Privatization is not capitalism

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The slow-roll collapse of the ill-advised Iowa Medicaid privatization, which was put in place by former Governor Terry Branstad, continues under his successor, Kim Reynolds, to harm the lives of real Iowa citizens with disabilities and chronic medical conditions. Because of that fiasco, I thought it would be useful to dispel some widely-held myths about government privatization efforts in general.

The overarching myth is that the privatization of government services is an important ideological stake-in-the-ground to “save capitalism” and “reduce the size of government.” My summary response is that (1) privatization has very few aspects of “capitalism,” (2) it represents a failure of the ability of elected government officials to perform the duties of their office, that is, to serve the public good (the “commonweal”), and (3) it is a looting of the public coffers that effectively transfers public money from wage income for citizens who provide “public good” services to fellow citizens, turning it into capital income, to the owners of the “privatized” businesses.

When the labels mislead

The terms “capitalism” and “socialism” carry so much historical, ideological and political baggage that I’d like to scrap them both for purposes of this discussion, and talk instead of “things best accomplished by individuals” versus “things that require some collective effort.” Most of the other stuff hung around those two words is ideological “add-ons.” ALL modern economies have some mix of the two entwined in an economic “dance,” so extremist rhetoric tied to either word is typically bunk. The question is, “Which method serves people best?”

Take prisons as an example. They are necessary (although often overused) as part of preserving the “public good.” Classically, incarceration of dangerous people has been a collective, rather than individual, effort in most countries, including the United States, with the “collective” being the federal, state or local government, depending on the nature of the danger.

I am hard-pressed to think about how a true “private prison” would work. What we do instead is to make a partial attempt to avoid some public responsibility by shifting the capital construction costs (which are not really “free market” because there is usually a public guarantee behind the debt contract) and ceding the “hard decisions” about corrections management (which the public should care about) to people farther out of reach of public oversight. Promised “cost savings” are usually an illusion. Instead, the “savings” happen when we permit the transfer of employee wage costs, accomplished through the common tamping down on collective bargaining activity, over to the investors in the form of shareholder returns or higher private-sector management salaries.

The “private prison” business, set up with government guarantees to capital access and operational cash flow, “looks like” a normal free-market corporation, but it is far from it. Instead, it is a diversion of taxpayer dollars to private investors, all to accomplish a function that a community or state typically should be responsible for collectively. In this sense it represents the failure of government officials to do their jobs.

Ironically, the push to privatization more often uses the autocratic weight of the state to amplify the ability of now-very-powerful businesses to exert wage pressure on employees that the state alone could not effectively manage. Employee collective bargaining, long-term job security and retirement benefits have often been the first casualties of privatization.

When we look at the classic characteristics of capitalism, most of them are missing in privatized government services like this one. Rather than relying on open capital markets, as noted earlier, taxpayer-backed financing is common. Classically, capitalism pushes for minimal governmental interference, but privatized business is joined at the hip with “big government,” clearing and protecting a market niche for the chosen business granted a limited monopoly on, say, incarceration services or waste collection services.

While there may be some semblance of competitive bidding in the initial awarding of contracts for privatized services, political favoritism in this process is rife. Then begins the digging in for permanence of the selected company’s niche, in order to prevent the bidding to ever become an issue or threat again, hardly a capitalist ideal.

And finally, in an open capitalist system, the market sets the price through the invisible hand of competition. For privatized businesses however, competition becomes a threat, and the government becomes the primary agent of minimizing that threat.

Back to Iowa’s Medicaid Privatization

Government can always get more efficient. But the “treasure trove” of “waste, fraud and abuse” that prompts legislators to push for privatization is usually an illusion. It is almost always smaller in percentage terms than promised privatized profit margins, and private corporations have their own issues with out-of-control costs that often parallel government cost control issues in size.

This certainly proved true in Iowa’s disastrous Medicaid privatization. Promised profits did not materialize when “waste, fraud and abuse” proved to be minor compared with the real medical needs of disabled people and nursing home residents who consumed the bulk of the dollars. Instead, the three selected Managed Care Organizations (MCOs) first tried to squeeze the most vulnerable providers, such as home health aides, delaying or denying reimbursement for approved services provided. When that failed to produce sufficient savings, two of the three MCOs fully or partially abandoned the state.

In Iowa’s case, the MCOs bailed when the promised profit margins did not materialize. Note that “promised profit” is not a feature of real capitalism. The federal Medicare Advantage program similarly funnels about 14% more in per-person reimbursements to ensure profits for private insurers who take on over 17 million Medicare recipients. Privatization can often prove much more costly than well-run government services.

In just about every case, privatization of government services involves a formalization of the larger problem with American capitalism today, which is the co-opting of government power in order to “privatize profits while socializing losses.” American corporations would rather purchase politicians than invest in their own competitiveness. It is apparently cheaper that way.

1 thought on “Privatization is not capitalism

  1. Sherry Morain

    Thank you for this, Rick. It is is obviously the Iowa issue most important to me personally these days. You have given me some good phrases to use in my discussions with Joel and Amy. Cheers!


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