The Ownership Society

THE OWNERSHIP SOCIETY….The New York Times writes today about the aftermath of the crash of California Charter Academy, a chain of publicly financed charter schools:

It had been a month since one of the nation’s largest charter school operators collapsed, leaving 6,000 students with no school to attend this fall. The businessman who used $100 million in state financing to build an empire of 60 mostly storefront schools had simply abandoned his headquarters as bankruptcy loomed, refusing to take phone calls. That left [Ken] Larson, a school superintendent whose district licensed dozens of the schools, to clean up the mess.

“Hysterical parents are calling us, swearing and shouting,” Mr. Larson said in an interview in Oro Grande last week. “People are walking off with assets all over the state. We’re absolutely sinking.”

Now, this is not an argument against charter schools. It’s a mess, to be sure, but plenty of public schools are a mess too. A few years ago, for example, the Compton School District was in such disastrous shape that the state finally took over control and didn’t hand it back to local authorities for a decade.

What it is, though, is a cautionary tale about the “ownership society.” The problem with privatizing public services is that, in the end, it’s the government that picks up the pieces if the private sector fails. If you invest a piece of your Social Security in private mutual funds and your mutual fund collapses when you’re 64, what happens? In theory, it’s just tough luck and you’re screwed, but we all know perfectly well that’s not what would really happen. As with the S&L disaster in the 80s or the LTCM collapse in the 90s, if enough people are affected the government will step in and make them whole.

There’s no way to avoid this kind of moral hazard completely, but you can reduce it considerably with fairly intrusive regulation. Unfortunately, the cure may be worse than the disease. To reduce the moral hazard sufficiently often requires a level of regulation that effectively converts a private enterprise into a de facto public enterprise. So what’s the point?

This is one of my biggest problems with Social Security privatization. It’s not really clear to me that it benefits anyone except the well-off to begin with, and I’m certain that if private returns collapsed the government would rush in to make up the shortfall anyway. That’s just the political reality. But if the government is essentially guaranteeing a minimum rate of return, why bother with privatization in the first place? Just let the feds fund Social Security out of current revenues the way they do now.

Privatization implies private sector levels of risk, but as the charter school story shows, the public is not willing to accept that kind of risk for things they think of as public services. They may like the idea of school choice, but when the charter schools fail it’s the local school district that has to put up with the outraged parents.

There’s no free lunch. The free market absolutists who are so enamored of privatization ought to know this. But they don’t seem to.