Privatization and Its Discontents

JurisdictionUnited States,Federal
Publication year2013
CitationVol. 63 No. 2

Privatization and Its Discontents

Alex Kozinski

Andrew Bentz

PRIVATIZATION AND ITS DISCONTENTS


Alex Kozinski*
Andrew Bentz**


INTRODUCTION

The question of what government should control exclusively and what it should delegate to private entities is as old as government itself. In ancient Greece, ownership of forests and mines rested with the government, but the government "contracted out the work to individuals and firms."1 And in ancient Rome, the private sector "fulfilled virtually all of the state's economic requirements," like tax collection, supplying the army, and feeding the sacred geese of the Capitol.2 Though privatization is nothing new,3 it's becoming an increasingly important issue as government gets bigger and its functions multiply. As the pressure to privatize increases, we must be mindful of its advantages and pitfalls.

Privatization comes in two basic flavors.4 First is the shift in the production of goods and services from the government to the private sector,5 such as privatizing Amtrak or the Tennessee Valley Authority. This process belongs to the world of law and economics6 and won't be addressed here, except to say

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that privatization of production is generally a good thing. Moving in the opposite direction—toward communism—doesn't work.

This Article will focus on the second flavor of privatization, meaning the shift of government functions to private control.7

As you likely know, privatization offers many benefits. When combined with competition, it can improve efficiency and lower costs.8 FedEx and UPS compete with each other and drive down prices, while still turning a profit.9 Contrast that with the U.S. Postal Service, which loses billions of dollars a year.10

Privatization also leads to specialization. In fact, the modern administrative state is built on the idea that the government needs agencies to specialize.11 For example, areas like medicine and air quality are beyond Congress's ability to manage directly, so it established the FDA and the EPA. And sometimes, the experts needed to work in these agencies are easier to find—or at least easier to motivate using market incentives—in the private sector. Thus, by privatizing certain government functions, we can allow private companies with specialized expertise to run them.

When you combine competition and specialization, you get efficiency. Efficiency isn't something you can usually count on in government because the incentives are misaligned.12 If you're the government and your costs increase, you can just raise taxes. But if you're a private company, you have to figure out how to reduce costs or increase revenue, or you'll go bankrupt.

These benefits mean that privatization of many government functions is not at all controversial. Nobody minds if Atlanta hires a private construction firm to build a city office building. And we don't complain when janitorial services at federal buildings are performed by private contractors rather than government employees. But what about privatizing core government functions?

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Public institutions are public for a reason. Sometimes, it's because of the tragedy of the commons.13 We all need clean air and feel that the governing rules should be written with public input and enforced by a politically accountable entity, so we established the EPA. Sometimes, it's a collective action problem.14 We all need national defense and want to ensure that military power is used at the direction of our elected, civilian commanders, so we formed a public military. And sometimes, it's a moral sensibility. We want to deter crime and punish criminals, but we don't want victims to exact private retribution.

Privatizing such core government functions can give us some gains in efficiency, but we risk forfeiting the benefits of the institutions' public character—in particular, equality and accountability.15 This Article will focus on areas where the pressure to privatize and the challenges to equality and accountability are most acute—education, prisons, the military, and the justice system. By focusing on each of these in turn, we hope to highlight some of the pitfalls of privatization and suggest some ways to avoid them.

I. Education

First, education. The most direct route to privatization is through vouchers. Voucher programs allow parents to send their kids to private schools with taxpayer money.16 The most famous advocate of school vouchers, Nobel laureate Milton Friedman, argued that giving parents the option to choose their children's school would create free-market competition.17 "For Friedman and those who follow[] him, the school voucher is a straightforward application of first-year college economics to ameliorating poor school quality."18

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When you have a single school district, there's often little competition driving the public school to provide children with a better education.19 Opening up the market leads to competition among schools for funding, which can lead to good results. It can drive down costs. For example, the Milwaukee voucher system saved Wisconsin over fifty million dollars in 2011 alone.20 Voucher systems can also help kids. In Milwaukee, voucher students were more likely to graduate from high school than their public-school counterparts.21 And pupils who remain in public schools can benefit too. Even though it undoubtedly drove some strong students to private schools, the introduction of vouchers in Milwaukee is credited with driving up test scores in public schools.22 Similarly, a study on the Florida voucher program found that public schools facing pressure from voucher programs opted to change the way they taught.23 They increased instructional time and teacher resources and began targeting high-needs children.24 However, "once the threat of vouchers goes away, so does the incentive for failing schools to improve."25

But privatization can also undermine the advantages of public education. The main reason we've committed to public education is to equalize access, and we've spent decades trying to achieve it. When communities turn to voucher programs, they must be mindful of the disparate effect these programs can have on poor families.26 If private schools can charge more than the voucher is worth, poor families still face a barrier to entry. The vouchers may not be enough to pay for any private school that's better than the public school

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they'd be leaving.27 Moreover, if private schools are siphoning money from public schools, they may leave the kids stuck in public schools far worse off.28

How do we fix this? One solution is to limit the amount schools can charge on top of vouchers. The Ohio voucher program approved by the Supreme Court in Zelman v. Simmons-Harris required that schools not charge the lowest income families more than $250 over the voucher amount.29 Or we could require schools to accept a certain percentage of students for the cost of the voucher, perhaps based on need. Or, if we really wanted to level the playing field, we could give out vouchers only to the truly needy.30

One other obvious concern with privatizing education is that it increases the state's involvement with religious schools. It's true that a lot of voucher money goes to religious schools. In Zelman, for example, ninety-six percent of voucher students enrolled in religiously affiliated schools.31 Because money is fungible, any funds paid by the government to help run a religious school release an equal amount to support the school's religious mission.

But what's more interesting is the flip-side of the religious concern-accountability. The state may lose a fair amount of control when schools are privatized. One major cause of this is the Supreme Court's understanding of the Establishment Clause: If the government starts messing around with religious schools too much, it might violate the third prong of the Court's Lemon test.32 So states have to be somewhat hands-off when it comes to private schools. This lack of accountability may strike some as problematic, as it may result in students in private schools getting an inferior secular education compared to those in public schools.

In fact, the Florida Supreme Court struck down a voucher program largely because of the lack of accountability.33 The court held that the voucher

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program violated article IX of the Florida Constitution,34 which requires the legislature to provide a public school system that is "uniform."35 The court found that the voucher program allowed Florida to give money to private schools that were "not subject to the same standards as those in force in public schools."36 And since article IX has been interpreted to require "uniform operation throughout the State," the diversion of money to private schools was deemed to be unconstitutional.37

There's no reason to debate Florida constitutional law here, but how much of a problem is this in practice? Schools, after all, are accountable to customers—the parents who send their children there.38 We trust parents to make all sorts of decisions regarding the welfare of children, and parents are generally pretty good at it. If parents are unhappy with their children's education at one school, they'll pull them out and send them elsewhere. If parents are happy with the school, they'll keep their kids enrolled, and the school will continue to get money. This system allows parents to hold schools directly accountable.39

II. PRISONS

But there are other kinds of institutions, where there are no customers, or at least no customers who can exercise choice. Prison—where the kids who didn't get a voucher end up—is a good example. We've had some form of private prisons in America since our founding.40 But today, private prison populations are ballooning. More than 100,000 convicts are in prisons run by private companies.41 And from 1999 to 2010, the number of federal prisoners in private custody increased by 784%.42

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So we're certainly...

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