Tag: privatization

This Week in Government Failure

Over at Downsizing Government, we focused on the following issues this week:

  • Taxpayers received a rare, albeit small and temporary, victory when a pork-laden omnibus bill died in the Senate. We’re now about to find out how serious Republicans are about cutting spending.
  • Chris Edwards looks at breastfeeding and argues that bigger isn’t better when it comes to subsidies.
  • “The nearest earthly approach to immortality is a bureau of the federal government.”
  • Former President George W. Bush defends his abysmal spending record in his book Decision Points. Upon further review, perhaps the book should be retitled Deception Points.
  • A new Cato essay discusses the problems of the U.S. Postal Service and concludes that taxpayers, consumers, and the broader economy would stand to gain with reforms to privatize the USPS and open mail delivery up to competition.

This Week in Government Failure

Over at Downsizing the Federal Government, we focused on the following issues this week:

  • Unfortunately, the party favored by tea party supporters at the moment has no interest in shuttering the Department of Education.
  • Columnist Robert Samuelson is right: the Obama administration’s high-speed rail dreams “represent shortsighted, thoughtless government at its worst.”
  • Attention GOP: the electorate wants spending cuts, and they will support the policymakers who take the lead on cuts if they are pursued in a forthright and serious-minded manner.
  • New Republican members of Congress will be looking for ways to cut the budget deficit and also to increase economic growth. One way to do both is to privatize government assets.
  • Will the House Republican leadership embrace spending cuts proposed by their own members in the conservative Republican Study Committee?

Republican Agenda: Privatization

In coming months, new Republican members of Congress will be looking for ways to cut the budget deficit and also to increase economic growth. One way to do both is to privatize government assets, such as the U.S. Postal Service, Amtrak, and the air traffic control system.

Privatization can reduce deficits from the one-time gain of an asset sale and from the elimination of annual taxpayer subsidies. Privatization can spur economic growth by moving resources from moribund government agencies to the higher-productivity and more innovative private sector.

A new report by a trade magazine specializing in privatization confirms that the United States lags many nations on innovative infrastructure financing. Public Works Financing has been tallying data on “public-private partnerships” around the world since 1985. PPP is sort of half way toward the full privatization of government assets such as highways. I prefer full privatization (such as this highway), but PPP has swept the world in recent years and it is a step in the direction of market reform.

Public Works Financing is subscription only, but I can summarize a few findings from their October annual survey.

  • Since 1985, the magazine has tallied 1,867 PPP infrastructure projects worldwide valued at $712 billion. U.S. projects represented just 8 percent of the total value.
  • With a population about 10 percent as large as the United States, Canada had 53 percent of the U.S. PPP deal value. With a population of a similar size as the United States, Europe has had five times the value of PPP deals.
  • Of the 35 top global transportation firms doing PPP deals, the United States had only one firm, Flour, which was ranked number 33. Countries with firms heavily involved in PPP include Spain, Australia, China, and France. American entrepreneurs are apparently losing out because U.S. policymakers are asleep at the switch regarding private sector infrastructure financing.

Examples of PPP in the United States include the project to widen the Capital Beltway in Virginia, which involves the firms Transurban and Flour, and the leasing of the Indiana Toll Road, which involves Cintra and Macquarie. These deals aren’t full privatization, but they will hopefully bring some market efficiencies into an area of the economy dominated by the government over the last half century.

Congress is expected to write a major transportation authorization bill next year. The likely GOP chairman of the House Transportation and Infrastructure Committee, John Mica, has a more favorable view of private infrastructure than the prior Democratic chairmen. However, it is not clear that some of the incoming Republicans really understand the anti-spending message that voters delivered on Tuesday. Regarding President Obama’s $8 billion in wasteful high-speed rail subsidies, Mica did not call for killing them, but just for making them “better directed.”

The election ended the debate over whether to cut federal spending, but the debate about cutting particular programs has just begun.

Postmaster General Stepping Down

Postmaster General John Potter has announced that he is stepping down. The Washington Post speculates on the reason for Potter’s departure:

It is not immediately clear why Potter decided to step down, though USPS staffers and others in the postal community – a wide fraternity including the shipping industry, labor unions and large retailers – signaled recently that he was likely to go after another record year of financial losses and failing to earn greater management flexibilities from Congress.

When Potter testified before a Senate Appropriations subcommittee hearing in March on the USPS’s desire to drop Saturday delivery, I noted that his comments indicated the need to privatize the U.S. Postal Service.

In his testimony, Potter stated:

If the Postal Service were provided with the flexibilities used by businesses in the marketplace to streamline their operations and reduce costs, we would become a more efficient and effective organization. Such a change would also allow us to more quickly adapt to meet the evolving needs, demands, and activities of our customers, now and in the future.

Of course, Congress has shown virtually no interest in giving the USPS, which is bleeding red ink, the greater flexibility it needs. This makes me wonder if Potter will reach the same conclusion that his predecessor, William Henderson, reached following his departure from the USPS.

Three short months after Henderson stepped down as postmaster general in June 2001, he penned an op-ed in the Washington Post that called for the USPS to be privatized.

Henderson wrote:

But for all the ways in which the Postal Service already resembles a private company, it lacks the advantages of any other corporation, such as being able to turn on a dime when it comes to rate changes, perhaps raising prices at times of high demand and lowering prices to entice customers during traditionally slow times, which for the Postal Service means summer. Today, a price change requires the permission of the Postal Rate Commission – a yearlong process.

And unlike a private company, the Postal Service has a universal service obligation, meaning it must deliver everywhere, six days a week, at a regularly scheduled time, making the delivery even for a single piece of mail, which is not cost-effective. And it means delivering in the Grand Canyon and in rural Alaska and in high-risk neighborhoods and lots of other places where delivery is not cost-effective.

The trade-off is that the Postal Service gets monopoly protection; no private company is allowed to compete with it head to head by carrying letter mail or using the mailbox. It should give up that protection for the greater benefits of privatization.

Henderson’s conclusion still rings true almost ten years later:

I can’t believe that 25 years from now the Postal Service will still be owned by the federal government. But the point is that, as with any government asset, this one needs to be maximized. And that means we need to free ourselves from the usual discussion about controlling costs or keeping rates stable or mailing more, all of which is simply a form of denial about the real issue. The model itself is not going to work for the long haul: It must be changed.

Unfortunately, Congress is still in denial. In commenting on Potter’s departure, Sen. Susan Collins (R-ME) offered the vacuous statement that his successor “must strengthen the Postal Service by cutting costs, enticing more customers and putting this vital institution on a sound financial footing.” Instead, Sen. Collins and her colleagues need to recognize that the USPS model “is not going to work for the long haul” so long as politicians ultimately remain in charge.

Obama and Infrastructure

The President is continuing his push for the federal government to go deeper into debt in order to fund infrastructure projects. While nobody disputes that the country has infrastructure needs, the precarious nature of federal and state finances indicate that policymakers need to starting thinking outside the box. Specifically, policymakers should be looking to make it easier for the private sector to fund and operate infrastructure projects.

As my colleagues Chris Edwards and Peter Van Doren have explained, the main problem with government infrastructure spending is the lack of efficiency:

More roads and transit capacity may or may not make sense depending on whether the benefits exceed the costs. One sure way to find out is to have private provision and user charges. If users are not willing to pay the costs of extra or newer capacity, then calls for taxpayer involvement probably imply subsidy of some at the expense of others rather than efficiency.

A lot of what the the president wishes to spend taxpayer money on – for example, high-speed rail – is of questionable economic value. Unfortunately, policymakers all too often allocate resources on the basis of politics rather than economics.

For more on this topic, interested readers should check out our essays on the Department of Transportation. Also, an essay on privatization argues that “The benefits to the federal budget of privatization would be modest, but the benefits to the economy would be large as newly private businesses would innovate and improve their performance.”

Cuban Government Will Choke the Nascent Private Sector

Following the announcement of massive layoffs in the public sector, the Cuban government published today new guidelines that will allow private employment in 178 economic activities. Among the newly authorized private occupations are masseurs, clowns, shoemakers, locksmiths, and gardeners.

However, these new entrepreneurs will face a few hurdles before enjoying the benefits of their own work. Not only must they get a government license in order to operate (according to official sources the number of permits will be capped at 250,000), but they will also have to pay high taxes. A leaked document from the Communist Party says that small businesses will pay between 10 to 40 percent of their gross income in taxes. On top of that, they will have to contribute 25 percent of their incomes to social security.

Don’t expect a thriving private sector in Cuba any time soon.

Congress Is Hurdle to USPS Reforms

National Journal reports that two key policymakers don’t support the U.S. Postal Service’s desire to eliminate Saturday mail delivery. House Financial Services Appropriations Subcommittee Chairman Jose Serrano (D-NY) says he’ll be working with USPS management and the postal unions to avoid service cuts. And House Oversight and Government Reform Federal Workforce Subcommittee ranking member Jason Chaffetz (R-UT) announced that he too opposes the move.

Chaffetz intends to introduce legislation that would instead eliminate twelve delivery days a year. Twelve days? With the USPS facing $238 billion in losses over the next ten years, it’s hard to understand why the Republican congressman is fiddling around with such small changes.

From the article:

Chaffetz said he is concerned that if the Postal Service cuts Saturday deliveries, it could end up hurting itself in the long run by creating an opening for private delivery companies. “You have got to serve your customers, or somebody else will come in and do it for you,” he said.

What private delivery companies? UPS and FedEx are allowed to compete with the USPS on express mail delivery, but the USPS has a government-granted monopoly on regular mail. In pointing out that the USPS’s reduction in services isn’t good for customers, Chaffetz unintentionally make the cases for opening up the mails to competition from private providers.

“The challenge for the Postal Service is to become more relevant to people’s lives,” he said. “They have been cutting back … and I applaud them for that. The Postal Service is also one of the few things highlighted in U.S. Constitution. They’ve got to figure out ways to cut and make it more relevant.”

Mr. Chaffetz: The Constitution gives the federal government the power “to establish Post Offices and post Roads.” It doesn’t say the government has to have a monopoly over the provision of mail. Nor does it say that Congress must perform this service. Today, there are better private options.

The reality is that the USPS is bleeding red ink because it is becoming less relevant to people’s lives because of electronic communication. Surely Rep. Chaffetz doesn’t want the government’s mail monopolist involved in electronic correspondence to make it more “relevant”?

A story out of Finland demonstrates why that would be a bad idea. Finland’s state-owned postal service is testing a cost-cutting idea that would have it open mail, scan it, and then send an electronic copy to a digital mailbox. The original mail would then be sealed up and physically delivered, but delivery would only be done twice a week. Fins are rightly concerned about their civil liberties being violated by the government viewing their private correspondence.

The underlying idea behind the Finnish experiment is nonetheless sound. In a competitive market for mail delivery, electronic scanning and transmittal would be a more cost-effective – and thus perhaps profitable – way of getting people their mail. This could be especially appealing for costly-to-deliver rural areas, which proponents of the USPS often cite as a reason why mail privatization is untenable.