Private prisons and "faux privatization"

At Forbes, E.D. Kain provides a poignant analysis of why "faux privatization" of prisons really isn't privatization at all, but merely a way to transfer monopoly rents from public coffers to private ones. In a post last week he posited:

Here’s the problem with faux privatization: If all you do is take taxpayer money and give it to a private corporation to do a mandated public service like prison work, you’re not actually shrinking government.

That’s just a ruse. All you’re actually doing is giving a monopoly rent to a private contractor who then goes about the same business the state would have provided. This is often referred to as “cronyism”.


Some services the state provides can actually be privatized. Imagine if the state provided snow shoveling services for all sidewalks. You could reasonably privatize this by deciding that the state would no longer provide the service and people would need to either shovel their own sidewalk or pay somebody else to do it.

That’s real privatization. The government is out of the equation altogether.

This simply doesn’t work with prisons, for obvious reasons. No matter what, the state is responsible for locking people up. Thus any ‘privatization’ that occurs is simply the transfer of the provision of a government service (in this case, incarceration) to a private contractor. The contractor still operates with the full force of the law. In other words, it’s still government, just government-for-hire or for-profit government.

Profiting off of crime should make us uncomfortable, I think, especially when it involves pocketing taxpayer money.

There are times when it makes sense to use a private contractor. For instance, government buildings are typically built by private construction companies. It makes very little sense for governments to have their own construction outfit. But things like construction are services for the government rather than for the taxpayer. Furthermore, they’re temporary. A contractor building a prison is very different from a contractor actually running a prison. Incentives differ in important ways.

So when we talk about prison privatization, it’s important to remember that it’s not actually privatization at all. It’s just a way to transfer monopoly rents over to private companies.

Bingo! Unless you believe government  has no function at all, imprisoning convicted felons must be a primary one. Private-prison companies provide at best short-term savings but bring with them more long-term problems. That's true both when the state leases beds (or management of its facilities) long term, and when counties overbuild their jails based on suggestions or promises from this or that private prison contractor. In the end, the company is obligated for no longer than the contract stipulates. By comparison, the government can't walk away from its obligation to incarcerate, so as contract partners go, it has a lot more skin in the game.

What's notable, but unstated: Mr. Kain's appraisal applies pretty much across the board to the entire private-prison industry, which collectively runs hundreds of units across dozens of states and countries. Is there any private-prison contract that withstands the critique that it "transfer[s] monopoly rents to private companies"? With scarce few exceptions, the entire industry relies upon a business model subject to Mr. Kain's harsh judgment. The stance, "You should not exist" is not one subject to too much compromise.

Given that, how should we regard Mr. Kain's provocative suggestion? From the perspective of theoretical economic efficiency regarding how to deliver monopoly public goods - the way the gray-haired Keynesians taught me as an economics major back at UT-Austin many years ago - Kain's analysis is right on track. From a practical perspective, there are times when private companies allow states to expand capacity more rapidly than would otherwise be possible, as Texas did in 2007 with new treatment and diversion dollars. And from a political perspective, private prison companies give a lot of money to a lot of incumbents, not just governors, and by comparison there's no powerful, monied PAC advocating on behalf of sound economic theory in these matters, now is there?

"Faux privatization," it is, then.