Tuesday, June 15, 2004

The Wisdom Of Hired Guns And Private Funds

An Op-Ed piece in today's New York Times by P. W. Singer, a fellow at the Brookings Institution and the author of "Corporate Warriors: The Rise of the Privatized Military Industry," makes an interesting point that, "From the abuses at Abu Ghraib prison to the mutilation of American civilians at Falluja, many of the worst moments of the Iraqi occupation have involved private military contractors 'outsourced' by the Pentagon."

The article focuses on two of the major problems encountered when "privatizing" military functions traditionally handled by the state:

First, there is no direct governmental oversight, coordination or management of private soldiers. Similarly, they are not bound by treaties such as the Geneva Conventions. This has made the recent scandal involving the torture, and in some cases murder and rape, of prisoners during interrogations in Iraq, and abroad, a particularly thorny legal issue. It it unclear which entity, if any, has jurisdiction over the private contractors, and thus investigating them and prosecuting them for alleged crimes has been made problematic to say the least. This could lead to the inconsistent outcome of military personnel being convicted for the same crimes that civilian contractors go unpunished for.

Second, contrary to claims from the cult of privatization, there are some tasks that the government does cheaper and more efficiently than the private sector. This is especially true in situations where cost efficient market forces are not allowed free reign. In the realm of military action, there is no evidence to suggest that outsourcing various functions reduces overall costs, which are always borne by taxpayers. In fact, the numbers suggest that private contractors often require larger sums of money to accomplish the same missions that the U.S. military can perform. To illustrate these points, Singer focuses on one instance a month ago when the "Pentagon awarded a $293 million contract for coordination of security support to a British firm called Aegis Defense Services."

This enormous contract "repeats the 'cost plus' arrangement that has proved problematic in the past. In effect, this deal rewards companies with higher profits the more they spend, and thus is ripe for abuse and inefficiency (as we have seen with the accusations of overbilling that have swirled around Halliburton). It has no parallel in the best practices of the business world, for the very reason that it runs counter to everything Adam Smith wrote about free markets."

Singer continues, "the usual mechanisms that increase efficiency in contracting, like choosing, rewarding and punishing firms based on their experience and reputation, have again been short-circuited. One would think such a major contract would go to a company that has a long operating history, or experience in such roles, or other major activities on the ground in Iraq. Instead, Aegis has been in existence for little more than a year, has worked primarily on antipiracy efforts rather than security coordination, and has never before had a major contract in Iraq. (Aegis is not even on the State Department's list of recommended security companies in Iraq.)"

Perhaps the most damning critique of the Pentagon's decision to hire Aegis comes via revelations concerning the checkered past of the company's CEO Tim Spicer. He "is a former British Army officer turned private warrior who titled his memoir "An Unorthodox Soldier." He is infamous in Britain for his role in the Sandline affair of 1998, in which a company he founded shipped 30 tons of arms to Sierra Leone in contravention of a United Nations arms embargo. His client in the case was described by Robin Cook, the British foreign minister, as "an Indian businessman, traveling on the passport of a dead Serb, awaiting extradition from Canada for alleged embezzlement from a bank in Thailand." When Mr. Spicer told the press that the British government had encouraged his operation, it nearly brought down Prime Minister Tony Blair.

Mr. Spicer also was a key character in a 1997 army mutiny in Papua New Guinea. The local army, upset that Mr. Spicer had received a $36 million contract to eradicate a rebellion there, instead toppled the government and put him in jail."

The outsourcing of military functions in Iraq is yet another example of blind faith in the ability of the private sector to handle every role and function more efficiently than the government, regardless of the artificial market forces that distort and undermine the benefits of free markets, which often come to bear on business arrangements that are subcontracted out by governmental agencies.

As singer concludes in his piece, "The strength of systems of democracy and capitalism are that they are supposed to be self-correcting and self-improving. When mistakes are made, lessons are learned so that the errors are not repeated. When it comes to the private military world, though, our government seems to be doing its utmost to learn nothing. It repeatedly ignores not just the basic lessons of better business, but also those of smart public policy."

The slavish devotion to the free market as a panacea to all fiscal concerns is manifested in many other aspects of conservative economic policy. Another prime example of privatization gone wrong can be found in the contrast between student loan regimes currently in place: direct government loans as opposed to guaranteed private loans. Under the direct loan program, the government lends to students directly from Treasury funds, but under the guaranteed student loan program, banks are used as middle-men, and thus this system is preferred by the devotees of privatization.

But even some proponents of market forces realize that they are not the best solution in all scenarios, or perhaps more accurately, market forces are not properly utilized in all situations. In an Op-Ed piece in yesterday's New York Times, penned by free-market advocate Republican Congressman Thomas Petri of Wisconsin, the following arguments were made:

"Consider an analogy. A friend asks you to lend him some money. You want to help him, but instead of lending him the money yourself, you ask a bank to do it. You'll guarantee the bank is paid back (plus interest) and even kick in extra money to ensure the bank makes a nice profit. Seeing a deal, the bank agrees, and your friend gets his loan. Over the next year the bank collects its principal and interest, along with the extra money you agreed to contribute.

This is how the federal government provides loans to college students under the guaranteed program. For banks, it's a guaranteed return, and profit, with almost no risk.

This is hardly a market-oriented approach; it's more like a government-assistance program for lenders. Tax dollars even go toward special payments that ensure banks don't lose money when interest rates rise. What's more, interest paid on the loans is set in law, above lenders' costs. And if a borrower defaults on a loan, banks have a government guarantee that they will get their money back. Because of that guarantee, banks have no incentive to spend resources trying to collect from difficult borrowers and taxpayers end up subsidizing private agencies to recover bad loans.

Most of these rules, by the way, are set by Congress; no market forces are involved. Moreover, no competitive bidding takes place to determine who can provide the loans at the lowest cost to taxpayers. All banks are entitled to the same subsidies."

Thus the system of lending that relies entirely on the government and excludes the private sector delivers more bang for the buck, and saves taxpayers money.

Privatization is not ideal in all scenarios. In most cases, the government is not performing the function in question with the intention of earning a profit. On the one hand, this can stymie efficiency and innovation, but on the other hand the ultimate costs borne by the recipients remain low, whereas the private sector has a vested interest in raising the cost of services to the highest level the market can bear. This is why a somewhat reformed Medicare might be more cost efficient in terms of tax dollars than subsidized private insurance providers. For all the money that the government is pouring into the promulgation of prescription drug benefit cards, it is unclear if any real savings are being passed on to senior citizens, hence the tepid reaction. Simply put, not all that glitters is gold, and not all that is private is a magic bullet.

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