During the 1980s, a privatization movement began and accelerated in Europe, the former Soviet Union, and former Eastern Bloc countries. With privatization, public-sector resources are transferred to the private sector in the hope that the profit motive might spur higher product quality, better customer service, and lower costs. The privatization movement gained momentum during the 1990s in response to growing dissatisfaction with the low quality of many government services and increasing dissatisfaction with cost overruns at the federal, state, and local levels of government.

In the United States, the privatization movement has thus far failed to generate the type of enthusiasm seen in many foreign countries. Nevertheless, local municipalities across the United States are increasing the amount of private-sector contracting for snow removal, garbage collection, and transit services. Since the late 1980s, a majority of state and local governments have greatly increased the amount of public goods and services contracted out to private providers. At the federal level, the U.S. Postal Service, now a quasi-private monopoly, has long used private carriers for rural deliveries. Similarly, the Department of Health and Human Services uses private contractors to process Medicare claims. The privatization movement has clearly made dramatic inroads in countries throughout Europe and Latin America, where government control over the economy has traditionally been comprehensive. During the 1990s, European and Latin American governments greatly increased the pace at which previously nationalized companies have been returned to the private sector. Prominent examples include electrical utilities, railroads, telecommunications businesses, and steel companies.

The economic justification for privatization is that cheaper and better goods and services result as the profit motive entices firms to improve quality and cut costs. Public agencies and government employees that face competition from the private sector also display an encouraging tendency to improve performance and operating efficiency. In Chicago, for example, competitive bidding between private contractors and city cleanup and repair crews creates incentives for public employees and public managers to become more effective. In a similar situation, the city of Phoenix Public Works Department won back a number of garbage collection districts previously lost to private bidders after instituting innovations that lowered operating costs below that of private competitors. Several city and county administrators have reported similar cost savings as a result of privatizing public services. In Milwaukee, school vouchers are given to low-income children to select the private school of their choice. Although parental satisfaction with Milwaukee's school voucher program is high, it is too early to tell whether educational quality has risen for both private and public schoolchildren.

Opponents of privatization argue that the transfer of government programs to the private sector does not necessarily lead to smaller government and fewer budget deficits. Profit-seeking firms who become dependent on public financing lobby for an expansion of public-sector spending with as much vigor as public-sector employees. Evaluating the success of private firms in providing public goods is also made difficult by inadequate performance measures and lax performance monitoring. For example, after the federal government relinquished direct control for job training, under the Job Training Partnership Act, measures used to evaluate program quality appeared to show the program was a success. Fully two-thirds of adult trainees found jobs. These performance measures were biased, however, because training contractors boosted their measured performance by only selecting the most promising job applicants. Similarly, in 1963, the federal government gave millions of dollars to private firms to build and staff mental health centers without developing a process to track results. By the 1980s, many of these centers were converted to for-profit status and served only those able to pay, leaving the poor and indigent without adequate mental healthcare.

A final argument against privatization is that the goal of public services is not just to achieve a high level of efficiency but to provide benefits that private markets cannot or do not provide. A private firm may, for example, find it unprofitable to educate unruly children from single-parent homes with little commitment to education. For-profit hospitals may find it prohibitively expensive to offer emergency room care to violent teens from inner-city neighborhoods. As a result, questions of what and how much to privatize must focus on those instances where privatization can work best. Successful privatization also requires specific goals and measurement criteria that clearly define the public interest. Finally, successful privatization efforts depend upon a direct link between the achievement of recognized goals and the compensation of public-sector and private-sector managers.

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