years to the point that it is effecting elections on both the State and Federal level as the price hikes are so controversial. A problem is that those companies have to pay back the loans used to buy the public electricity grids and as well, the senior management award themselves sky-high wages because they are totally worth it. These are factors that were never present when it was publicly owned. And just to put the boot in, those very same companies have been 'gold-plating' the electricity grid for their gain-

https://www.abc.net.au/news/2017-07-18/australian-gold-plated-power-grid/8721566

Meanwhile, whatever money the governments made selling their electricity companies has been long spent on white elephants or buying themselves re-elections by giving out goodies to voters.

Procopius , April 7, 2019 at 8:54 pm

buying themselves re-elections by giving out goodies to voters.

I don't reside in the states, so I don't see much of the detail of daily life. What are these "goodies" of which you speak? In what I am able to read on the internet, people aren't being given goodies any more. At least the old-time politicians handed out jobs, and turkeys at Christmas. The current crop do hand out jobs to their kids and immediate family, but not so much to anyone else.

John Rose , April 8, 2019 at 10:05 am

The county "poorhouse" in Lebanon County, PA over the years evolved into a bare-bones but very well run nursing home with caring, long-term staff. The Republican county commissioners, however, year after year, avoided raising taxes by underfunding the retirement plan for the employees. Then, "suddenly" there was a crisis because the underfunding had become legally untenable.
The solution was to sell the operation to a for-profit operator to fund the pansion plan shortfall at the minimal level required legally. In the next contract, the new owner cut health care and other benefits. The wages had always been minimal and he was free of the old pension plan requirements.
The employees went on strike for many months, the owner brought in replacements from companies that specialize in that service, until the employees had to cave in.
I had been counting on that facility when my sister was diagnosed with Alzheimers. I have family that is able to step in so she is provided for. Many others in the county are not so fortunate. Here are some staff comments: https://www.indeed.com/cmp/Cedar-Haven-Healthcare-Center/reviews?fcountry=ALL

Stratos , April 8, 2019 at 12:36 pm

" instead of trying to provide a public good to all, many [ordinary working people] are excluded because it is not considered commercially viable or economic to serve them."

There are also social and class dimensions to the exclusion. Private Internet Service Providers (ISPs) in the USA have made the "not commercially viable or economic to serve them" argument for decades when pressed about their refusal to wire the entire country. Their "business model" leaves millions without reliable broadband service in a variety of settings, from rural areas and small towns to inner cities and low income suburbs. In many cases, citizens in those areas have no access to broadband at all.

When small towns and counties in the US have taken the initiative to wire their localities, the ISPs have bribed state legislatures to pass laws prohibiting public broadband throughout the rest of the state. Talk about subversion of democracy! Insult to injury: the ISPs who wailed about "unfair competition" to state legislators then refuse to wire areas throughout the rest of the state.

Meanwhile, less affluent countries like Korea and Romania have lightning fast fiber optic broadband universally available at affordable prices.
https://motherboard.vice.com/en_us/article/jp5aa3/why-romanias-internet-is-so-much-faster-than-americas

Lack of universal and affordable broadband has two major effects:

➤ Local governments are shut out of economic opportunities because they lack connectivity. They are unable to shepherd business startups and existing businesses that need broadband to thrive. People move away. Businesses relocate or downsize. Local economies are left with erroding tax bases and boarded up downtowns.

➤ Children and young people in "broadband deserts" cannot tap into the many sources of learning that exist on the web. In particular, they don't have the opportunity to learn anything about frontend or backend web development applications such as, html, php, Ruby on Rails, Photoshop or Indesign.

That is one reason the US tech industry lacks workers from different backgrounds. Most tech workers grew up in areas the ISPs considered "commercially viable". In addition, many tech workers are self taught to some degree, even those with computer science degrees. It is difficult to be self taught if you lack access to the most basic resources and tools.

[Apr 08, 2019] Has Privatization Benefitted the Public naked capitalism

Notable quotes:
"... Privatization typically enriches the politically connected few who secure lucrative rents by sacrificing the national or public interest for private profit, even when privatization may not seem to benefit them. ..."
"... For example, following Russian voucher privatization and other Western recommended reforms, for which there was a limited domestic constituency then, within three years (1992-1994), the Russian economy had collapsed by half, and adult male life expectancy fell by six years. It was the greatest such recorded catastrophe in the last six millennia of recorded human history. ..."
"... Soon, a couple of dozen young Russian oligarchs had taken over the commanding heights of the Russian economy; many then monetized their gains and invested abroad, migrating to follow their new wealth. Much of this was celebrated by the Western media as economic progress. ..."
Apr 08, 2019 | www.nakedcapitalism.com

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<img src="http://b.scorecardresearch.com/p?c1=2&c2=16807273&cv=2.0&cj=1" /> Has Privatization Benefitted the Public? Posted on April 7, 2019 by Jerri-Lynn Scofield Jerri-Lynn here. Another succinct post by Jomo Kwame Sundaram that makes clear the "benefits" of privatization are not evenly distributed, and in fact, typically, "many are even worse off" when the government chooses to transfer ownership of the family silver.

Note that SOE is the acronym for state owned enterprise.

For those interested in the topic, see also another short post by the same author from last September, debunking other arguments to promote the privatization fairy, Revisiting Privatization's Claims .

By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development. Originally published at Inter Press Service

In most cases of privatization, some outcomes benefit some, which serves to legitimize the change. Nevertheless, overall net welfare improvements are the exception, not the rule.

Never is everyone better off. Rather, some are better off, while others are not, and typically, many are even worse off. The partial gains are typically high, or even negated by overall costs, which may be diffuse, and less directly felt by losers.

Privatized Monopoly Powers

Since many SOEs are public monopolies, privatization has typically transformed them into private monopolies. In turn, abuse of such market monopoly power enables more rents and corporate profits.

As corporate profits are the private sector's yardstick of success, privatized monopolies are likely to abuse their market power to maximize rents for themselves. Thus, privatization tends to burden the public, e.g., if charges are raised.

In most cases, privatization has not closed the governments' fiscal deficits, and may even worsen budgetary problems. Privatization may worsen the fiscal situation due to loss of revenue from privatized SOEs, or tax evasion by the new privatized entity.

Options for cross-subsidization, e.g., to broaden coverage are reduced as the government is usually left with unprofitable activities while the potentially profitable is acquired by the private sector. Thus, governments are often forced to cut essential public services.

In most cases, profitable SOEs were privatized as prospective private owners are driven to maximize profits. Fiscal deficits have often been exacerbated as new private owners use creative accounting to avoid tax, secure tax credits and subsidies, and maximize retained earnings.

Meanwhile, governments lose vital revenue sources due to privatization if SOEs are profitable, and are often obliged to subsidize privatized monopolies to ensure the poor and underserved still have access to the privatized utilities or services.

Privatization Burdens Many

Privatization burdens the public when charges or fees are not reduced, or when the services provided are significantly reduced. Thus, privatization often burdens the public in different ways, depending on how market power is exercised or abused.

Often, instead of trying to provide a public good to all, many are excluded because it is not considered commercially viable or economic to serve them. Consequently, privatization may worsen overall enterprise performance. 'Value for money' may go down despite ostensible improvements used to justify higher user charges.

SOEs are widely presumed to be more likely to be inefficient. The most profitable and potentially profitable are typically the first and most likely to be privatized. This leaves the rest of the public sector even less profitable, and thus considered more inefficient, in turn justifying further privatizations.

Efficiency Elusive

It is often argued that privatization is needed as the government is inherently inefficient and does not know how to run enterprises well. Incredibly, the government is expected to subsidize privatized SOEs, which are presumed to be more efficient, in order to fulfil its obligations to the citizenry.

Such obligations may not involve direct payments or transfers, but rather, lucrative concessions to the privatized SOE. Thus, they may well make far more from these additional concessions than the actual cost of fulfilling government obligations.

Thus, privatization of profitable enterprises or segments not only perpetuates exclusion of the deserving, but also worsens overall public sector performance now encumbered with remaining unprofitable obligations.

One consequence is poorer public sector performance, contributing to what appears to be a self-fulfilling prophecy. To make matters worse, the public sector is then stuck with financing the unprofitable, thus seemingly supporting to the privatization prophecy.

Benefits Accrue to Relatively Few

Privatization typically enriches the politically connected few who secure lucrative rents by sacrificing the national or public interest for private profit, even when privatization may not seem to benefit them.

Privatization in many developing and transition economies has primarily enriched these few as the public interest is sacrificed to such powerful private business interests. This has, in turn, exacerbated corruption, patronage and other related problems.

For example, following Russian voucher privatization and other Western recommended reforms, for which there was a limited domestic constituency then, within three years (1992-1994), the Russian economy had collapsed by half, and adult male life expectancy fell by six years. It was the greatest such recorded catastrophe in the last six millennia of recorded human history.

Soon, a couple of dozen young Russian oligarchs had taken over the commanding heights of the Russian economy; many then monetized their gains and invested abroad, migrating to follow their new wealth. Much of this was celebrated by the Western media as economic progress.

diptherio , April 7, 2019 at 9:11 am

SOE must stand for "state owned enterprise."

Jerri-Lynn Scofield Post author , April 7, 2019 at 9:30 am

Yes it does. I've now added a sentence to my introduction to make that clear. I noticed the omission when I was uploading the post, but wasn't sure whether readers would be confused.

Thanks for your comment.

caloba , April 7, 2019 at 10:45 am

As a rule of thumb, I'd say that any privatisations that require the introduction of convoluted pseudo-market structures or vast new regulatory bureaucracies or which derive most of their ongoing income from the public sector are likely to be contrary to the long-term public interest. In the UK, unfortunately, all these ships sailed a long time ago

DJG , April 7, 2019 at 11:15 am

After the recent Chicago municipal elections, I wrote up some notes on the reasons for the discontent. This article by Sundaram explains exactly how these schemes work. Further, you can apply his criteria of subsidies for the rich, skimming, and disinheriting the middle class and poor to all of the following instances in Chicago.

If I may–some for instances of how Sundaram's observations turn up in U.S. cities:

Chicago is the proving grounds for thirty or so years of the Democrats' surrender to neoliberalism and austerity politics. Let us not forget, brethren and sistren, that Rahm is the Spawn of Bill + Hill as well as dear friend and advisor of Obama. So there is the work of Daley to undo and the work of the Clintonians to undo. It will take more than one term for Lightfoot.

Consider:
–Parking meters and enforcement have been privatized, starving the city of funds and, more importantly, of its police power.
–Taxes have been privatized in TIFs, where money goes and is never heard from again.
–There have been attempts to privatize the park system in the form of the Lucas museum and the current Obama Theme Park imbroglio, involving some fifty acres of park land.
–The school system has been looted and privatized. The Democrats are big fans of charter schools (right, "Beto"), seeing them as ways to skim money off the middle class and the poor.
–Fare collection on public transit has been privatized using a system so deliberately rudimentary and so deliberately corrupt that it cannot tell you at point of service how much you have paid as fare.
–Boeing was enticed to Chicago with tax breaks. Yes, that Boeing, the one that now deliberately puts bad software in your airplane.
–Property tax assessment has been an opaque system and source of skimming for lawyers.
–Zoning: Eddie Burke, pond scum, is just the top layer of pollution.
–And as we have made our descent, all of these economic dogmata have been enforced by petty harassment of the citizenry (endless tickets) and an ever-brutal police force.

And yet: The current Republican Party also supports all of these policies, so let's not pretend that a bunch of Mitch McConnell lookalikes are headed to Chicago to reform it.

California is no better , April 7, 2019 at 5:16 pm

Providing professional services i.e. architecture, engineering, etc. for a public entity, local or federal, does not yield unreasonable profits. Typically, the public agencies have their own staff to monitor and cost control a project. The professional services provided to private developers yields far more profit- oftentimes twice the profits associated with public agency work. Most professional services companies will transition their work to the public agencies during a recession.

At any rate, especially in Illinois, privatizing the work to avoid pension liabilities is no longer a choice. Michael Madigan pension promises will require the public to maintain a public service budget with no staff to fill potholes. Essentially, these are the no work jobs made popular by the Soprano crew twenty years ago.

Discussion of the downside of the privatization of public services is merely an oscillation from discussing the weather, the Bears or any other kitchen table discussion – nothing more than pleasant small talk to pass the time.

Privatization, at any cost, is no longer a choice. We have abused the pension system and now the public must pay for private companies to provide the most basic services.

stan6565 , April 7, 2019 at 6:36 pm

The question is, what can one do to help arrest this wholesale theft of public resources and their expropriation into the hands of well connected. " Public", as in, it is the working public over the last 100 or 200 years that created (or paid for), the electricity grid, or public schools, or entire armed or police forces

I keep thinking that perhaps an Act could or should be introduced here in UK (same for the States, i suppose), which should ensure that all politicians that enable any type of privatisation of public resources or PFI arrangement (yes that old chesnut), should be made personally responsible for the results therof.

And any losses to the public accidentally or "accidentally" occasioned by such commandeering over public resources, to be treated like deliberate misappropriation by the said public officials.

With the financial and custodial penalties as may be appropriate.

Anybody out there with similar thoughts or should i really try harder and give up on drugs?

eg , April 7, 2019 at 12:04 pm

Michael Hudson, to his immense credit, explains the pernicious effects of privatization of common goods repeatedly throughout his work, and demonstrates that it has been with us at least as long as the ancient practice of land alienation and rural usury.

Natural monopolies ought to be nationalised, full stop.

Grizziz , April 7, 2019 at 12:39 pm

I support public ownership of natural monopolies, however it would be helpful if these pieces contained data, case studies or footnoted entries providing some empirical evidence of the author's thesis.

Thuto , April 7, 2019 at 1:00 pm

This article comes at a time when the clarion call for privatizing Eskom, SA's electricity utility, is hitting deafening levels. To the private sector, efficiency = maximizing profits by making the "bloated" enterprise lean (aka cutting the workforce) and quite literally mean (aka cutting services to "unprofitable" segments of the market, iow, the poor and vulnerable). When profits soar because the holy grail of efficiency is achieved, the mainstream business press brings out the champagne and toasts this "success" as proof that the previously "moribund" (they always exaggerate the state of things) monopolistic monolith has been given a new lease on life by privatizing it and the template is set for rescuing other "ailing" SOEs.

The drawbacks are never laid out as cleary as they are in this article and the plight of those worst affected, whether laid-off workers or those whose services have been cut, never makes it into the headlines.

PhilB , April 7, 2019 at 2:53 pm

And then there is prison privatization where the burden of operation and maintaining the institution should clearly be on the public so as to be constant reminder of the burden, among others reasons. The motivations by private prison operators to reduce services and costs out of site of the pesky prying eyes of the public are manifold.

RepubAnon , April 7, 2019 at 7:54 pm

Privatization is a great way to avoid having user fees wasted by providing services, and instead put to better use funding the re-election campaigns of politicians supporting privatization. Plus, it provides much-needed consulting fees for former politicians as well as job-creating 7-figure salaries for the CEOs,

(/snark, if you couldn't tell)

On a side note, the Dilbert comic strip is written about private industry ,

Iapetus , April 7, 2019 at 3:39 pm

There was a rudimentary plan put forward last June that recommended some pretty substantial privatizations of U.S. government assets and services which include:

-Privatizing the US Post Office ( through an Initial Public Offering or outright sale to a private entity ).
-Sell off U.S. government owned electricity transmission lines ( U.S. government owns 14% of this nations power transmission lines through TVA, Southwestern Power Administration, Western Area Power Administration, and Bonneville Power Administration ).
-Spin-off the Federal Aviation Administrations air traffic control operations into a private nonprofit entity.
-Spin-off the Department of Transportations operations of the Saint Lawrence Seaways Locks and Channels into a private non-profit entity.
-End the federal conservatorship of Fannie Mae and Freddie Mac, then regulate a new system of private guarantors for their MBS securities.

Not sure if these are still being considered.

Tom Stone , April 7, 2019 at 3:54 pm

There's no way I could ask that question with a straight face.

Jack Parsons , April 7, 2019 at 6:35 pm

At heart, the problem with privatization is that marketing to a government-employed purchaser or "purchase influencer" is ridiculously cheap, due to their poor accountability strictures.

This is abetted by the Katamari Damacy process (self-accretionary tendency) of money and power.

https://youtu.be/-U_Tccwyh70?t=139

The Rev Kev , April 7, 2019 at 7:50 pm

In Oz the electricity grids were privatized as they would be cheaper that way – or so people were told. Instead, the cost of electricity has risen sharply over the years to the point that it is effecting elections on both the State and Federal level as the price hikes are so controversial. A problem is that those companies have to pay back the loans used to buy the public electricity grids and as well, the senior management award themselves sky-high wages because they are totally worth it. These are factors that were never present when it was publicly owned. And just to put the boot in, those very same companies have been 'gold-plating' the electricity grid for their gain-

https://www.abc.net.au/news/2017-07-18/australian-gold-plated-power-grid/8721566

Meanwhile, whatever money the governments made selling their electricity companies has been long spent on white elephants or buying themselves re-elections by giving out goodies to voters.

Procopius , April 7, 2019 at 8:54 pm

buying themselves re-elections by giving out goodies to voters.

I don't reside in the states, so I don't see much of the detail of daily life. What are these "goodies" of which you speak? In what I am able to read on the internet, people aren't being given goodies any more. At least the old-time politicians handed out jobs, and turkeys at Christmas. The current crop do hand out jobs to their kids and immediate family, but not so much to anyone else.

[Jan 11, 2019] How Shocking Was Shock Therapy

Highly recommended!
Notable quotes:
"... You should have come here in the 90's to see a shock of the Doctrine to face social trauma of "PGR"(Huge National Farms) workers (it's the electorate of PiS (Law and Justice)), Miners near Wałbrzych, workers of textile industry near łdź bereft of everything from day to day (literally). Even the contemporary visit might ensure you quite a thrill if you knew where to look. Most of the firms that would easily survive if given some protectionism were hostily taken over by a foreigner capital and shut down with their production instantly replaced by imported goods. ..."
"... I do remember his speeches well. Form the spectrum offered by the Chicago boys he chosen the hardest option. It was Michnik and Kuroń who opted for less "Chicago" direction. But they were in minority. The prevailing Zeitgeist of the period caused words "social", "common" to be treated as a curse and socially stigmatizing. ..."
"... For a better understanding what went wrong you may take example of railroad privatization and compare it to the Czech way. ..."
"... the global elite perspective is that a quick way to rid the globe of the problems we face is to kill off enough people so that the problem dissipates -- war, fraud, nationalism/racism used to point the finger at the other (making it easier for people to harm one another or look the other way (Arendt). ..."
"... Efficiency requires a variety of gains, returns, profits and fairness. Otherwise it is simply theft. And when all is accounted for there might not be any profit to be had in the real world. Only in the minds of the neoliberals. Efficiency is something that should be accounted for carefully so that no vital systems are harmed. ..."
Jan 11, 2019 | www.nakedcapitalism.com

likbez , January 11, 2019 at 1:33 am

The level of the naivety of Barkley Rosser is astounding.

Poland was a political project, the showcase for the neoliberal project in Eastern Europe and the USSR. EU was pressed to provide large subsidies, and that marionette complied. The commenter ilpalazzo (above) is right that there has been " a tremendous development in real estate and infrastructure mostly funded by the EU that has been a serious engine of growth." Like in Baltics and Ukraine, German, French, Swedish and other Western buyers were most interested in opening market for their products and getting rid of local and xUSSR competitors (and this supported and promoted Russophobia). With very few exceptions. University education system also was partially destroyed, but still fared better than most manufacturing industries.

I remember talking to one of the Polish professors of economics when I was in Poland around 1992. He said that no matter how things will develop, the Polish economy will never be allowed to fail as the USA is interested in propelling it at all costs. Still, they lost quite a bit of manufacturing: for example all shipbuilding, which is ironic as Lech Wałęsa and Solidarity emerged in this industry.

Eventually, Poland emerged as the major US agent of influence within the EU (along with GB) with the adamant anti-Russian stance. Which taking into account the real state of Polish manufacturing deprived of the major market is very questionable. Later by joining sanctions, they lost Russian agricultural market (including all apple market in which they have a prominent position).

But they have a large gas pipeline on their territory, so I suspect that like Ukraine they make a lot of money via transit fees simply due to geographic. So they parochially live off rent -- that why they bark so much at North Stream 2.

Polish elite is a real horror show, almost beyond redemption, and not only in economics. I do not remember, but I think it was Churchill who said " Poland is a greedy hyena of Europe." This is as true now as it was before WWII.

Jura , January 11, 2019 at 4:54 am

Gosh! I used to actively fight the commies here in the 80's. But then with Balcerowicz I almost regretted it. as to your words:

"Balcerowicz himself at one point advocated something pretty much like what came to pass, a gradual privatization and maintaining most of the sociaal safety net while advocating shock monetary policies to bring inflation under control." They derail.

You should have come here in the 90's to see a shock of the Doctrine to face social trauma of "PGR"(Huge National Farms) workers (it's the electorate of PiS (Law and Justice)), Miners near Wałbrzych, workers of textile industry near łdź bereft of everything from day to day (literally). Even the contemporary visit might ensure you quite a thrill if you knew where to look. Most of the firms that would easily survive if given some protectionism were hostily taken over by a foreigner capital and shut down with their production instantly replaced by imported goods.

I do remember his speeches well. Form the spectrum offered by the Chicago boys he chosen the hardest option. It was Michnik and Kuroń who opted for less "Chicago" direction. But they were in minority. The prevailing Zeitgeist of the period caused words "social", "common" to be treated as a curse and socially stigmatizing.

For a better understanding what went wrong you may take example of railroad privatization and compare it to the Czech way.

Don't believe the official statistics, we have a huge part of our working poors here. Their voice will never be heard as they live in a subsistence economy and the've got neither time nor power to shout struggling to survive..

John Mc , January 11, 2019 at 11:28 am

One wonders why there is a need to revisit Klein's thesis to debunk parts of it in this moment?

And the point is so small in this article about Poland, that one wonders why a James Madison prof of econ does not have more time to look at significant problems everywhere instead of parse the progressive beast?

In my lifetime, I have not witnessed a time where more of the political machinery has drifted to the right -- caught in the headlights of what Chris Hedges calls the illusion of democracy in the decay of capitalism.

Its important to not forget Gina Haspel's contribution here and torture -- how torture (economic, physical, and social shock) is implicated, vaulting her to the head of our top Spy agency --

It reminds me of a recent article from Arundhati Roy's, that the global elite perspective is that a quick way to rid the globe of the problems we face is to kill off enough people so that the problem dissipates -- war, fraud, nationalism/racism used to point the finger at the other (making it easier for people to harm one another or look the other way (Arendt).

Susan the Other , January 11, 2019 at 1:21 pm

China is wisely looking at the efficiency of state owned enterprises with a reluctance to privatize them. It will become very clear now that everyone is sobering up from the collapse of the USSR that neoliberal capitalist efficiency (profits) can only be made by socializing costs and externalizing everything that reduces their bottom line with answers like "That ain't mine."

If even the doofuses at Davos are looking at various forms of "capital" (social, political, civil, environmental, etc.) they have begun to mitigate their global catastrophe.

Efficiency requires a variety of gains, returns, profits and fairness. Otherwise it is simply theft. And when all is accounted for there might not be any profit to be had in the real world. Only in the minds of the neoliberals. Efficiency is something that should be accounted for carefully so that no vital systems are harmed.

bruce wilder , January 11, 2019 at 2:17 pm

Barkley insists on a left-right split for his analysis of political parties and their attachment to vague policy tendencies and that insistence makes a mess of the central issue: why the rise of right-wing populism in a "successful" economy?

Naomi Klein's book is about how and why centrist neoliberals got control of policy. The rise of right-wing populism is often supposed (see Mark Blyth) to be about the dissatisfaction bred by the long-term shortcomings of or blowback from neoliberal policy.

Barkley Rosser treats neoliberal policy as implicitly successful and, therefore, the reaction from the populist right appears mysterious, something to investigate. His thesis regarding neoliberal success in Poland is predicated on policy being less severe, less "shocky".

In his left-right division of Polish politics, the centrist neoliberals -- in the 21st century, Civic Platform -- seem to disappear into the background even though I think they are still the second largest Party in Parliament, though some seem to think they will sink in elections this year.

Electoral participation is another factor that receives little attention in this analysis. Politics is shaped in part by the people who do NOT show up. And, in Poland that has sometimes been a lot of people, indeed.

Finally, there's the matter of the neoliberal straitjacket -- the flip-side of the shock in the one-two punch of "there's no alternative". What the policy options for a Party representing the interests of the angry and dissatisfied? If you make policy impossible for a party of the left, of course that breeds parties of the right. duh.

Likbez,

Bruce,

Blowback from the neoliberal policy is coming. I would consider the current situation in the USA as the starting point of this "slow-motion collapse of the neoliberal garbage truck against the wall." Neoliberalism like Bolshevism in 1945 has no future, only the past. That does not mean that will not limp forward in zombie (and pretty bloodthirsty ) stage for another 50 years. But it is doomed, notwithstanding recently staged revenge in countries like Ukraine, Argentina, and Brazil.

Excessive financialization is the Achilles' heel of neoliberalism. It inevitably distorts everything, blows the asset bubble, which then pops. With each pop, the level of political support of neoliberalism shrinks. Hillary defeat would have been impossible without 2008 events.

At least half of Americans now hate soft neoliberals of Democratic Party (Clinton wing of Bought by Wall Street technocrats), as well as hard neoliberal of Republican Party, which created the " crisis of confidence" toward governing neoliberal elite in countries like the USA, GB, and France. And that probably why the intelligence agencies became the prominent political players and staged the color revolution against Trump (aka Russiagate ) in the USA.

The situation with the support of neoliberalism now is very different than in 1994 when Bill Clinton came to power. Of course, as Otto von Bismarck once quipped "God has a special providence for fools, drunkards, and the United States of America." and another turn of the technological spiral might well save the USA. But the danger of never-ending secular stagnation is substantial and growing. This fact was admitted even by such dyed-in-the-wool neoliberals as Summers.

This illusion that advances in statistics gave neoliberal access to such fine-grained and timely economic data, that now it is possible to regulated economy indirectly, by strictly monetary means is pure religious hubris. Milton Friedman would now be laughed out the room if he tried to repeat his monetarist junk science now. Actually he himself discarded his monetarist illusions before he died.

We probably need to the return of strong direct investments in the economy by the state and nationalization of some assets, if we want to survive and compete with China. Australian politicians are already openly discussing this, we still lagging because of "walking dead" neoliberals in Congress like Pelosi, Schumer, and company.

But we have another huge problem, which Australia and other countries (other than GB) do not have: neoliberalism in the USA is a state religion which completely displaced Christianity (and is hostile to Christianity), so it might be that the lemming will go off the cliff. I hope not.

The only thing that still keeps neoliberalism from being thrown out to the garbage bin of history is that it is unclear what would the alternative. And that means that like in 1920th far-right nationalism and fascism have a fighting chance against decadent neoliberal oligarchy.

Previously financial oligarchy was in many minds associated with Jewish bankers. Now people are more educated and probably can hang from the lampposts Anglo-Saxon and bankers of other nationalities as well ;-)

I think that in some countries neoliberal oligarchs might soon feel very uncomfortable, much like Soros in Hungary.

As far as I understood the level of animosity and suppressed anger toward financial oligarchy and their stooges including some professors in economics departments of the major universities might soon be approaching the level which existed in the Weimar Republic. And as Lenin noted, " the ideas could become a material force." This true about anger as well.

[Sep 09, 2018] Revisiting Privatization s Claims

Notable quotes:
"... Fourth, privatization was supposed to reduce public sector monopolies, but there is often little evidence of significant erosion of the monopolies enjoyed by privatized SOEs. Arguably, technological change and innovation, e.g., in telecommunications, were far more significant in eroding privatized monopolies and reducing costs to consumers, than privatization per se. ..."
"... Also, natural monopolies (such as public utilities) are often deemed inefficient due to the monopolistic nature of the industry or market. The question which arises then is whether private monopoly is better, even with regulation intended to protect the public interest. ..."
Sep 06, 2018 | www.nakedcapitalism.com
Jerri-Lynn here. This short post usefully debunks arguments advanced to promote the privatization fairy. The author's reminds us that state ownership, when done properly, as in Singapore, can offer its own benefits and " is recognized there as the reason for public accountability, better governance and management."

By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development. Originally published at Inter Press Service

KUALA LUMPUR, Malaysia, Sep 4 2018 (IPS) Several arguments have been advanced to justify privatization since the 1980s. Privatization has been advocated as an easy means to:

  1. Reduce the government's financial and administrative burden, particularly by undertaking and maintaining services and infrastructure;
  2. Promote competition, improve efficiency and increase productivity in providing public services;
  3. Stimulate private entrepreneurship and investment to accelerate economic growth;
  4. Help reduce the public sector's presence and size, with its monopolistic tendencies and bureaucratic support.

Moot case for privatization

First, privatization is supposed to reduce the government's financial and administrative burdens, particularly in providing services and infrastructure. Earlier public sector expansion was increasingly seen as the problem, rather than part of the solution. Thus, reducing the government's role and burden was expected to be popular.

Second, privatization was believed by some to be a means to promote competition, improve efficiency and increase productivity in service delivery. This belief was nave, confusing the question of ownership with that of promoting competition.

It was believed that privatization would somehow encourage competition, not recognizing that competition and property rights are distinct, and not contingent issues. Associated with this was the presumption that competition would automatically result in greater efficiency as well as improved productivity, not recognizing economies of scale and scope in many instances.

Third, privatization was expected to stimulate private entrepreneurship and investment. There is also a popular, but nave belief that privatization was going to stimulate private entrepreneurship when, in fact, the evidence is strong, in Malaysia and elsewhere, that privatization often crowds out the likelihood of small and medium-sized enterprises actually emerging to fill the imagined void, presumed to exist following privatization.

Admittedly, there is scope for new entrepreneurship with privatization as new ways and ideas offered by the private sector are considered or reconsidered as the new privatized entity seeks to maximize the profits/rents to be secured with privatization.

However, the private purchase of previously public property, in itself, does not augment real economic assets. Private funds are thus diverted, to take over SOEs, and consequently diminished, rather than augmented. Hence, private funds are less available for investing in the real economy, in building new economic capacities and capabilities.

Fourth, privatization was supposed to reduce public sector monopolies, but there is often little evidence of significant erosion of the monopolies enjoyed by privatized SOEs. Arguably, technological change and innovation, e.g., in telecommunications, were far more significant in eroding privatized monopolies and reducing costs to consumers, than privatization per se.

From the 1980s, if not before, various studies have portrayed the public sector as a cesspool of abuse, inefficiency, incompetence and corruption. Books and articles, often with clever titles such as 'vampire state', 'bureaucrats in business' and so on, provided the justification for privatization.

Undoubtedly, there were some real horror stories, which have been conveniently and frequently cited as supposedly representative of all SOEs. But other experiences can also be cited to show that SOEs can be run quite efficiently, even on commercial bases, confounding the dire predictions of the prophets of public sector doom.

Has privatization improved efficiency?

Although some SOEs have been better run and are deemed more efficient after privatization, the overall record has hardly been consistent. Thus, it is important to ascertain when and why there have been improvements, or otherwise. It is also important to remember that better-run privatized SOEs, in and of themselves, do not necessarily serve the national or public interest better.

Undoubtedly, most SOEs can be better run and become more efficient. But this is not always the case as some SOEs are indeed already well run. For instance, very few privatization advocates would insist that most SOEs in Singapore are poorly run.

As its SOEs are generally considered well-run, public ownership is not used there to explain poor governance, management or abuse; instead, public ownership is recognized there as the reason for public accountability, better governance and management.

Principal-agent managerial delegation dilemma

Hence, in different contexts, with appropriately strict supervision, SOEs can be and have indeed been better run. Privatization, in itself, does not solve managerial delegation problems, i.e., the principal-agent problem, as it is not a problem of public ownership per se.

With SOEs, the principal is the state or the government while the agents are the managers and supervisors, who may -- or may not -- pursue the objectives intended by the principal.

This is a problem faced by many organizations. It is also a problem for private enterprises or corporations, especially large ones, especially where the principal (shareholders) may not be able to exercise effective supervision or control over the agent.

Also, natural monopolies (such as public utilities) are often deemed inefficient due to the monopolistic nature of the industry or market. The question which arises then is whether private monopoly is better, even with regulation intended to protect the public interest.

The answer needs to be ascertained analytically on the basis of evidence, and cannot be presumed a priori. If an industry is a natural monopoly, what does privatization achieve? Often, it means a transfer to private hands, which can be problematic and possibly dangerous for the public interest.

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