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| Rebecca Blank |
Northwestern economist Rebecca Blank, currently serving as a member of the Council of Economic Advisers, laid out the pros and cons of the complex issue in a 1999 IPR Distinguished Public Policy Lecture she delivered in Evanston on February 22.
"Some believe that some form of regulation, with income supplements or vouchers, is as far as the government should go," Blank told the audience of 140 faculty, students, and members of the public. "A broader view argues for much greater government control over ownership and management‹in at least some areas."
Addressing the topic of "When Can Public Policy-makers Rely on Private Markets? The Effective Provision of Social Services," Blank offered four models of government involvement:
Public ownership and management (typically, prisons, schools, and welfare services).
Public ownership with contracts to the private sector to manage and operate the service (e.g., privatized prisons and job training programs).
Private market ownership with government regulation and funding to subsidize low-income clients (e.g., Section 8 housing vouchers or food stamps).
Private market ownership and operation with some government regulation (e.g., emission standards for dirty water or smoke).
Choosing among them, in Blank"s view, depends on the mix and severity of four types of market failure in the social service area: externalities, informational asymmetries, agency problems,
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| Rebecca Blank |
Externalities become an issue when the benefits or costs of a service to society are greater than those to any specific recipient. As an example, Blank cited poorly run prisons, which may impose higher costs on society if they increase the possibility of crime after release of an inmate.
Informational asymmetries. Some social services are hard to monitor, too complex, or infrequently purchased, as in the case of health procedures. This makes it difficult for a recipient to judge quality.
Agency problems may be created when the recipient is not the decision-maker (e.g., a school child or nursing home resident) and someone else may not maintain the person"s best interests.
Distribution may be a problem when private providers do not cater to market segments that cannot pay for services. People with limited incomes, for example, could be excluded from certain markets such as health care or education.
Upside of Government. Government may be the preferred provider when information on quality in the private sector is lacking, when it can attract high-quality labor (while still paying low wages), when its own inefficiencies are low, or when universal provision of services is sought. In some cases, even "inefficiencies" become a virtue if they enhance quality, as when a nurse devotes extra "caring" time to sitting and talking with patients. This, however, might be provided by private sector employees as well.
If universal provision of services is desired, government may be the preferred provider because it has greater control to assure that standards are met. Publicly operated schools with uniform curricula and standards are an example.
In the past, the government commanded market power when it provided a source of jobs to high-quality workers who had been excluded from the private market. This was especially true for women teachers and social workers. But Blank pointed out that as the labor market for women has opened up, government"s ability to hire these higher quality workers at low wages has lessened.
Downside of Government. Government becomes less attractive when its inefficiencies are large enough to offset benefits, even if it offers somewhat higher quality, Blank said. Problems of patronage and corruption can create inefficiencies, and poor public management can affect quality of services. Two other factors are of growing significance: an erosion of public trust, when government cannot attract any more caring employees than the private sector, and an erosion of market power, when government may not be able to hire committed high-quality workers at lower wages.
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| Penelope Peterson, Dean of the School of Education and Social Policy responds to Blank's remarks. Northwest- ern Economic Chair Joel Moykr (left) listens attentively. |
"Arguably, both of these things have happened in recent years, perhaps providing one reason for the increased interest in greater private provision of social services," Blank said.
Pros and Cons of Private Provision. Concerns about agency are prevalent in the debate over private provision of social services, said Blank, who believes there are "real questions about whether parents can make the best schooling decisions for their children, whether individuals can make appropriate long-term savings decisions for retirement, and whether long-term welfare recipients will seek economic self-sufficiency."
She also suggests there may be an efficiency/quality trade-off in providing social services. If quality cannot be observed or incorporated into the decision-maker"s behavior, there is danger that the private sector may produce services at lower price as well as lower quality. However, Blank thinks the private sector could develop observable quality measures over time. She also sees some circumstances in which private ownership and management can effectively balance both efficiency and quality concerns.
Summing Up. Though she made no recommendations for public versus private provision of social services, Blank offered some possible guidelines: "If quality is readily observable, the government can regulate private providers to assure that standards are met. But when standards are difficult to observe or when the recipient is not the decision-maker, government ownership may be preferable‹unless private market providers can credibly signal their quality level."
Having laid out her arguments on both sides of this issue, Blank concluded that "there are a number of areas where the direct government provision of social services is not obviously worse than, and‹along at least some dimensions‹may be better than more privatized arrangements."