Economic Scene: Prisons Run by C.E.O.s? Privatization Under Trump Could Carry a Heavy Price

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“With prisons I do think we can do a lot of privatizations and private prisons,” Mr. Trump said on the campaign trail last year. “It seems to work a lot better.” Mr. Trump’s pick for attorney general, Senator Jeff Sessions of Alabama, is a staunch supporter of the approach, having invited private prisons into his state as its attorney general more than 20 years ago.

But privatization is likely to sweep through not only prisons. The president-elect wants to privatize health services provided by the Department of Veterans Affairs. He wants to privatize public infrastructure — drawing private sector companies to fix, build and manage bridges and roads, water supplies and airports. He is selling privatization as a surefire winner that will deliver better services for less public money.

“There’s a magical thinking among business executives that something about the profit motive makes everything run better,” noted Raymond Fisman, a professor of economics at Boston University. “What is government going to be like when it is run by billionaire C.E.O.s that see the private sector as a solution to all the world’s problems?”

A serious body of economics, not to mention reams of evidence from decades of privatizations around the world, suggests this belief is false.

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Sally Q. Yates, the United States deputy attorney general, wrote in a department memo last year that private prisons did not save much on costs and were useful only when public prisons were overflowing.

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Pablo Martinez Monsivais/Associated Press

Consider, for instance, what the profit motive has done for higher education. For-profit colleges absorb a full quarter of federal aid for higher education. Not all are fraudulent diploma mills set up to milk federal aid dollars from low-income students. Still, on average they are much more expensive than public institutions, while their degrees are much less valuable.

There are abundant similar examples in the health care industry. Hospices run for profit are less likely to admit patients with shorter, less-profitable expected lengths of stay. For-profit hospitals have been found to fib more to Medicare than nonprofits do — tweaking their diagnoses to get higher reimbursements. And they have been found to bolster profits at the expense of patient safety. A study at the RAND Corporation found that hospitals that switched from nonprofit to for-profit operation saw a sharp rise in profits but also a jump in mortality rates one to two years after their conversion.

Then there is a study by Bonnie Svarstad and Chester Bond of the School of Pharmacy at the University of Wisconsin-Madison more than three decades ago: They found that patients in for-profit nursing homes got heavier doses of sedatives than those in nonprofits got. Explaining the pattern, the economist Burton Weisbrod wrote that sedatives were “less expensive than, say, giving special attention to more active patients who need to be kept busy.”

Of course, the government can also do a horrible job of running things. And private corporations do many things well. They tend to be much faster to innovate. In competitive markets, the profit motive makes for a powerful incentive to deliver all kinds of goods and services, from widgets to telephone calls, efficiently and effectively. A study found that opening nursing homes in Sweden to private providers actually improved patients’ mortality rates.

But it is critical to understand how profit seeking can go awry, giving companies a motivation to skimp on quality to bolster margins. When a private provider faces little or no competition, or when quality of service is difficult to track properly — think of the well-being of patients in a nursing home, or the health of prison inmates — there will be nothing to stop it from pursuing higher profits at society’s expense.

“The private sector is good at cutting costs and finding ways to save money,” Oliver Hart, a professor of economics at Harvard, told me. “Some are socially desirable; some are not.” The critical issue is whether a contract can be written that reduces the space for socially undesirable tactics to a minimum.

Negotiating the trade-offs is not always obvious. For instance, the privatization of the water supply of Buenos Aires led to a reduction in infant deaths from infectious and parasitic disease. But it also increased water bills, so the unpopular concession to a private company was ultimately canceled.

Professor Hart, as it happens, won the Nobel in economic sciences last year for his work in studying precisely these sorts of contracts: When are they more likely to work? How should they be structured? Crucial tasks with many dimensions — waging war, policing the streets of a city — are often best left to the public sector, he points out. By contrast, a private provider could do a better job when the desired output is more straightforward and can be measured properly, like collecting trash.

He is not at all opposed to privatization. Indeed, he argues that determining whether a service should be privately or publicly provided should not be an ideological issue. The decision should be based on “what mode of organization achieves the social goal in the best way.”

Unfortunately, he noted, it seems unlikely Mr. Trump’s team will take the thoughtful path. Indeed, one of Professor Hart’s seminal papers, produced together with Andrei Shleifer and Robert Vishny nearly 20 years ago, suggested that while things like garbage collection or weapons production were quite suitable for private provision, the government would probably do a better job tackling tasks like foreign policy, the police and … prisons.

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