Privatizing Wisconsin

By Felix Salmon
February 22, 2011
Gin and Tacos picked up on a particularly audacious section of the Wisconsin budget-repair bill yesterday: the governor can sell off any state-owned heating, cooling, and power plants he likes, at any price, to anybody he wants, without any kind of auction or bid-solicitation process, and such a sale would be defined as being in the best interest of the state and to comply with criteria for certifying such a transaction.

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Ed at Gin and Tacos picked up on a particularly audacious section of the Wisconsin budget-repair bill yesterday: the governor can sell off any state-owned heating, cooling, and power plants he likes, at any price, to anybody he wants, without any kind of auction or bid-solicitation process, and such a sale would be defined as being in the best interest of the state and to comply with criteria for certifying such a transaction.

Ed calls this “a highlight reel of all of the high-flying slam dunks of neo-Gilded Age corporatism: privatization, no-bid contracts, deregulation, and naked cronyism” — but as Yves Smith notes, the sad fact is that all this language is gratuitous: if you’re a state, there are essentially no legal restrictions on how to privatize state-owned industries and franchises if you’re so inclined.

It probably comes as little surprise to note that the most lucrative privatizations have generally been done by parties of the left: I’m thinking in particular of the UK’s auction of 3G licenses, which netted the Exchequer $35.4 billion at the height of the dot-com bubble.

Right-wing parties, by contrast, are more prone to thinking of privatization as something inherently good, and of monies flowing to the government as a kind of taxation which is inherently bad.

And then of course there’s the other spectrum, from clean to corrupt, which is orthogonal to the left-right spectrum — the more beholden the government is to special interests, the more likely those interests are to wind up with sweetheart deals. Sometimes, the special interests in question are public-sector unions, which find themselves able to negotiate the kind of final-salary defined-benefit pensions which are now threatening state solvency and municipal bond markets around the country. At other times, the special interests are large corporations looking to buy up lucrative monopolies on the cheap. In both cases, elected politicians are not the best people to ensure a good deal; non-partisan career civil servants tend to generate much better results.

The advantage of privatization in cases like the Chicago parking meters is that it removes the utility from political meddling — in that case, from local aldermen who would always agitate for parking rates well below the optimal level. (Relatedly, if you haven’t read it yet, go read Ed Glaeser’s Atlantic essay on the massive economic cost of urban zoning regulations.)

But in the case of Wisconsin-owned energy plants, such considerations don’t come into play. There’s no reason to believe that the private sector will run those plants in a way that is better for the public, and every reason to believe that they will run the plants in a way that is worse (ie, more expensive) for the public. If the state wants to cut such a deal in return for a one-time check, that check had better be enormous. And there’s absolutely no reason to believe that it will be.

(Crossposted at CJR)

Comments
16 comments so far

Newsweek begs to differ with your assertion: http://www.newsweek.com/2011/02/20/sale- of-the-century.html

Posted by Curmudgeon | Report as abusive

The Newsweek opinion is irresponsible, ideological wishful thinking First of all, selling assets that will be needed indefinitely to pay for operating expenses is the poster child for short term planning. It’s equivalent to mortgaging your day to day expenses, and isn’t sustainable for more than a few years. In almost every case where states are considering selling assets, it’s to generate a one-time bonanza that will cover a budget shortfall which will re-occur the following year. Eventually you will run out of things to sell.

Advocates of this kind of government liquidation like to group it into “privatization”, but it’s not the same. Privatization is spinning out services that be competitively bid on. Selling an office building is only privatization if the government signs a very short term lease and is willing to move when it needs to get better terms – which it doesn’t do, as they usually sign long term leases with the buyers.

“Privatizing” always increases the cost to government, as the new service provider must pay more for capital than the government, and also needs to make a profit. And the people running the new enterprise get paid a lot more than their counterparts in the government. Savings are always illusory (please don’t anyone respond with the fairy tale that private enterprise is more efficient than government – there really is little different between a giant corporation and the government – both are large beauracracies operated primarily for the benefit of those who manage them). If there was competition for the service that was “privatized”, you could make a case for selling the asset, but it’s just not that easy to build a new highway right next to an existing one.

The nation has been consuming far more than it produces for some time now. There are two ways of financing this overconsumption – borrowing the money, or selling assets. When you choose the latter, you dig a deep hole that will be very difficult to climb out of once you run out of assets to sell. If you borrow, you can always hope for inflation.

Posted by KenG_CA | Report as abusive

@KenG, I have to admit that it was a contrarian article, and a view that I probably don’t subscribe to. It did intrigue me, though, in that it laid on the table the fact that the US can sell assets. I especially liked the comparison to buyers from Japan purchasing a number of signature properties in the late 1980s. I remember those times, and how the general consensus was that the US was selling its lifeblood. As it turned out, Japan was buying at a market high, and nothing bad came of it.

While there are those who believe that we can go on indefinitely spending more than we have, I thought your last paragraph was an excellent summary of our fiscal situation. I might add that there are any number of worthy ways to spend our tax dollars, and it’s clear that we can’t spend on nearly all of them. This has to prompt a national debate on the role and limits of government. It will be interesting to see how it turns out.

Posted by Curmudgeon | Report as abusive

Felix, you just don’t understand.

Since government is incapable of running anything and whatever it does is bad (except for the obvious exceptions of running the military, buying weapons systems, providing agricultural subsidies to big business, ensuring that bankers don’t go bankrupt, and accepting campaign contributions), then it just goes to reason that giving the state’s assets away would be preferable to the state continuing to run them.

Since an auction would be time-consuming and would involve government employees who couldn’t figure out how to sell candy to a child profitably, then it makes sense just to call your buddies and have them give you a real fair-market price from a real, live investor person who knows how to value things.

Posted by ErnieD | Report as abusive

@Curmudgeon, I didn’t think you were buying that article, so I just addressed the article, instead of you (thanks for the excuse to jump on a soapbox).

While I don’t have problems with private parties selling assets to foreigners, I don’t like the idea of governments selling assets they have to rent back. There are some properties (like stadiums and arenas) that governments should sell (they should never be in that business in the first place), but selling office buildings that they will use for 50 years is not the most efficient way to pay for them.

I am in agreement with your comments about the need for debate on spending priorities, which is why I am watching with great interest our newly elected governor, Jerry Brown, who wants to force the issue by bringing the choice between cutting spending and raising taxes, to a vote. Most politicians only talk about those options, and hide behind yard sales to carry them through the next election.

Posted by KenG_CA | Report as abusive

Thanks, KenG. Spending cuts and tax increases are a part of it, but I think there’s more. There are many more worthy causes than any amount of spending can address (and mismanagement and fraud seem to inevitably play a significant part).

I think this gets down to defining the role of government in these competing causes, if any. What is the government role in schools, the poor, elderly, disabled, infrastructure, and so on? In the 1960s, for example, we believed a War on Poverty was winnable. It wasn’t, and now we have to ask what is the proper role and limits on managing poverty by the government.

Posted by Curmudgeon | Report as abusive

The Koch bros.(et al) don’t care much about anything but money and how to make more, therefore environmental considerations, employees and people are not high on the list.

In other words, just the kind of person a Republican will shake hands with. Those who stayed home in droves got the Government they didn’t vote for…

PS: Never pick the last flower…

http://www.nytimes.com/2011/02/22/us/22k och.html

http://blogs.forbes.com/rickungar/2011/0 2/18/koch-brothers-behind-wisconsin-effo rt-to-kill-public-unions/

http://www.msnbc.msn.com/id/26315908//vp  /41674668#41674668

Posted by hsvkitty | Report as abusive

WOW … Here is the agenda… Unions first, Koch right there on top as an “ally” that needs to be in the know and also the giveaways you point out in the article.

Nothing like a guy that speaks “for the taxpayer” as he said he was doing, whilst speaking to a group of business leaders who pay as little tax as possible or next to none…

http://www.youtube.com/watch?v=WBnSv3a6N h4&feature=player_embedded

Posted by hsvkitty | Report as abusive

There is a second part… There are *20* minutes of this… and Walker barely stops talking, he is so proud of himself and bragging.

http://wnymedia.net/buffalopundit/2011/0 2/buffalo-beast-poses-as-david-koch-call s-wi-gov.-walker/

Posted by hsvkitty | Report as abusive

Sorry if you aren’t interested, but this statement by a state economist on MPR is really interesting.

http://origin-minnesota.publicradio.org/ display/web/2011/02/23/wisconsin-unions- pin/

“As a state economist and policy analyst, I was surprised that no one asked me about this proposal. I analyzed it for its economic impact. If public employee salaries are cut (through increased withholdings as proposed) by enough to fill the $137 million budget gap, the resulting drop in consumer spending will lead to:

1) a loss of over 1,200 nongovernment jobs;
2) a loss of about $100 million in business sales statewide;
3) a loss of nearly $35 million in personal incomes of nongovernment employee households;
4) ironically, a loss of nearly $10 million in state tax revenues.”

– Robert Russell, economist and analyst, Madison.

Posted by hsvkitty | Report as abusive

The power plants are out of date and need to be upgraded.
The state cannot afford to upgrade them.
They are under investigation by the EPA so they hope to get rid of them and have a private business pick up the cost.

Posted by naryso | Report as abusive

Now that I’ve listened to the audio of Gov. Walker’s prank call with fake funder David Kock, I suspect his motives regarding the plants are not in the public interest.

Posted by Gseery | Report as abusive

fredric, the $1237 million was creted in the first place by tax cuts to special interest groups as one of the first things walker did in office. Osensibly to “create jobs’ these tax cust are unlikely to come remotely close to the job creation that the MPR economist interview said would be lost as a consequence of the public union wage cuts in wisconsin

Posted by wiscottie | Report as abusive

If anyone is interested, the Legislative Audit Bureau conducted an audit and found NO deficit. The deficit as “wiscottie” stated was created by Walker in the first 6 weeks of his “reign”…

As a public worker in Wisconsin, we had already agreed to the cuts he proposed and his answer back to us was NO. He would not accept that, it must also be accompanied by our collective bargaining rights.

We have one of the most solvent, well-managed retirement systems in the country. We share the opinion that we must contribute and share the load. But this is a load of crap…we won’t go down without a fight.

Posted by carebear10 | Report as abusive

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Posted by traducere daneza romana | Report as abusive
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