Saturday, November 12, 2011

Book Review: Shrinking the State: The Political Underpinnings of Privatization


REVIEW of Harvey Feigenbaum, Jeffrey Henig, and Chris Hamnet, Shrinking the State: The Political Underpinnings of Privatization (Cambridge Univ. Press 1998).

This site offers reviews of new academic books and monographs on privatization as they come out (see, e.g., here), but we also want to provide our readers with the useful service of featuring important earlier texts that contributed significantly to the literature on privatization of government services.

Unlike most books in this area, this text focuses on the causes of privatization rather than the effects or consequences. This focus on causation makes the book a unique and significant contribution to the academic literature in this area. The causal connection is essentially political, rather than administrative (logistical need) or economic (best value).  As the title suggests, the authors see privatization primarily as an attempt to shrink the state, a political reaction against the large bureaucratic welfare states that emerged in Western/developed countries after WWII.  At the outset, the authors acknowledge that some privatization is illusory, as when the government cedes an enterprise to the private sector but then imposes a regulatory regime (licensing, permitting, code violations, etc.) that allows the government to retain enough control to be a partial owner.

More important for the authors’ thesis is the concept that privatization is a political pendulum – the state expands in response to demands for services from the lower classes, eventually triggering a backlash of those who want to downsize the government, which in turn creates an eventual backlash against privatization when such efforts go too far.  They trace the ebb and flow of privatization in France, the UK, and the US since WWII. This comparative perspective between three highly developed nations also makes the book a useful and significant contribution to the literature, with a well-written history of privatization in each of the countries, as well as discussion of how these trends were independent or influenced each other.  Click "read more" to continue with this review...




Before proceeding with further analysis, here is the Cambridge University Press summary from the back cover:

Privatization has spread worldwide during the 1980s and 1990s, and has significantly reshaped the balance between state and market in many countries. This book provides a comparative political analysis of the development, form, character and causes of privatization in three countries: the UK, USA and France. The authors argue that privatization is a political phenomenon and should be analyzed as such, rather than being seen as an economic response to the growth of the state and the cost of state provision. Privatization frequently has explicit political goals, and has consequences which redistribute costs and benefits to different groups. The book presents a threefold typology of privatization policy - pragmatic, tactical and systemic - and relates it to the experiences of USA, France and UK respectively. It will be of interest to students and scholars of politics, economics, public policy and business studies, as well as policy-makers and consultants in the field of privatization. 


And here is a nice quote from the authors about their own thesis:

"Our principal argument is that the broad privatization movement is, in most of its manifestations, better understood as a political phenomenon than as a technical adjustment to changing conditions or as a consequence of economic laws." (p. 41)

The authors structure their discussion in a series of three- and four- part typologies or categorizations of privatization.  The first is their overview of the three schools of thought about causes or motivations for privatization.  1) administrative (i.e., that privatization happens as a matter of necessity or at least convenience for government administrators); 2) economic (the argument used by privatization advocates, insisting that privatization saves money); and 3) political (the authors’ view, that large-scale privatization is about shifting power away from certain interest groups in favor of others).

Unpacking this political explanation of the causation, the authors then offer a threefold classification for privatization efforts themselves – pragmatic, tactical, and systemic  - with “systemic” further broken into three subcategories, explained below.  Pragmatic privatization is usually incidental and often a matter of necessity – usually on the municipal level – as where a town does not have the personnel or equipment to provide snow removal or towing of illegally parked cars, and must retain a private firm to provide this service as needed.  This is (has always been) very common in American towns and cities, and is rarely a partisan issue, and usually is not even controversial.  Tactical privatization is more ambitious and politically motivated, but also discreet and incidental – selling a particular asset/enterprise, or outsourcing a particular service, in order to garner votes from a particular special interest group in an upcoming election.  This tends not to be ideological or consistent, but is more of a one-time favor to certain constituents.  Systemic privatization is what we associate with Margaret Thatcher, Ronald Reagan, and George W. Bush.  In Thatcher’s case, this meant selling off major government-owned businesses or withdrawing from certain sectors entirely.  For Reagan and Bush, this meant outsourcing as many government tasks as possible to private firms on contract.

As mentioned above, there are three subcategories of systemic privatization: 1) Power shift, where the working class loses political power and the wealthy class demands cuts in taxes and services provided to the poor; 2) Perceptual shift, where the public develops a distrust of the government and wants it to do less; and 3) Institutional shift, where leaders decide that private business owners would make better decisions than government bureaucrats.  (see pp. 50-53)

 Systemic privatization came relatively late to the United States, and during the Reagan era, it shifted from being an economic model to a political strategy, a way to promise voters the seemingly contradictory goals of maintaining existing government services and benefit programs, while simultaneously slashing budgets and reducing government staff.  Strident advocates in this period wanted nearly everything outsourced to the private sector (see pp 130-32).

The authors’ main conclusion about all this is that that the political impetus for systemic privatization makes it vulnerable to political backlash or swings in popularity.  Pragmatic and tactical privatizations continue to occur because they seem necessary or expedient in discreet circumstances, but systemic privatization tends to go in and out of fashion.  The Obama Administration’s general reversal of the previous administration’s outsourcing binge seems to validate the authors’ theory.

Some readers will find this book frustrated because it avoids taking a position on the merits of privatization itself – privatization advocates may feel the book is not favorable enough (or is even rather bleak), and critics may find that the book stops short of being an enjoyable broadside attack on privatization.  It tries to be neutral and focus on the causes or motivations for different levels of privatization by governments.  This objectivity, however, enables the book to be a useful contribution to the debate – helpful history, tenable theories, and creative classifications.  A good read.

One academic reviewer summarized the book's thesis as follows:

“The  central  thesis  is  that  privatization  is  rooted  not  in economics  but  in  politics,  particularly  the  motives  and  designs  of  leading  politicians.  The  authors  develop  this  thesis  by examining  the  evolution  of  privatization  in  three  settings,  the United  Kingdom,  France,  and  the  United  States.  In  each country,  national  politicians  link  the  rhetoric  of  privatization to  ideological  or  partisan  goals.  Their  underlying  motivation is  not  the  quest  for  economic  efficiency  but  the  quest  for  a smaller  welfare  state  or  a  larger  victory  in  the  next  election."
(Review by William Gormley in The American Political Science Review, Vol. 94, No. 2, Jun., 2000).

COMMENT:  Though the authors focus on the political motivation of using privatization to shrink the state - a prevalent theme today among conservative presidential candidates - it seems to produce the opposite effect.  The logic is similar to that of Jevons' Paradox in economics: increasing efficiency in a system, rather than reducing the aggregate expenditures for inputs, can instead increase the level of consumption because the payoffs are greater for a given level of input. In other words, even where outsourcing of government services to private firms yields savings to the public fisc (which rarely happens in any case), the savings does not return to the voters in any type of tax relief, but instead allows for expansion of the government programs - cutting the costs in half merely allows the state to double its activity.  As the state expands, incremental annual cost increases (due, say, to inflation) are scaled accordingly, so the government budgets simply must increase over time, as any increases in efficiency are reinvested to expand the government rather than shrink the tax burden.  Conservatives may have noble goals in wanting to reduce government, but Jevons' Paradox suggests that this will probably backfire and lead to an ever-expanding government and tax increases in the long run.


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