The History of Privatization

How an Ideological and Political Attack on Government Became a Corporate Grab for Gold

he post-WWII era was a tough time for conservative economists, academics, intellectuals, and business leaders. Social Security, the Tennessee Valley Authority, the Securities and Exchange Act, and other New Deal programs represented a dangerous expansion of government’s role in the economy and society – nothing short of a frontal assault on freedom and the beginnings of socialism in the U.S.

Today, after 50 years of attack on government, privatization is a standard conservative response to tight public budgets, a key pillar of attacks on government, and a lucrative market opportunity for domestic and global corporations. Large corporations operate virtually every type of public service including prisons, welfare systems, infrastructure, water and sewer, trash, and schools. For example:

What follows is how that happened.

Austrian-born economist Friedrich von Hayek was the movement’s intellectual leader. His 1944 book, The Road to Serfdom, is considered to be the intellectual wellspring of anti-government, pro-market ideas and the privatization of public goods. The book was met with surprising success – with excerpts printed in Readers Digest and Look Magazine. It continues to be a significant influence on politicians, journalists, and business leaders. House Speaker Paul Ryan considers Hayek his intellectual guru.

Yet public support for government remained high throughout the postwar years as public services expanded and the economy grew. Hayek and his followers, therefore, were powerless to stem the continued growth of government activities throughout the 1950s. This began to change in 1962 with the publication of Capitalism and Freedom by economist Milton Friedman. Friedman was an effective promoter of two critical ideas: governments were just like markets and government was a public monopoly. Both of these became central arguments of privatization advocates in the 1970s and 1980s.

F. A. Hayek is famous for defending classical liberalism. His free market ideology is often contrasted with British economist John Maynard Keynes' emphasis on government spending and intervention.

Friedrich Hayek

Milton Friedman served as an advisor to both U.S. President Ronald Reagan and British Prime Minister Margaret Thatcher. His ideas on monetary policy, deregulation, etc. were highly influential in the 1980s.

Milton Friedman

Robert Poole is an MIT-trained engineer-turned-think tank founder. He wrote a handbook called Cutting Back City Hall, which defends privatization efforts at the local and state level.

Robert Poole

Friedman’s most important insight was that privatization didn’t necessarily mean cutting popular public services. The public still trusted and valued government programs; Friedman’s argument gave privatization advocates a new approach by making the distinction between government responsibility and government provision of public goods. You could put public services in the hands of private contractors while still maintaining the program. Friedman’s real agenda, though, was clearly about removing public responsibility as well. He called for the elimination of Social Security, the minimum wage, public housing and all national parks.

1970s – Turning Theory Into Action

Emanuel Savas is hardly a household name, but he’s been one of the foremost privatization advocates for four decades. He was the manager of urban systems at IBM Corporation and was a deputy city administrator from 1967 to 1972 under New York Mayor John Lindsey.

Savas published his first article on privatization in 1971, wrote a dozen books and countless articles on privatization, and is still a respected expert across the country. He serves on the editorial board of Reason Foundation’s Privatization Watch, founded in 1976. Savas, as an on-the-ground city administrator, translated Friedman’s theory of government monopoly into a practical attack on the workings of city government.

Savas’ 1971 article, “Breaking Municipal Monopoly,” complained that the “monopoly nature of police, fire, sanitation [and transit] services has produced work schedules totally unrelated to public needs.” In other words, why let bus drivers clock in for full-time hours when we could force them to only work during rush hours? And the same for police when there isn’t much to do at 4 a.m.

Because of municipal monopoly power, he argued, agencies relish crises to increase their budgets. "Dirty streets," he wrote, "are good for a street cleaning department, high crime is good for police… and an epidemic is good for doctors and hospitals." The argument defied logic in the face of growing urban fiscal shortfalls, but it was the beginning of a long effort to demonize public service workers - a constant theme of anti-government forces to the present.

"Today the federal government employs more than three times as many contract workers as government workers, and state and local governments spend a combined $1.5 trillion on outsourcing."

Rising discontent with government during the 1960’s and 1970’s created fertile ground for privatization advocates like Savas and Robert Poole, founder of the Reason Foundation. Not only did they see opportunity for increased contracting out, but they seized the moment to recast existing municipal practices as living proof that their ideas were correct. Local governments had considerable experience contracting for basic services. San Francisco, for example, began contracting with private companies for trash collection in 1932.

The urban fiscal crises of the 1970s offered the perfect opportunity to create a rationale for contracting out public services. Cities across the country were facing declining revenues as middle class families and manufacturing companies fled to the suburbs and Great Society welfare programs increased costs. The lengthy 1973 recession pushed cities into crisis and toward Savas’ solutions. Privatization was no longer only a right-wing attack on popular government services, but increasingly becoming a managerial response to tight city budgets.

By the end of the 1970s, the table was set. Cities were in fiscal crisis and a new conservative think-tank infrastructure (Reason, Cato, Heritage, ALEC, and others) that embraced privatization as a core strategy to downsize government was ready for a frontal assault.

And then a new president was elected.

The Reagan Years: Privatization’s Coming out Party

Ronald Reagan’s 1980 election was the opportunity conservatives hoped for to downsize government and privatize public services. Reagan didn’t run on an explicit privatization platform, but he embraced the idea as central to his agenda once elected. The administration began to develop concrete proposals to sell off government assets. He also gave privatization a rhetorical lift by adopting the term “privatization” (still unfamiliar at that time) and softened opposition with Friedman’s argument that it simply represented using private means to pursue public goals.

By his second term Reagan had made privatization a centerpiece of his agenda. His 1987 budget proposal included more privatization proposals than any president had ever recommended, including the sale of two federally owned airports, a railroad, four regional power agencies and their electricity-generating dams, and weather satellites. “It’s going to be the greatest effort to return the provision of goods and services to the private sector that we’ve seen in this century,” Richard Fink, president of the David Koch-created Citizens for a Sound Economy, said.

Against a Democratic Congress Reagan only succeeded in privatizing Conrail, the northeastern freight railroad taken over by the federal government from the bankrupt Penn-Central. Undeterred, in 1987, he created the President's Commission on Privatization. The commission developed a comprehensive road map of federal functions to privatize, including low-income housing, federal loan programs, air traffic control (still debated today), education vouchers, the Postal Service, prisons, Amtrak, Medicare, and urban mass transit. But the commission’s recommendations were again thwarted by the Democratic congress.

Privatization as Economic Theory Becomes Privatization as Political Strategy

The ideologues regrouped. Fred Smith of the Competitive Enterprise Institute charged that privatization “had quickly been captured by the forces of the status quo in and out of government.” In a somewhat bitter article analyzing the reasons for failure, Smith tore into Reagan for failing to develop an effective strategy to take the offensive against core Democratic constituencies. Smith argued that in order for a privatization proposal to “make it through the political process” it is necessary to “create a viable privatization coalition” in favor of it.

“Thus a top priority,” Smith wrote, “should be to identify Democratic senators and representatives who might be persuaded to support privatization and convince them to take the lead on the issue.” The liberal think tanks were also targeted. In 1988 the conservative Olin Foundation provided funding to the Brookings Institution for a book on education vouchers, and, throughout the 1990s, to the program on education policy at Harvard’s Kennedy School of Government. In the words of Olin’s executive director, James Piereson, “we were interested in getting these ideas ensconced at liberal places.”

Smith based his argument on the writings of Heritage’s Stuart Butler (especially his 1985 Privatizing Federal Spending) and Madsen Pirie (who had just published Dismantling the State, a handbook for his American audience), considered to be the two most important strategists of the privatization movement in the United States and U.K. Pirie is the founder and current president of the London-based Adam Smith Institute and was the architect of Margaret Thatcher’s privatization policy. Stuart Butler was an analyst at the Heritage Foundation.

The problem in the Reagan years, as Butler saw it, was not a lack of determination, but that the administration had failed to change the “underlying political dynamics that favor increased Federal spending,” specifically the influence of pro-spending constituencies.

Butler argued that privatization could alter the fundamental political dynamics that favored increased federal spending:

Conditions must be created in which the demand for government spending is diverted into the private sector. This is the beauty of privatization. Instead of having to say “no” to constituencies, politicians can adopt a more palatable approach to cutting spending. They can reduce outlays by fostering private alternatives that are more attractive to voters, thereby reducing the clamor for government spending. Changing the political dynamics of government spending in this way is the secret of privatization.

Butler argued for using privatization “to reshape the interest group environment,” for detaching key elements of the coalition supporting federal, state and local government programs.

Corporate America Weighs In

Governments had been contracting with private companies for many years prior to the privatization push. For example, Waste Management, Inc., - today a $6 billion company – formed in 1968 and grew rapidly in the wake of federal policy that increased waste disposal requirements.

American Water Works Company, later renamed American Water, the largest water and wastewater company (now worth $19 billion), has had municipal contracts for over a century. American Water faced growing efforts in the 1950s and 1960s by local governments to take over water systems American owned and operated. In response, American Water created new public relations programs to argue that supplying water was a task best left to private enterprise.

Federal agencies have been increasingly contracting with management consulting firms since the late 1950’s. McKinsey and Company was hired to re-organize NASA after Russia’s surprise launch of Sputnik. The solution, argued McKinsey, was that "industry should be given as extensive a role as possible” with government retaining only the “bare minimum of internal expertise.” Since then, McKinsey, Booz Allen & Hamilton and other consulting firms have baked in an ideological preference for using outside contractors throughout the federal government.

Stuart Butler’s strategy called for organizing these types of companies that would benefit from privatization by getting lucrative government contracts.

In 1985, a group of large firms created the Privatization Council. The driving forces were David Seader and Stephen M. Sorett, the privatization coordinator for Touche Ross & Co. a top-tier consulting firm that became Deloitte and Touche in 1989. Touche was involved because it wanted to change the tax codes standing in the way of private municipal sewerage work. Seader went on to lead the Privatization and Infrastructure Group of Price Waterhouse, the global consulting and accounting firm. (The Council was renamed the National Council for Public-Private Partnerships – a less politically charged term than privatization – in the early 1990s).

By 1990, The Privatization Council boasted 150 members, a who’s who of consulting firms, corporations, and industry associations that had their sights on contracting opportunities in water treatment, transit, prisons, trash pickup, airports and finance.

The other significant corporate voice came in through the American Legislative Exchange Council (ALEC), which increased and operationalized corporate involvement in moving state-level privatization policy.

ALEC put together working groups of corporations, think tanks, and legislators, like one that brought together the Reason Foundation’s director of the Local Government Center, Heritage’s Stuart Butler, Seader from the Privatization Council, a private prison company (Corrections Associates, Inc.) and the National Solid Wastes Management Association to set priorities and draft legislation to make it easier to outsource public services. ALEC, too, has been funded by right-wing foundations like Scaife and Coors as well as major American corporations, some/many of which had an eye on public contracts.

Devolution - A Ticking Time Bomb

By Reagan’s second term, industry, political leaders and conservative intellectuals still hadn’t seen the broad-based acceptance and large government contracts they hoped for. Reagan’s privatization program wasn’t immediately successful but he had planted the seeds early in his administration that would ultimately force large-scale local, state and federal privatization.

Reagan spent much of his first term pushing what he called the “New Federalism,” which others described as the “devolution revolution,” shifting federal responsibilities to state and local governments. Despite pushback from governors, he was ultimately successful in reducing the amount of federal aid going to states and cities. Local and state governments were already dealing with the fiscal straitjacket created by the property tax revolt launched by California’s Proposition 13 in 1978. Governors and mayors were faced with a painful dilemma: raise taxes or cut services. Contracting out promised cost savings – primarily by cutting labor costs.

“Cities have been discovering that public services do not necessarily have to be reduced by government or paid for by taxes,” the Privatization Council’s David Seader told the Milwaukee Journal in 1986. Individuals can pay for what they use and private companies are ready to take their money.

Reason founder Robert Poole saw cutting costs as a means to fundamentally redefine the role of government. “Most local services have few attributes of true public goods. Most of them – garbage collection, park and recreation services, libraries, airports, transit, and aspects of police and fire protection – have specific, identifiable users, who are the services’ beneficiaries,” wrote Poole.

"Governors and mayors were faced with a painful dilemma: raise taxes or cut services."

The Clinton years – From Idea to Institutionalization

President George H. W. Bush, a more foreign policy-focused president, didn’t maintain Reagan’s drive for privatization. Vice President Dan Quayle led the administration’s Council on Competitiveness but didn’t make much progress. Bush’s one significant privatization-related action in the final year of his presidency was to sign an executive order that would make it easier for states and cities to sell or lease public facilities such as housing projects, roads, or sewage treatment plans built with federal money. The order, though, didn’t launch a sell-off of public assets.

President Clinton, the New Democrat, had warmer attitudes towards the role of government but followed the Reagan-Bush direction of smaller government.

In fact, Clinton succeeded where Reagan and Bush failed. Writing in 1997, the Heritage Foundation’s Ron Utt (who had been Reagan’s “privatization czar”) praised Clinton for pursuing “the boldest privatization agenda put forth by any American president to date,” and noted that his proposals were “virtually all drawn from recommendations made in 1988 by President Reagan’s Commission on Privatization.” In 2006 Reason Foundation’s Robert Poole declared that “the Clinton administration’s privatization successes exceeded those of Reagan.”

In the first year of his administration Clinton assigned Vice President Gore to oversee a major initiative to “reinvent” government under the auspices of an intergovernmental task force, the National Performance Review (NPR). Clinton embraced the ideas popularized by David Osborne and Ted Gaebler, in their 1992 bestseller Reinventing Government: How the Entrepreneurial Spirit Is Transforming the Public Sector, and later on by a follow-up book by Osborne and Peter Plastrik, Banishing Bureaucracy.

The Gore initiative was about making the federal government more effective, but the idea of privatization was also baked in from the start, as it was in Osborne and Gaebler’s work.

Clinton’s 1992 campaign promises included a plan to cut 100,000 federal jobs. Downsizing was a significant part of the plan and further baked in pressure to contract out public services and functions that still needed to be performed.

In 1995 President Clinton asked Vice President Gore and the task force to identify programs that could be reinvented, terminated, privatized, or sold. Each agency identified potential functions to privatize including the Seafood Inspection Service, the OSHA and MSHA Accreditation Process, the Office of Personnel Management’s background investigations service (which became USIS, the company that performed background checks on contractors including Edward Snowden and was found to be “flushing” background checks to meet monthly quotas ), the DOL Penalty and Debt Collection, and the Federal Helium Program.

Perhaps Clinton’s most significant contribution to privatization was ideological. The NPR reports redefined government services in market terms – “citizens” became “customers” of public services and competition became a guiding management principle. The NPR’s final recommendations (1995) called for “more competition, more privatization,” an idea first articulated by Friedman and Savas, who called in 1971 for “competition to reduce the monopolistic control many governments have over their customers.”

The NPR institutionalized downsizing and contracting out across federal government agencies. But the 1996 Welfare Reform law supercharged privatization. The law removed restrictions that prohibited states from contracting out welfare intake and eligibility in what the Washington Post described as potentially “the largest transfers of public sector operations into private hands.”

Large corporations including EDS, IBM, Lockheed, and a subsidiary of Arthur Anderson and Co. saw welfare reform as a lucrative new market that promised to become a “multi-billion dollar enterprise.”

The law represented a significant shift in the history of privatization. The contractors weren’t simply managing public services. They would make important public decisions – helping to determine which Americans received welfare and under what circumstances.

"...'citizens' became 'customers' of public services and competition became a guiding management principle."

Texas and Wisconsin moved quickly to privatize their welfare intake programs. Texas Gov. George W. Bush wanted to go further than the law permitted and contract out eligibility screenings beyond welfare to other programs such as food stamps and Medicaid — a lucrative $2.8 billion, seven-year contract. The Clinton administration, after 9 months, showed restraint and ruled that the outsourcing of food stamp and Medicaid eligibility review were not allowed under federal law.

In the end, Maximus, Inc., a “small” company with only $100 million in government contracts, got the Wisconsin contract and Ross Perot’s EDS got the initial Texas contract. Maximus is now one of the largest for-profit managers of public social services across in the country today.

The W Years

President George W. Bush considered privatization central to his presidency. As Governor of Texas, he was an early adopter of privatized welfare systems. As a presidential candidate he made his intentions clear by declaring: “Government should be market-based – we should not be afraid of competition, innovation and choice. I will open government to the discipline of competition.”

His most high profile privatization initiative didn’t go well. Some argued that he even set back the privatization movement by taking on Social Security. After his 2004 reelection, Bush pledged to use the “political capital” he’d earned in the election to privatize Social Security but soon faced a storm of opposition and abandoned the effort.

Despite the defeat, he didn’t back away from his broader privatization agenda. Alongside his ideological commitment to the market, he was following a political strategy laid out by Grover Norquist to weaken his political opponents – in particular public sector unions. Outsourcing the public unionized workforce to non-union private contractors could kill two birds with one stone.

The administration found privatization targets that were lower profile, didn’t need congressional approval, and therefore attracted less attention. Bush outsourced a wide variety of public functions including intelligence gathering, post-Hurricane Katrina security operations, and almost two-thirds of the Forest Service workforce.

Perhaps his most far-reaching accomplishment was the outsourcing of American war. While he was not the first president to use military contractors in war zones, he took it to new heights, fundamentally redefining how American wars are fought. In 2007, contractors outnumbered troops in Iraq 180,000 to 160,000. In March 2009, the Congressional Research Service found that contractors made up 57% of the Pentagon’s force in Afghanistan.

Secretary of Defense Donald Rumsfeld, before leaving the administration, formalized the use of contractors in US military doctrine. In the Pentagon's 2006 Quadrennial Defense Review, Rumsfeld described a "road map for change" that redefined the "Department's Total Force" as "its active and reserve military components, its civil servants, and its contractors - constitut[ing] its warfighting capability and capacity."

The Obama Years: A New Era in the Struggle Between Private and Public

Few presidents since FDR have given more a forceful defense of the role of government in creating a good society as President Obama has. Last month (May), he told residents of Flint, Michigan that the “myth that government is always the enemy; that forgets that our government is us … that attitude is as corrosive to our democracy as the stuff that resulted in lead in your water."

Obama, like Clinton, came into office hoping to make government work better. But he has also embraced the idea that private investment and operation will bring much needed “market discipline” to government services.

On one hand, he signed executive orders requiring federal contractors to adhere to higher standards - a $10.10 minimum wagepaid sick leave and a record of compliance with a host of federal labor laws. Obama pledged to insource jobs of federal contractors but contractor’s pushed back. Still, the administration brought thousands of jobs back in house. ( DOD had insourced 17,000 jobs by February 2012.)

On the other hand, the administration has increased the number of publicly funded, privately operated charter schools with billions of dollars in federal grants and subsidies. At the same time, for-profit charter management companies are growing. Obama has embraced the use of public-private partnerships that would attract private investment to needed infrastructure projects, but that also privatize the operation of transit systems, water and wastewater plants and other critical infrastructure. And the number of immigrant detention beds in privately operated centers continues to increase.

In the last decade, much of the battle over privatization has shifted to states and cities across the country. Obama’s initiatives incentivize privatization, but state and local governments are making it happen – more aggressively by red-state politicians motivated by ideological and political aims, but also by politicians in blue regions facing budget constraints.

Rebuilding a Movement for the Common Good

Today, privatization is weakening democratic public control over vital public goods, expanding corporate power and increasing economic and political inequality. Domestic and global corporations and Wall Street investors covet the $6 trillion in local, state and federal annual public spending on schools, prisons, water systems, transit systems, roads, bridges and much more.

A new pro-public movement, with this history in mind, is growing quickly. It has become clear that the 40-year conservative assault on government is enriching some and leaving more and more Americans behind. Groups across the country are organizing and starting to see success. Water systems are being remunicipalized, private prison companies are losing contracts (and both Democratic presidential candidates have pledged to end for-profit incarceration), and a growing movement is focused on rebuilding our national commitment to public education. Over the last 40 years, private interests have gained control over important public goods and the impacts are clear. The next 40 years are ripe with opportunity to put the public solidly back in control.

Donald Cohen executive director of In the Public Interest, a national research and policy center on privatization and responsible contracting.

explore the series

The Hidden History of the Privatization of Everything

Note From The Editor

PART 1: The History of Privatization

PART 2: The True Cost

PART 3: Who Really Runs Your City?

PART 4: No Test Left Behind

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