The Need for Privatization of a State-Owned Oligopoly

Anyone acquainted with Indiana politics is aware of the 'trouble' our governor, Mitch Daniels, has gotten into with many of the state's residents for selling huge portions of previously state-run industries to private investors. His biggest 'mistake' was leasing the Indiana Tollway to an overseas conglomerate. Now he has privatized (or is trying to privatize) the Indiana Lottery, Indiana's Medicare program, and the construction of the proposed Illiana Expressway and the farther-south Commerce Connector. His critics (every Democrat, many Republicans, and a fair portion of the state's residents) say that he is butchering the state, selling it to the highest bidder, and screwing the public in every way. The General Assembly has passed laws giving them the final say on all sales, and putting a time limit on all such leases (any lease longer than 2 years must get Senate approval). What's worse, there's a good chance that Mr. Daniels won't be reelected in 2008. But 'My Man Mitch' is on to something here; he just hasn't gone far enough.

Most uneducated people would see this privatization plot as a bad thing. They don't believe that a foreign investor will provide fair prices and fair service on the Tollway. They don't believe that a private investor can run the state lottery or Medicare program as well as the bloated Indiana government. These views demonstrate how uneducated the Indiana population has gotten.

There is one purpose for government and one alone: to protect the rights of the individuals that it governs. Not to protect them from themselves. Not to give them everything they ever wanted. Just to protect their right to property and freedom. Since Roosevelt's New Deal, government has put itself in all sorts of places that it doesn't belong. As a result, those markets have become inefficient. This is the necessary side effect of Keynesian economics: markets that are influenced by an outside force cannot do what they do naturally.

Any person who has ever taken a course in economics (at least those that understood it) can tell you that markets are inherently efficient. Free markets, that is. When there is a demand, some producer will supply it. If prices increase, quantity sold will decrease, with few exceptions (prestige goods, for example). These are basic laws of economics, and they cannot ever be false, if left to the market. A producer can't produce low-quality, high-price goods for long, because no one will buy them, or another producer will enter the market and produce higher-quality, lower-priced goods. Even monopolies are limited in their power over consumers in a free market.

However, when government enters the picture, markets lose their efficiency. Take the food industry in America as an example. We've all heard about Upton Sinclair's The Jungle that exposed the disgusting habits of the Chicago sausage industry in 1906. Partly due to Sinclair's exposé, the national government formed the Food and Drug Administration to regulate the food industry here in America. That's a good thing for consumers, right? After all, the FDA wouldn't let bad food into the market, or allow drugs that kill people into the market. What most citizens don't realize is that the Chicago sausage industry cleaned up their act because of public outcry, not the FDA. Why? Because no consumer would buy sausage until the plants were cleaned up, or until the price was so low that they didn't care about the humans and rats in it. The FDA didn't do that; the free market did.

But surely the FDA should exist to regulate drugs, right? Libertarians like myself say no. People are better at deciding what to put in their bodies than the government. Let's say Pfizer creates a new drug that completely cures AIDS. A patient wakes up, and his HIV is gone. Now, this could save lives right now. RIGHT NOW. But the FDA wants to 'protect' consumers, so they will put this drug through trials (the same ones Pfizer ran) to test its efficacy, a process that takes over a year, and costs millions (which drives the final price up). During that time, more people die from AIDS, and taxpayer dollars are spent on a cure for something that most will not contract. All for what? Well, the FDA says that it makes the drug market safe. But remember The Jungle?

Tell me, would you buy a drug that you heard kills every person that takes it? Of course not. What if you heard it kills 50% of people? Would you still risk it? Depends on the pain you're in, I suppose. But the point is that no rational person will take a drug that will kill them. Which means that Pfizer, wanting to continue to make billions, NEEDS to produce a drug that works and is cheap, or else NO ONE will buy it. You can't run a multi-billion dollar industry if you have no customers. It is the best interests of the food and drug industry to put out products that will not hurt people. The FDA is a waste of money, doing exactly what the free market would do instead.

Now, I could write dozens of examples of government programs that waste money by doing what the free market would do anyway, but I want to get back to a point I made earlier. I said that, in privatizing major industries in the state, Governor Daniels had not gone far enough. There are still massive industries in Indiana that are inefficient, that don't do their job, and need reform that government cannot provide. The best example of this is education.

I support the abolition of public schools.

Now, I know what you're thinking: Ben, we can't take away the free education provided to poor Hoosier children! Ben, we can't fire thousands of teachers who do the best job they can do! Ben, you don't actually mean eliminating state-controlled education! Well, we can, we can, and I do. I know it sounds radical, but it is necessary to let children learn from the best, and bring back a level of intelligence we haven't seen in this country since the 1940s.

As I discussed earlier, free markets are efficient. Those with government control are not. Proof? See the decline in test scores of Hoosiers compared with those in other states. See the decline in test scores of Americans compared with those in other countries. We were the best. Now we rank lower than thirteen other countries in math scores, including places like Singapore and Hong Kong.

The idea behind public schools was that every child could receive a free education, and that, as a result, we would all be better off. First of all, dispel the notion that it is free. Everyone pays for it through taxes, even those of us who have no children, or who send our kids to private schools, or whose children are grown and out of college. There is no such thing as a free education. It just seems to cost less because everyone pays for it, even people who don't use it.

Wouldn't an all private school system be too pricey though, since the cost per student would be spread only over the people using the service? No, and the free market explains why.

Let's say there are two tubs of butter in the super market. They are identical in every way, except one is half the price of the other. Which do you buy? Well, if you are a rational consumer, you buy the cheaper butter. The butter companies, in perfect competition, must lower their prices to compete. The same thing happens with schools. If two schools are identical, then you would rationally send your child to the cheaper of the schools (unless one of the schools is a prestige good, where you pay more for the name alone, like Harvard). But, obviously not all schools are exactly the same.

Back to butter. Let's imagine you are shopping for butter again. There are two brands. They both cost the same, but one has fewer calories, more nutritional benefits, and the tub even looks prettier. Which do you buy? A rational consumer buys the better brand. So butter makers have incentive to raise quality, because consumers want better butter. The same thing applies to schools. If you have two schools that cost the same, but one has pumped out twelve Rhodes scholars, half the graduating class won full-ride scholarships, and the football team makes it to state every year, and the other is full of druggies and most end up at trade-schools, which would you send your kids to? The higher quality school wins again!

If schools in a free market want to compete, therefore, they have to provide the best education for the lowest price. Some schools will find a way to get more talent out of lower-paid teachers. Others might find that spending more increases test scores. Naturally, some schools will be better than others and some will be cheaper. Just like butter. There are lousy butters that barely get the job done, but are dirt cheap, and there are heart-healthy butters that cost more than my car. Here, consumers decide what matters more to them, prices or quality. People that want the best will pay more, but people who just want something to put on their bread will buy the best they can within the price range they are willing to spend.

This brings me to a second myth, that public schools make education available to all students. No market would have only two options: if we all had to choose between a buying a Maserati and a Ford Pinto, you would find a lot more people riding bikes or taking the bus. No market can sustain only having substandard cheap goods or overpriced quality goods.

Let's say you're an investor, looking for a safe moneymaking venture. You see a county in rural Indiana where there are two schools. One is a run-down building with broken windows and test scores in the bottom 5%, but that is virtually free. On the other side of the street is an elite boarding school, providing teachers with doctorates and which is better in every way, except that the price tag is higher than the cost of the homes in the county. Don't you see a middle ground -- a market for the taking? You could build a school that was a little more expensive than the rundown hole, but still provided good education. Don't you think a lot of rational parents would choose the middle ground? Of course. Now imagine a system where, at any time there is a niche to be filled, someone fills it. That system is called the free market. Do parents want a school with a top-notch soccer program? Someone can come in and build a school that has one, or one of the existing schools will have incentive to build one.

Critics of this plan will point out that I keep mentioning a scenario where poor kids would have to choose an inferior school. But a free market wouldn't allow that. After all, if poor families had to choose an inferior school, there would be a demand for a cheap yet moderate quality school. Sure, it wouldn't be Cornell, but it would be cheaper than Cornell too. If there is a need or want in a free market, someone will provide for it.

What about public schools though? Well, in most places, you have only one choice for a public school. You can either pay a lot of money for a private school or go to the one school that is in your district. What if that school is lousy? Well you're out of luck. This is what is happening to the poor now. They pay for education at the point of a gun (see what happens if you don't pay those taxes that fund the school) and yet they get a poor education. The Gary schools are a good example. Most people in Gary can't afford to move to a city that has high quality public education, and can't afford the private school options. Where does that leave them? A school district with bad teachers and unsafe hallways. I doubt that they think public schools are worth what they pay.

Historically, private schools have been better than public schools. Why is that? Is it because of the price tag, which allows the schools to spend more per student than the state? No. It is because private schools have to compete, not just with each other, but with public schools. They have to increase quality, because if they don't, then the parents will just send their children to the free public schools. And because they cannot afford to charge parents a huge tuition (for the same reason), they have to find ways of keeping per head costs down. They have to be run efficiently, like a business. Public schools, on the other hand, spend more per head than an annual salary at the poverty line (over $20,000 in many places). They waste money, because they do not have to compete to keep students.

Now, I have been looking at this from the view of students and parents so far, but what about the other side? Where are teachers better off? After all, the teacher's union makes sure that every teacher is paid highly in public schools (often to the dismay of taxpayers).

Let's go back to our hypothetical free-market Indiana. A teacher has five schools to choose from. Which school does he or she choose? The best paying, of course. So schools, wanting to attract the best talent, will raise teacher pay and benefits, and will do so cost-effectively to the students. No rational teacher would go to the lowest paying of five equal schools.

What about the quality of teachers? Well, in a completely free market, teachers would have every incentive to be as well trained as possible. You wouldn't see a group of teachers that were dropouts from other college majors. You wouldn't see teachers who don't teach. Why? Because they would be terminated as soon as someone better showed up. What about the union? A free market school could say "I don't want union teachers at my school." Would that annoy the union? You bet. But fewer teachers would join the union. Teachers would have to actually work to keep their jobs, because without incentives, they don't. Better teachers would get the raises (just like in a company, where better workers get better raises). Worse teachers would either be forced to get better, or would have to take lower pay.

If all of that isn't convincing enough that a free market in education is more efficient than a public school system, consider this last tidbit. This whole time I've been talking about incentives: incentives to lower prices, incentives to raise quality, incentives to fill a void in a market. Incentives are powerful things in economics. Incentives are why people act. Does the public school system use incentives properly? You decide.

Under the current system of public education, money is thrown at underperforming schools. The rationale is that more money will solve the problem by letting schools pay teachers better, or provide better facilities. Schools that are at the very top of the pyramid, those that produce the best test results, are seen as doing their job well, so they get the same amount, or less, the next year. Tell me, lawmaking supporters of public education: what incentive are you giving to underperforming schools? The message you send is, "If your scores get lower, we will give you more money. Keep going lower, and we will keep giving you more money. But beware: if you get too good, we'll cut off your money supply."

What kind of system rewards people for not doing their job? An inefficient one.

Mr. Daniels, you've done a great job privatizing the state so far. You just haven't gone far enough.