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WORLD

Privatization and Failed Government in the US

David KERANS | 18.10.2012 | 00:00
 

The financial crisis that erupted in 2008 has introduced many countries and masses of people to the fragility of social welfare in many ways. The destruction of wealth, jobs, and security continues to roll on four years later, with the current epicenters, Greece and Spain, now tilting towards mass strikes and unpredictable economic dislocations. Across much of Europe, so-called «austerity programs» have not only ravaged state spending on employment and the social safety net, but have opened the door to a wide range of schemes to privatize public assets, ranging from mineral resources to utilities, schools, land, roadways, etc. Much of the wealth societies have built up for public benefit over the last few generations or more is now at risk of falling into private hands, with serious, far-ranging consequences. 

We have discussed core dimensions of the privatization of public assets in this forum before, and have outlined the inroads privatization has made in the US. The current presidential campaign offers strong evidence of a leap in privatizations just over the horizon in America. Most important in this respect, Republican candidate Mitt Romney advocates a gradual privatization of health insurance for the elderly, and his running mate, Paul Ryan, is the most vocal member of the House of Representatives in calling for the privatization of Social Security (the federal pension plan). The savage austerity program implied in the (intentionally vague) Romney and Ryan budget plan would impel states and municipalities towards privatizing all manner of public assets, including school systems. In anticipation of this, their platform foresees chaneling huge numbers of school children into privately owned schools (a so-called «voucherization» program, which would ghettoize public education and ring up large profits for corporations running private schools). Romney has also been clear about his eagerness to sell off federally owned land, even saying that he doesn't know what the purpose is for having federally owned land. 

President Obama, for his part, has been less than energetic in safeguarding public assets. He has openly encouraged energy companies to expand drilling programs in the most environmentally risky manner (fracking of natural gas, and offshore oil drilling in the Arctic), and he has repeatedly hinted at his willingness to shrink federal expenditures by $4 trillion or more over ten years, so long as the Republicans accept a very modest measure of tax increases on wealthy Americans. The sort of budgetary contraction Obama is proposing implies a heavy dose of austerity for local and state governments, whom Washington would no longer be able to support at customary levels. Further, on a number of occasions--including his first debate with Romney on October 3rd, the most prominent stage of all--Obama has said he is prepared to pare down Social Security. Likewise, he is toying with cutting back Medicare and Medicaid (government-supported health insurance for the elderly and health care for the very poor, respectively).

Notice that deliberation on policies that would adjust the relationship of public and private property have run overwhelmingly in one direction in America for several decades. In keeping with Gore Vidal's famous quip that «the Republicans and Democrats are just two wings of the property party», discussion of reclaiming private assets into public hands is stillborn in Washington. Even when the nation's largest banks were on the brink of collapse on account of their own wrongdoing in early 2009, the Obama administration refused seriously to consider taking them temporarily into conservatorship, no matter how compelling the case for this was. 

Apart from policies that steer the distribution of assets between the private and public sectors, government can play a role in creating new public assets, in sectors like infrastructure, schools, and science. This has been a core function of government in advanced societies for more than 150 years, of course, and the US has as glittering a record as any country in this respect. Since the ascendance of Reagan in 1980, however, its performance has been chronically and embarassingly weak. In the last two decades of the twentieth century, for instance, the country added just 6 percent more mileage to its roadways, even as vehicle miles travelled rose by more than 60 percent. The George W. Bush years saw only about 1 percent more roads constructed. The rail network is now only half the size it was in 1970, even though it carries 137 percent more freight. The economic cost of freight bottlenecks and congestion total anywhere from $200 billion to $1 trillion annually, depending on how such estimates are structured.

Meanwhile, funding for basic science has flagged so much that Federal Reserve Chairman Ben Bernanke devoted a special presentation last year to reminding the nation of the fact that government-led research and development generally produces better outcomes for society than does private sector R&D. Government-led research is much more heavily weighted to advancing fundamental science, which is the platform for sustained innovation. Private sector R&D, in contrast, focuses on developing commercially viable applications of basic science. Total US expenditures (public and private) on R&D have been stable over the last three decades, at about 2-1/2 percent of GDP, but the federal government's share has steadily shrunk over that period (from 50 percent in 1978 to just 26 percent by 2008), with deleterious consequences on the styles of science pursued. America's willingness to privatize R&D implies that the country will likely surrender a large share of its long-held preemenince in science and innovation over the next decade or two. 

Meanwhile, maintenance of existing public assets is subpar at best. A look at the state of transportation and water infrastructure tells the story in unambiguous terms. The percentage of GDP allocated to transportation and water infrastructure fell steadily from 3.1 per year in the early 1960s to just 2.4 in 2007. The federal stimulus package Obama achieved in 2009 delivered some much needed relief in this regard, but over 90 percent of the infrastructure allocations in that package have already been spent, and the shortfall in funding just to maintain infrastructure is enormous—anywhere from about $130 billion to $260 billion per year for transportation alone, according to a range of estimates. About 90 percent of the burden of maintaining transportation infrastructure falls on local and state governments (up from 80 percent 30 years ago, when the federal government still paid serious attention to public assets). Real expenditures per mile travelled have dropped by about 50 percent since the 1950s, and they stand to sink even further now, because local budgets are under ever-increasing strain. Elevated levels of unemployment and stagant wages for working people are reducing tax receipts, as are the persistently sluggish residential property values, all while pension liabilities for local government are escalating--annual pension payments equalled 15.7 percent of payroll payments in 2011, about two and a half times the 6.4 percent mark of a decade ago. Spending by state and local government has declined for 11 consecutive quarters.

A sustained, federally-sponsored infrastructure maintenance and buildout program is obviously long overdue. But it is just as obvious that Washington will not deliver anything of the kind. Last fall Obama included only a modest admixture of infrastructure projects in his American Jobs Act, and the Republican-controlled House of Representatives rejected it when the White House refused the Republicans' demand to include in the bill the relaxation of all manner of environmental regulations that constrain various industries' profitability (and protect the health of human beings and the environment, but of course that is of little concern to the Republican Party). 

Absent resuscitation of the American Jobs Act, reinforcement of transportation infrastructure in the US will depend on the obscure Moving Ahead for Progress in the 21st Century Act (MAPS-21) which passed in July. MAPS-21 allocates just $41 billion of federal funds per year to the sector. As paltry as that figure may be, the maturation of political patronage systems in the US over the last couple of decades ensures that the potency of this funding will be far less than it would have been in earlier generations. Washington politicians have perfected the practice of exchanging favors, to the point that favors, not social or economic benefits, govern the disbursement of funds for all manner of projects. As far as infrastructure disbursements are concerned, approximately one quarter now go to districts that cannot demonstrate the need for them. The rhetorical «bridge to nowhere» is seemingly everywhere now. In consequence, the return America gets on infrastructure investments has declined to near zero in this century, from mid-single digits in the 1990s, and double digits before 1980. 

Notwithstanding the galloping dysfunction in corporate-dominated Washington, the public sector of the US economy will not disappear, nor will all of the country's public assets disintegrate. The benefits Americans have enjoyed from these assets stand to shrink, however, and the bite may be fierce indeed. The police department of Detroit has just offered a poignant reminder of this, declaring their city so dangerous that it is unsafe to enter, and warning that they are not capable of responding when needed. In more ways than one, and sooner rather than later, the great mass of Americans will have reason to regret the retreat of their government…

 
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David KERANS

David Kerans is a historian of Russia and financial analyst. He has held appointments at Harvard, Stanford, and Yale Universities, as well as Wall St. investment houses. Lives in New York.


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