Asymmetrical Information

Another "neat" thing about government agencies is that they don't have to comply with many of the regulations that they impose on the private sector. Add the same regulatory burden to government agencies, and make them account for it properly, and the myth of "greater government efficiency" would quickly fade away.

You can't compare private companies with the sector of the state that "competes" with them because of crowding-out, in a sense.

The government takes the bottom of the market, the poorest consumers, because it's "free", therefore private companies specialize in added benefits (they must give you what the state does PLUS something extra, to justify the extra cost).

You can notice this by asking yourself... why don't rich people go to the state for services when there's a private sector available? (If the services of the state are really better, why do the rich insist on paying more?)

If the government would free up the "bottom" of the market then there would either be price discrimination, maybe via adverse selection contracts, or lower prices.

Gabriel,

The upside of this is that government agencies often cannot refuse their services as easily as private companies do. For example, it is much easier for a private school to refuse admitting troublemakers than a public one. Similarly, insurance companies can turn away costly customers that a public insurer cannot.

I'm trying to think of an area in which government and private services do or ever would compete, but I can't really think of any. It seems to me that the goverment provides services that private industry isn't the least bit interested in. E.g, building roads to places with no prospects of turning a profit, handing out political favors and corporate welfare, providing services to people who haven't earned them on their own, building a military to fight in places that most people are completely unfamiliar with until the war starts. It makes sense when you think about it, why would the government ever do anything that private industry is already doing? Even in places where there seems to be direct competition, it isn't really the same service that's being provided. Nationalized healthcare for example, is about providing health care to people who don't have it, not providing it to the people who already do. Private industry is providing the healthcare services demanded by paying customers, the government is providing welfare services in the form of healthcare. As Jane says - apples to fruitflys.

is your question rhetorical? gov'ts the world over do things that the private sector does elsewhere (provide healthcare, phoneservice, utilities, television, etc.). compare tap water and bottled water in the US. same product, correct? compare private security forces and police. same product, no? compare army and all those defense contractors in iraq. gov't and private industry overlap everywhere.

While I'm at least as libertarian as Jane, I think the US Postal Service competes fine with the major package delivery services. The competition is a bit skewed, as USPS focuses on low cost and FedEx/UPS/etc focus on high speed. Of course, USPS is heavily subsidized, not least by the factors Jane notes, but it does generally compete within the scope of Randy's comment.

dj, many of those things you list really are not comparable. For one thing, where the state runs a monopoly you CAN'T compete. One relatively sound reason for such a monopoly is to subsidize service for some recipients, where that subsidy serves a broader societal purpose. We can quibble about phone service to farms in Iowa (eg), but it's clear the private market has relatively little interest in providing that absent coercion.

dj,

In almost every area you mention, what the government is actually doing is providing welfare in the form of a service to people who can't or won't afford that service on their own. That is, what the government is providing is not roads, phones, utilities, security, healthcare, etc., but rather, welfare in the form of these various services. The private sector can and does provide these services to those who can afford them, but it will never provide them to those who can't. The government steps in when it decides that someone "should" have a particular service, whether they can afford it or not. In each and every case, what the government is really providing is welfare. Same product? No, not at all. It only appears the same on the surface.

Shelby,

USPS - hmmm...

Does the USPS exist to provide mail services to paying customers? - or non-paying customers? A little of both, I think. But the subsidy part is certainly for the purpose of providing a service to non-paying customers.

Shelby,

The USPS has a monopoly on slow mail, and receive many billions in revenue from it. They use the profits from slow mail to cross-subsidize their package and express mail businesses.

Sam Ryan explained in the National Review the other advantages USPS enjoys:

"USPS is exempt from most taxes; it's free from SEC financial-reporting requirements; it can borrow from the U.S. Treasury at favorable rates"

USPS does rely on private corporations to accomplish its mission. Since 2001, USPS has paid Fedex to move Express Mail, Priority Mail and First-Class Mail on the latter's air network. This past June, USPS awarded UPS a contract to move Priority and First-Class mail to and from 98 U.S. cities.

If USPS had to compete on a level playing field with Fedex and UPS, they'd quickly be out of business.

In NZ for a long time the ACC system of accident insurance had far lower administrative costs than any private insurer.

They achieved this by not doing any claims investigation.

So of course total costs were very high, being driven by the large number of fraudulent claims.

Eventually the government got sick of total costs being so high and instructed ACC to spend money on fraud investigation, leading to a significant drop in total costs.

So just because a place has low administrative costs, that doesn't mean that it is efficient.

Can any of the studies be accessed on the Web?

-dk

The USPS has a monopoly on slow mail

What, because nobody in the private sector wants to provide a slower service in a comparatively volatile ultra-low-margin, high-volume manner? Huh. Good thing for most of us that somebody does, although email has now replaced a lot of that type of surface mailing. Meanwhile, FedEx and UPS ship envelope mailers, for a price. The cannot use your federal mailbox for their deliveries, but they can and do deliver to your door or multiunit office in most places.

I really don't understand where the USPS bashing meme comes from. In most countries on earth, representatives elected or otherwise have generally concluded that it is in their citizens' best interest to have a public, universalized, low-cost system available for the shipping of envelopes and small parcels among their citizens. Frankly, the USPS ever since its partial-privatization has been one of the best-run out there. (Compare your recent USPS experiences to your recent DMV experiences, for example.)

The fact that it regularly contracts with multiple private-sector courriers (FedEx, UPS, DHL, etc.) in order to maximize economies of scale, strikes me as a Very Good Thing. Service is faster because the private companies have more incentive to keep their systems efficient, and less public money is spent on maintaining a duplicated set of air and land transportation infrastructure.

When a government agency has a monopoly, it has a LEGALLY ENFORCED MONOPOLY WHERE YOU GO TO JAIL FOR VIOLATING IT!!!!!

USPS is the only company allowed to charge low prices to deliver slow mail on regular routes. There is a minimum price below which FEDEX and UPS can't go to protect the USPS from capable competition. They also have to assume that every package weighs a minimum, again to enforce the floor price and monopoly for letter mail. This is true in nearly every country and is a ridiculous vestige of the stalinist policies (with a bit of French dirigisme) forced on us in the 20s and 30s that we are slowly chipping our way out of.

Medicare "overhead" expenses are only 2% of total expenditures for two reasons:

1. Many Medicare payments are for large hospital bills. The two scenarios below generate $1,000 in administrative fees. Which seems more reasonable?
_ a. 200 office visits billed at $125, each with a 4% ($5) fee
_ b. a single $50,000 hospitalization with a 2% ($1,000) fee.

2. Medicare administrative costs are passed to hospitals and physicians. For the providers, it costs more to get payments from Medicare than from most private health insurers. The federal government mandates how information is collected and sent and, unlike the insurers, does not have to worry about competition.

That said, the EITC seems to be a very effective antipoverty program. The comparative advantage over much more expensive and less effective antipoverty programs is very large.

Regarding the DMV - Why can't there be a separate line where you pay an extra $3 or $4 and go immediately to the front of a special line with no waiting? There'd be a lot of people who valued their time enough to pay for the priveledge, and the extra money could be used easily to hire more employees.

I know that California offers on site DMV services (typically for celebrities), but that's a bit more expensive.

"The fact that USPS regularly contracts with multiple private-sector courriers ... strikes me as a Very Good Thing. ... less public money is spent on maintaining a duplicated set of air and land transportation infrastructure."

To their credit, USPS finally realized this to be true. Fedex proposed eliminating the USPS duplicate air transport and bag sort infrastructure in 1991. As the Fedex project manager, I was responsible for determining we could save USPS tens of millions of $ and still make a profit. For some reason USPS didn't agree until years later, I think after a change in their personnel.

The point I intended, though, was that much of the so-called efficiency of USPS is due to reliance on private enterprise. Shelby had offered USPS as an example of government successfully competing with private enterprise.

Shelby, there is a law that only the USPS can deliver non-time-critical letters. The USPS sometimes "audits" corporations that heavily use UPS or Fedex, requiring them to prove that all the letters (not parcels) sent by UPS or Fedex actually require faster than 1st class service.

How is taxation relevant if we're talking about whether government is more efficient than private charity?

Tracy W, above, makes a very good point. Even if we believe that a system like Medicare really has lower administrative costs, and I am always suspicious of government accounting, this does not mean it is more efficient. Does one really think private insurance companies want to spend money on administration rather than just take the money as profit? If they are spending money on administration, I think very, very likely that there is a profitable reason for doing so.

Stuart,

I would say that the fact of taxation makes the issue of relative efficiency a non-starter. If government did not have the power to tax, or if private enterprise did, then we would be comparing apples to apples. As it is, private enterprise exists to make a profit from paying customers, and government exists to provide welfare to non-paying customers. So regardless of similarities in the operations, they are never really in the same business, and there is therefore no way to do a direct comparison.

I'm trying to think of an area in which government and private services do or ever would compete, but I can't really think of any.

My county bought a golf course rather than have it be sold to developers. They claimed that it would run at a profit so they were be no need for taxpayers money to be used for operation. Of course they used the tax money in the county's "Open Space Fund" to buy the course. Fees for out of county residents are higher than other comparable private-owned public courses. County residents fees are in line with what other comparable private-owned public courses charege. After a couple of years they dedided the course needing upgrading and a new clubhouse and the golf course started to get regular funding from the county.

James,

That's a great example. The original private owners of the golf course were in the business of making a profit from paying customers who wanted to play golf. The county was in the business of providing welfare in the form of golf services to people who apparently didn't want to pay the full price of playing golf.

Not saying there's anything inherently "wrong" with the actions of the county, just that its not the same business.

"The upside of this is that government agencies often cannot refuse their services as easily as private companies do. For example, it is much easier for a private school to refuse admitting troublemakers than a public one. Similarly, insurance companies can turn away costly customers that a public insurer cannot."

This is a bug, not a feature.

Okay, now that I find myself getting repetitious, what's the point? Its about nationalized healthcare. If we recognize that the government is always in the welfare business, regardless of the structure imposed or method applied, then we can see that nationalized healthcare is simply a complex method of providing welfare. And there are simpler ways of providing welfare than screwing around with a private healthcare system which has provided an outstanding service to its paying customers. Just hand out money for god's sake. Now that would be efficient.

Jane, are you saying that the need for a tax accounting group diminishes the efficiency of private enterprise, or are you saying that the added expense of a corporate income tax reduces the efficiency of private enterprise.

If it is the former, I think you have a point, but government agencies probably have a greater compliance expenses than private industries (contrary to what a previous poster suggested), which probably would offset that.

If it is the latter, I don't think actual paying of additional corporate income tax makes it more expensive for private industry, as they only pay income tax out of profit, and by definition, government agencies are non-for profit.

> I think you have a point, but government agencies probably have a greater compliance expenses than private industries

Really? Which govt agency monitors itself for anti-trust compliance?

Govt agencies do have a bigger problem with "the mayor's idiot nephew's son must have a job", but that's unlikely to be accounted for as "compliance".

Jane thank you for posting on this. I had suspected (being that I work in the field) that much of Medicare’s allegedly “lower” administrative costs were the result of shifting those costs onto private providers who were seeking reimbursement. It hadn’t occurred to me that another reason might be because many of their administrative functions were being performed by other government agencies (IRS) and hence not being included in their budget.

It would be great to see some actual documentation or a report to see how much of the allegedly “lower” administrative costs of Medicare are as a result of this cost shifting. At least we can see the demise of another talking point.

Imagine a system of welfare "judges" authorized to issue treasury checks to anyone at their own discretion. No Bureaucracy, no standards, no expectations - just elected judges authorized to write checks. Need public assistance? Convince the judge and you get it. Don't convince the judge and you can appeal, but if unsuccesful you'll have to turn to private charity.

I expect that such a system would be far more effective and efficient than the current system. It would leave the congress with nothing to do but set the total amount of funds to set aside. The cases would be a matter of public record and corrupt, overly-liberal, or overly-conservative welfare judges could be quickly thrown out of office. It would also eliminate corporate welfare. What self respecting citizen would have the guts to show up at the court with his or her hand out? Only those with legitimate needs would bother to ask, and as these would no longer be in competition with big money interests, they would be very likely to get the help they need.

Just a thought...

Correction; "private charity" should read "private charity or private investors".

What self respecting citizen would have the guts to show up at the court with his or her hand out?

Possibly none. It's the self-non-respecting citizens that will clog the system with bogus claims.

Anonymous,

...which could be easily dispensed with through the use of a big red bullshit stamp. I did mention that there would be no standards, yes? Pure discretion. If the judge wanted to set up a department to process a certain type of claim, that could easily be done. Or a department to quickly dispense with unsupported claims. It would still be far more efficient than the current system.

mouse - sorry, forgot the e.

...it is much easier for a private school to refuse admitting troublemakers than a public one.

Conversely, there is also a market for private schools which cater to the parents of troublemakers. It costs as much to educate a rich brat as a rich scholar.

The welfare court is a really bad idea. We have them now in the form of class-action suits and personal injury suits of the too hot coffee variety. Judges love to be generous with OPM, other people's money.

As a corporate tax lawyer I have long seen estimates that the cost to corporations of complying with the corporate income tax equals the federal take from it. At my last corporate job it took 35 people full time, over half were highly paid professionals. The company lost money.

For anyone who thinks USPS is just providing a service, a little tale from a few years back;

An entrepreneur (someplace in Texas, if memory serves) struck on the neat idea of re-selling stamps -- surrounded by ads, which they'll sell for profit -- for less than face value. Unless you like your letters to be pretty, isn't this a great idea? The savings were promoted to be substantial -- and how much does business spend on mailings? -- although we'll never know because the Post Office lawyers hounded them out of existence. Not long after USPS appeared to be selling advertising on their postmarking.

Beyond all the other interesting issues various commenters have raised, consider that the public sector can both crush good ideas that merely threaten them (for some reason) or rip ideas off the private sector with essentially no consequences.

Will,

Re; "Judges love to be generous with OPM, other people's money."

Good point. So they would not be allowed to exceed their budget.

I'm not saying that such problems wouldn't exist. I just suspect that such a system would be more efficient than what we have. In effect, the congress is the court today. It operates almost invisibly to the public. It hands out money to people who don't even ask. And it can pile debt upon debt. Something has to be done. I'm just thinking that a system that is more visible, less bureaucratic, and restricted by a firm budget would be an improvement.

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