Thursday, August 30, 2012

Privatization and Rent-Seeking

As a reminder, I run a company that privately operates public parks, originally in the pioneering US Forest Service program and today, as park budgets are cut, for many government agencies.

Anyway, about 3 years ago a lobbyist showed up at my door selling his services.  He said he could help me promote this model in various state legislatures.  I was not wildly excited, knowing that legal changes were irrelevant until individual parks agencies saw value in the model.  He then gave me what he thought the best selling point was:  he could get the legislation crafted in a way such that only my company could win the bidding.  I threw him out.

I got into the business out of passion for the outdoors and for what I thought was a better idea.  I felt dirty thinking about creating such crony returns for myself.  But it was a valuable lesson I have remembered ever since when discussing privatization with skeptics:  people fear cronyism in privatization programs -- and they have good reason for doing so.

I am not an expert on private prison arrangements, but I know prison companies are often accused of seeking rents through political favoritism.  With large fixed investments in prisons to cover, private companies have been accused of using legislative influence to increase the rates they are paid, to increase their share of the prisoner population, and even to support laws that would create more criminals (e.g. harsher drug laws).  I have sat in on some of these appropriations sessions and it is not always pretty.

I am working on a post discussing how public recreation agencies avoid many of these issues, but before I get to this material in the next post, I wanted to make a couple of observations that privatization critics often ignore in the rush to tar privatization with the cronyism label

1.  Public actors rent-seek as well.  To my mind, prisons are not a particularly logical place to start a privatization effort, yet they are at the leading edge of American privatization.  This is not accidental -- state run prisons had become tremendously expensive and inefficient, in large part because powerful prison unions played the legislative influence game to beef up their pay and benefits and work rules long before private companies entered the fray.  

Public prison companies have rightly come under fire for lobbying both for larger fees as well as harsher laws that create more prisoners (example from Think Progress).  But what is generally ignore by critics is that public prison unions do exactly the same thing.  I don't have access to the lobbying numbers, but we can look at election donations, as did Reason magazine recently:
Let's take a look at the two top spenders [in the recent election cycle]:
  • The Correction Officers Benevolent Association has spent $183,800 thus far in 2011-2012
  • The California Correctional Peace Officers Association has spent$142,800 thus far in 2011-2012
COBA represents correctional officers in New York; CCPOA obviously represents workers in California. In 2011-2012, these two unions have donated to politicians and PACs in two states almost as much as GEO Group ($170,000) and Corrections Corp of America ($206,000) have donated to politicans and PACs in all 50 states. (Lobbying expenditures is, of course, another story.)

Does that mean public sector prison unions are up to no good, the way private prisons are assumed to be? Or that the politicans they donate to have been corrupted by their influence, as the recipients of private prison money supposedly have been?
In California, the prison guard union wields immense political power -- far more powerful, I would argue, than the private prison companies in Arizona that Think Progress fears is running the state from the back room.  Sasha Volokh wrote in 2007:
The most active public corrections officers’ union in advocating incarceration is the California Correctional Peace Officers Association (CCPOA). It gives twice as much in political contributions as the California Teachers Association, though it’s only one-tenth the size; only the California Medical Association gives more in the state. CCPOA spends over $7.5 million per year on political activities. It contributes to political parties, political events, and debates; it gives money directly to candidates; it hires lobbyists, public relations firms, and polling groups. 
Many of its contributions are impossible to trace back to any particular agenda item: Since the union also opposes privatization, favors higher wages, and has positions on other issues, it’s just as plausible that the contributions were made for those other purposes. 
But many of its contributions are directly pro-incarceration. It gave over $100,000 to California’s Three Strikes initiative, Proposition 184 in 1994, making it the second-largest contributor. It gave at least $75,000 to the opponents of Proposition 36, the 2000 initiative that replaced incarceration with substance abuse treatment for certain nonviolent offenders. From 1998 to 2000 it gave over $120,000 to crime victims’ groups, who present a more sympathetic face to the public in their pro-incarceration advocacy. It spent over $1 million to help defeat Proposition 66, the 2004 initiative that would have limited the crimes that triggered a life sentence under the Three Strikes law. And in 2005, it killed Gov. Schwarzenegger’s plan to “reduce the prison population by as much as 20,000, mainly through a program that diverted parole violators into rehabilitation efforts: drug programs, halfway houses and home detention.”
We have to be careful - such rent-seeking is bad and represents a clear failure of governance, but critics who point it out with private contractors need to be fair and acknowledge similar activities by public employees in those same functions.

2.  And this brings us to my second point, that there is an internal contradiction in much of the criticism of privatization.   Critics will argue that private management fails because private actors have baser motivations than public officials, who are self-selected and trained to only want to improve the public good and make decisions consistent with that good.

What is never explained to me by such critics is how these folks who are so pure of spirit when managing an activity themselves within government, suddenly become so disdainful of the public when managing private contractors.  This makes no sense, which is why we shouldn't be surprised that prison insiders act in many of the same ways whether they are public or private employees.

What we should be looking for is a way to shift the incentives, such that insiders, whether they be public or private, don't have their personal returns and success disconnected from how well they do their core function  or how efficient they are with public funds.

How do we do that?  I will give just a hint right now.  McDonald's would save money by not cleaning the bathrooms.  So why does it clean them?  Marriott would save a ton of money if it did not wash the sheets between visits.  So why does it do so?  Because Marriott and McDonald's make money only when the public finds value in its services.  Neither can run to the legislature for higher prices or more customers if they are not making enough revenue.  In my next post, I will discuss privatization models that establish these same incentives.

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