The Privatization of Everything

Betty Reid Mandell

[from New Politics, vol. 9, no. 1 (new series),
whole no. 33, Summer 2002]

BETTY REID MANDELL, a welfare rights activist since the 1960s, co-edits Survival News, written by and about poor people. She is a member of the New Politics editorial board.


SELLING UNCLE SAM is the title of a book on how to do just that, for entrepreneurs eager to make some money off of Uncle Sam.1 Sitting close to it on the library shelf is a book sponsored by the World Bank and the Fleming Bank, advising corporations worldwide on how to make money by privatizing their government's various ventures.2 Both the World Bank and the Fleming Bank fund privatization ventures throughout the world. In their analysis of what has already been accomplished through privatization, they like most of what they see.

For the past two decades, businesses have been eager to take over every government function that shows promise of making a profit. They are even taking over and selling the water that people drink. As a child, I would not have thought in my wildest imagination that the pure water that I drank from a stream in the Rockies or from the well at my home would one day be bottled and sold at an exorbitant price as "designer water." Nor could I have dreamed that corporations would one day own water and sell it. "Water is the last infrastructure frontier for private investors," says Johan Bastin of the European Bank for Reconstruction and Development.3 If corporations thought they could make a profit off of bottling and selling the air that we breathe, they would probably do it.

Corporations are increasingly taking over basic services such as hospitals, crime prevention, and sanitation. Libraries are starting to be privatized, while more city parks are operated by private services. Businesses are even making a profit from selling skin, bones and organs. Those selling skin for cosmetic purposes have monopolized the supply, so severe burn patients are often unable to obtain help, while some of this skin has even been found to be diseased.4

Over the same period, both neo-liberals and neo-conservatives have been trashing government while exalting the beauty of the free market, touting it as more efficient, productive, higher quality and cost effective than government because it is competitive. In contrast, government is described as monopolistic, bureaucratic, inefficient, and staffed with overpaid featherbedding functionaries. The solution, they say, is to farm government services out to private businesses.

"Privatization" implies an adversarial relationship between government and business. A more commonly used term now is "public-private partnerships," which posits government and business as cooperative partners focusing on efficient management techniques. Stephen Linder suggests that the Labor government in Britain preferred to use the term "partnership" in order to distance themselves from the worst excesses of privatization under the Thatcher government.5

The Blair government refers to the partnership idea as central to what they call the "New Public Management." The rationale of partnerships is that the joint-venture between government and business will stabilize volatile markets and mitigate competitive pressures. The "Third Way" of Tony Blair and Bill Clinton aimed to bring the discipline of the market to the government. These partnerships presumably would make better, more competitive, managers out of stodgy public bureaucrats by bringing the expertise of business managers to government functions. The National Council for Public-Private Partnerships in the United States and the Canadian Council for Public-Private Partnerships both have official government sanction. Linder describes their functioning as "networks of prospects awaiting partners, databases of experienced exemplars, corporate underwriters, fee-for- service consultation, a speakers bureau, workshops, conventions, and of course, membership fees."6

International Approaches to Privatization

PRIVATIZATION CAN TAKE VARIOUS FORMS. One is to sell government industry and services outright to private corporations, with very little government regulation. Under Margaret Thatcher, the British government engaged in large-scale privatization of government industries and services, selling British Telecom, British Gas, Britain's railways, and the power and water industries to private corporations.

New Zealand followed soon after, first corporatizing state enterprises by forcing them to operate according to commercial principles, then selling them to private corporations.

Chile was one of the first developing countries to privatize, following the overthrow of Salvador Allende. The World Bank is fulsome in its praise of Chile's "innovative" privatization of pension funds:

This move created a sizable and stable base of institutional investors for Chile's equity market, allowing a number of large privatizations to be absorbed domestically. Pension funds acquired some 23 percent of the shares in divested state enterprises. Chile's move toward private management of pensions has been emulated by other Latin American countries, including Argentina, Bolivia, Mexico, and Peru.7

The World Bank doesn't mention that since privatizing its pension funds, administrative costs in Chile ran to over 15 percent of the funds, as compared to 0.8 percent for administrative costs of Social Security in the United States.8 Fifteen percent would be over 1500 percent increase over less than 1 percent. With banks currently paying about 4 percent interest on safe CDs, the 15 percent administrative costs would be impossible to overcome. Privatizing Social Security would be an enormous windfall for stockbrokers and a disaster for nearly everyone else.

Mexico has become the proving ground of neo-liberal economic reforms "as the International Monetary Fund and World Bank used the leverage of foreign debt to require massive changes in economic priorities designed to encourage foreign investment."9 State industries put up for sale included airlines, ports, railroads, banks, the phone system, and sections of other industries.

Russia's approach to privatization after the demise of the USSR looked like an egalitarian plan at first, but eventually turned into a corrupt looting of the economy. Paul Klebnikov, who has studied Russia extensively, described the process as follows:

The initial plan was to give every citizen an equal piece of state assets through vouchers on the grounds that "the vast majority of industrial assets in Russia were state- owned and hence every citizen had an equal piece of those assets."10 However, reformers in the Yeltsin government made the mistake of putting too much of Russia's state-owned industrial and natural resource wealth onto the market at once. They decided to sell it quickly in order to "break the back" of the power of the "red directors" who controlled the state-owned enterprises. While some of those old industrial managers were incompetent, others were not.

Selling so much wealth all at once was a fundamental mistake "that could be predicted by anyone with even a minimal understanding of how a market works. If you throw a huge quantity of products onto the market at once, your price is going to be very low because there's not that much demand for it at that point."11 Consequently, the value of the vouchers was low, equivalent to about $7 in U.S. money -- enough to buy two bottles of cheap vodka. The value of the enterprises shrank to "almost meaningless amounts." The insiders and financial operators then bought up the vouchers at a fraction of their market value. Most of them ended up in the hands of the directors themselves, the very thing that Yeltsin's reformers were trying to avoid. About a third of Russia's industrial and natural resource wealth was privatized through vouchers.

The next phase of privatization was a

much more cynical type of privatization than the voucher auctions. It didn't even pretend to have a noble concept underlying it. Anatoly Chubais, who by 1995 was the privatization czar effectively running the Russian economy under Boris Yeltsin, decided to take the top 12 export-oriented companies in Russia -- mostly oil and gas producers and metal exporters -- and privatize the controlling stakes.12

Chubais gathered together six to eight top Russian financiers, "the crony capitalists" who later would be called the "oligarchs." They agreed among themselves who would bid for which company and at what price. No foreigners were allowed to bid, and the oligarchs paid prices "from 10 to 30 times less than the price at which these companies were selling on the market in the mid-1990s."13

Some of the theft in Russia was carried out by "simple-minded crooks." Some involved complicated illegal financial dealings. One of the oligarchs, Boris Berezovsky, called the first stage of privatization the "privatization of profits" of an enterprise. He got control of Aeroflot, the former Soviet airline, and other companies and had the managers sign various corrupt deals that resulted in most of the cash revenues being drained into his own pocket and the pockets of the managers. As a result, the company went bankrupt and Berezovsky ended up wealthy. He is now wanted on fraud and embezzlement charges, and a number of his top managers are awaiting trial.

The Russian economy suffered its worst decline since the Nazi invasion of 1941, a 42 percent decline in GDP. In August 1998, the ruble collapsed and the government defaulted on its debts. The population was impoverished. Mortality rates skyrocketed. "Essentially the government had declared bankruptcy. This disaster was partly the result of all of these misguided privatization policies."14 This disaster was partly the result of misguided advice from the American government, from Harvard University's Jeffrey Sachs, and from the IMF, who told Yeltsin, "You've got to do shock therapy. You've got to do it quickly; you've got to do it radically."15 Unfortunately, the Russians slavishly followed their advice.

There was a groundswell of outrage in the Russian population, and President Putin let the oligarchs know that they would have to change their ways. Putin said he wouldn't look into the criminal way in which the oligarchs acquired the companies, but from now on the oligarchs would have to pay taxes and reinvest their profits into the Russian economy. Most of the financiers agreed. The few who did not went abroad to live. To date, not a single major Russian industrialist or financier has been put on trial for any significant misdeed or criminal act.

How Different is the United States?

THE RUSSIAN STATE sold large industries and natural wealth to private individuals. In the United States, however, the public sector has always been limited in scope. Here the government has been contracting out government services to private entities for a long time. Privatization in this country generally refers to expanding this practice, especially on the state and local levels. Contracting out complex services requires a long-term contract, with mutually enforceable terms clearly specified.

When an organization decides to buy rather than to make a product, it can buy from either a spot market or a contract market. Spot markets are usually used to acquire products that the company doesn't make itself. They are sufficiently standardized for commercial companies to routinely maintain inventories, such as office supplies or automobiles. Spot markets can also include services that companies could do for themselves but prefer not to, such as preparing a payroll or maintaining a subscription list.

Another form of privatizing involves government giving individuals coupons to pay for goods or services. The government pays for the scrip, but private businesses get the money. Examples include vouchers given to parents which can be paid to private schools; food stamps used to buy groceries; and housing vouchers or certificates that individuals can use to rent an apartment (subsidized housing).

Finally, government can be privatized simply by withdrawing government funds from a service, as has been done with welfare, Medicare and Medicaid, the National Endowment for the Arts, and National Public Radio. When government funds are withdrawn, people are forced to pay for goods and services from private sources, or rely on private charity. This form of privatization is closely related to the conservative push for voluntarism and charitable choice.


AS CAPITAL SEARCHES for investment opportunities, privatization has become globalized, and no country is exempt. Some of the rules of the process are imposed by the General Agreement on Trade in Services (GATS), as negotiated by the World Trade Organization (WTO). GATS requires various service sectors to open up their services to the competitive market. Ruth Rikowsi warns that many, if not all, public services, "including libraries, will fall under the GATS in due course. This is because the GATS agreement commits WTO members to progressive liberalization."16 The WTO compact that affects information provision is called the Trade Related Intellectual Property Rights (TRIPS) agreement. Information that has up to now been considered public domain could be privatized and sold. Rikowsi says that private corporations are already making inroads in providing library services in Britain and there are signs that library services will become increasingly commodified. Examples are the sale of products in libraries, and beginning efforts to charge for transactions on the Internet. Professional standards of various professions, including librarians, may be eroded because of the global standardization that the WTO requires.

For the past twenty years, the World Bank and the International Monetary Fund have effectively taken control of the economies of scores of nations in the Global South which are heavily in debt. The Bank and the IMF have been requiring these countries to accept "structural readjustment," which includes opening markets to foreign firms and privatizing state enterprises, including utilities.

There is a much stronger tradition of state ownership and management in Europe than in the U.S. There was not much privatization there during the 1980s except in France, where a right of center government privatized 14 large industrial, banking and financial trusts between November 1986 and January 1988.17 During the 1990s, there was much more privatization activity in Europe.

Privatization was driven partly by ideology. The Socialist government in France put a halt to privatization in 1988, but the right of center government which was re-elected in 1993 expanded it, slating 21 enterprises for privatization. The election of a Socialist government in 1997 only slowed the pace.

Italy began a privatization program in 1993 despite political opposition. By 1996 some 300 state companies had been involved in corporatization and share sales. However, continuing opposition and frequent changes of government slowed the privatization program.

In 1985, West Germany outlined a privatization program affecting 13 firms, but they were met with protests from the trade unions and the government reduced the number of firms to five. After the absorption of the former Communist East German, the Federal government sold nine former West German enterprises entirely and three partially, "thereby almost ending the Federal government's shareholdings in the industrial sector."18 However, the regional governments continue to have major shareholdings in public services.

Sweden developed one of the largest welfare states in Europe after 1945, but had few state owned industries, relying on large taxes on the private sector to fund welfare provisions. However, in the 1970s the state rescued a number of failing companies and by the mid- 1980s the state sector was fairly large. However, the defeat of the Social Democrats in 1991 led to a major change in policy. A privatization commission recommended a plan to sell 34 state firms. Between 1991 and 1994 the government sold shares in 20 companies, but the reelection of a Socialist government led to reassessing the program and many planned sales were shelved.

European Union

IN THE IMMEDIATE POST-WAR PERIOD, the European Union was neutral on the ownership of industry, accepting the mix of state and private sector industry across Europe. Then most European countries believed that state monopolies were necessary in the public utility sectors to ensure universal service and network economies. Yet the Treaty of Rome, which governs the European Union, emphasized the importance of free trade. Competitive markets are now favored, but "EU policy intervenes only when government policies are seen to be in conflict with free and fair trade within the EU."19

The Single European Act of 1986 aimed to remove the remaining non-tariff barriers to free trade within the EU by the end of 1992. This had implications for public utilities, which were generally protected from competition. Utilities remain governed by national legislation and regulatory rules, "but following the Single Market Agreement, the European Commission has applied pressure on member states for utility markets to be opened up to competition."20 Member states are reluctant to give up their autonomy, and as a result of some national opposition, the European Commission has not yet proposed EU-wide regulation. The EU directive regarding opening up railways to competition met with fierce resistance from the railway unions, especially in France.

At a Barcelona meeting of the EU in March 2002, France said that it would accept a partial privatization of energy markets in line with the EU goal to become the world's most "dynamic economy" by 2010.21 But its agreement was conditional on keeping traditional public services off-limits to free enterprise. Prime Minister Jospin and President Chirac said they would agree to open gas and electricity markets across Europe to competition by 2004 for businesses, but not for private citizens. They sought guarantees that governments would retain control over some services.

Some governments have sold some or all of their stakes in national airlines and power and telecommunications companies. The European Commission is pushing for more privatization. Their 1995 White Paper said that

progress is required in the areas of insurance, intellectual and industrial property, public procurement, new technologies and services and freedom of movement. Moreover, progress has been slow in the extension of the single market to telecommunications and energy, while the internal market in transport remains incomplete. Furthermore, additional progress is necessary in reinforcing competition rules, reducing State aid and reducing the role of the public sector. Privatization, to the extent that Member states judge it compatible with their objectives, could further the progress already made in this direction.22

Competitiveness, Efficiency, and Cost Savings

BUT DOES THE FREE MARKET really increase competition? Is it more efficient than government, and can it produce goods more cheaply? Those are key questions to ask when evaluating the claims of the proponents of privatization. There are other important questions that free market proponents tend not to ask: Does the free market serve the basic needs of people better? Does it promote equity? Is it more democratic? Is it more accountable to consumers?

Eliot Sclar, a Columbia University sociologist and privatization critic, argues that the free markets inevitably collapse into monopolies. The theory of the free market is based on a concept of each individual buyer and seller pursuing his or her own gain independent of the others. All buyers and sellers presumably have equal knowledge (or ignorance) about product quality and prices in the market. Buyers need only to seek out the lowest priced seller. On the production side, sellers adopt production methods that keep costs as low as possible. All producers presumably have all the technical possibilities for producing the goods and each chooses the least costly means to do so. Under these conditions, the market is said to be competitive. Profit maximizing for each producer and satisfaction- maximizing for each consumer are highly predictable.

The complexities, uncertainties, and ambiguities of imperfect information, inadequate distribution of existing information, barriers to market entry, and product differentiation are all assumed to be either nonexistent or trivial."23

This model is labeled a "Pareto optimum" after Vilfredo Pareto, who claimed to follow the teachings of Adam Smith. It implies that

not only will a competitive market society enhance material wealth, but that as each individual acts in pursuit of his or her own gain, everyone is in fact helping to create the optimal possible amount of material satisfaction for everyone else in society."24

This market model has nothing to say about the fairness of any Pareto optimal outcome. The Nobel Prize winning economist Amartya Sen commented, "A society or an economy can be Pareto optimal and still be perfectly disgusting."25

The problem with this model, according to Sclar, is that the barriers to market entry for additional sellers are often high and purchasers often don't have access to good information on which to base their decisions to buy. The real economy is not a level playing field, but a "mountainous terrain that includes several high peaks from which well- endowed corporate and individual warriors swoop down to seize targets of opportunity."26 There is some real competition, mostly between small businesses, but the tendency is to try to monopolize the market in order to maximize profits. Small businesses generally don't have the capital to handle large contracts over a long period of time.

There is another reason, in addition to Sclar's, disproving the idea that privatization follows the Pareto principle. Privatization begins with getting government money. How is the Pareto principle followed when prisoners are forced to be in private prisons? And how is the Pareto principle followed when the government gives private corporations money to build and run those prisons? There is no buyer and seller. And since private schools depend on government money in the form of vouchers, there is no free enterprise commerce. If someone starts a private school and competes with public schools on an equal basis, that is free market competition, but the use of vouchers (government money) destroys that.

Even though privatization doesn't follow the classic Pareto principle, it does help to accomplish a goal that conservatives hold dear -- downsizing government -- and Sclar sees privatization as a back door to downsizing government. Precisely because the public supports public services, it is more easily convinced that the size of government should be diminished than that its responsibilities be curtailed, so contracting out public services to private businesses becomes an ideological Trojan horse. The next step is convincing the public that private firms can provide equal or better services at an equal or lower cost. If contracting out doesn't achieve this, then the rationale for privatizing becomes weak and the public is likely to lose confidence in it.

The staunchest advocates of privatization would like to get rid of government entirely and give all of its functions to private businesses. In his 1980 book Cutting Back City Hall, Robert Poole, founder of the libertarian Reason Foundation, envisioned a city run entirely by contracting out government services to many private providers.27 Milton and Rose Friedman would prefer ending all public financing of primary and secondary education, except in hardship cases, but propose vouchers as a more acceptable first step.28 Stuart Butler argues for breaking up "public spending coalitions" to bring about a permanent reduction in the base of political support for government growth.29

These and other staunch advocates of privatization base their arguments on an assumption that contracting takes place in a competitive market environment. Sclar points out, however, that "only in a highly constrained set of conditions is it possible to sustain competitive contracting."30

Does Privatization Increase Competition?

STUDIES OF PRIVATIZATION SHOW THAT, while bidding for a contract may be competitive, the larger corporations generally win the bid and eventually monopolize the service. The process generally results in an oligopoly. Two of Sclar's case examples illustrate this -- public transportation in Denver, and school busing in New York City. In Denver, 20 percent of public transportation was put up for bidding in 1988. Small firms entered the bidding initially, but a handful of national firms consistently won the major contracts. They had the expertise to write expert proposals, lobby legislators regulating the industry and gain easy access to the necessary bonding, insurance, and financing. These firms engaged in the typical strategy of capturing a new market quickly and driving out small competitors by submitting an extremely low initial bid. "Once the Denver market became established, there was scarcely a whiff of competition."31 Two of the firms even merged in 1995. The legislature had been told that the efficiency brought about by competitive privatization would reduce operating costs by 40 percent. But the opposite happened. Between 1988 and 1990, operating costs had gone up from $100 million to $112.3 million.

New York City, with 1.1 million students, is the largest school district in the United States and has the most expensive municipal school-busing system in the country. Sclar says that it is so expensive mainly because it is privatized but not competitively contracted. Although the city wanted to encourage competition, the realities of the situation made it impossible. Frequent changes of providers in a system of 3,800 routes carried too many risks of disrupted school schedules and child safety. "Continually changing drivers, bus monitors, and dispatchers creates confusion and unacceptable risk to children."32

Because of a bitter strike by employees, the school board agreed to pay its contractors enough so they could peg their wages to the settlement arrived at by the New York City Transit Authority with its bus operators. Since public-transit wages are far higher than those usually paid to private school-bus drivers, costs went up beyond what the city would have paid if they had their own bus fleet. Sclar reports that the present system runs smoothly. High wages ensure low labor turnover and, therefore, a good safety record. "The contractors have no incentive to keep a lid on salaries because they are paid what amounts to a management fee that is proportionate to operating costs. The higher the costs, the higher the fee. Thus, everything in this arrangement conspires to drive up its costs."33

In the spring of 1995, Mayor Giuliani announced his plan to return to competitive contracting. He failed, but he did obtain a substantial cut in the costs of the next contract and persuaded the vendors and their unions to uncouple their wages from those of the NYCTA. However, "the noncompetitive structure of the market remained in place. Even if competition could have been re-instituted, given the nature of the service, the market would more than likely evolve once again in exactly the same manner."34

Does Privatization Cut Costs?

LABOR UNIONS ALMOST ALWAYS oppose privatization. It can lead to lost jobs, hiring less than full-time workers, and reducing or eliminating benefits. Low wages lead to a high rate of labor turnover. That often results in higher training costs, more inexperienced workers, higher accident rates, inferior service to the public, and even law suits. After the Southeastern Pennsylvania Transportation Authority (SEPTA) was privatized, the entire operator labor force turned over, on average, between 2.4 and 3.6 times in one year during the mid-1990s. This led to a high rate of passenger complaints.

It is hard to compare the cost of a publicly provided service with one that is contracted out. The measures that one chooses for comparison involve judgment and choice and, as Sclar points out, "there can be no formulaic objective analysis."35 Studies done so far show that the cost difference between contracting out and direct service provision is small, regardless of the direction of the savings, "typically measured in single digit percentages."36 A survey of contracting practices in eight states concluded "that the cost advantage generally favors in-house, not contracting out transportation service."37

Sclar points out that the only way to obtain meaningful savings is by cutting personnel costs. A study by HUD showed that 71 percent of all direct, municipal, public service operating costs are labor. Proponents of privatization argue that public employees are significantly overpaid and describe them as a "protected class." One study showed that wages of public sector employees rose 14.6 percent between 1980 and 1989 while private-sector wages rose only 3.4 percent. However, this study did not control for education, skill level, and job tenure. When those variables were controlled, studies showed that public-sector employees are paid 4 to 5 percent less than their private-sector counterparts.

Public- sector workers are also better educated, with 44 percent having some college education, as compared to about 20 percent of private-sector workers. It is only among the lowest skilled and lowest paid occupations that public employees have a significant wage advantage over private-sector workers. The HUD study found that the two lowest skilled categories of public workers received wages and fringe benefits far exceeding those of their private-sector counterparts. Publicly employed janitors received a compensation package that was almost 70 percent higher than their private-sector counterparts. For turf-maintenance workers, the differential was 52 percent. However, at the higher end of the pay scale, public compensation lags behind private compensation. Lawyers in the public sector, for example, earn significantly less than their private counterparts.

One of the top priorities of privatization advocates is to break the back of unions, and especially the public unions, which have been gaining strength even as unions in the private sector decline. Closely related to this priority is their desire to lower wages for all workers. The relatively high wages for public workers at the lower end of the wage scale have been eroded by welfare reform, which has forced millions of welfare recipients into the low wage labor market and lowered wages for workers in the lowest third of the pay scale.

When the economics of the decision to privatize is in question, the decision is often based on politics. The politically motivated decision by Governor William Weld of Massachusetts to privatize the state highway maintenance program is a prime example. While Weld claimed that this was a pilot project, a 1994 study by the state Legislature named it the beginning of a strategy to take it statewide. The Legislature found that there was an overly chummy relationship between the contractor and the government official in charge of supervising the contractor's work (a not uncommon occurrence in privatization contracts). Furthermore, the terms of the contract itself made the nature of oversight vague, permitting the contractor to set priorities, resulting in poor highway and bridge maintenance. The state auditor estimated that the department actually lost approximately $1.4 million. The Weld Administration challenged these findings, saying it actually saved $2.5 million. The discrepancy between the two estimates involved different ways of computing personnel costs. About a third of the work was still done by state workers, and these costs weren't reflected in the contractor's estimates. Also, much maintenance was deferred, passing the cost on to another administration.

Advocates of privatization often think of it in terms of a "spot market" rather than in terms of the complex transaction costs involved in public-private partnerships. Those costs involve specifying the product, negotiating prices, closely monitoring the quality, and anticipating unforeseen contingencies. Obtaining all the relevant information can require considerable time and money. Spot markets, on the other hand, are used to buy products such as office supplies and motor vehicles which companies do not make themselves.

Sometimes using the spot market can save money and be more efficient. Sclar gives an example of sensible outsourcing. When he worked for the federal government, they obtained office supplies from a central government store. An employee had to go "shop" and bring back supplies. In the present day "when large private firms such as Staples and Office Max can ship overnight at low prices, the rationale for using a public agency to store and track a large inventory is difficult to sustain. It is equally difficult to justify using valuable employee time to physically shop for needed items."38

Sclar gives a remarkable example of public workers turning privatization to their advantage and actually taking control of the production process. Since the workers get a share of the savings they make, they have no problem with sending work out that could be done less expensively by a private specialist.

Employees who maintain the public transportation service in Indianapolis (the Indianapolis Fleet Service) were threatened with losing their jobs in 1991 because the mayor of Indianapolis, Stephen Goldsmith, announced his plan to privatize the service. Their union, District Council 62 of the American Federation of State, County, and Municipal Employees (AFSCME) made it clear that they were prepared to fight privatization efforts in the city to the bitter end. The union virtually ran the campaign of the mayor's opponent. They organized a massive media campaign to make the public aware of the issues. They took the city to court over the privatization of the wastewater treatment plant.

After a particularly bitter round of contract negotiations, the director of the Department of Transportation finally proposed a more conciliatory path of negotiations. He invited the union to compete against private vendors in the bidding for management of the service. The union agreed to enter their bid, but built in protections in the bidding process such as getting training in writing the proposal from the city, the right to submit several practice proposals, and various other protections.

The union won the bid in 1995 because of the savings they were able to make in overhead costs. With the help of a sympathetic mayoral advisor, they removed patronage employees, which helped to gain the trust of the rank-and-file workers. They also got rid of several middle management people and clerical workers. Beyond attrition, no jobs were lost on the shop floor. The shop now runs without any foremen because each worker is trained to do the work.

Is Privatization More Efficient?

IT IS TRUE THAT PUBLIC OPERATIONS are sometimes inefficient. Public bureaucracies, "like sedentary people, tend to accumulate fat around the middle."39 They often collect more middle level managers than they need, some of who are political appointees. Sclar points out that the solution to this is not privatization; the solution is reorganization of the public service.

Use of the spot market may lead to more efficiency and cost savings, but the picture is different when complex contracting is involved. There is no evidence that private corporations manage complex services more efficiently than governments. In fact, private corporations often hire managers from the public sector to manage their contracts. The substantive experience of the public managers is crucial to effective service delivery.

The British rail service is a good example of how privatization can break down partly because of the complexity of contracting and supervising the contract. Amid promises of greater efficiency, reliability, and returns from corporate taxes, the British railway was sold to Railtrack, a private corporation. The system was broken up into more than 100 separate businesses, some of which subcontracted parts of their responsibilities. By October 2000, there were two major collisions, caused by faulty signals, which killed a total of 38 people, while a third crash caused by a broken rail, killed another four. Last year, the number of train cancellations rose to 165,000, nearly three times the 1999 level. In October 2001, the government placed Railtrack in "administration" -- in effect, bankrupting it.40

The private corporations cut costs by firing workers, which caused problems ranging from cancellations due to few drivers being available to dangerous unstaffed stations. Maintenance companies cut their staff by about a third. Government subsidies to the railways were about three times higher than before privatization. Public opinion polls show large majorities in favor of renationalizing the whole system.

It became impossible to run the system as an integrated whole because there were so many contractors who often did not communicate with each other. The accumulated wisdom of the experienced workers was lost. The Financial Times described the

breakdown of the old comradeship, which used to mean that problems were easily spotted, repairs made, and people could talk to each other. Track workers operated in gangs and knew their stretch of rails like their own back gardens. Instead, workers became nomadic, moving to the next job with little or no local knowledge and instructions not to talk to rival workers except via a supervisor miles away. The second big problem was a growing lack of control over the staff and their work. There have been complaints of subcontractors recruiting workers out of pubs to fill gaps on the night shift."41

Regulation and De-regulation

PRIVATIZATION OFTEN LENDS ITSELF to corruption by both private and public officials. Since this is done in secret, it is hard for the public to find out about it. To avoid corruption in contracting, privatization must be placed under strict supervision. Proponents of privatization resist this, as they want less public regulation. In spite of their singing the praises of competition, they are even happier if they can get the contract without bidding for it. More than half of the federal government's purchases last year were done without bidding or with procedures that auditors say are noncompetitive.42

Congress passed legislation in 1984 requiring full and open competition for all government purchases except in special cases, such as utilities with only one supplier or weapons systems made by just one company. However, since the 1990s when the Clinton administration and the GOP-controlled Congress streamlined purchasing under its "reinventing government" initiatives, noncompetitive shopping has been on the rise, according to an Associated Press analysis of government contracting records. It accelerated under President Bush last year. In all, the government bought $123 billion of its $230 billion in goods and services in 2001 without bids. This resulted in large overcharges for goods.

A Pentagon review found the prices paid for commercially available spare parts bought without competition increased more than twice as fast between 1993 and 2000 as did prices for similar parts bought competitively. Watchdogs have found repeated instances of overpricing. Boeing charged the government $5 million for parts that were worth $3.2 million in the competitive market, the Pentagon inspector general found in 1999.

Lockheed has a long history of bribery of public officials, price-fixing, "and the art of defiantly pleading no contest to such charges when they become public."43 They were caught twice during the 1980s for using illegal influence with New York City public officials to get a contract to privatize their parking enforcement activities. Mayor Giuliani barred Lockheed from any business dealings with the city for four years. Still Lockheed tried to get a contract from the city by lobbying at the state level to privatize the management information system of public transportation in the city.

Lockheed is now the largest business in the welfare reform market. Its Information Management Services Division had child support contracts in 16 states and contracts in 20 states to convert various welfare benefits to electronic debit cards. After TANF (the Republican- promoted, Clinton-approved Temporary Assistance for Needy Families) was enacted, Lockheed launched a major "welfare reform/self-sufficiency initiative."44

The Welfare Warriors, a welfare rights group in Milwaukee, Wisconsin, documents the corruption in welfare contracts in Wisconsin, describing it as "Wisconsin's Bloated Welfare Empire." Six private, for-profit companies received contracts to administer the city's TANF case welfare program. Under welfare reform, Wisconsin's welfare costs increased from $548 million for 299,700 individuals to $710 million for less than 20,000 individuals. During the first 2 years of welfare reform these corporations earned $65.1 million in profits. Some of those earnings were achieved by denying cash to families, sanctioning them, or kicking them off the rolls.

An audit of Wisconsin's welfare program, called "W-2," was conducted in April 2001. They found that two of these companies, Goodwill and Maximus, admitted to "improperly spending" a half million dollars each in projects in other states, parties, promotional schemes, meals and concerts. "Neither corporation was prosecuted for felony welfare fraud. Nor did Tommy Thompson, then governor of Wisconsin, terminate their lucrative W2 contracts."45

The Enron collapse reveals the venality of corporations in evading regulation. Enron's auditor, Arthur Anderson, and four other large accounting firms have waged a war against the Securities and Exchange Commission to avoid government regulation. Arthur Leavitt, Jr., who was the chairman of the Securities and Exchange Commission under President Clinton, told a New Yorker reporter that the "Big Five" accounting firms organized themselves into a lobbying force on Capitol Hill that essentially bought the Congress and destroyed the power of the Securities and Exchange Commission to regulate them.46

Social Services and the Public Interest

ADVOCATES OF THE FREE MARKET assume that the public interest will be automatically served if each individual follows his or her economic self-interest. It hasn't worked out that way for the poor and the vulnerable. Private companies have increasingly taken over the social services. In business to make a profit, they prefer to serve clients who will help them do that, which leads to "creaming" the clientele. The people whom private organizations find too difficult or intractable are left for the government to serve directly, if they are served at all.

Social services (e.g., foster care and adoption, counseling, rehabilitation, private charity), have long been dominated by the non-profit sector. Private charity began before public charity, most often under the auspices of religious groups or religious-minded individuals. Catholic Charities, the Federation of Protestant Welfare Organizations, United Jewish Appeal-Federation and the Salvation Army, for example, are large providers of private charity. However, voluntary agencies are not really "private" any more because much of their funding comes from federal, state, and local governments in public-private partnership arrangements. Nonprofit agencies have, in effect, become "paid agents" of the government to an extent that no one in the 19th century would have dreamed possible. They have increased their contracting with both state and federal governments since the 1980s.

Nonprofit agencies are no longer exclusively concerned with the poor; in fact, they have increasingly disengaged from the poor. A study by the Urban Institute in the 1980s showed that over half of nonprofit human service agencies had few or no poor clients and only 27 percent had mostly poor clients. Research shows that

charity benefits the relatively advantaged rather than disadvantaged groups, well-established organizations rather than new, grassroots activities, community organizing, issue advocacy, or controversial public policy initiatives. Social and class elites are overrepresented on boards and have disproportionate power over priorities, though there is more risk taking with younger diverse board membership.47

During the 1960s, the government's War on Poverty program encouraged some agencies to pay more attention to the poor, sometimes paying them to do so through lucrative contracts. For the first time, some prestigious private agencies such as Family Service Association and Jewish Family Services hired low-income people from the communities they served, and the government established a human services career ladder for low-income people, subsidizing many human service programs in colleges.

Some people claim that private non-profit agencies are more creative and innovative than government in responding to need, but it was the government during the War on Poverty that established some of the most path breaking programs. The Community Action Program organized poor people to fight unresponsive government bureaucracies. The National Welfare Rights Organization was organized largely by Community Action Programs and VISTA volunteers. Head Start, the government childcare program for poor families, compares favorably with high quality private childcare programs. Users of services were brought in as equal partners in setting policy when the Economic Opportunity Act required the "maximum feasible participation" of a program's beneficiaries. That demand for democratic participation echoed the demand for participatory democracy of the 1960s New Left, and was a radical breakthrough in social services, far beyond anything the nonprofit sector has done. It continues to live on in some programs through statutory requirements for parental involvement in Head Start programs and in planning educational programs for special needs children.

The federal government employed a social services strategy to ending poverty and increased funding of nonprofit agencies in the 1960s. Between 1967 and 1972, federal funds authorized by the 1962 Title XX amendments to the Social Security Act grew from $242 million to $1.688 billion. Congress became alarmed by the open-ended nature of funding for social services and in 1972, they put a $2.5 billion ceiling on it.48 The federal budget for social services began to decline under the Reagan Administration. Conservatives believed that social programs were actually harmful, and they turned to moral regeneration as an anti-poverty program. The neo- liberals emphasized the moral value of work and individual initiative; neo-conservatives added to that a belief in traditional values, religion, and marriage and the family. They believe in faith-based social services. The libertarian Reason Foundation advocates getting government out of the financing and delivery of services altogether. They would substitute families, churches, neighborhoods, and community groups to meet social needs.49

The Reagan Administration turned the federal social service program (Title XX of the Social Security Act) into a block grant, which sharply reduced federal funding levels but also eliminated state matching requirements. It virtually eliminated reporting requirements, and allowed even greater flexibility in the targeting of funds. The conservatives who were now in charge of social service delivery demanded more businesslike management and more business involvement. In 1986, for example, child support legislation specifically encouraged the states to contract with private companies for technical activities. By the mid-1990s, for-profit firms accounted for nearly half of all social service agencies and about one-third of social services employment.50

Managed care is becoming increasingly popular in several social service fields, including child welfare. For-profit businesses have entered almost every field of the social services -- nursing homes, child care, vocational rehabilitation, adoption assistance, family counseling, services for the handicapped, mental health, and others.

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), which created the TANF program, allowed state or local agencies to contract out their entire welfare program, including intake, eligibility, and services. As a result, large for- profit companies, including Ross Perot's former company, Electronic Data Systems (EDS), and IBM, have entered the welfare market. The Applied Research Center in Oakland California refers to this phenomenon as US private companies "prospecting among the poor in the welfare reform gold fields."51 Sandy Felder, public sector coordinator of the Service Employees International Union, claimed that the 1996 welfare reforms permitted "one of the largest corporate grabs in history."52 A Lehman Brothers analyst estimated the potential market for welfare-related contracts at over $20 billion a year. He noted that "it's a huge revenue target for the private sector to go after."53

These firms claim to save tax dollars while promoting "self-sufficiency."* They speak glowingly of getting people off the rolls into jobs, but they don't mention the approximately 40 percent of people who haven't found jobs or the increase in homelessness, hunger, and infant mortality. Nor do they mention that most people who got jobs are still poor, earning on average between $7 and $9 an hour. Caseload reduction is the main standard specified in their contracts. Performance standards were not established for client wages, benefits, or job retention and so contractors had no incentive to work for those goals. They were, in fact, doing what the government wanted them to do when it passed the welfare law -- push people into the low-wage job market as fast as possible, without regard for the consequences.

It would be hard to compare the performance of private contractors with public employees because the public employees have also been told to do the same thing. The calculated cruelty of welfare departments is probably as fierce in a public agency as in a private one. But states that are doing the job with public employees are probably at least saving money because they are not concerned with profits and stock market returns to their investors.

The PRWORA included a charitable choice provision, which allows faith-based organizations to get TANF funding. This has raised constitutional issues about the separation of church and state and the potential for discrimination by faith-based agencies.

An important function of the government is to insure fair and equal treatment to its citizens. When private agencies discriminate, the government should prohibit that. A notorious lawsuit which challenged the discriminatory practices of some private agencies is documented by New York Times reporter Nina Bernstein in her book The Lost Children of Wilder.54 The suit, filed in federal court in 1973, named as defendants six state and city officials and seventy-seven voluntary agencies and their directors. It charged that the statutory basis for the provision of child welfare to New York City children was unconstitutional because the agencies sponsored by religious organizations discriminated against black children. The suit charged that because these agencies gave preference to children of their own faith, they were violating the First Amendment's proscription against laws that established religion or prohibited the free exercise of religion. It also charged that their practices violated equal protection and due process guarantees of the Fourteenth Amendment. Furthermore, it charged that when those children most in need of care were denied adequate services and instead were sent to institutions where they were subjected to cruel and unusual punishment, this violated the Eighth Amendment.

Directors and trustees of religious agencies, rabbis and priests, city and state officials, and their lawyers all marshaled their forces to fight the suit. The Federation of Jewish Philanthropies feared that they might lose private donations if they were forced to take large numbers of non-Jewish children, and also feared that the suit threatened government funding for nursing homes for Jewish elderly, a larger and more costly part of their functioning.

The suit, known as Wilder (the name of the girl who had been in foster care), went on for 14 years. Lawyers often likened the case to Jarndyce and Jarndyce, the suit in Dickens's Bleak House that dragged on for so long that people forgot what it meant. The Wilder suit was settled in 1987, guaranteeing children equal access to the best foster-care services available, regardless of race or religion. It did, however, exempt an Orthodox Jewish agency, which remained all white, pervasively religious, and publicly funded. It also contained compromise language on family planning to make it acceptable to the Catholic Church. Judge Justine Wise Polier, a strong advocate of separation of church and state, was deeply disappointed. She was convinced that the child welfare system's resistance to change was rooted in a sectarian structure that violated the First Amendment and that the settlement abandoned the principle of separation of church and state.

This case points up the dangers inherent in faith-based social services. Prior to the charitable choice provision, agencies that were tax exempt were prohibited from mixing religion with social service provision when they received government funds. Now they can be openly religious as long as clients have a choice of a comparable non-religious social service. Sometimes such an alternative is not easily available to a client.

The conservative morality and emphasis on faith-based charity and "self-help" has led to diminished support for public services and stigmatization of people who depend on government support. It directs the analysis of problems away from dysfunctional systems to dysfunctional individuals. The Reagan Administration began the call for self-help and internal solutions to black social problems, while at the same time engaging in a massive disinvestment in black communities that increased their poverty. President Bill Clinton advocated personal responsibility among black people. The Million Man March expressed this self-help ideology, too, one that lets government off the hook while increasing people's internalized oppression and weakening their ability to fight back.

For-profit businesses often rely on performance-based and outcome-based contracts, emphasizing an efficiency that may be conservative, but is seldom compassionate. In their welfare-to- work training programs, companies focus almost exclusively on skills that will actually be used on the job, without regard to clients' emotional and cognitive needs or practical difficulties. They want to get people into jobs as fast as possible. The Ohio legislature gave Anderson consulting a million-dollar contract in 1996 to help the state restructure the welfare department based on a "tough love" approach, with strong job incentives and sanctions for failure to work.55 Many non- profits, on the other hand, are more likely to take a more holistic approach to the welfare- to-work process, helping clients build emotional resilience and offering them a community of supporters to help them through finding and retaining a job. A long-time community worker describes her contacts with private businesses involved in welfare reform:

They hold these meetings to describe the proposal process for new money and we see people in the room who have never worked with poor people before . . . then we hear that they got big money to make people "job-ready" . . . pretty soon they call us up asking for help because their clients have too many problems to hold jobs.56

In their search for allies, welfare rights activists who oppose the current welfare reform are often disappointed by the absence of human service providers among their ranks. There are some who fight against TANF, but many are afraid to oppose the state for fear of jeopardizing their contracts. Ann Withorn studied how community-based nonprofit agencies are responding to welfare reform. She found that agencies were facing increased demands on their resources because of welfare reform, but feel intimidated about protesting. One community leader said,

We can speak up here, with each other, but it is hard before the legislators -- and not because we are afraid for our funding. A strange dynamic happens, they don't want to hear us whine; they want us "to think outside the box." So we try to speak so that we won't threaten anybody with how bad it is and our limits in dealing with it.57

The Commodification of Care

THE UNITED KINGDOM WHITTLED away at its National Health Service by public funding of a massive expansion of private nursing and residential care. Long-term care for frail elderly people, the chronically ill and the physically and mentally disabled has been almost completely eliminated from NHS and local authority provision. In 1990 the central government devolved responsibility for long- term care to local governments, giving them a block grant to carry this out. However, the grant specified that 85 percent of the money had to go to private sector providers, which effectively prevented local authorities from reverting to providing long-term care directly in-house and making alternative provision in the community virtually impossible.58

But reliance on for-profit companies is tricky. If profitability drops in one sector, the company will leave the field, moving on to other, more lucrative markets. Nursing homes in the United States were at one time bringing in big returns on the stock market. However, with government cutbacks in Medicare and Medicaid reimbursements, profits are down. Sun Healthcare Group (SGH), one of the largest US nursing home chains (and the holding company of the British chain Ashbourne Group, which operates 149 homes and 8,367 beds nationwide) faced reduced shares of more than 60 percent at the beginning of 1999. Companies such as SGH and Tenet are introducing cost cutting measures such as staff cutbacks, reducing time spent with patients, and using lower-paid professionals to deliver the care. The company has already fired 7,490 employees, including 36 percent of rehabilitation workers.59

Profits from residential and nursing home care depends on the use of non-union labor with low wages, minimum guaranteed hours and no sick pay or training opportunities. These dismal working conditions lead to high staff turnover and lower quality of care. In Britain, home-care assistants were among the 10 lowest paid occupations in 1996. The majority of home-care assistants and nursing home aides are women. Many former welfare recipients in the US are working in these low-paid occupations.

A 1993 World Bank report on health care "reinforced the neo-liberal canon of the privatization of health care to turn it into a terrain for capital accumulation."60 We know how that has played out with health care in the United States. Private insurance companies refuse to serve the sickest, business managers rather than doctors decide what kind of treatment people will get, care is time-limited, and over 40 million people are uninsured. The rich still get premium care from their "boutique doctors," but as states cut back on Medicaid, the poor are denied even basic dental care.

Privatization of mental hospital care has led some hospitals to engage in financial and emotional exploitation of patients. In 1991, a Texas family told a state senator that their 14-year-old son had been apprehended, detained, and treated on an emergency basis by a private psychiatric hospital, without their consent. A Senate committee investigated, and many testified at the hearing that hospitals manipulated diagnoses in order to justify longer admissions and increase insurance benefits. Patients described incidents of forced and inappropriate treatment, which enabled the hospitals to collect payment from the patients' health insurance.61 Many mentally ill people were forced out of state hospitals due to the deinstitutionalization movement that took place from the 1960s through the 1980s. Those without health insurance often received no treatment at all in the private sector. Private psychiatric hospitals prefer to treat those with money. People joke about the "60 day miracle cure" that occurs when hospitals declare people to be cured when their insurance runs out.

Conservatives want to scale back Social Security and Medicare to cover only the most vulnerable of the aged population -- the poor, sick, frail, and incapacitated. This would lessen the role of government and contain expenditures. Proposals have been circulated to partially transform Old Age and Survivors Insurance (OASI) into a defined contribution plan, to issue Medicare vouchers to the old, or to impose an "affluence test" on Social Security and Medicare beneficiaries. Eligibility for full OASI benefits is already scheduled to rise from 65 to 67 by 2027. Raising the eligibility age for Medicare benefits was proposed during the Balanced Budget Act debates in 1997. Raising the eligibility age for services under the Older Americans Act from 60 to 65 or even 70 has also been proposed.

Proponents of these plans argue that since people are living to a longer and healthier old age, they are able to work longer and no longer need so much government assistance. They have "graduated into the private sector." Conservatives want to eliminate programs that "have the effects of bestowing entitlement and/or creating dependency."62 They would like to turn Social Security into a means tested program without entitlements, as they have already done with TANF.

Privatizing Prisons

PRISONS ARE NOW BIG BUSINESS and they are traded on the stock exchange. Private corporations entered the business in response to the enormous increase in the U.S. prison population over the past 20 years, which placed a strain on state budgets. Private contractors promised to run the prisons more cheaply, although studies on this are inconclusive. When there are cost savings, they are achieved at the expense of reducing and underpaying staff. Unions have always opposed the privatization of prisons, as have the ACLU and state Bar Associations.

Already 25 states plus Puerto Rico and the District of Columbia have passed laws allowing private contractors to run correctional facilities. Between 1985 and 1995, the number of prison beds under private management grew from 935 to 63,595 -- a increase of nearly 7,000 percent. Though this is only a small percentage of all prison beds, one researcher estimates that there will be some 360,000 privately run prison beds by the year 2004.63

Many stock analysts have urged their clients to invest in the major corporations in the field, such as Corrections Corporation of America (CCA) and Wackenhut Corrections. The Wall Street Journal called Wackenhut a "hot industry." Forbes magazine described it as "A Surefire Growth Industry."64 Some criminologists are concerned about private corporations having a vested interest in having a large incarceration rate. Jeffrey Reiman comments: "I have been pointing out how the rich get richer while the poor get prison, but the privatization movement points to a new phase in which the rich get richer because the poor get prison!"65

CCA is the first and the largest private corporation to run prisons. By 1997 it had become a half- billion-dollar-a-year corporation, with sixty-seven facilities in the United States, Puerto Rico, Australia, and Great Britain. However, by the late 1990s, it faced problems, and, "ultimately, its ability to maintain the double-digit growth rates it had posted throughout the decade."66 In Youngstown, Ohio, 44 assaults and two fatal stabbings took place within the prison. Also, six inmates escaped from the facility, leading Youngstown residents to demand its closure. An Ohio legislative committee found that over 100 maximum-security prisoners had been sent to the prison, although the contract had specified that only medium-security prisoners could be sent there.

Later four prisoners escaped in another prison in Clinton, Tennessee. Opponents of CCA staged a protest chanting "public safety's not for sale," and claiming that CCA was sacrificing security by cutting corners. They also accused the firm of getting a free ride from the government, which organized escapee manhunts and financed medical payments for prisoners above CCA caps. The protesters aimed to stop the reintroduction of a bill in the Tennessee legislature that would permit the private management of 70 percent of the state's prison beds. In 1999, CCA named J. Michael Quinlan, a former director of the federal Bureau of Prisons, as president and chief operating officer (yet another example of the revolving door between public and private managers).67

On ethical grounds alone, giving private individuals the authority to punish law-breakers raises serious ethical issues. Max Weber argued correctly that since criminal acts violate laws, which are created by representatives of the state, legal punishment must be imposed and administered by state authority.68

Privatizing Education

THE SUPREME COURT WILL SOON DECIDE whether it is constitutional to give parents government money to send their children to private schools. Supporters of school vouchers claim that it will give poor children a chance to escape from public schools that are failing them. Opponents charge that it violates the principle of separation of church and state by supporting religious schools and that it doesn't benefit poor children.

The Ohio Legislature set up a voucher plan to give parents $2,250 a year of state money to send their children to private schools, and Cleveland is implementing the plan. In theory, the voucher program is open to any private school and any suburban public school. However, only 51 private schools enrolled, all but five of them run by the Catholic archdiocese.69 No suburban schools enrolled because the state will only reimburse those schools at per pupil state basic aid, $4,000 when the law was passed in 1995. Michael Charney, a union official of the Cleveland Teachers Union asks, in a letter to the editor: "Why would suburban schools sign up, lose thousands of dollars, and then be answerable to property owners during school levy elections?"70

The voucher program benefits lower middle-class students already attending parochial schools. Seventy-nine percent never attended a Cleveland public school. Almost one- third of families using the vouchers earn more than 200 percent of the poverty level, while 88 percent of Cleveland public school elementary students qualify for free and reduced lunches.71 Ellen Goodman comments that the taxpayers send "nearly $10 million to schools where students are required to say Mass or, in the case of one Cleveland school, pledge allegiance to the 'Christian flag and to the Savior for whose Kingdom it stands.'"72

Private and parochial schools have an advantage over public schools because they can select children. They can refuse children with special needs, learning disabilities, behavioral problems, or language difficulties. Private schools are free of the accountability required of public schools. President Bush filed a brief on behalf of the Ohio program, but he would not apply to voucher schools the same annual testing and standards-based curriculum required of public schools in his new education law.73

Another way to privatize public education is for corporations to run the schools themselves. In 1990, Education Alternatives, Inc. (EAI) was the first for-profit firm under contract to run a public school, the South Pointe elementary School in Dade County, Florida. The business community has been enthusiastic about the profit making potential of running schools. The Wall Street term-if-art for private companies operating public schools is Education Management Organizations (EMOs). Proponents of EMOs like to compare public education to the healthcare industry of 25 years ago, before the sweep of HMOs. Mary Tanner, managing director of Lehman Brothers, told a 1996 Education Industry Conference, "The emergence of HMOs and hospital management companies created enormous opportunities for investors. We believe the same pattern will occur in education."74

But it has been far from clear sailing for private corporations in the education business. EAI soon found it couldn't run public schools for less funding than did the districts with which it contracted; neither could it fulfill its promises of academic improvement. By the spring of 2000 the company was bankrupt.

Despite their failure, other companies are claiming they can improve educational performance while turning a profit. Edison Schools, Inc., now based in New York City, is the largest. It runs 136 schools serving 75,000 students in 22 states and the District of Columbia. But Edison has not made a profit and they admit that they aren't certain when they will make a profit, if at all.75

In New York City, parents voted against Edison's managing five New York schools. In Wichita, Kansas, the school board is debating whether to end its contracts with four Edison schools in the district, which each cost $250,000 more than comparable district schools. In Dallas, the school board forced Edison to renegotiate its five-year contract when it was found that Edison would have otherwise received $20 million more than the actual cost of running its seven schools. In San Francisco, parents and school board members revoked Edison's charter when test scores showed that the school's performance was the worst among the city schools.

In Philadelphia, Edison attempted to secure a six-year $101 million consulting contract and a separate deal to run as many as 45 of the district's schools.76 The state appointed a School Reform Commission with four members appointed by the governor and one by the mayor that has authority to remake the Philadelphia school district in almost any way it chooses. Edison had strong political connections with then governor Tom Ridge (now director of the Office of Homeland Security), and confidently expected their political clout to win them the contract. However, Christopher Whittle, the president and chief executive of Edison Schools Inc., behaved arrogantly toward city officials and failed to build grass roots support.77

Edison ran into stiff community resistance, but the School Reform Commission has hired Edison to be its key advisor on a broad range of issues. In April, they announced plans to hire 12 companies and nonprofit groups to offer advice on how to manage the school system. Opposition to the company has been intense from community members, who criticize Edison's for-profit status and its uneven record in running schools. Barbara Goodman, a spokeswoman for the 21,000 member Philadelphia Federation of Teachers, said, "We don't see any grand plan that addresses the real issues, like improving graduation and attendance rates and test scores. We have a once-in-a-lifetime opportunity to improve outcomes for kids, and we are probably blowing it."78


IS THERE HOPE OF WINNING against the powerful force of globalization? The verdict is still out, but water privatizations, for example, have been backfiring in many countries. Protests have erupted in Ecuador, Estonia, Chile, Indonesia, Pakistan, India, South Africa, Poland, and Hungary.79

When Bolivia privatized its water system, the action forced a national crisis. Bolivia signed a lucrative, long-term contract with Aguas del Tunari, a consortium that was dominated by the United States-based Bechtel Corporation, to take over the water supply of the country. In 1999, they took over the water system of the Andean city of Cochabamba. The corporation raised the water rates so much that ordinary workers had water bills which amounted to a quarter of their monthly income.

Some residents of Villa San Miguel, a settlement two miles from Cochabamba, formed a cooperative and dug their own well, with the help of Danish aid workers. It provided plentiful and relatively cheap water to 210 families. The Bolivian government then auctioned the Cochabamba water system, and the company that won the bid installed meters to charge for water on cooperative wells such as Villa San Miguel's. A new water law had been rushed through the Bolivian parliament to legalize these expropriations.

Local engineers and environmentalists began calling public meetings to air their concerns. The government ignored them. Neighborhood associations, water cooperatives, labor unions, and others soon joined the protest, forming a broad coalition called La Coordinadora, the Coordinator for the Defense of Water and Life. When the first water bills arrived, middle- class householders joined the protests. The company's manager responded to the protests by saying that if people didn't pay their water bills their water would be turned off.

A good part of the 800,000 citizens of Cochabamba were in the streets, "battling police and soldiers in what people had started calling la guerre del agua -- the Water War."80 The national government declared martial law as unrest spread to the rest of the country. The protests expanded and the government sent in troops. The leaders were arrested and some were taken to a jungle prison in the Amazon. Nearly 200 protesters were arrested, and 70 civilians and 51 police officers were wounded. In April 2000 the Army killed a 17-year-old student, Victor Hugo Daza. Dozens of other people were treated for bullet wounds. "By the time Daza had been raised onto his bier and the police and the Army had been repeatedly prevented from seizing his body, there was clearly no future for Aguas del Tunari in Cochabamba."81

The Coordinadora forced the government to pass a new national water law which gave legal recognition to usos y costumbres -- traditional communal practices -- by protecting small independent water systems, guaranteeing public consultation on rates, and giving social needs priority over financial goals. The war seemed to have been won, but the government was slow to implement the law. The old public utility known as SEMAPA, having driven away international capitalists, desperately needs new capital. Service is still poor. The World Bank was not interested in helping. Its representatives have never met with the leaders of the Coordinadora. In recent years, the Bank has been widely accused of not fulfilling (or even seriously pursuing) its self-proclaimed mission of fighting poverty. The new SEMAPA "has not won the hearts of many in Cochabamba -- it is, after all, still the water company. But, its supporters point out, at least it is Bolivian."82

Bolivia resisted the Coordinadora so fiercely because it feared that renouncing their contract with the consortium would be a blow to the confidence of foreign investors, which they depended on for financial stability. An auction to sell the La Paz telephone company drew no bidders at all. The United States has been considering labeling the episode an expropriation, which would be a blow to Bolivia's hopes of attracting foreign investors.

In the United States, the battle against privatization is being fought by unions, community groups, and some progressive city and state officials. In addition to the successes in Indianapolis and New York (already cited), there's hope from the city of Paragould, Ark., whose residents fought against a private cable company's attempt to take over municipal cable service. Mayor Dennis Kuchinich fought off a private corporation's attempts to take over the municipal electric company of Cleveland. In Massachusetts, a law called the Pacheco Act requires that all proposed privatization be subject to a cost analysis. It permits employees who will be affected to submit proposals for work reform which could demonstrate that problems could be solved within the public sector.

Perhaps the most significant resistance to privatization in the U.S. are the living wage campaigns. Nationwide, 83 communities have enacted laws raising wages for thousands of low-paid workers employed by city contractors. These laws undermine the threat of privatization because contractors are less likely to bid for city services when they are required to pay higher wages, and cities are less tempted to seek to save money by privatizing services.83

We don't fight for public rather private programs because we assume that government programs are necessarily better. A public prison is still a prison. A government that wants welfare recipients to get into the low-wage labor market will force them there whether it pays public employees or private employees to do it. Even when their jobs are alienating, it is understandable that public employees would fight for their jobs whether they are in a prison or in a welfare department.

It is in our interest to fight against privatization because companies are interested in profit, not human needs. Democratic socialists are fighting not just for jobs, but for a humane society. We want nothing less than democratic control of all of society's institutions. That begins with defending, expanding, improving and -- yes -- democratizing the public sector, not with capitulating to the parochial needs of property and profit-making.


* The term "self-sufficiency" is an ideologically loaded term, and is widely used when talking about welfare recipients. It implies that welfare recipients have been "dependent" and unmotivated to work for a living. I prefer the term "economic stability." No one is "self-sufficient"; we all need various kinds of support from other people. return


  1. Clinton L. Crownover and Mark Henricks, Selling Uncle Sam, New York: McGraw-Hill, 1993. return

  2. Ira W. Lieberman and Christopher D. Kirkness, eds., Privatization and Emerging Equity Markets, Washington, DC: The World Bank, 1998. return

  3. William Finnegan, "Leasing the Rain," New Yorker, April 8, 2002, p. 44. return

  4. "Skin and Bones," 60 Minutes, ABC, April 14, 2002. return

  5. Stephen H. Linder, "Coming to Terms With the Public-Private Partnership," American Behavioral Scientist, Vol. 43 No. 1, Sept. 1999, p. 38. return

  6. Ibid., p. 43. return

  7. Lieberman and Kirkness, Privatization and Emerging Equity Markets, pp. 3-4. return

  8. Eric R. Kingson and James H. Schulz, eds., Social Security in the 21st Century, New York: Oxford University Press, 1997, p. 286. return

  9. "Mexico's Privatization Pi¤ata," Multinational Monitor, Oct. 1996. return

  10. An interview with Paul Klebnikov, "Theft of the Century: Privatization and the Looting of Russia," Multinational Monitor, Jan./Feb. 2002, p. 23. return

  11. Ibid. return

  12. Ibid., p. 26. return

  13. Ibid. return

  14. Ibid. return

  15. Ibid., p. 27. return

  16. Ruth Rikowski, "The Capitalisation of Libraries," unpublished ms., April 2002. return

  17. David Parker, "Privatization in the European Union: A Critical Assessment of Its Development, Rationale and Consequences," Economic and Industrial Democracy, Vol. 20, No. 1, Feb. 1999, pp. 9-38. return

  18. Ibid., p. 13. return

  19. Ibid., p. 22. return

  20. Ibid., pp. 22-23. return

  21. Robert Wielaard, "France yields on privatization at EU economic summit," Boston Globe, Mar. 16, 2002, p. A20. return

  22. European Commission, "Broad Economic Policy Guidelines," European Economic Policy 60 (1995), p. 15. return

  23. Elliott D. Sclar, You Don't Always Get What You Pay For: The Economics of Privatization. Ithaca: Cornell University Press, 2000, p. 7. return

  24. Ibid., p. 8. return

  25. Ibid. return

  26. Ibid., p. 9 return

  27. Robert W. Poole, Cutting Back City Hall, New York: Universe Books, 1980. return

  28. Milton Friedman and Rose Friedman, Free to Choose, New York: Harcourt Brace Jovanovich, 1980, pp. 161-63. return

  29. Stuart M. Butler, Privatizing Federal Spending: A Strategy to Eliminate the Budget Deficit, New York: Universe Books, 1985. return

  30. Sclar, You Don't Always Get..., p. 12. return

  31. Ibid., p. 86. return

  32. Ibid., p. 89. return

  33. Ibid. return

  34. Ibid. return

  35. Ibid., p. 28. return

  36. Ibid., p. 29. return

  37. Henry J. Raimondo, ed., "Contracting-Out Services in the New Jersey Department of Transportation," Prepared for the Policy Research Seminar (July), Eagleton Institute of Politics, New Brunswick, NJ: Rutgers University, 1992. return

  38. Ibid. p. 5. return

  39. Ibid., p. 164. return

  40. Brendan Martin, "Derailed: The UK's Disastrous Experience With Railway Privatization," Multinational Monitor, Jan./Feb. 2002, p. 8. return

  41. Ibid., p. 11-12. return

  42. David Pace, "US awards billions without competition, analysis discloses," Boston Globe, April 1, 2002, p. A3. return

  43. Sclar, You Don't Always Get..., p. 132. return

  44. Mark Carl Rom, "From Welfare State to Opportunity, Inc.: Public-Private Partnerships in Welfare Reform," American Behavioral Scientist, Vol. 43, No. 1, Sept. 1999, p. 166. return

  45. Pat Gowens, "Press Conference in Madison, Wisconsin, Exposes Wisconsin's Bloated Welfare Empire," press release, Welfare Warriors, Jan. 6, 2002. return

  46. Jane Mayer, "The Accountants' War," New Yorker, April 22 and 29, 2002, p. 64. return

  47. Laurence E. Lynn, Jr., "Social Services and the State: The Public Appropriation of Private Charity," Social Service Review, Vol. 76, No. 1., March 2002, p. 73. return

  48. Ibid., pp. 63, 64. return

  49. John Hall and William D. Eggers, Health and Social Services in the Post-Welfare State: Are Vouchers the Answer? Policy Study no. 192, Los Angeles: Reason Public Policy Institute, 1995. return

  50. Lynn, "Social Services and the State," p. 70. return

  51. Gowens, "Press Conference in Madison...." return

  52. Rom, "From Welfare State to Opportunity, Inc.," p. 170. return

  53. Ibid., p. 166. return

  54. Nina Bernstein, The Lost Children of Wilder, New York: Vintage Books, 2001. return

  55. Peter Frumkin and Alice Andre-Clark, "The Rise of the Corporate Social Worker," Society, Vol. 36, No. 6, Sept./Oct. 1999, p. 48. return

  56. Ann Withorn, "Friends or Foes? Nonprofits and the Puzzle of Welfare Reform," The Annals of the American Academy of Political and Social Science, Sept. 2001, p. 112. return

  57. Ibid., p. 114. return

  58. Stewart Player and Allyson M. Pollock, "Long-Term Care: from Public Responsibility to Private Good," Critical Social Policy Ltd., Vol. 21, No. 2, May 2001, p. 248. return

  59. Ibid., p. 249. return

  60. A. C. Laurell and O. L. Arellano, "Market Commodities and Poor Relief: The World Bank Proposal for Health," International Journal of Health Services, Vol. 26, No. 1, 1996, pp. 1-18. return

  61. Karen Glumm and Jennifer D. Johnson, "Creating the 'Unfit': Social Darwinism or Social Triage?" The Journal of Applied Behavioral Science, Vol. 37, No. 2, June 2001, p. 155. return

  62. Robert B. Hudson, "Conflict in Today's Aging Politics: New Population Encounters Old Ideology," Social Service Review, Vol. 73, No. 3, Sept. 1999, pp. 370-371. return

  63. Jeffrey Reiman, The Rich Get Richer and the Poor Get Prison, Boston: Allyn and Bacon, 1998, pp. 153-154. return

  64. Karen L. Tippett, "Shares of Wackenhut Break Out As Prisons Become a Hot Industry," Wall Street Journal, April 10, 1996, p. F2; Michael Schuman, "A Surefire Growth Industry," Forbes, Jan. 16, 1995, p. 81. return

  65. Reiman, The Rich Get Richer..., p. 154. return

  66. Willis Emmon, Strategic Implications of Deregulation and Privatization, Boston: Harvard Business School Press, 2000, p. 174. return

  67. Ibid., p. 178. return

  68. M. Weber, The Theory of Social and Economic Organization, New York: Free Press, 1947. return

  69. Ellen Goodman, "Bad schools or bad choices?" Boston Globe, Feb. 24, 2002, p. E7. return

  70. Michael Charney, "Vouchers don't benefit urban poor," Boston Globe, Feb. 24, 2002, p. E6. return

  71. Ibid. return

  72. Goodman, "Bad schools or bad choices?" return

  73. Editorial, "No on vouchers," Boston Globe, Feb. 20, 2002, p. A14. return

  74. Barbara Miner, "Business Goes to School: The For-Profit Corporate Drive to Run Public Schools," Multinational Monitor, Jan./Feb. 2002, p. 14. return

  75. Ibid. return

  76. Ibid., p. 15. return

  77. Brent Staples, "Edison Schools Inc. Faces Tough Sledding in the Philadelphia Takeover," New York Times, Feb. 24, 2002, p. IV:12. return

  78. Catherine Gewertz, "Takeover Team Picked in Phila." Education Week, April 3, 2002, pp. 1, 21. return

  79. Finnegan, "Leasing the Rain," p. 43. return

  80. Ibid., p. 51. return

  81. Ibid. return

  82. Ibid., p. 53. return

  83. Steven Greenhouse, "'Living Wage' Roulette: Bigger Check, or Will It Be a Pink Slip?" New York Times, May 19, 2002, p. 25. return

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