Privatization and Subsidies Don't Mix

James Surowiecki says, quite rightly, that the US student-loan system is one enormous boondoggle for private lenders to students. And he sees the same syndrome elsewhere, too:

In part, it’s ideology, and the dominance of what you might call the privatization mystique—the idea that anything the government can do, the private sector can do better. Often, this makes sense: the free market is more likely to come up with efficient ways of creating and distributing products and services than the government is. But the student-loan market isn’t a free market in any meaningful sense of the term, because the government effectively determines prices, insures against losses, and subsidizes volume. In this environment, most of the competition among private companies is really just squabbling over how to split up the spoils. Economists call this behavior—when a company seeks to manipulate economic conditions rather than actually create value—“rent-seeking.” It’s common in areas where the fetish for privatization has taken hold, such as the outsourcing of homeland security to private contractors and the boom in private Medicare insurers. (The private insurers are less efficient than Medicare and receive billions in subsidies from the government.) Outsourcing tasks to private companies is supposed to let government reap the benefits of the free market. But sometimes it just ends up uniting the worst of government and the worst of the private sector into one expensive mess.

I think we can be more precise than waving our hands vaguely in the direction of "areas where the fetish for privatization has taken hold". How's this for a theory: Privatization never works when it involves continued subsidies from the government. That explains why rail privatization in the UK was a disaster, while the rest of the UK's privatization efforts were generally successful. And it explains why privatizing Amtrak wouldn't work, either, while the privatization of Germany's railroads just might succeed.

In general, the government should feel free to sell off, for some large sum, the right to make lots of money in the future, by doing things such as operating toll roads or lotteries. But there's really no reason why it should outsource the spending of Uncle Sam's money: the private sector simply hasn't demonstrated it can ever do that efficiently.