Hijacking 'Privatization'

by Lee McCracken

The Associated Press recently reported that the GOP, now in control of both the White House and Congress, is set to pursue its agenda of, among other things, partial privatization of Social Security. According to the AP, "Emboldened by Republicans' election triumph, proponents of partial privatization of Social Security are pressing for an overhaul of the retirement system as early as next year."  

The kind of plan most congressional Republicans likely have in mind is similar to those promoted by the Cato Institute, the Heritage Foundation, and other mainstream conservative and libertarian think tanks. According to the Cato plan, “Rather than paying taxes into a government-owned fund, workers should be allowed to redirect their payroll taxes into individually owned, invested accounts, similar to 401(k) plans and Individual Retirement Accounts.” The thinking behind such plans is that workers would get a better return on money in a 401(k) than on their government “investment” and that they would have more choice about where their money goes.

While Cato initially envisions that people will invest 2-3 percent of their payroll taxes into capital funds, eventually this amount could be increased “and allow workers to control the maximum feasible amount of their retirement income.” Now, this plan might certainly be preferable to the Ponzi scheme that currently exists, but what is truly objectionable is calling it a plan for the “privatization” of Social Security. Our first tip-off that something fishy is going on is that even the language used by Cato (“workers should be allowed,” “maximum feasible amount”) implies that the government will still be calling the shots.

As George Orwell saw so clearly, the corruption of language leads to the corruption of thought. Political language, in particular, tends to be vague and misleading, often hiding something indefensible behind bland and comforting words, like “collateral damage” or “humanitarian intervention.”

In modern political speech, “privatization” has come to mean something very different from its natural meaning. “Privatization” has been used to describe Cato-style Social Security plans, the government’s use of prisons run by corporations, school voucher programs, and turning the management of public schools over to for-profit companies. Unfortunately, none of this represents privatization in its most important sense.

A government service has been privatized only when the government ends its coercively enforced monopoly on the provision of that service. For this to happen, two conditions must be met: The market in that service must be opened up to competition, and people must be able to opt out of the service altogether. Social Security “privatization,” “private prisons,” school voucher programs, and “for-profit” management of schools are not examples of privatization, but simply examples of government outsourcing and subcontracting for various services while maintaining its monopoly.

Take the example of so-called “privatization” of failing public schools. In some states, such as here in California , certain public schools that have been consistently inept at managing their money and educating their students have been turned over to private for-profit corporations to see if they could be better managed. But these are still government schools, funded by tax dollars, and subject to all the regulations and restrictions that go along with that.

The case of Social Security is similar. Even the supposedly libertarian Cato Institute is not proposing that people be allowed to opt out of Social Security altogether. Your tax money will still be extracted from your paycheck; it’s just that you’ll have (slightly) more say over where it goes. But, should you decide you’d rather spend that money on a retirement plan not approved by the feds, or on something else altogether, well, that’s just too bad. Your government-extracted money can be invested in a government-approved fund, rather than going directly into the government’s coffers. Anarchy, here we come!

To call this privatization is like saying that the U.S. Army was partially privatized because it used Afghan civilians as proxy troops in its war against the Taliban. This was still a government-directed operation from start to finish, just with a significant amount of outsourcing. The proponents of these schemes of psuedo-privatization seem to have forgotten an essential distinction between private and public institutions. As Murray Rothbard put it in his For a New Liberty:

“The libertarian sees a crucial distinction between government, whether central, state, or local, and all other institutions in society . . . . [E]very other person or group receives its income by voluntary payment: either by voluntary contribution or gift (such as the local community chest or bridge club), or by voluntary purchase of its goods or services on the market (i.e., grocery store owner, baseball player, steel manufacturer, etc.). Only the government obtains its income by coercion and violence—i.e., by the direct threat of confiscation or imprisonment if payment is not forthcoming. This coerced levy is ‘taxation.’”

This distinction makes it crystal clear that any service, even if it is ostensibly provided by a “private” firm, has not actually been privatized as long as it is funded coercively, i.e. by taxation. This includes all “private” prisons, “private” schools, and “private” Social Security accounts that are funded (and directed) by the government.

What is so sinister about the way the term privatization has been hijacked by proponents of statist programs is that it lulls conservatives and libertarians into thinking that they’re successfully rolling back the state, and it sours the general public on all talk of privatization when these government-funded and directed endeavors fail (as they’re wont to do). In fact, privatization (much like the related tern “deregulation”) has come to mean almost the opposite of its intended meaning. Rather than reducing the role of the government in providing important services, privatization seems to have become an all-purpose justification for the government to extend its influence into even more areas of the economy and private life. For instance, some opponents of school vouchers justly fear that using tax money to fund private and religious schools will only give the government an excuse to regulate the policies and curricula of those schools.

The only way to genuinely privatize any service would be to invite competition and to make funding purely voluntary—in other words, get the government out of it, period. True privatization is not just another name for government outsourcing. A system of nominally private institutions being funded by taxation and guided by the state resembles the discredited system of fascism far more than it does the free market. The upshot of this confusion is to further blur the distinction between private and public, between the coercive state and civil society.