Source Dave Anderson
Date 99/05/01/21:40

/* Written 6:52 PM May 18, 1998 by in igc:labr.all */
/* ---------- "privatization" ---------- */
---------- Forwarded message ----------
Date: Sun, 17 May 1998 17:02:02 -0600 (MDT)
Subject: privatization 1 (fwd)

Here's a story from the Wall Street Journal dealing with a backlash
against privatization (part one)

Dave Anderson

The Wall Street Journal Interactive Edition -- May 14, 1998
Market Economy Begins to Reach
Further Into Government, Society


Like never before, the U.S. is unleashing the turbulent
forces of the market: competition and choice, prices and

Profit-making companies are invading areas once thought
the exclusive preserve of government. Roughly one in 20
federal inmates is now in a for-profit prison, and more than
one in eight community-hospital beds is in an
investor-owned hospital. Deregulation is shaking up
once-drowsy industries like electric utilities, prompting a
frantic scramble for dominance. Skilled people in endeavors
from singing to software find that, like baseball's free
agents, they can command once-unimaginable salaries if
they exploit the market.

The changes are found in unlikely
places. In the land of the freeway, a
privately owned stretch of Route 91
in Southern California charges a
60-cent toll at night and $3.20 at
rush hour to discourage peak-hour
travel. In Kansas, the state hires
private contractors to find homes for
foster children, paying a fixed
per-child fee to provide an incentive
for prompt placement. Even the U.S.
government is learning to play the game: The Federal
Aviation Administration took bids to operate its payroll
computers. Interestingly, the Department of Agriculture
beat IBM and two other companies.

This march to the market confronts America with a
question that hasn't provoked serious debate in
generations: Is the market penetrating too deeply into
American life?
On a Roll

To even ask the question at this moment seems a heresy.
Capitalism is triumphant. Market forces have spread to
every corner of the globe. National boundaries seem to be
dissolving as goods and information move freely and
companies like Daimler-Benz and Chrysler, once the very
symbols of nationalism, merge. Efforts to chart a middle
course between the torpor of socialism and the insecurity
of U.S.-style capitalism have floundered; the
much-ballyhooed Asian model, for now, is discredited.

Yet here in the U.S., still the cutting edge of capitalism, the
early stirrings of backlash against the market are in sight.
They can be seen most clearly in recent reactions to
managed health care and profit-minded hospitals. But they
can be seen elsewhere, too. As market forces push into new
frontiers, Americans wonder: Where should the line be

Consider the heated debate this spring in Lake County, Fla.,
sprawling north and west of Orlando and struggling to cope
with a development boom that is turning farms and citrus
groves into subdivisions and mobile-home parks. Between
1990 and 1997, the county's population swelled by nearly
30% to 196,000.


Because local fire stations are overwhelmed, County
Commissioner Richard Swartz suggested that the county
hire the same for-profit company that already provides
ambulance service to run the fire department. About 30 of
the company's 84 paramedics and emergency medical
technicians already are trained firefighters, more than the
fire department itself deploys. The efficiencies were obvious,
Mr. Swartz argued.

But the commissioner, who runs a bicycle shop, ran into
fierce resistance. "If the privatization of the fire department
is good, why don't we privatize the sheriff? Or the county
commission? Or the tax collector?" asked John Gammon,
leader of an association of mobile-home residents who
questioned the proposal. If the fire department is privately
run, said Mal LaShay, head of the residents' organization at
the affluent Plantation development, "What does the county
manager do? Does she have control over them, and if so

Foes ran ads exploiting concern over in-patient costs using
the local hospital that owns the ambulance company as
ammunition. "Think about how much one aspirin costs you
at a private hospital," read one. "Don't let YOUR fire
department go private!" Another ad pictured the expensive
home of the ambulance firm's top executive.

Fire Alarm

The firefighters' union spread the tale of Estero, a small
Florida community that hired Wackenhut Corp. to run its
fire department. After one of the new private firefighters
was killed in the line of duty last year, leading the
Occupational Safety and Health Administration to cite the
company for safety violations, Estero severed its ties to the
company and resurrected its public fire department.

In the end, Mr. Swartz lost. The hospital that owns the
ambulance company decided the business wasn't worth the
brawl, and withdrew its bid. For now at least, that has
deprived Mr. Swartz of the only feasible candidate for his
privatization idea.

Lake County isn't an isolated example. Across the country,
the advance of market forces is being met with pockets of
resistance by consumers, opposition by some businesses,
second thoughts by government officials and even some
conservative intellectuals, and, in some instances, downright
failure of the market solution to deliver on its promise.

"What I'm concerned about is the idolatry of the market,"
says conservative intellectual William Bennett, a former
education secretary and author of "The Book of Virtues." He
worries particularly that the market for popular music and
movies with sexual or violent content has a corrosive effect.
"Unbridled capitalism ... may not be a problem for
production and for expansion of the economic pie, but it's a
problem for human beings. It's a problem for ... the realm of
values and human relationships because it distorts things."

Public opposition is stiffest, not surprisingly, where
consumers perceive they would have to pay more if market
forces were unleashed. In New York, boisterous opposition
from protected tenants scuttled an aggressive plan by
state Republicans to sharply cut back rent regulation of 1.1
million apartments. In California, highways that charge
higher rush-hour tolls are attacked as "Lexus lanes" for the
impatient affluent, turning the poor into second-class

The market-friendly, Republican-controlled Congress has
responded to constituent fears that profit-conscious health
insurers may skimp on care. Last year, Congress decreed
that every new mother deserves 48 hours in the hospital, 96
hours if she has a Caesarean. This year, it is expected to
approve a "patient bill of rights" that would further fetter
market-driven health care.

"Americans are willing to tolerate more insecurity than
people in other industrial nations, but there are still limits
to how much insecurity they will accept. Elections and
opinion polls demonstrate that while the public does not
want government to extend its reach, neither does it want
this rich country to abandon its American-style safety net,"
Daniel Yergin and Joseph Stanislaw write in their new book
"The Commanding Heights," which tracks the global
embrace of the market over the past two decades.

Business Balks

Sometimes it isn't consumers but business executives --
always more enamored of competition in concept than in
practice -- who resist the move to markets. The
Telecommunications Act of 1996, for instance, was
designed to provoke competition for telephone customers.
But as the SBC Communications-Ameritech announcement
shows, some companies would rather merge than fight.

The government's Health Care Financing Administration
learned just how resistant business can be when it tried to
harness market forces with an experiment in Denver. As
currently structured, Medicare pays any eligible
health-maintenance organization a flat fee -- roughly 95% of
cost of the traditional fee-for-service insurance -- for
covering senior citizens. HCFA says that fee is too high
because HMOs tend to attract healthier senior citizens. To
save money, it sought to force HMOs in Denver to submit
bids for what they would charge to provide a standard
package of benefits. HCFA wanted to use the bids to set
new, lower rates.

But the HMOs, while professing support for the concept of
competitive bidding, objected to nearly all the details and
derailed the experiment in court. Then Colorado Republican
Sen. Ben Nighthorse Campbell, who also says he supports
competitive bidding in principle, introduced legislation that
prevented HCFA from spending any money on the
experiment. Former HCFA Administrator Bruce Vladeck
says: "I don't believe we could run a purely competitive
procurement process in a way that would satisfy the HMOs
because they are better off without competition."

Congress subsequently established a 15-member
commission of outsiders to oversee seven Medicare
experiments in competitive pricing over the next few years.

Cleaning Up

Despite the occasional resistance, the move to markets
continues. The number of private businesses doing jobs
once the near-exclusive province of public employees is still
on the rise. Across the county, 73% of local governments
use private janitorial services and 54% use private garbage
collectors, up from 52% and 30%, respectively, a decade
ago, according to a survey by Mercer Group Inc., an Atlanta
consultant. About the only audible complaints come from
public-employee unions.

At the other end of the spectrum, some government
functions still are widely seen as unsuitable for privatization.
No one is proposing to privatize the criminal courts (though
a significant number of business disputes are handled
outside the public court system) or to hire private
companies to sail aircraft carriers.

But in between using private janitorial services and hiring
Wackenhut to run the Marines Corps are a host of activities
where relying more on market forces raises vexing
questions and emotional debate. Should the government
continue to ban the sale of human organs for transplant?
(Nobel laureate Gary Becker and a few other economists
say no.) Should the government proceed with a plan to sell
its uranium-enrichment operations, even though the
organization has been assigned the delicate task of buying
uranium from Russia? (President Clinton says yes, though
his former economic adviser Joseph Stiglitz says "absolutely

And, most controversial, is making a profit by serving the
poor a terrible notion that smacks of a Dickens novel, or is
it a welcome move towards efficiency?

"Private citizens should not have life or death power over
other private citizens when you're talking about basic
necessities," says Rep. Barney Frank, a Massachusetts
Democrat who speaks for many liberals on the subject. "The
financial motive should not be at work when we're talking
about benefits."

The Wal-Mart Argument

Mr. Stiglitz, who once pondered such questions in academia
and now serves as chief World Bank economist, says that
sweeping reaction against privatizing services to the poor is
wrong. "Wal-Mart makes profits off poor people, but it
makes them better off. It's providing high quality and low
price." Whether social services are delivered by for-profit
companies, nonprofit agencies or the government is
irrelevant, Mr. Stiglitz argues. Rather, the key is whether
the ultimate consumers can choose between competing
providers. It is competition, not private ownership, that
makes the market work well, he says.

"Because you have the choice of going to the post office,
Federal Express has an incentive to treat you well and serve
you quickly," Mr. Stiglitz notes. "You don't have a choice in
applying for a welfare check. Because you don't have a
choice, you can be mistreated" by either the government or
a private company.

It was the hope of offering the Wal-Mart combination -- high
quality, low price -- that led the state of Kansas last year to
seek private bidders for its costly and cumbersome
foster-care system. Contractors hired by the state receive
a fixed fee for placing children in foster care and then in a
permanent home. Privatization initially won favorable
reviews for producing speedier resolution of cases that once
languished on the desks of overburdened government

But some child-welfare advocates lately have become vocal
about the danger that outside contractors will cut corners
to protect their bottom line rather than serve troubled
children. "Every single decision is based on that capitated
rate," complains social worker Sky Westerlund, who heads
the Kansas chapter of the National Association of Social
Workers. "Their question is: Can we afford this?"

Financial pressure already has led the Salvation Army to
reduce its role in foster care to cut its financial risk. The
organization, which had bid to serve the Wichita region in
partnership with a Methodist youth-services organization
and a for-profit managed-care company, concluded that
fees from the state weren't covering costs. "If we were
making a product, we could tweak the assembly line. But
these are kids," says Staci Warner, a Salvation Army

In Utah, Republican Gov. Mike Leavitt balked at a
Kansas-style experiment. "It would be inappropriate and
wrong for me to delegate the power of decision making as
to whether a child stays in a home," he says. So, in contrast
to Kansas, state employees in Utah still decide. Utah is,
however, turning to private organizations to recruit and
train foster families. "I hire good social workers," says Robin
Arnold-Williams, Utah's director of human services. "I don't
hire people who are good at marketing. We ought to do
what government does best."

Welfare Business

Under pressure from public-employee unions, the Clinton
administration last year rejected Texas's proposal to hire
big companies, such as Lockheed-Martin, to decide whether
applicants are eligible for Medicaid, food stamps and
welfare. It said turning an entire state's welfare system over
to private contractors was simply too risky.

In other instances, resistance to reliance on the market
turns on whether the public interest coincides with the
private interest -- and if it doesn't, whether the government
can adequately regulate the private company. "You can't
just privatize and not think about conflict of interest," Mr.
Stiglitz says.

Trading Uranium

The pending sale of the U.S. government's
uranium-enrichment operations illustrates the complexities.
As long ago as 1969, President Nixon said that "these
facilities should be transferred to the private sector, by
sale, at such time as various national interests will be
served." In 1993, Congress turned the agency into an
independent government-owned corporation, called U.S.
Enrichment Corp. or USEC, and instructed it to prepare to
transfer ownership to private investors. A privatization plan
was approved by President Clinton last year.

But back in 1969, it never occurred to Mr. Nixon that the
U.S., eager to get the makings of nuclear weapons out of
Russia, would want to buy bomb-grade uranium from Russia
-- and assign that delicate task to USEC. Privatization
critics see an obvious conflict: The national security calls for
buying as much Russian uranium as quickly as possible. But
since the Russian imports are indistinguishable from the
power-plant fuel that USEC makes domestically, the
company's interests may lie in importing less.

A 1996 incident heightened the potential conflicts. Hungry
for cash, the Russians offered to sell more uranium than
originally planned. Although details are disputed, USEC
initially rejected the proposal. Sen. Pete Domenici, a New
Mexico Republican who heads an energy appropriations
subcommittee, accused USEC of "acting directly contrary
to the national-security interests of the United States."
Some White House officials agreed. U.S. Enrichment
relented, and contends that government officials knew what
it was doing all along. But government oversight of the
soon-to-be-private company was intensified.


Even when they don't involve troublesome ethical or
national-security questions, private solutions sometimes
don't work as promised. The Dulles Greenway, a 14.2-mile
stretch of privately financed highway outside of Washington,
D.C., opened with fanfare in September 1995, and
immediately ran into difficulty because it didn't draw
enough cars at the $1.75 toll to meet interest obligations.

Traffic picked up after the toll was slashed to $1 -- it has
since been raised to $1.15 -- but the project hasn't paid
interest to lenders since July 1996.

The project's woes have discouraged investors from putting
money into other private highways, says privatization fan
Joseph Giglio, a Northeastern University business professor
and former investment banker. "Full-fledged privatization of
transportation facilities has largely been a failure in the
United States. The few successes have come only after
years of complicated negotiations and a sad history of
aborted projects," he says.

And then there is the thorny issue of what to do when the
market produces something that some or even many
Americans abhor. It is easy to justify laws against
pay-for-hire murder or the selling of unwanted children.
Some otherwise market-friendly conservatives are prepared
to ban or restrict Internet pornography or excessively
violent Hollywood productions.

Republican Sen. Dan Coats of Indiana has complained that
market forces simply won't allow lesser measures such as
voluntary rating systems to work. "There is no incentive for
pornographers to comply, and every economic incentive not
to," he reasons.

Sen. Phil Gramm, a Texas Republican, an economist and a
market enthusiast, disagrees. "There are real limits to what
you can tell Hollywood or television to do," he says. "When
my mother complains about all the sex on the daytime
shows, my suggestion to her is: (a) turn it off, (b) don't buy
the products of companies that advertise it and (c) write
'em a letter and tell 'em what you're doing."

But, he notes with a smirk, "She complains about it, but
she's watching it."

Copyright 1998 Dow Jones & Company, Inc. All Rights Reserved.

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