Is it time to begin privatization?

The new economy

Posted: Friday, January 07, 2000

It won't be long before Juneau once again welcomes the state legislators to our fair city. If this year is like most, we'll see quite a bit of hot air and political posturing before much of anything gets done. As always, one of the most contentious issues will be the size and composition of the state budget.

This time the budget discussions will have an extra issue to consider: Privatization. Is it time to begin selling state-owned assets? In what areas would private business replace the state government?

The Legislature created the Privatization Commission last year to explore whether the state can save money by selling some assets and having some functions done the private sector. The idea is that competition and the profit motive will force the private sector to be efficient and thus save the state money.

Don't jump to the conclusion that privatization is an original idea. Several other states have been considering privatization of some of their governmental functions for some time now. Many states, for example, pay private firms to manage their prison systems, and some cities are experimenting with allowing private business to manage public schools.

But there is a fundamental difference between privatization in Alaska and most other states. Just as the booming national economy has resulted in a substantial fiscal surplus for the federal government, booming state economies have resulted in surpluses from most state governments as well. Why hasn't this happened in Alaska? Simple: We have no state income or sales taxes, so our revenues are virtually divorced from economic activity. When the economy grows in other states, people pay higher income and sales taxes so the states can afford the higher level of public service that the growing economy requires. This doesn't happen in Alaska because our revenues depend primarily on oil production and the price of oil.

What this means is that for most other states, budget issues are less pressing so the move towards privatization can be done carefully with a focus on increasing efficiency and the level of public service. In Alaska, our move towards privatization has been born out of desperation. We refuse to tax ourselves so we must do without the public goods and services we need - unless the private sector can provide those goods at a profit. We can't afford a world-class university system so we give land to the university and let them sell it. But giving land to the university is a one shot solution, at best. What is the next source of university revenue once it has sold the land?

The Alaskan approach to privatization reminds me of discussions that took place during the Reagan Administration. When it became apparent that ill-conceived fiscal policies had generated the largest peace time fiscal deficits in U.S. history, there was talk of selling the national parks and privatizing care of the poor. Congress and the public railed against the thought of selling the national parks, although significant concession leases were sold to private business.

And while most care of the poor remained in the hands of the government, thousands of people were released from hospitals and mental institutions in an effort to save money. Many people today trace the homeless problem to this measure. Talk of privatization became a background murmur after President Reagan raised taxes in 1986 and the deficit began to shrink.

Privatization of some activities now being done by the state government may be a good idea. It well could be that would be cheaper to ship Alaskan prisoners to jails in Arizona. It might be cheaper to train Alaskan nurses out of state and get the University out of this business entirely. We may even want to close some University satellite campuses and let private business operate vocational training programs in their place. And it is possible that the state does have land that should be sold to the private sector for development. But before we begin wholesale privatization, we need to overhaul the state tax system.

Until and unless we do that, the best we can hope from even a massive privatization program is a short term fix. Alaska has too long relied upon this sort of policy.

Bill Brown teaches economics at the University of Alaska Southeast. He can be reached at william.brown@uas.

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