Why can’t the public and private sectors just get along?

In the US, as in many rich, first-world nations, we have a hybrid private/public economy and we carve up the pie between the two sectors with relatively little overlap. We have rather few instances where private and public institutions compete head-to-head in the same markets.

The US Eeconomy

The US Economy

In the US we have a national public postal service and a variety of private carriers whose markets all overlap a little, and we have private hospitals competing with public ones and private schools competing with public schools and charter schools. However, the public and private versions of these enterprises have tended to adapt to serve somewhat specialized market niches.

In the ideal public/private balance, government would in a sense provide the “basic cable” package, and private enterprise would deliver the premium products–the HBO and Showtime packages, so to speak. Both private and public enterprises usually benefit from carving up the turf . By specializing in the high-volume and large-scale of  basic public needs like roads and utilities, the public sector can realize some economies of scale that the private enterprises might struggle with, and the private companies can pick and choose their niches to suit their particular strengths . If this complementary specialization is balanced and managed properly everyone will benefit.

One example of a nationwide basic service the government has been very successful with, despite right-wing claims that government can do nothing right, is the US Postal Service.

The Modern Postal Service: Public Agency or Business?

According to the laws under which it now operates, the U.S. Postal Service is a semi-independent federal agency, mandated to be revenue-neutral. That is, it is supposed to break even, not make a profit.

United States Postal Service

Image via Wikipedia

In 1982, U.S. postage stamps became “postal products,” rather than a form of taxation. Since then, The bulk of the cost of operating the postal system has been paid for by customers through the sale of “postal products” and services rather than taxes. (http://usgovinfo.about.com/od/consumerawareness/a/uspsabout.htm)

Postal Service Charts Course for Sustainable Future

The Postal Service receives no tax dollars for operating expenses, and relies on the sale of postage, products and services to fund its operations.

A self-supporting government enterprise, the U.S. Postal Service is the only delivery service that reaches every address in the nation, 150 million residences, businesses and Post Office Boxes. The Postal Service receives no direct support from taxpayers. With 36,000 retail locations and the most frequently visited website in the federal government, the Postal Service relies on the sale of postage, products and services to pay for operating expenses. Named the Most Trusted Government Agency five consecutive years and the sixth Most Trusted Business in the nation by the Ponemon Institute, the Postal Service has annual revenue of more than $68 billion and delivers nearly half the world’s mail. If it were a private sector company, the U.S. Postal Service would rank 28th in the 2009 Fortune 500.

A distinction without a difference

Just as in the case of the Postal Service, there is noting in principle to prevent some parts of the public sector from operating on a fee-for-service basis just like private sector. If the government can sell stamps and deliver mail, it can also sell internet services or medical services, or it could operate green power utilities, for example. The public sector might be able to charge enough for one set of goods and services to pay for another set of of goods and services out of the surplus.

Of course, as recent events in Tennessee suggest, the fee-for-service category should NOT include fire protection. Nor should it include any other basic saftey net or emergency services. Nonetheless, the government could raise revenue by charging fees for products and services aimed at consumers well above the poverty line. By raising money in that way, rather than strictly by taxation, the government might actually enhance its ability to redistribute wealth downward at the same time that it could ease up on its “confiscatory” taxation of the middle class.

(I know that Americans doubt that Government can  find its own ass, but the postal service and a few other government services prove otherwise, outperforming the private sector.)

The point is that some public operations are potentially revenue positive. In fact, public businesses can function identically to private businesses if they choose to do so. The difference between public and private is really only 1) a technical distinction that has more to do with management structure and accounting than with economics, and 2) a difference in whose interests and what interests are placed first in the cost/benefit/utility calculations. Public vs private is really a distinction in priorities without any inherent difference in capability. If there is any advantage in capabilites, it generally goes to the government and not to the private sector, although there are plenty of exceptions.

In the public sector, the President is the CEO, the Congress is the board of directors, the judiciary is the legal department, and the voters are the shareholders. There is no fundamental reason why the government could not be paying dividends to the voters rather than just collecting taxes.

Conversely, in the corporate sector the CEO is the President, the board of directors is the Congress, etc.

Of course most private businesspeople do not want direct public competition because (dare I say it?) they are hypocrites who wish for government to absorb as much of their costs and losses as possible (where’s the concern for the taxpayer?) while leaving their markets and profits alone.

Mr. Natural aka

Mr. Natural aka “Mr. Progressive”

Mr. Progressive says: I’m sure you’ve heard it in the bailout debates: “privatize the gains and socialize the losses”. If that’s not a double standard, what is?

If the government offered a revenue-neutral (non-profit) health insurance plan run like the postal service to cover working-age people and their families, this would lower costs for business and boost the global competitiveness of our private sector.

Though no one in the private sector would probably ever admit it, Social Security may have been a boon for business compared with the old defined benefit pension plans, and after the stock market antics of the past decades who would argue that IRAs and 401-ks are as safe and secure as the Social Security System’s retirement funds? So maybe Social security wins that beauty contest.  But that hardly constitutes a government take-over of the retirement savings and investment market;  nor would a public insurance option take the whole US insurance industry captive. That is a moldy old straw man. The cries of “wolf” from the private sector are patently false and they are getting very, very tiresome.

But the question of which sector might actually be best at providing any of the of the particular goods and services in each pie slice of the US economy remains–is it the government or the private sector?

Theoretically the private sector can mimic just about any agency of the government (and with the great government outsourcing rush of the Bush era, private contractors did just  that). Likewise there is no congenital handicap to prevent government from “in-sourcing” (what old-school economists might call “nationalizing”) just about any task that the people might ordain.

On privatization [in public sector transportation] 09/21/2010    (Humantransit.org)

There are many different ways to involve private enterprise in providing transit services, and these are so different that vague talk of “privatization” simply doesn’t illuminate what’s going on.

At one extreme, you can privatise operations, planning, fleet, public information, branding and almost everything else.   In this model, prominent in Britain (but not London) and in British-influenced countries like Australia and New Zealand, government merely subsidises services that wouldn’t make a profit, but doesn’t try to control the overall planning of the network.  This approach sometimes “works,” in a political sense, in areas where you have low expectations for transit overall, such as rural areas.  It’s been very problematic in urban areas, because it deprives government of the control that its subsidies should be buying, and makes it impossible to plan rational networks that would meet the shared goal of a city and its people, and that would use limited street space efficiently.  Sydney, Brisbane, and Auckland all went far down this path and are trying, at various speeds, to pull back from it and re-assert government control over most aspects of planning and marketing.

At the other extreme, you can privatise operations only.  This is the model used in a number of lean North American operators such as Southern California’s Foothill Transit.  In Australia, only Perth takes this approach, but it’s very successful there.  A public agency answerable to voters keeps full control of planning, and also owns the fleet and facilities.  Private operating companies are hired only to provide operations and maintenance, under contracts to the agency that are periodically re-opened to competitive procurement.  This is a targeted kind of privatisation aimed at the functions that are the biggest budget-killers for all-public agencies: labor costs, labor relations, and liability related to operations and maintenance.   You can make a good case that the private sector is in a better position to handle all of these than government agencies are, and while I won’t argue the whole case here, many  agencies — especially newer agencies that don’t have legacy labor commitments — are finding this a very good model.  In Australia, Perth works this way, and other cities are moving this direction.

You can find examples anywhere on the spectrum between these extremes.

If private monopolies are squeezing consumers too hard, why shouldn’t those voters decide to establish a public competitor? Or conversely, if the public sector can outsource selected operations functions, as in the transit case above, retain the overall ownership and planning authority, and save taxpayers money, then what’s wrong with that?

How can we tease apart which sector is best at which particular jobs so that both sectors can best serve the American people?

Mr. Natural aka

Mr Progressive says: “Rather than argue endlessly about it on theoretical and ideological grounds, why not put it to the test in the real world?”

Obama vs British Petroleum: Is that a low blow comming? Who will clean up?

Obama vs British Petroleum: Is that a low blow comming? Who will clean up?

If the public and private sectors just can’t stop quarreling and feuding with each other, maybe they need to settle some of their disputes in the boxing ring. Not in bare-knuckle, ultimate combat cage matches, but  in scientific bouts between sportsmanlike gentlemen under the Marquess of Queensberry rules. Those rules might include the private sector owning up to externalities and accepting various pro-labor standards and on the public side they might include a requirement to operate at a positive net revenue of 10-15 per cent.

Depending on the various market venues in which they compete, one may win a contest here and the other may win a bout there, but in many cases the competition may be a draw and the market may find niches for both. Everybody gains from the scientific exhibition of  pugilistic skills (except the cranky old public plutocrat and the mean old private monopolist who are both disqualified for low blows, head butting, and other unsportsmanlike conduct. Both have become dinosaurs no one can afford to feed or clean up after. Big dinosaurs consume a lot of resources and break a lot of china.

I think the Apatosaurus is BP.

Big, old dinosaurs break a lot of china

Big, old dinosaurs break a lot of china

A Stinging Defeat

The venue where progressives most recently lost a very-high-stakes public/private sector prize match was of course the health insurance reform debate. We came so close to a public insurance option we could taste it (not a government take-over of the whole boxing arena–just a new public contender in the ring to liven things up and draw a new crowd) and then we lost the match in the last round thanks to the wiles of two-timing conservadems like Ben Nelson and Blanche Lincoln.

Mr. Natural aka

Anyway, Mr. Progressive says: “Fair, regulated public/private sector competition is the way to go for a thriving, efficient, and democratic economy in the USA. The two sectors can settle their arguments in the ring and then shake hands and get on amicably (mostly) with each other in a fairly civilized and half-way dignified manner…”

“Enjoy the ring-side seats, friends!”

Mr. Progressive also says: “Remember, progressives, the private sector does not own the “market”, “entrepreneurship”, or “free-enterprise” turf or terminology. That is something we progressives must stake our own claims to.”

The latest wrinkle, Freemium

Much of our economy, including much of the public sector, could be run on a freemium model (a product or service with a free version and one or more priced “premium” versions). This may be one of the best hybridizations of profit/nonprofit and public/private devised so far. It might greatly reduce the need for taxation and philanthropy, while making a greater range of goods and services available for free. I haven’t studied the freemium market enough to know how it works in detail, but I use the free versions of several freemium products, including antivirus, without feeling like a second-class citizen. I suspect that competition between providers of similar freemium products and services motivates them to make the free versions sufficiently desirable, and if one producer adopts a freemium price model, others almost have to follow suit.

“About 77% of the top 100 grossing mobile apps in Apple Inc.’s App Store use a freemium pricing plan, up from just 4% in 2010, according to Velti PLC, a mobile advertising and marketing company. ” (WSJ)

I think many public goods and services could eventually be freemium apps. What works for apps might work for other goods and services, both in the private and public sector. In fact, the freemium model might eventually blur the line between public and private and between for-profit and non-profit much more than it already is.

This might ease some of the Right’s anxiety about “coercive taxation” (but probably not) without making the poor pay for their public services the way they have to pay for postage stamps. Don’t get me wrong, US postal rates are a good deal, but what if we had a free “second class” service and stamp? (There used to be 2nd and 3rd class rates that were cheaper than 1st class but not free — now they have other names)
Freemium might be also used by many nonprofit organizations to become more self-sufficient,

Although we probably shouldn’t use it in public safety applications or k-12 education, it might make sense in post-secondary education if it meant the difference between a somewhat spartan (but free) college education and no college education at all. The downside could be minimized if very high-quality curricula and digital resources were available online free to all and the freemium model applied only to the human and physical resources side of the system.

It could easily be applied to many areas of healthcare and insurance, too.
Due to the nature of fossil fuels (non-renewable, negative externalities, etc.) I think they should be publicly owned, produced, and distributed. That applies to most non-renewable resources. That said, the freemium model might still apply to some degree, i.e. those who pay for premuim gas might help subsidize a cheaper grade, but production and distribution of non-renewable resources probably shouldn’t ever be left entirely to the marketplace, even a freemium one.
Food is renewable, and I think the freemium model might apply pretty well, i.e. the lowest grade of food would be free, subsidized by revenues from higher grade food. Grade might apply to food types as well as quality, i.e. basic commodities of good quality might be free and subsidized by revenues from more elective or luxury types of foods.

Of course, a successful deployment of the freemium model in more sectors of the economy depends on there being enough competition in each product and service category. Freemium could easily be used in an anti-competitive manner, so strong antitrust regulation, and other measures to promote adequate competition would be a key factor in a freemium economy.

Poor Richard


2 Responses to “Why can’t the public and private sectors just get along?”

  1. "Natural Lefty" Says:

    Richard, I think I will make regulated public/private sector competition one of my recommendations, too, at least as something that is economically doable in the short-term future.

  2. The value of inefficiency « Poor Richard's Almanack 2010 Says:

    […] An evolving society should be an open laboratory where all economic theories (within reason) can be tested and compared. I would even like to see public and private solutions to providing goods and services compete side by side in the marketplace. Of course, to keep the public sector from taking unfair advantage over private enterprise we would need strict rules of fair play. I explore this in “Why can’t the public and private sectors just get along?“ […]

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