WASHINGTON, Nov. 25 (UPI) -- Amid great fanfare, the U.S. Senate last week finally passed the largest reorganization of the U.S. federal government since 1947, in which 38 different government agencies are to be combined in a Department of Homeland Security. Few think this will make much of a difference in practice -- after all, the provision of "homeland security" is to remain a public sector monopoly.
It is a curious comment on the inflexibility of the human mind that, after an era in which breaking up public sector monopolies has been enormously fashionable -- with both political parties in the United States, in Asia, Eastern Europe, Russia, Latin America and even France -- there still remain certain areas of the economy in which public sector monopoly is thought to be the natural way to run things, and the inefficiencies thereof are never properly examined.
Homeland security is a good example of this. It comprises a number of different functions, some of which, such as the identification and monitoring of terrorists or potential terrorists among the immigrant and visitor population, require the use of highly confidential information such as governments typically wish to keep to themselves. Yet other homeland security functions, notably visa processing and airport security, are routine operations that can most efficiently be performed by the private sector.
We have all had experience of the U.S. Post Office, most of us have had experience of the state vehicle licensing centers, and many of us have dealt with the Immigration and Naturalization Service. All three institutions are relatively pleasant and easy to deal with when sufficiently decentralized, in a rural area or outer suburb, but become extremely unpleasant and time consuming, with consequent huge loss of output to the economy as a whole (since they operate only within "business hours") in the big cities. As was demonstrated by the ease with which the Sept. 11, 2001, terrorists were able to enter the country and get driving licenses, the harassment by these institutions of their customers does not correlate with any particular efficiency in exercising their security functions.
Private sector institutions with similar functions have demonstrated time and again their ability to manage big city crowds; banks have installed ATMs, supermarkets have gone to 24 hour opening, and numerous businesses such as credit card companies have discovered the joys of answering customer queries over the Internet -- or even the telephone, an instrument which the INS, in particular, appears extremely reluctant to use to communicate with the general public.
The prison service indicates what can be accomplished by privatization. Twenty years ago, it was unthinkable for prisons to be run by the private sector. However, since the 1980s, Corrections Corporation of America and other private sector prison management companies have demonstrated that, for minimum-security and medium-security facilities, the private sector is highly competitive with the government as a prison manager (CCA is now the sixth-largest prison operator in the country, after Texas, California, the Federal Bureau of Prisons, New York and Florida.)
Only when very high security is required, for the most dangerous criminals, has prison management remained a public sector monopoly. The result of prison privatization has been a decrease in costs, that has allowed an increase in incarceration without costs escalating, and a corresponding decrease in crime -- the level of crime in New York is now approximately one-third that in London, because prison sentences in the United States are typically two to three times longer than in Britain.
Thus the legislation to nationalize airport security after the Sept. 11 attacks, while understandable in a moment of national shock, was a move in precisely the wrong direction, as has since been demonstrated by the appalling delays and cost overruns in getting the new security equipment in place, the staff trained, and the system as a whole in operation. After all, it has now been shown that airport security, which allowed the hijackers onto planes armed with box-cutters -- not previously thought of as effective weapons -- had only limited responsibility for the failure to block the attacks compared to the INS, which allowed the hijackers into the country on the basis of false visa applications, and the FBI, which failed to follow up on perfectly credible warnings from its Arizona office -- the INS and FBI of course both being public sector monopolies.
In any case, it is hardly surprising that airport security is ineffective, since it is operated by airports, which are themselves public sector monopolies, generally being owned by municipal special purpose corporations such as the Port Authority of New York and New Jersey. The failure to privatize airports, as has been done in Britain with BAA PLC, has led to the subsidization of unnecessary bureaucracy and unionization in their municipal owners, and their failure to capitalize on huge revenue opportunities from their captive customer base of travelers. This in turn has led to airport "landing fees" charged to airlines being generally too high, one of the principal sources of the perpetually sour economics of the airline industry.
If airports were relieved of the obligation to provide public sector sinecures, and to subsidize other municipal transportation boondoggles, and were encouraged to develop fully the retail potential of their facilities, then airlines using an airport would be regarded as providing the airport with a service, bringing herds of wealthy captive customers through the facility. With much higher retail profits, and much lower wage costs, airports would then pay landing fees to airlines, rather than the other way around. These landing fees, in turn, would offset the high fixed costs of providing a particular service. Since airlines suffer from high fixed costs, offset by almost 100 percent variable cost margins, both their absolute profitability and their financial stability would thereby be greatly improved.
Part 2 of this column will appear Tuesday.
(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
