How Government “Contracting Out” Drives Up Costs, Pushes Down Workers

Dave Johnson

When a government “contracts out” – privatizes – one of its services, that is supposed to save taxpayers money. A new study finds that privatization not only costs governments more than it saves, it has forced millions of people into lives of poverty.

According to the study by In The Public Interest called “Race to the Bottom: How Outsourcing Public Services Rewards Corporations and Punishes the Middle Class,” privatization of government services “contributes to the decline of the middle class and the rise in poverty-level jobs, thereby exacerbating growing economic inequality.”

Since the 1980s and 1990s mass-scale privatization of government services has pushed millions of people into a “race to the bottom” cycle of poverty and added considerable stress to local, state and federal budgets.

Here’s How It Works

Imagine this common situation: A city council decides to “save money” by contracting out its trash collection to a private company. The city lays off the people who were doing the job and the company takes over. Here’s what the city council hadn’t considered:

1) The city workers who are laid off lose their income and benefits, causing a loss of income taxes. Local businesses take a hit when the families have to cut their spending, which causes sales tax revenue to drop. Homes are foreclosed on and local home values drop, which cuts property tax revenue. The families have to turn to government “safety net” services, which government has to pay for. Local schools have an increase in below-poverty-level kids, which costs even more. And on it goes.

2) The workers hired by the contractor are paid at or near minimum wage, with few or no benefits, so they also end up dependent on “safety net” services. They aren’t spending at local businesses, can’t afford good housing and send impoverished kids to local schools. The result, between the laid-off public employees and the low-wage replacements, the locality is poorer in aggregate.

3) The contracting corporations make large profits, but often are not locally based and are able to shelter themselves from taxation.

4) Along with paying minimal wages, the company also “saves money” by cutting the quality of the services they provide.

Now, take this to a national scale. For decades cities, counties, states and the federal government have been “contracting out,” privatizing government services to “save money.” How many people have been pushed out of secure, good-paying, middle-class jobs with good benefits and pensions and into low-wage “temp” or independent contractor jobs with no benefits at all? How is this good for our country, our economy and most of all how is this good for We the People?

Here’s What It Does To People

Mary Sparrow is a former Milwaukee County custodial worker who was laid off after her job was privatized. In this recording of a news conference by In The Public Interest, she explains what it was like for her and co-workers. Mary Sparrow’s story starts at 18:18:

A New Study: Race to the Bottom

The In The Public Interest study asked the question, “As state and local governments outsource important public functions to for-profit and other private entities, what happens to the quality of life for the workers who provide these services, and the communities in which they live?”

What did they find? “Outsourcing public services sets off a downward spiral in which reduced worker wages and benefits can hurt the local economy and overall stability of middle and working class communities.”

Timothy Noah writes about this problem at MSNBC.com, in “How privatizing government hollowed out the middle class“:

Two decades ago, liberals and conservatives found common ground in the doctrine of government privatization. “It makes sense to put the delivery of many public services in private hands,” affirmed David Osborne and Ted Gaebler in their best-selling 1992 book, “Reinventing Government,” “if by doing so a government can get more effectiveness, efficiency, equity or accountability.” Vice President Al Gore headed up a “reinventing government” initiative that concluded, among other things, that the Occupational Safety and Health Administration should avoid “hiring thousands of new employees” to perform worksite inspections by giving the job to private-sector inspectors instead.

A generation later, the federal government employs more than three times as many contract workers as government workers, and state and local governments spend a combined $1.5 trillion on outsourcing. One result, according to Demos, a nonprofit public policy organization, is that the federal government effectively pays $12 or less to nearly two million contract workers – “more than the number of low-wage workers at Walmart and McDonalds combined.”

Read the study in full here. Then send that link to your local city council, county and state government officials.

Comments