One percent's twisted new heist: What's really behind privatization

Outsourcing government not only leads to poor services -- it's killing the middle class, an expert tells Salon

Published June 6, 2014 12:30PM (EDT)

Jamie Dimon, Donald Trump, David Koch                                (Reuters/Yuri Gripas/AP/Dan Hallman/Evan Agostini)
Jamie Dimon, Donald Trump, David Koch (Reuters/Yuri Gripas/AP/Dan Hallman/Evan Agostini)

As most experts and layman enthusiasts will tell you, there's no one, single explanation for the past 30-plus years of growing economic inequality. Its drivers are multiple and separating one from the other is often quite complicated. Low taxes on wealthy individuals and corporations, the gutting of labor unions, the increased mobility of capital, technological gains, overly protective intellectual property law; the list goes on.

In fact, here's another one to add to the list: privatization. According to "Race to the Bottom: How Outsourcing Public Services Rewards Corporations and Punishes the Middle Class," a new study from In the Public Interest, a think tank focused on how privatization affects the economy, the routine practice of outsourcing government functions is another important reason why the middle class is shrinking as those at the very top reap more and more of the fruits of our economy. To explain how that is — and why it's important that people committed to economic justice push back against the practice — Salon recently spoke with ITPI research and policy director Shar Habibi. Our conversation is below and has been edited for length and clarity.

I think the general perception is that privatization/government outsourcing really kicked off under Reagan, so about 30 years ago. Is it still a problem today?

I think that 30-year time frame is correct in terms of when the idea really gained steam, but I would say, since the financial crisis in 2008, there have been a lot of cities and states that have had budget shortfalls and some financial stress, and private companies have been coming in and saying, "We can do this better, faster and cheaper; we can take over these services and run them for you." Unfortunately, there’s really a growing body of evidence that these claims are untrue and that public services that have been outsourced are not running better, faster and cheaper. What our report specifically looks at is how government outsourcing degrades jobs and takes what were once middle-class jobs that supported families and turns them into poverty-level jobs.

What did you find when you examined privatization/government outsourcing?

What this report really looked [at] was the effects of government outsourcing, at the local and state levels, on jobs and the impacts it has on the community and ultimately on the issue of income inequality. What we see is that ... when state or local government outsources, these jobs are no longer good, public-sector jobs that provide a decent wage and benefits, but instead become jobs for a contractor that pay very low wages and typically have very few or no benefits. And really what is kind of alarming about this is [that] outsourcing public services sets off a downward spiral in which reduced worker wages and benefits can hurt the local economy and the overall stability of middle- and working-class communities. By paying family-supporting wages and providing important benefits like health insurance and sick leave, governments have historically created what we’re calling "intentional ladders of opportunity" to allow workers and their families to reach the middle class. And this has been especially true for women and African-Americans, for whom the public sector has been a source of stable, middle-class careers. Unfortunately low-road government contracts reverse this dynamic. So while corporations rake in increasing profits through taxpayer dollars and while CEO compensation continues to soar, the examples in our report show that the workers employed by state and local government contractors receive those low wages and few benefits.

I can share a few examples from the report that I think illustrate this dynamic. There was a study in 2009 that looked at the effects of outsourcing on food services in K-12 public schools in the entire state of New Jersey, and what that researcher found was that the companies ... that take over this function cut workers’ wages on average by $4-$6 per-hour, following privatization. A lot of those workers completely lost their health-insurance benefits. And, in fact, at that time food service contractors had the highest level of employees and their children enrolled in the New Jersey family care program, which is the state’s Medicaid program — and that’s another aspect to this, that there are hidden costs to outsourcing that are not taken into consideration when state and local governments make that decision to outsource. When contractors slash wages and get rid of benefits, that means that those workers are newly eligible for some public assistance programs, so that’s an increase in another part of the budget.

I’ll give you another example from our report. In 2011, Michigan outsourced nursing assistant positions at a state-run home that serves veterans, and when they did that, the contractor significantly lowered wages and benefits for those nursing assistant positions. So nursing assistants working for the contractor were paid a starting wage of $8.50 per hour with no health and pension benefits. State nursing assistants who worked directly for the public home earned between $15 and $20 per hour with health benefits, with pension benefits. Unfortunately, the low compensation levels of the contractor nursing assistants resulted in high turnover among that staff, and ultimately a lot lower levels of reliability and quality of care.

How does the right's ongoing campaign against public-sector unions play into the push for greater privatization?

We have seen a lot of attacks on public-sector workers, on public-sector unions in recent years, and I think it’s important to point out that one of the reasons the public sector has been a good source of decent, family-supporting jobs is that workers in the public sector have had more bargaining power. The jobs in the public sector  — especially in the sectors that we’re talking about in our report — have traditionally been good jobs and better jobs than some of the private-sector counterparts. This is especially true for women and people of color; they have had more advancement opportunities from the bottom to mid-level jobs because there has been more bargaining power in the public-sector ... We lose that when we outsource these positions. We lose those decent jobs with benefits, and instead turn them into low-wage positions that don't have a road to advancement, and don’t have any sort of ladders of opportunity that existed in the public sector.

How big of a role do you think privatization plays in the larger phenomenon of growing inequality?

I think that it’s often overlooked, but it’s a sizable piece of the puzzle ... We don’t have exact numbers of how many workers this affects because state and local governments aren’t keeping good, systematic records of this (and fixing that is one of our recommendations in the report) but ... we do know on the federal level there are three times as many contract workers as civil-service workers and so we also know that there are about 14.5 million full-time, and almost 5 million part-time, state and local government workers. So if the proportion is anything near the federal ratio of contract-to-direct-government-worker, that’s millions of jobs that we’re talking about. There’s also some very rough estimates that total state and local procurement can be valued around $1-1.5 trillion — that’s a very crude estimate. But contracting anywhere approaching that fiscal magnitude means millions of jobs are being created through state and local contracting. So when states and local governments use low-road contractors that slash wages and benefits and create low-wage jobs, this is really a factor in growing income inequality and the disappearing middle class. It’s often overlooked, but it’s very significant.

Alongside the ways privatization makes it harder for people to experience social mobility, do you think it also presents issues in terms of accountability? Does it make it harder for people to know whom to blame when something goes wrong if it's technically not the government but a contractor who's at fault?

Yes, I think there is an issue of accountability. At the end of the day, government is ultimately accountable; but you get into situations where it’s difficult for the person who relies on the service to know whom to contact when there’s a problem. I’ll just give you one example that we’ve heard in a lot of school districts where they have outsourced school bus service, transportation service — a bus driver working for a contractor, they don’t know the route very well, they’ll repeatedly skip some stops or let a child off at the wrong area, and a parent will be very concerned and will call the school, and the school will say, "We’ll talk to the contractor." [The parents] will call the contractor, and the contractor will say, "We’ll talk to the school." So I think outsourcing definitely muddies this idea of accountability.

By Elias Isquith

Elias Isquith is a former Salon staff writer.

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