@solaris @mildpeach @kottke

The problem extends beyond government. The same Reagan-era push to privatise was accompanied by (and was often driven by the same ideas as) a push to outsource and off-shore things in companies.

The theory is sound. Any company has some things that they are good at and where they make money by being good at these things. They make some kinds of things better / faster / cheaper than competitors and that’s their core competency. Everything else that they do is a supporting activity. A company that makes components for jet engines needs people to clean the offices, to cook in the canteen, to manage payroll, and so on. These jobs don’t make money for the company, they exist to enable the jobs that make money.

The problem with having the support rôles in house is that your company may not be very good at them. And you many not need an integer number of them. This makes a huge amount of sense for small businesses. If you’re a corner shop, you need an accountant to audit your accounts at least once a year. Having an accountant on staff wouldn’t make sense (a good accountant probably doesn’t want to work full time for a corner shop, and you don’t have enough work to justify more than a small fraction of their time). Even if an outsourced accountant costs 2-3x more per hour than a staff accountant, you’ll get much better value.

The first problem comes with scale. It turns out that big companies will need multiple full-time people in these rôles. Firing your legal department and putting a law firm on retainer will be more expensive because now, rather than a few lawyers paid a reasonable salary with occasional consultation from external experts, you’re paying full-time hours at an hourly contracting rate and paying a law firm’s profit margin as well. The only way this makes sense is if they are hiring much better lawyers than you could hire for the same rate.

And that’s the second problem. It turns out that a lot of support rôles are not actually fungible. People who do these things in house learn the specific requirements of the company, whereas outsourced workers are going to treat you as an example of a generalised model. And, because you’re one of a dozen customers they work in, they’re far less invested in your success than if their salary depended on your company succeeding.

[ Note: some of this was also driven by accounting and accountability dodges. Payroll and outsourced spending are accounted differently and there are various tax things that often made the latter cheaper. And sometimes it’s useful for an executive to be able to say ‘we contracted a company to do this and they are supposed to be experts but it turns out that they suck’ rather than ‘employees that we hired screwed up’. ]

This accompanied a push to off-shore. Maybe an outsourced company can’t hire competent people here more cheaply (per unit competence) than you can. But what if you let them hire anywhere in the world? Maybe you can find people willing to work for below the local minimum wage. And now you have a much lower cost, but at the expense of much weaker accountability. Still maybe fine for things that you don’t care about, but a disaster if they’re things where quality matters.

All of this gets applied to government and it misses on a bunch of core problems:

First, government’s are huge. When a company can exist with a single customer, it’s just overhead. It isn’t likely to be more efficient than the customer running it as an in-house division. If you think companies are more efficient than civil service organisations, make it a publicly owned company where the government is the only shareholder and therefore the organisation the company is accountable to.

Second, the civil service’s core competency is delivering services uniformly to citizens. That’s quite different from a commercial setting where it’s fine for a company to focus on the most profitable 80% or even 20% of the market. We’ve seen this in the UK when the Royal Mail’s parcel delivery monopoly was broken. Companies sprang up to deliver only in cities (where the distances are smaller so the per-parcel costs are lower) and could undercut the publicly funded alternative that has a uniform cost for the whole country. This eventually led to the costs for Royal Mail to deliver parcels going up. It also caused a load of externalities, because now we often see 5+ delivery vans per day on our road instead of one, which increases congestion, pollution, and wear on the roads.

And that brings me to the final problem. A lot of what the government provides is infrastructure. If you run infrastructure at a profit, you are starving the rest of the economy. Infrastructure exists to enable other things. The cheaper the infrastructure is at point of use, the more it enables. If you outsource operation of infrastructure, it’s really hard to get the incentives right. It can still work, but you need to be very careful. For example, privatising rail and funding the operators with ticket sales is a disaster because you incentivise running the minimum number of trains at the highest price. You might have more success if you set comfort tiers (leg room, speed, available WiFi, and so on) and paid them a per-passenger subsidy that goes up for each tier, but even then you need to model the pricing curves to make sure that the companies will make the most money if they deliver the things that you want (ideally, fast, frequent, comfortable trains that make people sad when they have to drive instead of taking a train).

The final macroeconomic issue is that money that the government pays in salaries is immediately reinvested in the local economy. The government can decide where to put bits of the civil service. Putting moderately large civil service organisations in areas in need of economic development is an easy way of directing funding to a regions (see the DVLA in Swansea as a case study, or GCHQ in Cheltenham). Secondary industries spin up either to support or to poach qualified staff (which leads to staffing churn, but is also a long-term investment in local industry). In contrast, a big chunk of payment to an outsourced company will go to shareholders, who are either not based in the country or who are then investing outside. This has far less impact (and even less controllable impact) on the country’s economy.

But both public and private ownership tend to be pushed for ideological reasons rather than starting with the goals and then trying to determine the best way of delivering.