Mariana Mazzucato - The Value of Everything - Making and Taking in the Global Economy

The cost to the taxpayer of all the contract workers is double that of civil servants, not because contract workers are paid better – they often have to put up with low wages and poor conditions – but because the contractors’ fees, overheads and profit margins, and the ratio of the number of contract workers to the number of civil servants is sometimes as high as four, revealing how bloated and inefficient the outsourcing process can become. 64A recent study shows that the ‘federal government approves service contract billing rates – deemed fair and reasonable – that pay contractors 1.83 times more than the government pays federal employees in total compensation, and more than 2 times the total compensation paid in the private sector for comparable services’. 65Again, it is not the contracted workers who get the higher amounts, but the firms that win the public contracts.

The mantra of higher efficiency through privatization, therefore, is unsupported by the facts – if you can get hold of them, that is. Such facts can be hard to ferret out, despite claims of greater transparency in the private sector. Rather than increase competition through more consumer choice, privatization has often resulted in less choice and less democracy – as is clearly evidenced by the above description of the outsourcing of many NHS services and the high cost of PFI contracts to build and maintain hospitals. 66What the public gets is frequently less transparency, lower quality, higher costs and monopoly – exactly the opposite of what in theory privatization (poorly justified as it was in the first place) is supposed to achieve.

Good Private, Bad Public

What is also striking is the commonplace assumption that when the public does own something, it will privatize that asset by retaining in the public hands the ‘bad’ company and selling off the ‘good’ company. The narrative of good private versus bad public could not be more clear! A salient example is the privatization of Royal Mail, which delivers post, and runs a chain of some 11,000 post offices across the UK. But, as is well known over the last two decades, email and the Internet have caused a dramatic fall in the level of postal traffic. In 2008 an independent review commissioned by the government, led by Richard Hooper CBE (the former Deputy Chairman of the government’s competition authority, Ofcom), concluded that the Royal Mail and the post offices be split into two separate private companies. Five years later, the Conservative-led government privatized Royal Mail by floating it on the London Stock Exchange, while retaining a 30 per cent stake. The now separate Post Office Ltd remains wholly in public ownership. But the government was strongly criticized for selling Royal Mail at too low a price: on the day of flotation the share price rocketed from the official price of 330p a share to 455p within hours. According to some critics, the flotation valuation of £3.3 billion should have been more like £5.5 billion. Moreover, fees to banks, lawyers, accountants and other advisers came to £12.7 million. The sweetener that greatly added to the attraction of the privatization for investors was that the Treasury took responsibility for the Royal Mail Pension Plan, the biggest in the country, which covers workers in both Royal Mail and the post offices. This was to all intents and purposes the ‘bad company’ dumped on the taxpayer.

Similar situations have occurred with banks which are affected by bad loans, such as RBS in the UK. Such banks end up with balance sheets full of worthless loans that then prevent the banks in question from making any further loans. The default answer in such cases has often been to take out all the toxic assets from the ‘good’ part of the bank, and to put them in a government-run ‘bad bank’. The idea is that doing so will allow the private bank to get back on its feet, with the taxpayer taking on the responsibility of managing or selling off the bad assets. But this has resulted in the socialization of risks and privatization of rewards that we examined in Chapter 7: in the same way that the US government picked up the bill for the failed Solyndra, and let the profits from the similar investment made in Tesla go private, the taxpayer picks up the bill for those parts of public assets that are less efficient, and sells off the better bits to the private sector – and often at a garage sale discount. Similar examples have occurred in non-financial companies: in 2014 Italy’s national airline Alitalia was split into a good company, sold privately, and a bad company which remained in government hands.

The use of the words good versus bad in the above examples could not be more stark: private is good, public is bad. If you are constantly told that you are an impediment to dynamism and competition, you might begin to believe it.

REGAINING CONFIDENCE AND SETTING MISSIONS

Public Choice theory’s interpretation of government failures as worse than market failures, and the drive towards making government ‘efficient’, has had the effect of eroding the ethos and purpose of public services. It has also reduced government capacity and confidence (gaslighting), and eroded civil servants’ ability to ‘think big’.

The epigraph opening this chapter, in which Keynes argues the need for governments to think big – to do what is not being done – shows that he believed that government needs to be bold, with a sense of mission, not merely to replicate the private sector but to achieve something fundamentally different from it. It is wrong to interpret him as believing that what is needed from policy is to simply fix what the private sector does not do, or does badly, or at best invest ‘counter-cyclically’ (i.e. increase investments during the downside of the business cycle). After the Great Depression, he claimed that even paying men simply to dig ditches and fill them up again could revive the economy – but his work inspired Roosevelt to be more ambitious than just advocating what today would be called ‘shovel-ready projects’ (easy infrastructure). The New Deal included creative activities under the Works Progress Administration, the Civilian Conservation Corps and the National Youth Administration. Equally, it is not enough to create money in the economy through quantitative easing; what is needed is the creation of new opportunities for investment and growth – infrastructure and finance must be embedded within the greater systemic plans for change.

President John F. Kennedy, who hoped to send the first US astronaut to the moon, used bold language when talking about the need for government to be mission-oriented. In a 1962 speech to Rice University he said:

We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too . 67

In other words, it is a government’s duty to think big and confront difficulties – exactly the opposite of the facilitating role predicated by Public Choice theory, the inevitable result of which is timid and lacklustre public agencies which will be easier to privatize later.

Replacing these bold ambitions with financial cost-benefit analysis has dismissed the public value that governments can create. Civil servants are told to step back, minimize costs, think like the private sector and be fearful of making mistakes. Government departments are ordered to cut costs, inevitably also diminishing the skills and capacity of the public structures in questions (departments, agencies, etc.). When government stops investing in its own capacity, it becomes more unsure of itself, less able, and the probability of failure increases. It becomes harder to justify the existence of a particular government function, leading to further cuts or eventually to privatization. This lack of belief in government thereby becomes a self-fulfilling prophecy: when we don’t believe in government’s ability to create value, it eventually cannot do so. And, when it does create value, such value is treated as a private-sector success or goes unnoticed.