Friday, January 7, 2022

The Problem With Privatization


Is privatization a good or bad thing?  It depends.

In response to my previous posting about for-profit prisons, a reader writes that privatization of some government functions would result in improved service and lower costs.  I disagree, in part, based on the historic evidence of the privatization orgy of the 1990's.  While it is true that privatization could result in reduced costs and better service, so could better management.  The problem for government-operated enterprises is that you have 435 managers in the House of Representatives, 100 in the Senate, and a President, to boot.  Each has their own pet ideas on how government agencies should be run.  And sadly, privatizaion doesn't always eliminate this layer of interfering "management" from the equation.

My personal experience with privatization was at the Patent Office.  For decades, the Patent Office generated a profit for the US Government - the income from application and issue fees exceeded the costs of running the place.  Unfortunately, the income was put into the general fund, and the Patent Office had to beg Congress for some of it back - and Congress wasn't about to do that.  The Patent Office argued that if they were allowed to spend their "own" money, they could hire more examiners, issue better quality Patents, and do so in a shorter period of time.  But that was not to be - not with 435 managers in the House, 100 in the Senate, and so on.

When Bill Clinton was President, they did initiate a "Privatization" scheme to take some functions of the Patent Office and farm them out to government contractors.  So the clerks who handled the files were all laid off and rehired as contractors - for a lower salary and fewer benefits.  Bear in mind that as a GS7-1225 Examiner, back in 1987, I was making the stellar sum of $22,000 a year.  Imagine what a GS-2 or GS-3 clerk made.  Not a lot of savings, there!

The inherent problem with privatizing functions like that is that the contractor wants to make a profit (needs to make a profit) and has overhead of his own.  If the same work is to be done at lower cost, then either corners need to be cut or salaries slashed in order to do the same work for less money - and leave headroom for contractor profit.   What privatizing these trivial jobs did, however, was reduce headcount, which allowed Clinton to argue he "shrank" the size of government, even if the actual size - including contract employees - was about the same, if not larger.  It was a shell game.

What's worse is that contractors may not appreciate the amount of work involved, which can be disastrous.  Another function of the Patent Office which was contracted out, was file storage.  This was in the era where we still had paper files - and would for a few years more.   The contractor leased a warehouse off-site, and all the Patent files were stored there on huge racks, like the ones you see at the wholesale club.  In the old days, if you wanted to inspect a file - either as an Examiner or a member of the public - it took a day or less to retrieve them, unless they were very, very old.  With the new contractor, everything took a day or more - often far more.  A truck hauling files to and from the off-site storage area went back-and-forth every day, loaded with files.   It was cumbersome to say the least.

Now of course, today, we have electronic files, and a lot of older files have been scanned-in so they are available electronically.  So the "savings" in going to off-site storage was temporary at best.  I suspect today the files are just shredded once they are scanned-in.  But even if they are extant, they can be put in cold storage forever, once they are online.

The big problem for the contractor was they had no idea what they had signed up for.  The warehouse quickly filled up with files - stacked ten tiers high on those steel "big box store" shelves.  So they decided to add five more tiers on top of that.  No one bothered to do a weight and stress analysis for the shelving.  And one bad day, one of the tiers collapsed, which created a domino effect, as rack after rack of shelves tipped over, going across the warehouse until the entire place was a mass of twisted shelving and paper files scattered all over.  They had to use a front-end loader to clean the place out.  And after that, they had to go through each file, one at a time, to put the papers back in, and then re-stack and re-store them on new shelving.  Some papers were never properly matched up.   Privatizing, in this instance, was a disaster.

And the cost savings?  Probably negligible.  Improved service?  Not bloody likely.  As I noted in my previous posting, privatizing nationalized industries is probably a good idea.  Venezuela nationalized its oil industry and output plummeted.  In response, they jailed the executives of the company.  Output plummeted further.  The problem with nationalizing industries like that is that the dictator's nephew is put in charge, and he doesn't know zip about the oil business.  Or people put in charge are selected based on their loyalty to the government, rather than their knowledge of the oil business.

On the flip side, privatizing governmental functions runs the risk of corruption - as contracts are handed out to political supporters rather than based on merit.  They used to call that "machine politics" and yes, it still goes on today, to some extent.  I think the difference between the two is that if you privatize an oil company, they run it as they see fit - and charge what the market will bear.  If you privatize a governmental function, on the other hand, the contractor can only charge what the government is willing to pay - per the terms of the contract - and may still be subject to governmental interference.

Getting back to the Post Office, the problems the USPS has are not because it is a "gubment agency" as indeed, for centuries, the Post Office ran very efficiently.   As I noted before, go overseas sometime and mail a letter.  In many countries, you might as well throw your letter in the trash as to put it in a post box.  In highly-efficient Japan, you can expect to spend a dollar or more (back in 1990 when I was there) on a post card and it would not arrive for weeks.  I am not talking about overseas delivery, either.

The two big problems for the Post Office are the number of interfering "managers" in the form of politicians, and the drastically reduced volume of mail.  General Motors suffered from the latter problem.  GM employees had decent benefits and high pay.  And over time, they retired and started collecting pensions and using expensive health care.   In the meantime, GM sold fewer and fewer cars and had less income to pay for all these retiree costs.  Eventually, it came to a head and the company went bankrupt.  They could not just raise the prices of the cars, due to competition.

The Post Office has the same problem.  The Postal Workers health care plan is one of the best - I know as I was on it. As a Federal Employee you had your choice of any health care plan offered and all the Examiners I worked with said, "Sign up for postal workers!  They have the best plan!"   But like with GM, more and more workers retired and meanwhile the volume of mail decreased dramatically as faxes, FedEx, and eventually e-mail took the place of paper documents - for the most part.

Now, for a private company, the solution is simple - cut expenses and raise prices.  But Congress throws a fit every time they raise the postage.  The media (boo! hiss!) throws a fit every time they raise the postage.  "It will cost 50 cents to mail a letter!" the cry.  OK Boomer, who the fuck mails letters anymore?  So each postage increase is like pulling nails, and requires Congressional hearings and investigations, so all those Congresspeople can get their name in the paper as "fighting for the little guy!"

Cutting costs is not that much easier.  Eliminating Saturday delivery would save a ton of money.  It isn't just one more day of work, but additional employees to hire.  A vested postal worker works the same route five days a week, and a rotating employee covers that sixth day.  The newbies have to handle the rotation and it is murder as you don't get the hang of a route - it changes from day to day.   This sort of stress is one reason why we had people "going postal" in the 1980's, although that seems to have died down as of late.

Back in the early days of our Republic, the postal service was it - the only way to communicate from one place to another.  So it had to be strictly reliable and service had to be stellar.  We have a collection of antique postcards that Mark's Grandmother had - all in a big box.  One of them is dated in the early 1900's and says, "We'll be coming up on the train tomorrow to visit!  Meet us at the station!"  Even in the era of the telephone and telegraph (both very expensive) Mark's Grandmother knew that if she put a postcard in the mail by the afternoon cutoff date, it would be delivered the same day to her relatives in Mattawamkeag, who would then know to pick her up at the station.  The postal service was that accurate and that reliable because it had to be.

Today?  Well, the Postmaster appointed by Trump made waves by changing the standards for First-Class delivery from "a day or two" to "whenever it gets there!" or something along those lines.  And quite frankly, in this day and age, we can live with that, as there is very damn little that is so important that it can't wait a day or two.  If it was important, you'd pony up the dough for Priority Mail, or FedEx or whatever.

But speaking of which, these other services illustrate why privatization of the mail might not work.  While it costs 58 cents to send a letter by first-class postage, the cheapest rate for FedEx, UPS, or any other "private" service is several dollars - ten times as much.   Of course, those private services are set up to deliver packages, not letters, and if they were to get into the letter business, they would have to invest millions in sorting equipment or take over existing USPS facilities.  Even then, you can assume prices would be a lot higher - remember, private carriers have to make a profit as well!

And would they do a better job?  Maybe.  Maybe not.  There have been numerous stories in the press about FedEx contractors "dumping" packages rather than delivering them.  Recently, some Amazon employees were busted for stealing and dumping packages. Turns out, there is a cost in hiring the cheapest possible labor, particularly today.  You end up with unsavory employees who steal.   Granted, there have been dozens of such stories about USPS carriers, who "hoard" mail in their homes.  But in those cases - for the most part - they were not so much stealing mail as just failing to deliver it because they were lazy or felt pressured by the schedule.  Many thought they would "catch up" with mail deliveries later on, but it snowballed out of control.

This mail delivery business isn't an easy nut to crack, is it?

Another cost-saving measure proposed - and used in many other countries - is to have community mailbox centers, at the end of each block, where residents would walk or drive to, to get their mail, each from a separate box with key.  A large box could be used to store packages.  It reduces delivery costs as the postal carrier doesn't have to walk from house to house.  But attempts to implement this in the USA have met with the same howls of protest as attempts to raise the postage or cut Saturday delivery.  You can't reform the USPS with so many people looking over your shoulder.

But that raises the question - if you "privatized" the Post Office, would the contractor be able to make such cost-cutting decisions themselves or be hamstrung by their Congressional overlords?  I suspect the latter.  In other words, even if legally (under the Constitution) Congress could contract-out and privatize the USPS, chances are, they would keep a tight grip on operations, which would be setting up the contractor to fail.  The contractor's only choice, therefor, would be to screw the crap out of the employees by cutting salaries and benefits and making everyone a subcontractor (as is already the case for many rural routes).  Expect more people to "go postal" as a result.

The "problems" with the USPS are like the "problems" with Social Security - easily solvable, but no one wants to take responsibility.   You can raise the cutoff for Social Security taxes or reduce benefits.  There is no third way.  No politician in their right mind wants to do either.  Ditto for cutting Saturday delivery, raising postal rates, or any other cost-cutting or revenue-enhancing measure.  It just takes guts, and politicians have none.  So privatization is dead on arrival - unless you let the contractor make these hard choices for you.

Amtrak suffers from a similar problem.  Some popular routes make money, but are more than offset by losses on other routes.  No one wants to be the Congressman who "lost rail service to Whooterville" so these money-losing routes continue, even if they are served by buses as well.  Congress "rescued" passenger rail service and created Amtrak because private companies were losing money at it.  It was like the trolleys - they lost money once cars became popular, so one by one, municipalities took them over and ran them at a loss - before replacing them with buses.  There was no grand conspiracy to kill off the trolleys - unless you consider basic economics to be a grand conspiracy (many do, sadly).

Yes, we need public transportation of some sort - in cities and whatnot, where getting around is essential to working and survival.  But train service? It is sort of an anachronism in this day and age, with airlines taking the bulk of long-distance travel, so much so that even bus companies have gone bankrupt.

Amtrak could be privatized and make money, provided the contractor had the ability to set routes and schedules. If Congress retained control of that, and insisted on the contractor running money-losing routes, well, it would fail as a private enterprise as well as a public one.

Privatization is the easy answer to a tough problem - and easy answers are usually the wrong answers.  On the other hand, making tough choices isn't always the insurmountable problem we make it out to be.  We can solve our problems in America, it just requires some backbone on the part of our elected officials. We have been conditioned to think that some topics and solutions are "off the table" and thus hobble ourselves and limit our choices - or erase them entirely.

Just a weird thought, but maybe the answer isn't in privatizing everything (what was the question, again?) but in holding our elected officials' feet to the fire and getting them to make unpopular decisions and unpopular choices.  Maybe if our elected officials didn't live in fear of losing re-election because they did what was right for America, these "problems" would disappear.'

And once again, it comes back to us - because we believe the attack ads, and we vote for the clown who says, "Vote for me, and I'll bring back Saturday delivery and cut first-class postage to a dime!"

We have met the enemy and he is us.