The Incoming Privatization Assault

The Incoming Privatization Assault

Get ready for everything from private infrastructure and private prisons to voucherized schools and Medicaid.

April 24, 2017

This article appears in the Spring 2017 issue of The American Prospect magazine. Subscribe here

In The Art of the Deal, Donald Trump wrote about perhaps his first deal ever, made with his younger brother, Robert: “One day we were in the playroom of our house, building with blocks. I wanted to build a very tall building, but it turned out that I didn’t have enough blocks. I asked Robert if I could borrow some of his, and he said, ‘Okay, but you have to give them back when you’re done.’ I ended up using all of my blocks, and then all of his, and when I was done, I’d created a beautiful building. I liked it so much that I glued the whole thing together. And that was the end of Robert’s blocks.”

According to President Trump, Robert, now 67, likes to tell the “blocks” story because it revealed to him where Donald was headed. Now, we know where Donald was headed—to the White House, which comes with a much larger playroom, the most powerful in the world: the federal government of the United States.

But the “blocks” story tells us something more. Trump’s signature brand of wheeling and dealing fits neatly in the recent tradition of running government “like a business.” For decades, the corporate world has increasingly become the exemplar of good governance, and the market has come to stand for economic efficiency. These claims have fed into a trend of creeping privatization, which has weakened democratic public control over public goods, expanded corporate power, and widened economic and political inequality. Some of this trend has been driven by the desire to save public funds, and some of it by pure ideology.

Historically, government has often contracted out some tasks, such as highway construction and production of military materiel. There have been reasonable debates over what services, such as electricity, should be provided by government as opposed to regulated public utilities. But not until the late 1970s was there a movement to privatize basic public functions.

With the Trump presidency and Republican control of Congress, privatization will drastically accelerate—from privatized infrastructure and private prisons to voucherized schools and Medicaid or Medicare. Despite claims of greater efficiency, the reality is usually higher fees and costs, reduced services, lower wages, and loss of public control. The essence of a public service is cross-subsidy. Free or low-cost provision of water and sewer service, public transit, public education, and public parks tends to help lower-income people, based on the premise that these are basic public goods. Market principles, by contrast, abhor cross-subsidies. When public goods are redefined as market commodities, the system raises costs to users, especially those with lower incomes.

Take the “deal” at the center of Trump’s guarantee to “Make America Great Again,” his promise to invest $1 trillion in the country’s roads, bridges, and other infrastructure. While this represents only a fraction of the money estimated to be required, such an investment would be substantial, more than Barack Obama’s stimulus at the nadir of the Great Recession. Trump’s infrastructure plan is a pillar of his promises to grow the economy and create millions of new jobs—and for good reason: Infrastructure projects generate middle- and high-skill construction and engineering jobs, and inject money into local economies.

But what we know of the plan so far amounts to a stealth privatization of public infrastructure. Most of that $1 trillion would be private money, and investors would get a tax break to spend it. Based on a paper released during the election cycle by business professor and Trump adviser Peter Navarro and Wilbur Ross, Trump’s commerce secretary and billionaire private equity investor, the plan relies on a whopping 82 percent tax break to attract private capital to infrastructure projects. Private investors would front some of the cash to build, say, a new highway, and through the details of a complex “public-private partnership” they could influence policy regarding the highway. On top of the tax break, they would recoup their investment by collecting the highway’s toll revenue for decades.

The plan still needs legislative approval. But given the aversion of the Republican Congress to spending money on domestic needs, the final legislation will certainly lean heavily on private finance and privatized operations and maintenance.

Dave Tamburo/Creative Commons

Big Shoulders: Parking fees doubled in the first five years after Chicago's parking meters went private. 

In this model, there’s plenty to be wary of—just ask Chicago. In 2008, former Mayor Richard M. Daley signed a 75-year public-private partnership with a Morgan Stanley–led consortium to operate the city’s parking meters, which puts taxpayers on the hook for any city decision that eliminates parking spots. If Chicago throws a street fair or builds permanent bike lanes, the city must reimburse the consortium for lost revenue—for another 66 years. On top of that, downtown parking meter rates more than doubled in the five years after they were leased out.

Privatization’s consequences are widespread and well documented. In theory, public savings result from superior efficiencies. In practice, management is seldom better and often more vulnerable to sweetheart deals, and savings come mainly from cheaper pay to workers. Outsourced jobs typically offer lower wages, fewer benefits, and little to no protections. In the pursuit of profit, contractors often cut corners, lowering the quality of public services. Taxpayers lose access to basic public information. As more and more public services are contracted out, government begins losing the capacity to supervise the contractors, opening the door to corruption and contractor “lock-in.” Public money goes to contractor profits, investment returns, and executive salaries, rather than to investments needed in public health, education, infrastructure, and good jobs.

But privatization also cuts deeper, to the foundation of American democracy. It’s an assault on public control of public goods. The fine print in contracts often makes it harder to make democratic decisions about things we care about. Examples abound. Charter school management organizations often deem curriculum and lesson plans confidential private property, even though the materials were created with public dollars. Public-private partnerships often include non-compete clauses that protect profits for private investors and make it tougher to build other infrastructure nearby, like mass transit, to address climate change. Many private prison contracts contain “bed quotas” that all but guarantee 80, 90, and even 100 percent occupancy, boosting mass incarceration. Trump has already reversed President Obama’s decision to phase out use of private prisons for undocumented immigrants convicted of crimes—and the stocks of private prison companies soared.

While Trump comes to the presidency with no government experience, he’s surrounded himself with free-market ideologues, crony capitalists, and conservative think tanks bent on downsizing and outsourcing government. The former president of the Heritage Foundation, Edwin Feulner, who’s been advising Trump’s transition, once said, “Any government function that can be found in the yellow pages should be a candidate for privatization.” Billionaire Betsy DeVos, the new education secretary, is a staunch advocate for charter schools and voucher programs. Trump’s nominee to run the Centers for Medicare and Medicaid Services, Seema Verma, recently helped Iowa privatize its Medicaid system, which sputtered into crisis within months. Verma’s potential boss, Tom Price, the new secretary of health and human services, has been relentless about privatizing Medicare.

The entire range of public assets and services are potential targets. Since Election Day, Republican leaders have mentioned selling off public lands and privatizing the nation’s air traffic control system, nuclear waste storage, the Corporation for Public Broadcasting, and the Department of Veterans Affairs. The GOP-controlled Congress will surely redouble efforts to turn Social Security and Medicare benefits into individual vouchers.

For conservatives, having Trump at the helm is a trifecta of opportunity. First, there’s a lot of money to be made—about $7 trillion spent each year by federal, state, and local governments. Second, there’s a chance to severely weaken public-sector unions, a powerful pro-government force and a formidable political opponent in elections. Third, free-market ideologues see an opening to fundamentally redefine the role of government. In a democratic society, citizens have rights and responsibilities to each other. In a market society, people are individual consumers of a limited set of public services.

Roots of a Crusade

The year Trump was born, 1946, also kicked off the career of the best American promoter of free-market ideas. Milton Friedman joined the faculty that year at the University of Chicago, where he’d eventually become the foremost economist in the so-called “Chicago school” of economics. Friedman’s insight that government responsibility could be separated from government provision of services gave conservatives a fresh approach. This meant that privatization didn’t necessarily require cutting popular public services—instead they could be handed to private contractors.

Privatization advocates chipped away at government through the 1970s, but it wasn’t until the 1980s, with the election of Ronald Reagan as president, that privatization went mainstream. By 1987, Reagan’s budget plan included more privatization proposals than any president had ever recommended, including the sale of two federally owned airports, a railroad, four regional power agencies and their electricity-generating dams, and weather satellites. Stymied by a Democratic Congress, Reagan only succeeded in privatizing Conrail, the northeastern freight railroad taken over by the federal government from the bankrupt Penn Central. In 1988, a presidential commission developed a road map of federal functions to privatize, including low-income housing, federal loan programs, air traffic control, education vouchers, the Postal Service, prisons, Amtrak, Medicare, and urban mass transit. But congressional Democrats stood up again, thwarting the commission’s recommendations.

Fred Smith Jr. of the Competitive Enterprise Institute, a libertarian think tank, tore into Reagan for failing to develop an effective strategy to take on core Democratic constituencies. Smith argued that for a privatization proposal to “make it through the political process,” a “viable privatization coalition” must be created. Thus a top priority, Smith wrote, “should be to identify Democratic senators and representatives who might be persuaded to support privatization and convince them to take the lead on the issue.”

Smith’s ideas were inspired by Madsen Pirie, the architect of Margaret Thatcher’s privatization efforts across the pond, and the British-American Stuart Butler, then at the Heritage Foundation. The problem in the United States, as Butler saw it in a 1987 paper, was not a lack of determination, but that the Reagan administration had failed to change the underlying political dynamics that favored increased federal spending. “Conditions must be created in which the demand for government spending is diverted into the private sector,” he wrote. “Instead of having to say ‘no’ to constituencies,” through privatization “politicians can adopt a more palatable approach to cutting spending.”

Though the right continued to push privatization during the Bush and Clinton eras, Congress was able to block most major efforts at the national level. Much of the battle over privatization moved to state capitols and city halls. A well-established network of conservative think tanks, industry associations, investors, and corporate lobbyists—the State Policy Network, ALEC, and others—began pushing privatization projects and enabling legislation. Today, contractors, Wall Street, and multinational corporations vie for the estimated $1.5 trillion that state and local governments combined spend annually on outsourcing. Red-state politicians carry the water, but politicians facing tight budgets in blue regions increasingly have become game.

NOT Lanes: In Virginia, a deal with a private consortium punishes the state for increased carpooling, which costs the consortium toll revenues. Virginia deters HOV use by requiring three occupants; most states require two. 

Enter Trump, riding a wave of right-wing populism and hatred for nearly everything government. The Reagan administration had similarly broad goals but hadn’t built the political apparatus and congressional support to accomplish them. Trump has been handed both, and privatization will now be a key goal of federal policy.

Privatized Infrastructure

To say America has an infrastructure problem would be an understatement. The American Society of Civil Engineers estimates that our roads, bridges, water systems, and other infrastructure need $1.4 trillion in investment before 2025. State and local spending on roads, bridges, schools, water treatment plants, and other infrastructure is at a 30-year low. Federal spending has fallen by half over the past 35 years. Washington spends around six times more on the military than it does on infrastructure.

Public opposition to taxes—fueled by attacks on government—has left mayors and governors desperate for ways to make up this funding gap. This desperation has opened the door for private investors, construction giants, and global water companies who see potential for market share and stable returns. The centerpiece for this burgeoning infrastructure industry is the “public-private partnership,” which replaces public debt with private capital and privatizes operations and maintenance.

Traditionally, infrastructure projects are built with public debt raised through tax-exempt bonds sold to institutional investors like pension funds and mutual funds. The public pays off the debt through taxes or a combination of taxes, fares, and tolls. In a public-private partnership, investors front the cash to build—and often maintain and operate the resulting asset—allowing elected leaders to promise no new taxes. Private financing is considered “off–balance sheet debt,” because it doesn’t show up on a city’s or state’s debt load or impact their bond rating. But the debt is still real. The public pays it off through tolls, user fees, or transit fares, and sometimes through guaranteed annual payments (called “availability payments”) from general taxes. Investors promise better, cheaper, and faster, but they demand a healthy return—usually 10–25 percent—making the deals a costly and dangerous alternative to building things the old-fashioned way, with tax-exempt public debt. The deals are sold as benign “partnerships,” but without strong protections for the public, they can be anything but.

Many public-private partnerships, by design, limit or eliminate the public’s ability to make critical decisions. Through so-called “non-compete” clauses and compensation clauses often buried deep in contracts and long-term leases, investors reduce their risk exposure and lock in profit. Such clauses limit the public’s control over policy by adding additional costs to normal policy decisions. The examples border on absurd. A private consortium operating the Northwest Parkway toll road in Denver, Colorado, stopped the city in 2008 from making improvements to a nearby public road. The consortium cited contract language that prevented improvements that “might hurt the parkway financially” by providing an alternative route for travelers, thus potentially reducing toll revenue. In Virginia, a long-term contract with a multinational consortium penalizes the state for increased carpooling on the Capital Beltway’s high-occupancy express toll lanes. During floods in 2008, a state of emergency was declared and tolls were waived on the Indiana Toll Road—the private joint-venture running the road charged the state $447,000 for missed tolls.

Private investment increases dependence on tolls and user fees to pay debt service and ongoing operations and maintenance. Infrastructure costs money—there’s no free lunch—but private investment makes it nearly impossible to provide affordable access for everyone. The small Pennsylvania town of Coatesville, for example, saw the cost of water skyrocket after the city sold its water and wastewater systems to the publicly traded corporate giant American Water in 2001. Residents, nearly three-quarters of which are of color, saw their water bills increase 282 percent between then and 2015. In Chicago, where downtown parking meter rates have skyrocketed, not a cent of the $121.7 million the privatized meters took in last year went to the city. Instead, it went to the Morgan Stanley–led consortium, which is on pace to make back the $1.15 billion it paid to the city by 2020, leaving more than 60 years of meter revenue to go. The city of Bayonne, New Jersey, recently made headlines for its massive water-rate increase—nearly 28 percent since the city sold its system to a private equity firm in 2012. To sell the deal to residents, city officials promised a four-year rate freeze that never materialized. Public-private partnerships often shift the political burden in this way. Ratepayers and taxpayers foot the bill, but government agencies can say tolls, fares, and rates are private decisions.

Sometimes the decisions really are private. A public-private partnership recently fell through in Texas when the consortium that financed and built the State Highway 130 toll road didn’t hit its revenue projections and declared bankruptcy. The consortium, led by a Spanish developer, had long refused to release the traffic projections the project was based on, claiming that doing so could help its competitors.

United States Patent and Trademark Office/Public Domain

Based on a paper released during the election cycle by business professor and Trump adviser Peter Navarro and Wilbur Ross, Trump’s commerce secretary and billionaire private equity investor, pictured here, the plan relies on a whopping 82 percent tax break to attract private capital to infrastructure projects.

In a similar deal, the Indiana Toll Road, built by the public in the 1950s, was turned over to a Spanish-Australian joint venture in 2006 for 75 years in exchange for a $3.8 billion upfront payment to the state. Since then, traffic has dropped and toll rates have skyrocketed, so much so that the joint venture went bankrupt in 2014. Many blamed faulty traffic projections, but who would know? The actual projections remain proprietary and shielded from public view. In late February of this year, Trump added a key player in that deal, D.J. Gribbin, who worked for the Australian half of the joint venture at the time, as special assistant on infrastructure policy.

Trump has yet to release a formal infrastructure plan, but has tipped his hand by stocking his administration with public-private partnership enthusiasts. Beyond Navarro and Ross, the transition point person for transportation and infrastructure policy staff was former George W. Bush transportation official Martin Whitmer, who previously ran the “public-private ventures division” at the American Road & Transportation Builders Association. Shirley Ybarra, who led the Department of Transportation transition and presumably helped peg Elaine Chao for transportation secretary, is a former transportation policy analyst at the libertarian Reason Foundation and authored the first public-private partnership bill in the nation, Virginia’s Public-Private Transportation Act of 1995.

Chao, who is married to Senate Majority Leader Mitch McConnell, has remained relatively agnostic about the use of public-private partnerships, saying in her confirmation hearing when asked whether the Trump administration would be supportive of direct federal spending on transportation, “I believe the answer is yes.” But she also said, “In order to take full advantage of the estimated trillions in capital that equity firms, pension funds, and endowments can invest, [public-private] partnerships must be incentivized with a bold, new vision.” Straddling the line might have been the safest play, but as a former distinguished fellow at the Heritage Foundation, which promotes “private sector ownership, financing, operation, and maintenance of infrastructure and transportation services,” Chao will likely favor the private sector where the rubber meets the road.

The Prison-Industrial Complex

When it comes to criminal justice, Trump has no qualms with running government like a business. He told MSNBC’s Chris Matthews during the campaign, “I do think we can do a lot of privatizations [sic] and private prisons. It seems to work a lot better.”

Trump must’ve been relying on facts of the alternative variety. Today, private prison companies already hold contracts to operate hundreds of prisons, jails, and detention centers across the country. Studies show that these facilities increase recidivism and tend to be more violent than public facilities. In 2014, Idaho, not exactly a liberal state, ended a contract with the country’s largest private prison company, CoreCivic (formerly CCA), after the rate of assaults at the company’s prison was four times that of the other seven Idaho prisons combined. Prisoners said the prison was so violent it was nicknamed the “Gladiator School.” When the Obama Justice Department announced in August of last year that it would begin to phase out some of its private prison contracts, it concluded that private prisons “simply do not provide the same level of correctional services, programs, and resources; they do not save substantially on costs; and … they do not maintain the same level of safety and security.”

For decades, private prison companies have acted as an enabling force for both mass incarceration and the criminalization of immigration. As incarcerated and detained populations have swelled, the business of owning and operating prisons and jails to incarcerate them has grown into a multibillion-dollar industry. The industry spends millions of dollars each year influencing public officials, making it harder to break the country’s addiction to incarceration.

With Attorney General Jeff Sessions in the driver’s seat, the Justice Department is likely to take a step back from the mild reforms it enacted under the Obama administration. Sessions is a big fan of the war on drugs, which has been a major driver of mass incarceration. He also has a history of supporting private prisons, green-lighting them for use in Alabama when he was attorney general of his home state. Private prison companies have taken note. Shortly after the Justice Department’s August announcement, the country’s second-largest private prison company, GEO Group, hired several lobbyists, including two former Sessions aides. Investors have taken note, too. The day after Election Day, CoreCivic’s stock increased in value more than any other on the New York Stock Exchange. Trump’s “law and order” rhetoric sent the stock skyward, but so did his promise to deport millions of undocumented immigrants. The immigration detention system is highly privatized. Massive deportation would likely require help from private prison companies to expand old detention facilities or build new ones to hold immigrants awaiting deportation.

The Friedman Foundation for Educational Choice/Creative Commons

Milton Friedman’s insight that government responsibility could be separated from government provision of services gave conservatives a fresh approach.

Regardless of what Trump does, private prison industry leaders have long seen the writing on the wall as many states continue criminal justice reform efforts. As fewer people have been sent to prisons and jails in recent years, the industry has expanded beyond the business of incarceration. Since 2005, CoreCivic and GEO Group have collectively spent more than $680 million acquiring smaller companies that provide services such as residential re-entry (“halfway houses”) and electronic monitoring. Like private prisons, private halfway houses have been rife with scandal.

Private prison companies have also positioned themselves, in an effort to elude mounting backlash, as if they were in another line of business altogether. When CoreCivic changed its name from CCA in October, CEO Damon Hininger said it was about transforming the business to provide a “wider range of government solutions,” including real estate. In fact, several years ago, CoreCivic and GEO Group changed their corporate legal status to become Real Estate Investment Trusts, offering significant tax reductions. In 2015 alone, the companies used the REIT status and other avenues to avoid a combined $113 million in federal income taxes.

The War on the Poor

There may not be a better representative of Trump’s winner-takes-all attitude in Congress than former Georgia Republican Representative Tom Price. Last March, the former orthopedic surgeon announced his opposition to a proposal meant to reduce doctors’ financial incentives to prescribe expensive drugs through Medicare. A week later, he bought stock in six pharmaceutical companies that would benefit from the proposal’s defeat. The companies had lobbied Congress—and presumably Price—to stop the proposal, and they eventually won.

Price happens to now run the Health and Human Services Department under Trump, which means he’ll oversee core health-care entitlement programs like Medicaid and Medicare. He’s been an advocate for forcing “able-bodied” Medicaid recipients to meet work requirements and shifting Medicaid funding into state block grants. Shortly after the election, Price said he expected Congress to push forward with a Medicare overhaul—i.e., privatization via vouchers—within the first six to eight months of the Trump administration. A day after Trump nominated him to run HHS, Price released a new agenda that called for automatic across-the-board cuts to programs, including Medicare and Medicaid, and even Social Security.

The magical thinking of privatization has no more devastating consequences than when it’s applied to those living on the margins. Ask Iowa’s poor and disabled. Last spring, the state handed its Medicaid system to three big insurance companies. Under “managed care,” the insurance companies are paid a fixed amount to cover nearly 600,000 of Iowa’s most vulnerable. Managed care appears to be headed for disaster. Hospitals, nursing homes, and clinics say they’ve lost hundreds of thousands of dollars in expected reimbursements and spent countless hours chasing down payments. Even so, the insurance companies say they’re struggling too. In October, Iowa Republican Governor Terry Branstad, who spearheaded the privatization effort, saying it would save the state millions, handed the companies an additional $33.2 million, which triggered an extra $94.5 million in federal money. Apparently, that wasn’t enough. The companies expect themselves to have lost $450 million total in the first year of managed care. In February, an executive for one of the companies told investors not to worry—he’s optimistic about negotiating even more money from the state in the future.

The architect of Iowa’s managed-care system may soon be a familiar face nationwide. Seema Verma, Trump’s pick for administrator of the Centers for Medicare and Medicaid Services, has deep ties to the administration. In 2007, Verma helped Vice President Mike Pence create savings accounts for Medicaid recipients in Indiana, requiring poor and disabled people to make premium-like monthly payments into an account to receive coverage. Verma considers the payments a way to get people to take “personal responsibility” and encourage them to stay engaged with their health. State reports show thousands of people have been kicked off of coverage for missing payments, and many more are confused about how the program even works. As of November 2016, 397,000 people had enrolled in the program out of the 573,000 that are estimated to be eligible and would have been automatically covered without the payment requirement.

AP Photo/Charlie Litchfield, File

Correct this: Corrections Corporation of America (now CoreCivic) ran what inmates dubbed "Gladiator School" because of a violent atmosphere they say understaffing helped create at the Idaho Correctional Center. 

Trump considers Verma and Price “the dream team that will transform our healthcare system for the benefit of all Americans.” But in reality—not dreams—the health-care system, especially the social safety net, has long been transforming to benefit fewer and fewer Americans. Safety net programs are low-hanging fruit for privatization efforts, as they impact those who have little to no political power. The 1996 Personal Responsibility and Work Opportunity Act, Bill Clinton’s signature welfare overhaul, set the stage for social services privatization. Welfare reform centered on cost savings for programs and work requirements for beneficiaries, supercharging the privatization of services like Medicaid provision, foster care, food stamps, and child support. For example, shifting to block grants for services like cash assistance contributed to a shift in funds to private companies, as contractors promised states cost savings through privatization. The law also removed restrictions that had prohibited states from outsourcing welfare intake and eligibility in what The Washington Post described as perhaps “the largest transfers of public sector operations into private hands.”

The result: Fewer and fewer poor families actually receive the benefits they need. For example, since 2001, Oklahoma has given a contractor more than $70 million in TANF money to run relationship workshops, including classes to help couples find compatible “love styles,” as a way of encouraging marriage. In the 15 years the classes have been offered, the marriage rate has actually fallen. Contractors have flourished in the new social services environment. In 2000, Lockheed Martin disclosed that welfare-reform services was one of its two fastest-growing business lines at that time. JPMorgan Chase made more than half a billion dollars between 2004 and 2012 providing public assistance benefits.

In the first months of the Trump administration, more direct assaults on our democracy have gotten most of the attention. Privatization of the public realm is another core assault. But evidence is piling up about the true costs of privatization. Communities across the country have struggled against and won against private prison companies, billionaires funding school choice, multinational water corporations, and more. One front where many citizens can come together in the Trump era is in the struggle for what we own together.

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