Solving Public Spending and Debt Crises with Privatization

Posted by PITHOCRATES - May 23rd, 2011

To Privatize or not to Privatize the NHS

Some want to start privatizing parts of the National Health Service (NHS).  Some don’t.  Some want to improve quality and cut costs.  Some don’t.  But as people live longer into retirement, there is no place for costs to go but up.  Especially when there is no competition (see Where lucre is still filthy posted 5/19/2011 on The Economist).

THE profit motive is alive and well at the Circle hospital outside Bath, in south-west England. The hospital was designed by the architect Norman Foster, and is run by Circle Healthcare, a firm part-owned by its employees and set up by Ali Parsa, a former banker at Goldman Sachs, in 2004. It treats a mixture of National Health Service and private patients. Corridors are wide and gleaming, operating theatres newly equipped. Doctors and nurses have more say in management decisions than in many English hospitals.

So a private, for-profit hospital is well run, clean and has new equipment.  Which implies that the run of the mill NHS hospital is bureaucratic, cramped, dirty and outdated.  Hmmm.  Based on this it would appear that the private, for-profit hospital is a better hospital than your run of the mill NHS hospital.  At least, from a patient’s viewpoint.  And who could argue?

Trade unionists and lobby groups are queuing up to denounce any expansion of the private sector’s role in health care.

So trade unionists and lobby groups are against cleanliness and modernity.  They prefer bureaucratic, cramped, dirty and outdated.  One can only presume so because of the money.  For it usually is.  Of course, they will deny this.  And say they are just looking out for what’s best for Britons.

To some foreign observers, this reticence about private involvement looks odd. There is ample international evidence that competition among private providers yields better results. For example, a report last year by America’s National Bureau of Economic Research found that increased competition in health care was correlated with improved financial and clinical outcomes; adding a rival hospital and instigating patient choice substantially increases the quality of management. As Nick Seddon, of the British think-tank Reform, points out, “It’s a fallacy to think you can choke off the profit motive without losing momentum and innovation.”

And the current debate somehow overlooks the fact that for-profit companies are already delivering many support services in health, education, prisons and other public services. Family doctors have been private operators since the foundation of the NHS in 1948. The profit motive has been making further steady advances in the state sector since Margaret Thatcher’s outsourcing campaign in the 1980s. Tony Blair let privately owned treatment centres provide specialist services within the NHS. His wider reforms were restricted by internal battles in the Labour Party; all the same, a recent report from the London School of Economics found that introducing competition among NHS hospitals in 2006 helped to reduce patient deaths.

The history appears to side with privatization.  Both in the UK.  And the USA.  That is if you’re measuring by the quality of patient care.  And by the number of people you prevent from dying.  Which is a rather important statistic in any hospital I would think.

Let’s take a closer look at this ‘not dying’ thing.  Suppose there is only one hospital serving an area.  And suppose that 5 out of every 10 patients that enter dies.  Now suppose a second hospital opens up.  Where only 1 out of every 10 patients that enter dies.  Which hospital would you want to go to?  I’m guessing the 1 out of 10 one.  Because that ‘not dying’ thing is pretty relevant when choosing a hospital.  And when more people do in this example, the ‘5 in 10’ hospital will have no choice but to improve.  To become a better hospital.  This is what competition does.  It makes everything better.  And it’s just not the UK and the USA seeing this.

Britain is unusual among rich democracies not in how much private involvement there is in its public services, but how little. Only 4% of acute-care beds are provided by private companies. In Germany, the proportion of hospitals run for profit (32%) overtook the number of publicly run ones (31%) two years ago (charitable and voluntary organisations account for the rest). The Spanish region of Valencia allows for-profit firms to run over 20% of its health-care services, with the sort of long-term deal British providers hanker for. New European democracies are experimenting with similar public-private mixes. Two-fifths of Slovak hospital provision is delivered by private operators.

It’s rather ironic.  The people who did so much to improve the life of the individual coming out of the Middle Ages is now among the least free nations when it comes to health care.  They’re talking about privatizing more health care to improve quality.  And cut costs.  Because the NHS, as all state monopolies do, is trending in the wrong way in areas of quality and costs.  The fact that there is a debate proves this.  Now, don’t get me wrong, the NHS is full of good people.  It’s not the people in the system.  It’s the system.  And the people managing the system.

But old bureaucracies are hard to reform.  People trust them.  Because they’re used to them.  Like a comfortable pair of filthy, worn slippers.  But people are living longer.  Consuming more health care in their retirement years.  Vastly increasing health care costs.  Which the NHS has to pay.  Either by more taxation (which can reduce economic activity, which will reduce tax receipts across the board).  Rationing services to make what they have cover more people.  Or by more deficit spending.  Borrow and spend for today.  Leaving a debt bomb for future generations to worry about.

Italy and Spain Circling the Drain?

And speaking of debt bombs, a couple more are about to go off in the European Union (see U.S. stocks plunge on European debt worries by the Associated Press posted 5/23/2011 on the Los Angeles Times).

Stocks plunged Monday after warnings about the finances of several European countries stoked fears that the region’s debt crisis is worsening. The euro dipped briefly to its lowest level against the dollar in two months…

Italy is the latest European country to be affected by the region’s widespread debt problems. Standard & Poor’s said Saturday that country was in danger of having its debt rating lowered if it could not reduce its public borrowing and improve economic growth.

Too much public sector spending has caught up to the Italians.  High taxation to support that spending is hindering economic growth.  And they’ve borrowed so much that people are starting to think that they won’t get their money back.  Making people that much more reluctant to loan (i.e., buy Italian bonds) them money again.

Spain’s public finances are also worrying investors. Spain’s ruling Socialist party was roundly defeated in local elections, raising concerns that political instability would keep that country from enforcing spending cuts. The Ibex 35 index on the Madrid stock market fell nearly 2 percent in midday trading.

The 10-year U.S. Treasury yield fell to 3.10 percent, its lowest level this year. Bond yields fall when prices go up, so the drop is a sign that investors are clamoring for the safety of long-term U.S. debt.

And the Spanish are in the same boat.  Even with their partial privatization of health care, there’s still just too much public spending.  And a political atmosphere that won’t take kindly to spending cuts.  Unemployment among the young and educated is high.  Close to 50%.  Making their prospects for future borrowing not that favorable either.  So they, like the Italians, will not be able to pay their bills one day.  Which will eventually bring about those spending cuts.  The hard way.

Greece too far gone to Save?

The big public sectors in the social democracies of the European Union (EU) are taking their toll.  Their costs are crippling some of their economies.  And it all started in Greece.  Who is still trying to dig themselves out of their debt hole (see Greece mulls deeper spending cuts as borrowing rates hit record by Derek Gatopoulos, Associated Press, posted 5/23/2011 on thestar.com).

Greece’s borrowing costs surged to another record Monday, as the crisis-hit country’s prime minister chaired emergency talks to deepen austerity measures beyond his own government’s term in office.

A Cabinet meeting began as yields rose above 17 per cent for Greek 10-year-bonds, hitting a record margin — or spread — over the benchmark German rate.

Greece suffered another bond downgrade late Friday from the Fitch ratings agency, lowering its investment ranking by three notches deeper into junk status. Prime Minister George Papandreou conceded over the weekend that plans to return to bond markets next year may not be achievable.

Junk status.  Wow.  That’s bad.  That means few people think they’ll get their money back if they loan any to Greece.  And according to Papandreou, no one will next year.

Greece’s economy is being kept afloat by €110 billion ($156.6 billion), in a 2010-2013 package of rescue loans from European countries and the International Monetary Fund.

But that rescue package does not cover all of Greece’s financing needs for 2012, and EU countries are demanding tougher cost-cutting action from Greece before considering offering another financial lifeline.

In return for the bailout, the government imposed a series of austerity measures, including pay cuts in the public sector, tax hikes and social security reforms, and is under strict supervision from the EU and IMF to ensure the country is meeting the conditions for the rescue loans.

And here we see why they have such a debt crisis in Greece.  High salary and benefits for a bloated public sector.  And state benefits that are too generous.  Things that are hard to cut.  As is evident by the requirement of another bailout.  And the demand by those doing the bailing for tougher cost-cutting.  Because what they’ve done so far isn’t enough.

In Vienna, top financial official Olli Rehn said Greece needed to take more steps “in the coming days and weeks” to convince other EU nations and lending institutions that it is serious about overcoming its huge monetary deficit.

He urged the crisis-hit national to urgently step up its ambitious privatization program. General elections are due in Greece in 2013.

And here again we come to that wonderful panacea.  Privatization.  For the EU countries with the greatest debt crisis are the ones with the least privatization.  Whereas the strongest economy in the EU, Germany, has quite a bit.  Even in the one area people fear most.  Health care.  Germany has more private hospitals than public ones.  So profit (i.e., lucre) isn’t a dirty word in Germany.  They have a strong economy.  And fiscal restraint.  Which is why Germany is doing a lot of the bailing in the EU.  Of course, they have experience rehabilitating financially weak nations.  They no doubt learned a lot when they reincorporated the former East Germany into a reunified Germany after the Cold War.

Ticking Debt Bombs

Public spending has grown in countries big and small.  And it is crippling countries big and small.  Privatization is a way to cut public spending.  But it doesn’t help win elections.  So it’s not easy to do.  People get set in their ways.  And once people grow up on generous state benefits, it’s hard to convince them that things will be better if they start paying for what they once got free.  So few try.  It’s easier to just keep promising more of the same.  And close your eyes to that ticking debt bomb.  Hoping that it will blow up later rather than sooner.  And that the people continue to enjoy their comfortable pair of filthy, worn slippers.  No matter how filthy and worn they get.

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