The Myth of Private Sector Superiority
Is the conservative line that the private sector is more efficient than the government really true?
It has long been an article of faith among American conservatives that government is far more inefficient than business at getting things done. They disparage government bureaucracy and the sluggishness of governmental processes. They claim that competition and the profit motive make the private sector more efficient. To that end, they curry favor with the public by emphasizing the “free” in free markets and free enterprise; they work the political system through lobbying and campaign finance to reduce or eliminate regulation and to lower taxes; and they seek to siphon government revenues into their own coffers by pushing for the privatization of government functions (schools and prisons are good examples).
What they do not talk about is how business, abetted by a compliant government, lay at the root of the two greatest economic catastrophes this country has experienced, the Great Depression of the 1930s and the financial collapse of 2008. Or that the government underwrites the infrastructure that permits the private sector to prosper: it is “we the people” who pay for the highways, the air transportation system, and the seaports that allow for the movement of goods. It is the government that bailed out the financial sector after 2008 when reckless behavior brought the global economic system to the brink. It is the government that pays three-quarters of a trillion dollars per year for our military and our defense, much of which goes to private contractors.
Nor do they discuss how private sector success is often based on government initiatives. As economist Mariana Mazzucato pointed out in her 2013 book, The Entrepreneurial State: Debunking Public vs. Private Sector Myths:
[The US}, the preacher of the small State, free-market doctrine, has for decades been directing large public investment programs in technology and innovation that underlie its past economic success. From the Internet to biotech and even shale gas, the US State has been the key driver of innovation-led growth- willing to invest in the most uncertain phase of the innovation cycle and let business hop on for the easier ride down the way.
As Ms. Mazzucato makes clear through examples such the Internet (created under the auspices of the Defense Department’s Defense Advanced Research Projects Agency DARPA)), or the basic research on new pharmaceuticals funded by the National Institutes of Health, the government’s role has often been to take on the riskier investment in the initial phases of development, only to turn the positive results over to the private sector.
In short, we socialize the risks in pursuing innovation necessary for continued economic growth but privatize the rewards.
Perhaps the simple truth is that our capitalist economy depends on a synergistic relationship between the public and private sectors. While their goals are different- the government is charged with acting in the public good, business with turning a profit- they rely on each other to accomplish them. This is a tricky balance to maintain, as the history of the last 100 years illustrates. The laissez faire governmental approach of the early 20th Century meant there was little regulation of the financial sector- literally, no cop on the beat. The reaction to the stock market crash of 1929 was eventually massive government intervention to rescue the economy in the form of the New Deal of Franklin Roosevelt, an intervention that lasted until the Reagan years. In this period, the American economy experienced rapid growth and prosperity. However, the conservative backlash that emerged during the 1980s saw the steady erosion of many of the guard rails put in place during the previous 50 years by both Democratic and Republican administrations.
If one term characterizes this period, it would be deregulation. Emblematic of this revanchist rolling back of regulation was the repeal of the Glass-Steagal Act (in reality, the “Act” were four provisions contained in the United States Banking Act of 1933), a federal law separating commercial banking from investment banking. Its repeal in 1999 opened the way for a less-regulated securities market, a contributor to the 2008 disaster.
But the example that probably hits home for many Americans is the current state of air travel. Airlines were the first major industry to be deregulated* and after more than 4 decades, it appears that operating in such an environment came at the expense of airline passengers. When a crisis hits, the industry’s go-to position is to reduce service, lay off workers, and hike fares. And, then the carriers go begging to the federal government (the government!) for money. They did so in 2008 when skyrocketing fuel prices threatened many with bankruptcy. They did so again in 2020 when the coronavirus pandemic grounded much of the flying public: air travel was down 70%.
In between these two crises, both the large carriers (American, Delta, United, JetBlue) and the budget carriers such as Spirit, Allegiant, and Frontier, earned large profits. But the trend in the industry in the mid-2000-teens was to not only reward their shareholders with dividends but to pump up share prices with stock buybacks. Billions were spent on the buybacks and hundreds of millions on increased executive pay. There were no provisions made for rainy day funds as a hedge against a spike in fuel prices or a sharp decline in travel. Moreover, they completely misjudged the lasting impact of the pandemic on their business. Interviewed by The Atlantic’s Derek Thompson, Scott Keyes of Scott’s Cheap Flights observed that in 2020:
Airlines were trying to become as lean as possible to reduce those operating expenses with the anticipation that they were not going to be making much money. They also retired older planes.
Those decisions certainly helped improve the balance sheet throughout 2020. But would they have made the same call if they had known how quickly travel demand would rebound? Almost certainly not. They assumed that this was going to be a six-year recovery period, not an 18-month recovery period. So when travel demand started rebounding much quicker than they anticipated, the airlines were caught flat-footed.
Could it be that they were so trapped because of their prior beliefs in the ineffectiveness of government that they left themselves no response but to gape at the rapidity with which both the Trump and Biden administrations oversaw the development and distribution of the Covid-19 vaccines?
“Why do airlines deserve to be bailed out? Over the last decade they spent 96%of their free cash flow, including billions in tax savings from the Trump tax cut, to buy back shares of their own stock. This boosted executive bonuses and pleased wealthy investors but did nothing to strengthen the airlines for the long term. Meanwhile, the four biggest carriers gained so much market power they jacked up prices on popular routes and slashed services (remember legroom and free bag checks?).” -Robert Reich, former Labor Secretary, The Guardian, March 22, 2020.
The question we should be asking is why the costs of the free market are paid for by the taxpayers? Doesn’t being the piper mean we get to call the tune?
*You can find a basic explainer of how deregulation changed the airline industry here.
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