Privatize the Levees and the Public Sector

by Michael S. Rozeff
by Michael S. Rozeff

By reading the articles on LRC about New Orleans, many of us, me included, have learned that the serious flooding came from the breaks in the levees. More importantly, we have learned that many people, in government and out, ordinary and professional, old-timers and new-timers, knew that the levees were in precarious condition or could not withstand a severe shock. Many who were supposed to be responsible knew the risk, and they did nothing about it. In fact, the Bush administration diverted money from shoring up the levees to their higher priority, the Iraq War.

Lew Rockwell, Walter Block and others have correctly pointed out that the public sector that has been charged with these responsibilities, has no stake in seeing that they are done well and that privately owned and operated companies would have done better. We would all be better off if the facilities now under public management were under private management. The more general way to think about this (than facilities) is that we want various services, and we would be better off if we left their provision to the spontaneous invention of the people themselves through any and all organizational forms that they might invent that would operate without tax, regulatory, or other coercion. These are the services associated with air flight control, airports, harbors, roads, the post office, public education, policing, bridges, sewers, waterways, satellites, military defense, libraries, welfare, housing, weather forecasting, justice, dispute resolution, and more.

In addition, we would all be better off if our so-called private sector were in fact private, which most of it is not. It is hard to name any unregulated industry or any industry not actually in bed with the public sector. Through subsidy, cartelization, privilege, licensing, rules of exclusion, zoning, patents, court rulings, laws, and similar devices, businesses merge with the State and shield themselves from accountability to their customers in the same way that public sector service-providers do.

Reason (theory and understanding) and experience working together provide the pathways to the truth that private is better than public. The bitter experience of disasters is a hard way to learn how inept the public sector is at handling emergency and infrastructure services. Those who favor the public sector do not make learning any easier when they throw sand in our eyes and shift the responsibility for problems away from their origin – which is the existence of public sector management itself.

Katrina is not an isolated instance. Every Communist country provides examples in spades of the grave defects of public management. Politicians and bureaucrats controlled whole countries in the Soviet Union, apart from the private sector or black markets. The resulting defects and deficiencies were obvious to the eye of any casual observer.

Even before Russia became Communist, it suffered from autocracy. It was backward. Yet after 8 decades of Communist rule, the water in Leningrad remained filled with parasites that would devastate the bowels of any visitor. The environmental damage wrought by Russian public sector manufacturing enterprises put Lake Michigan pollution to shame. Russian public housing multiplied Chicago’s Cabrini Green to national scale. The food was, by Western standards, unfit for human consumption and the people’s health and complexions reflected that. To fly was to endanger one’s life. Airports were small, dark, dank, and dreary. The clothing was ill-fitting, scarce, coarse, and without style. Where else could occur a disaster like Chernobyl that created massive radiation damage? Vodka had always been and remained the way out of facing a life run by public bureaucrats, a life in which opportunities to get ahead were limited.

A visit to a butcher shop in the Soviet Union would reveal the butcher chopping a side of beef into indiscriminate portions of mangled meat and bone. No t-bone steak, no round steak, no sirloin or tenderloin, no brisket or chuck roasts, no eye round or bottom round, no porterhouse or club steaks. The manifold discrimination among cuts that we take for granted was completely absent. Why? Because the public sector management had decreed that the butcher shops would have no price system. There was no incentive to peddle the better cuts or the cuts more in demand at a higher price and sell the tougher or less desired and desirable cuts at lower prices. There was no profit in it, so the butchers really did butcher the meat! There is no profit in fixing a levee either, or maintaining a drainage system in proper order.

These defects of public sector management were obvious to all but the CIA which must have been examining only the marbled Moscow subway, not the empty shelves in the State stores. The completely faulty assessments of the Soviet Union’s real strengths by our Central Intelligence Agency were either intentionally calculated to fool the public and prolong the Cold War agenda of the military-industrial complex benefitting from it, or were the result of the gross incompetence of the CIA, or both. Both factors were and are at work.

Since the CIA itself is a public sector group that provides the service of gathering and interpreting information, we can be quite sure that its incompetence far exceeds those of any other privately-run concern or concerns like Morningstar, Moody’s, or the Standard and Poor’s Corporation. If we take at face value the recent words of our legislators who are trying to absolve themselves of their own decisions, the public intelligence agencies completely bungled their job prior to the Iraq War. And, if they did not bungle the job, if they allowed intelligence to be twisted, which the facts suggest, then we see that they shirked their responsibilities to the ill-defined public interest in favor of a select group of neoconservatives who wished to promote their private war-making agenda. Either way, we have another perfect example of public sector failure.

The public sector always fails at serving its purported customers. It must fail. That is its nature. It is built into the nature of the organization through its incentive structure. When and where it does not fail or fails less, that occurs because the incentives more closely resemble private sector incentives. The U.S. will come to resemble the old Soviet Union the more that its public sector grows, and Russia, Vietnam, India, and Somalia will thrive and prosper, each in its own way, the more their private sectors grow. Hong Kong is a better model for China than Zimbabwe.

A publicly-managed airport in the U.S. is and was better than a Soviet airport because the U.S. airports to some extent raise monies by bond issues, some of which must be endorsed by public voting. Any bond issuer is subject to some market discipline. There have to be prospective revenues to cover the costs, or else the issue is not feasible. Airports usually do not have a call upon the public treasury. If and when they do, then their services will deteriorate accordingly because their accountability will decline.

Now, the U.S. Army Corps of Engineers says that lack of funding for levees is not the reason that they burst, a claim that is strongly questioned in that same article. It blames decisions made years ago by a cost-benefit analysis, in which it was determined that building against a Class 3 hurricane was economic, but not building against a Class 4 hurricane. However, no matter which way this debate ends, it will not alter a basic fact. The levee projects are funded from the public treasury, not from issuing bonds. To issue bonds there would have to be a levee authority, and it would have to be able to tax those who benefit from the levees. This would partially privatize the levees and align the incentives of those who manage it more properly with those who receive the benefits.

Even if the Clinton and Bush administrations cut back levee funding, as they did, it will not solve our social problem if funding is now restored. That is because taxes will be diverted from some other project somewhere else through a haphazard political process. If we were sure that Iraq War money would be used for fixing the levees and similar problems, without an overall expansion of the public sector, we could say that’s an improvement. We can never be sure of this dream, however. Money is fungible. We can’t easily track where it is coming from or going in a dynamic process like taxation, appropriation and spending. Since the State just keeps getting bigger and bigger, it is foolhardy to think that more public money is the solution to problems like this. Privatization is the solution.

Communism, socialism, fascism, democracy, autocracy, monarchy, feudalism, plutocracy, ochlocracy, oligarchy, dictatorship – for many purposes it is useful to distinguish these forms of government. For purposes of this discussion, the main factor is this: How large a control does the public sector exercise over activities that could be handled privately? The main factor is how totalitarian a State is, that is, how much absolute centralized power the State has. The bigger the control of the public sector, the more totalitarian the country is. And the more totalitarian the country is, the worse off it is.

The public sector succeeds at what its real aim is, which is to live off the bounty produced by those outside the public sector. The growth of the public sector in the U.S. and other countries shows just how successful tax parasites can be. Having worked for a public university that is somewhere between 25 and 50 percent funded by the State of New York, I can vouch for the parallel between working for the U.S. post office and working for a university. Those of you who have attended universities will have encountered the unresponsiveness of the professors to the students. Unfortunately, nearly all private universities also dip liberally into the public treasury via subsidies for research distributed by the National Science Foundation and the National Institute of Health.

An association of individuals in a stock company can be very, very large in terms of assets or sales or customers or worldwide scope. This does not make it totalitarian, because it lacks political power in and of itself. In the world as it is today, all sorts of private businesses and organizations, associations, and unions of all types have and seek political power. The powers of aggression that they gain and wield are through and because of the State. They should not be confused with the lack of legalized aggressive power that social groups have when unaided by the State. Even in a system like ours that has the improper incentive of seeking the aid and comfort of State power, privatizing the public sector helps make services more responsive to customer wants at least for a time.

The key issue in keeping a society going on a proper footing on a long-lasting basis is to prevent the growth of totalitarianism or absolute, centralized power. If there are alternatives open to people to choose or not choose a particular service-provider, or to withhold or provide funds to a provider, and if alternative providers have ways of replacing existing managers with fresh management, then centralized power is held in check. That is the goal of privatization.

The first key to attaining the benefits of freedom is to know that freedom is far more beneficial than totalitarianism. The second key to attaining freedom is to know it when you see it. The third key is to know oppression and totalitarianism when you see them.

Freedom means untrammeled choice and association in all matters, great and small, that do not harm others. It means a child can run a lemonade stand without being forced to be licensed, inspected, having wages withheld, paying a helper the minimum wage, meeting safety standards, labeling the lemonade contents, or being open only certain hours. Oppression means every baby having to have a Social Security number, being herded into a convention center or stadium, kept there and left to die, and being severely beaten for no good reason by a brutal customs agent.

September 5, 2005

Michael S. Rozeff [send him mail] is the Louis M. Jacobs Professor of Finance at University at Buffalo.

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