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Article Summary

Starr, Paul. 1987. "The Limits of Privatization." Washington, D.C.: Economic Policy Institute.

In this article, Starr responds to those who would claim that privatization is the answer to all of our nation's problems. He first notes that private markets are not natural creations; rather they are legally and politically structured. Because these public functions are present even in the private sphere, it is not an "either-or" question of public or private, but rather what form of public-private partnership is "best"; a determination not based simply what is the cheapest or most efficient, but one that should include concerns about justice, security, and citizenship.

Starr points out that ideally privatization opens up public monopolies to competition from a number of private firms, but often it merely transforms public monopolies into private ones. It is difficult to sustain competition within the private sector, as successful contractors build local knowledge that gives them an advantage over other bidders. Also, many public services are performed by nonprofit organizations, which are less competitive by nature. However, it is possible to introduce competition into the public sector.

Starr believes that some exponents of privatization, while they talk about vouchers and contracting, have the ulterior motive of gaining support for wholesale government disengagement from providing many services. These advocates tend to view the economy in zero-sum terms, where more government spending means less economic growth in the private sector. This picture is not accurate, however. Many Western countries that have high government spending have also had high growth rates. In addition, public spending often represents investment in human capital and other intangible capital that is not quantified in any budget. As much as private markets are touted, we still rely on government for economic stability and for intervention when necessary.

While a strong argument for privatization comes in the form of promoting "public choice," Starr believes that this economic theory inappropriately envisions the public arena as a political marketplace in which everyone's goal is to maximize his or her benefit. Privatization advocates claim that support for expansive government spending is based on politicians' collaboration with narrow special-interest groups. Actually, the general public has supported most programs and services that government provides.

Starr disputes the notion that contracting services out to private producers will lead to cost savings. In fact, he states, it will merely create new groups with a strong interest in seeing government spending rise. He cites defense production, construction projects, and health care as three areas that have historically been produced privately for government but at tremendous costs. A greater level of private contracting is likely to change the nature of public-private relationships, as private firms come to depend on government dollars. The public will also require a greater level of accountability from private firms if they are receiving tax dollars, so they will be subjected to more regulation and oversight, making them resemble the public institutions they are replacing.

While he acknowledges that government services often provide little choice, Starr does not believe, as privatization advocates claim, that providing more choices through market mechanisms will lead to greater equity. Political participation allows democratic choice, where each person gets one vote, while in the marketplace, those with more money essentially have more say. The political arena creates space for debate, not just the impersonal registering of preferences. Through privatization, decisions are moved from one realm to another, where there are different rules, less disclosure, and very likely less access than in the public sphere. In some areas, such as the provision of public TV and radio, government actually expands choice.

Another conservative complaint is that broad (and therefore expensive) government programs benefit many who are not necessarily in need of assistance. Even public education falls into this category for some privatization advocates. Starr points out that targeting services narrowly to certain groups would be much worse, creating resentment between classes of citizens and stigmatizing poorer groups.

Finally, the symbolic effect of privatization is not to be overlooked. The government is the steward of many of our important national legacies, such as parks and monuments, that have meaning to us as a nation. To privatize these things would deny our citizens a common ownership of them.

Starr believes there is a role for privatization, but its various forms must be carefully considered, as there is no single remedy for government's problems. We face not a choice between public or private, but an extensive variety of options in organizational forms and modes of ownership, control, and finance.