Making Incrementalism Work

Sheldon Richman wonders whether efforts to streamline government are really worthwhile if they fall short of complete privatization. This is a legitimate concern, but the question needs to be posed carefully. Powerful political forces oppose privatization, and demands for nothing less than outright privatization may be self-defeating simply because pure privatization in one fell swoop may be impossible.

The real question for those who want to move resources from the public to the private sector is: what is the most likely political path for such a change? It is true, as Richman says, that some halfway measures may prevent eventual privatization, but other measures may open up the path for such an action.

Multiple groups typically benefit from public ownership and control. For example, public ownership of infrastructure typically benefits contractors who build the infrastructure, public employees who operate the infrastructure, politicians who get to pass out infrastructure favors, and private parties who may use the infrastructure at less-than-market cost.

Halfway measures that merely trade off one set of beneficiaries for another will not, as Richman suspects, ease the path to eventual privatization. For example, one proposal before Congress would replace Amtrak with private companies who would bid on individual Amtrak routes. Congress would determine routes, frequencies, and speeds of each train and then offer to pay companies enough of a subsidy to maintain those schedules. The proposal would also require the companies to pay employees as much as Amtrak pays them. Supposedly, the private companies would be more efficient than Amtrak, leading to an eventual savings, but they would also become lobbyists to maintain the subsidies.

Alternatively, it may be possible to plan a path that takes on one of the beneficiaries at a time without immediately threatening the others. Each of the initial steps of the path may fall short of complete privatization, yet the process would not only culminate in full privatization, but each step would make such privatization more likely.

For example, when the automobile was first developed, the main justification for public ownership of roads funded out of gasoline taxes was that the toll collections required for private ownership were both costly and delayed traffic. This same justification was used in the 1950s, when the U.S. Bureau of Public Roads advocated a federal gas tax dedicated to the Interstate Highway System.

Today, electronic tolling has reduced collection costs and eliminated delays, yet opponents of state highway privatization are legion. One of the obstacles is the states themselves, which get billions of dollars a year from the federal government—support that, under some Congressional proposals, would decline with every mile privatized. Outright privatization by the states seems impossible, yet a multi-step process could lead that way.

The first step is to devolve federal transportation funding to the states, but that in itself will be a multi-step process. The House Transportation & Infrastructure Committee is the largest committee in Congressional history because transportation has become one of the greatest sources of pork. Members of Congress who joined the committee to pass out pork are not going to give it up overnight.

Federal transportation dollars fall into three categories: formula funds, given to the states based on population and other factors; competitive grants, supposedly given to the most worthwhile projects but actually distributed largely on political criteria; and earmarks, the most obvious source of pork. Proposals to let states take over gas taxes and eliminate the federal middleman have fallen on deaf ears, but a House dominated by Tea Party Republicans forced the Senate to agree to eliminate earmarks in 2012. The next step is to eliminate the political grants. If all federal funds are formula based, pork-oriented members of Congress will lose interest, and devolution would become a likely next step.

Once federal funds are out of the picture, the states will be forced to rely on their own resources for transportation. All states fund roads out of state fuel taxes, but some play a complicated game of diverting a share of gas taxes to other uses and then spending revenues from sales, income, or other taxes on roads. This enhances legislative power because the groups that get the diverted gas taxes are grateful for the diversions while highway contractors are grateful for the use of general funds on roads.

For example, California diverts more than $2 billion a year of fuel taxes and motor vehicle registration fees to mass transit and another $400 million to general purposes. Meanwhile, the state spends $2.4 billion in general funds on roads, almost exactly the same amount that is diverted. Privatization is politically unrealistic so long as state legislators get the political benefits of playing this money game.

Rather than insist on immediate privatization, tax activists at the state level should demand that state and local governments stop spending general funds on roads, while at the same time they should oppose diversion of highway user fees to non-highway programs. Once these steps are taken, a discussion of privatization becomes more realistic.

It is interesting that Richman quotes an abolitionist to make a case against incrementalism. In the 1820s, emancipation—in which the government would buy and free the slaves—was a viable alternative to abolition that was actively supported by many slaveowners in Virginia and the Carolinas who felt the moral quandary of slavery but believed they could not afford to simply give up their investments. The emancipation movement was killed by a combination of the abolitionists, who argued that slaveowners should not be compensated for the loss of their slaves, and slaveowners in the Deep South, who argued that a government that would take some property (slaves) without compensation would be just as likely to take other property (land) without compensation. The issue was only resolved, of course, after a costly and deadly war.

In short, as Richman says, some halfway measures can themselves become obstacles to true privatization. But insistence on nothing short of complete privatization can itself become an obstacle toward that goal.

Also from This Issue

Lead Essay

  • From State to Society by Sheldon Richman

    In a sweeping essay, Sheldon Richman explains why private property and free competition are superior to state-provided goods and services. He warns against granting “private” corporate monopolies, which are not true privatizations, but act as arms of the state. He adds that for many state activities, the best way to privatize is not to provide the service at all — as in the case of punishing victimless crimes, which no one should do. For legitimate services, he recommends a “homesteading” approach, in which stakeholders in a public service, such as a school, would receive shares in a new, independent corporation.

Response Essays

  • The Incremental Approach to Privatization by Leonard Gilroy

    Leonard Gilroy argues for the benefits of incremental privatization. The general public, he writes, must still be convinced that private entities can perform many of the services that have for a long time been provided by monopoly government entities. To win them over, demonstrations will be necessary, and these should be incremental in nature. Gilroy cites several such attempts and argues that they have successfully built support for the idea of privatization.

  • Nuanced Privatization by Dru Stevenson

    Professor Stevenson agrees that much so-called privatization does not deserve the name. It both fails to shrink the government and also creates new constituencies for government spending–the private firms who win lucrative contracts. That said, we must think very carefully about what a more privatized world would look like, and whether we would really prefer it in all cases. Are we comfortable, for example, with the largely religious education system that would likely replace state-run schools?

  • Paying Attention to Incentives by Randal O'Toole

    Randal O’Toole argues that the difference between success and failure in privatization is primarily a matter of incentives. He cites examples of failed incentive structures, like British Rail and New Zealand’s fishing quota system, as well as some successes: Denver’s Regional Transit District has contracted bus service that runs for half the cost of its government-operated lines, and Atlantic City has an entirely private bus fleet.

The Conversation