public sector Archives - The Pursuit of Happiness

Reagan’s Legacy? ‘Privatization’ Is a Dirty Word

May 26, 2017

In the era of a billionaire president (namely Donald Trump), any discussion of privatization turns nasty, and it’s Ronald Reagan’s legacy that is getting beat up in the process.

Reagan was big on running the federal government more like a business, and proposed broad ideas to get the private sector to take over some of the jobs government was doing. These public-private partnerships helped pump the economy, and it seemed to make more sense for these jobs to be done by companies whose business it was to do this kind of work. In a 1986 message to Congress, Reagan wrote:

In most cases, it would be better for the government to get out of the business and stop competing with the private sector, and in this budget I propose that we begin that process. Examples of such ‘privatization’ initiatives in this budget include sale of the power marketing administrations and the naval petroleum reserves; and implementation of housing and education voucher programs.

During the Reagan era, privatization began on a broad level, and private-public partnerships were instituted in a variety of areas. Today, these arrangements vary from prison administration to school vouchers. As Gerard Robinson, the former commissioner of education for Florida and secretary of education for Virginia, explains:

Public-private partnerships remain an important aspect of doing business in America; private prisons are still part of our state and federal corrections landscape; 26 school voucher programs are operating in 15 states and the District of Columbia; and 21 tax credit programs are operating in 17 states.

But in the age of Trump, Robinson says, much of the talk about private companies, which earn billions providing services to the government, has turned toward an anti-capitalistic tendency: namely arguments like, if a company has a contract with the government, it shouldn’t be allowed to profit.

But is that even remotely realistic? For one, these types of relationships have in fact been functioning for more than 100 years, not without flaws but certainly more efficiently than government could do alone. Two, what would be the incentive for companies to do business if they can’t benefit from the service? They already are doing it more more cheaply than could be done by a parallel company created by government to perform the same function without benefit.

Three, as Robinson points out, it’s just more feasible for some government agencies to contract out some educational services while doing others in-house. He uses examples from public school arrangements, for instance, in the area of technology support. Let Apple and Microsoft handle student computer services, not the schools. Or how about student transportation?

According to a recent report from Bellwether, district-managed public school buses account for approximately two-thirds of the 480,000 buses that transport 25 million students in urban and rural school districts each year. Private companies such as First Student, Inc., which has a contract with 1,200 school districts and employs 57,000 people to drive 6 million students to school each day, are among for-profit service providers that compose the remaining one-third. Why do districts outsource transportation? According to the National School Transportation Association, ‘School bus contracting benefits schools and school districts nationwide. Outsourcing transportation redirects attention and financial resources back into the schools that were overburdened by the expense and administrative commitment of providing their own student transportation.’

Robinson lastly makes the case that some anti-privatization groups may not want to admit: public employees benefit from investing in the private sector. If you remove that profit margin, public employees lose out, both in terms of an upper salary limit and by not having profitable companies into which they invest their retirement savings.

According to an American Investment Council report regarding the investments of over 155 public pension funds in various equity markets, funds invested in private equity produce a median 10-year annualized return rate nearly 4 percent higher than those invested in public equity. For example, the Teacher Retirement System of Texas invested $16.41 billion in private equity, and came away with a 15.4 percent increase in their annualized 10-year return. The New York State Teachers’ Retirement System invested $8.26 billion in private equity, and garnered a 13.2 percent increase in their return. The point is that these teachers, and countless more, will be able to retire with some comfort based on the investment of their public pensions in the private equity market.

So having profitable companies that provide valuable services seems like a smart choice that works on both sides of the coin, complementing government services while also providing a revenue stream for government investments. Seems like a viable course of action, one currently threatened by anti-capitalistic forces.

What do you think?

Which Pays Better Wages? Government or Private Sector

May 25, 2017

The Congressional Budget Office, the federal government’s numbers cruncher, recently completed an analysis comparing salaries and benefits received by employees of federal and large private-sector employers, and concluded that all things being equal, the federal government pays better wages than the private sector.

On average, the federal government’s compensation package pays a 17 percent premium over the private sector.

The analysis, called “highly professional” and “state-of-the art” by former Social Security Administration Deputy Commissioner Andrew Biggs, is an attempt to do an apples-to-apples comparison by taking into account levels of education and experience.

All-in compensation per full-time equivalent federal employee in 2015 was about $123,000. Assuming a 17 percent federal pay premium, this implies that on average a similar private-sector employee would receive total pay and benefits of about $105,000, an annual difference of about $18,000. …

When averaged over 2.1 million federal employees, the federal compensation premium adds up to real money. Total federal compensation last year was close to $260 billion. A 17 percent difference is about $38 billion per year, equal to what the federal government spends on energy and the environment and substantially exceeding federal spending on transportation.

The CBO report found that 91 percent of federal employees have an education ranging from high school graduate to master’s degree, and that these employees make more than those of equivalent educations at similar jobs in the private sector. The report found, however, that the 9 percent of the federal workforce that have doctoral level degrees make 18 percent less than those with equivalent degrees in the private sector.

Biggs says that the difference in the type of grades, alma maters, and fields of study have not been measured so there’s no way to know whether federal workers are more “middle of the road” students from average colleges compared to those Ivy Leaguers with top grades. He suggests that this lack of information may be where the weakness in the report lies and it could be a notable variable since “most private-sector employers could not attract and retain employees while paying 18 percent less than their competitors.”

Doubling back, however, Biggs then says that the federal pay premium could be hurting innovation because workers who choose to make more money in government than work in the private sector are squandering their potential creative energies.

As the CBO report shows, for less-educated workers federal pay is more than 50 percent higher than private-sector levels. This makes it almost impossible for an employer of less-educated workers to compete and, as a result, the best of that group — employees with the greatest drive, imagination, and leadership — may find themselves employed in government rather than the private sector, where they might make a larger impact on their communities. …

There are many highly-educated, highly skilled, highly-motivated Americans working for the federal government doing important jobs. But we shouldn’t miss the risk that generous federal pay could mean the founders of the next Google or Tesla find themselves working in a federal office building instead of creating the innovations that can change the world.

But perhaps the well-paid average government worker of a decent education isn’t missing his calling. A recently released study that tracked 81 high school valedictorians through their careers found that the best and the brightest often end up in great jobs but ones that lack creativity. The suggestion is that the early track toward professional success pushes these highly motivated students to avoid risk-taking. They do not pursue eminence in one particular field nor devote themselves to a single passion.

“They obey rules, work hard, and like learning, but they’re not the mold breakers. … They work best within the system and aren’t likely to change it.”

In other words, dropouts like Bill Gates, Steve Jobs, and Mark Zuckerberg are unlikely to be interested in government careers in the first place.

Ultimately, the federal government’s high pay does have side effects. It skews the pay scale and impacts the labor market, making it harder for companies to compete for bright employees. However, if the goal is to populate the federal government with good-quality workers, financial benefits are a solid offer to attract them.