The Wall Street Journal Interactive Edition -- May 14,
1998

Market Economy Begins to Reach
Further Into Government, Society

By DAVID WESSEL and JOHN HARWOOD
Staff Reporters of THE WALL STREET JOURNAL

Like never before, the U.S. is unleashing the turbulent
forces of the market: competition and choice, prices and
profits.

Profit-making companies are invading areas once thought
the exclusive preserve of government. Roughly one in 20
federal inmates is now in a for-profit prison, and more
than one in eight community-hospital beds is in an
investor-owned hospital. Deregulation is shaking up
once-drowsy industries like electric utilities,
prompting a frantic scramble for dominance. Skilled
people in endeavors from singing to software find that,
like baseball's free agents, they can command
once-unimaginable salaries if they exploit the market.

The changes are found in unlikely
places. In the land of the
freeway, a privately owned stretch
of Route 91 in Southern California
charges a 60-cent toll at night
and $3.20 at rush hour to
discourage peak-hour travel. In
Kansas, the state hires private
contractors to find homes for
foster children, paying a fixed
per-child fee to provide an incentive for prompt
placement. Even the U.S. government is learning to play
the game: The Federal Aviation Administration took bids
to operate its payroll computers. Interestingly, the
Department of Agriculture beat IBM and two other
companies.

This march to the market confronts America with a
question that hasn't provoked serious debate in
generations: Is the market penetrating too deeply into
American life?

On a Roll

To even ask the question at this moment seems a heresy.
Capitalism is triumphant. Market forces have spread to
every corner of the globe. National boundaries seem to
be dissolving as goods and information move freely and
companies like Daimler-Benz and Chrysler, once the very
symbols of nationalism, merge. Efforts to chart a middle
course between the torpor of socialism and the
insecurity of U.S.-style capitalism have floundered; the
much-ballyhooed Asian model, for now, is discredited.

Yet here in the U.S., still the cutting edge of
capitalism, the early stirrings of backlash against the
market are in sight. They can be seen most clearly in
recent reactions to managed health care and
profit-minded hospitals. But they can be seen elsewhere,
too. As market forces push into new frontiers, Americans
wonder: Where should the line be drawn?

Consider the heated debate this spring in Lake County,
Fla., sprawling north and west of Orlando and struggling
to cope with a development boom that is turning farms
and citrus groves into subdivisions and mobile-home
parks. Between 1990 and 1997, the county's population
swelled by nearly 30% to 196,000.

Hire-a-Hose

Because local fire stations are overwhelmed, County
Commissioner Richard Swartz suggested that the county
hire the same for-profit company that already provides
ambulance service to run the fire department. About 30
of the company's 84 paramedics and emergency medical
technicians already are trained firefighters, more than
the fire department itself deploys. The efficiencies
were obvious, Mr. Swartz argued.

But the commissioner, who runs a bicycle shop, ran into
fierce resistance. "If the privatization of the fire
department is good, why don't we privatize the sheriff?
Or the county commission? Or the tax collector?" asked
John Gammon, leader of an association of mobile-home
residents who questioned the proposal. If the fire
department is privately run, said Mal LaShay, head of
the residents' organization at the affluent Plantation
development, "What does the county manager do? Does she
have control over them, and if so how?"

Foes ran ads exploiting concern over in-patient costs
using the local hospital that owns the ambulance company
as ammunition. "Think about how much one aspirin costs
you at a private hospital," read one. "Don't let YOUR
fire department go private!" Another ad pictured the
expensive home of the ambulance firm's top executive.

Fire Alarm

The firefighters' union spread the tale of Estero, a
small Florida community that hired Wackenhut Corp. to
run its fire department. After one of the new private
firefighters was killed in the line of duty last year,
leading the Occupational Safety and Health
Administration to cite the company for safety
violations, Estero severed its ties to the company and
resurrected its public fire department.

In the end, Mr. Swartz lost. The hospital that owns the
ambulance company decided the business wasn't worth the
brawl, and withdrew its bid. For now at least, that has
deprived Mr. Swartz of the only feasible candidate for
his privatization idea.

Lake County isn't an isolated example. Across the
country, the advance of market forces is being met with
pockets of resistance by consumers, opposition by some
businesses, second thoughts by government officials and
even some conservative intellectuals, and, in some
instances, downright failure of the market solution to
deliver on its promise.

"What I'm concerned about is the idolatry of the
market," says conservative intellectual William Bennett,
a former education secretary and author of "The Book of
Virtues." He worries particularly that the market for
popular music and movies with sexual or violent content
has a corrosive effect. "Unbridled capitalism ... may
not be a problem for production and for expansion of the
economic pie, but it's a problem for human beings. It's
a problem for ... the realm of values and human
relationships because it distorts things."

Public opposition is stiffest, not surprisingly, where
consumers perceive they would have to pay more if market
forces were unleashed. In New York, boisterous
opposition from protected tenants scuttled an aggressive
plan by state Republicans to sharply cut back rent
regulation of 1.1 million apartments. In California,
highways that charge higher rush-hour tolls are attacked
as "Lexus lanes" for the impatient affluent, turning the
poor into second-class drivers.

The market-friendly, Republican-controlled Congress has
responded to constituent fears that profit-conscious
health insurers may skimp on care. Last year, Congress
decreed that every new mother deserves 48 hours in the
hospital, 96 hours if she has a Caesarean. This year, it
is expected to approve a "patient bill of rights" that
would further fetter market-driven health care.

"Americans are willing to tolerate more insecurity than
people in other industrial nations, but there are still
limits to how much insecurity they will accept.
Elections and opinion polls demonstrate that while the
public does not want government to extend its reach,
neither does it want this rich country to abandon its
American-style safety net," Daniel Yergin and Joseph
Stanislaw write in their new book "The Commanding
Heights," which tracks the global embrace of the market
over the past two decades.

Business Balks

Sometimes it isn't consumers but business executives --
always more enamored of competition in concept than in
practice -- who resist the move to markets. The
Telecommunications Act of 1996, for instance, was
designed to provoke competition for telephone customers.
But as the SBC Communications-Ameritech announcement
shows, some companies would rather merge than fight.

The government's Health Care Financing Administration
learned just how resistant business can be when it tried
to harness market forces with an experiment in Denver.
As currently structured, Medicare pays any eligible
health-maintenance organization a flat fee -- roughly
95% of cost of the traditional fee-for-service insurance
-- for covering senior citizens. HCFA says that fee is
too high because HMOs tend to attract healthier senior
citizens. To save money, it sought to force HMOs in
Denver to submit bids for what they would charge to
provide a standard package of benefits. HCFA wanted to
use the bids to set new, lower rates.

But the HMOs, while professing support for the concept
of competitive bidding, objected to nearly all the
details and derailed the experiment in court. Then
Colorado Republican Sen. Ben Nighthorse Campbell, who
also says he supports competitive bidding in principle,
introduced legislation that prevented HCFA from spending
any money on the experiment. Former HCFA Administrator
Bruce Vladeck says: "I don't believe we could run a
purely competitive procurement process in a way that
would satisfy the HMOs because they are better off
without competition."

Congress subsequently established a 15-member commission
of outsiders to oversee seven Medicare experiments in
competitive pricing over the next few years.

Cleaning Up

Despite the occasional resistance, the move to markets
continues. The number of private businesses doing jobs
once the near-exclusive province of public employees is
still on the rise. Across the county, 73% of local
governments use private janitorial services and 54% use
private garbage collectors, up from 52% and 30%,
respectively, a decade ago, according to a survey by
Mercer Group Inc., an Atlanta consultant. About the only
audible complaints come from public-employee unions.

At the other end of the spectrum, some government
functions still are widely seen as unsuitable for
privatization. No one is proposing to privatize the
criminal courts (though a significant number of business
disputes are handled outside the public court system) or
to hire private companies to sail aircraft carriers.

But in between using private janitorial services and
hiring Wackenhut to run the Marines Corps are a host of
activities where relying more on market forces raises
vexing questions and emotional debate. Should the
government continue to ban the sale of human organs for
transplant? (Nobel laureate Gary Becker and a few other
economists say no.) Should the government proceed with a
plan to sell its uranium-enrichment operations, even
though the organization has been assigned the delicate
task of buying uranium from Russia? (President Clinton
says yes, though his former economic adviser Joseph
Stiglitz says "absolutely not!")

And, most controversial, is making a profit by serving
the poor a terrible notion that smacks of a Dickens
novel, or is it a welcome move towards efficiency?

"Private citizens should not have life or death power
over other private citizens when you're talking about
basic necessities," says Rep. Barney Frank, a
Massachusetts Democrat who speaks for many liberals on
the subject. "The financial motive should not be at work
when we're talking about benefits."

The Wal-Mart Argument

Mr. Stiglitz, who once pondered such questions in
academia and now serves as chief World Bank economist,
says that sweeping reaction against privatizing services
to the poor is wrong. "Wal-Mart makes profits off poor
people, but it makes them better off. It's providing
high quality and low price." Whether social services are
delivered by for-profit companies, nonprofit agencies or
the government is irrelevant, Mr. Stiglitz argues.
Rather, the key is whether the ultimate consumers can
choose between competing providers. It is competition,
not private ownership, that makes the market work well,
he says.

"Because you have the choice of going to the post
office, Federal Express has an incentive to treat you
well and serve you quickly," Mr. Stiglitz notes. "You
don't have a choice in applying for a welfare check.
Because you don't have a choice, you can be mistreated"
by either the government or a private company.

It was the hope of offering the Wal-Mart combination --
high quality, low price -- that led the state of Kansas
last year to seek private bidders for its costly and
cumbersome foster-care system. Contractors hired by the
state receive a fixed fee for placing children in foster
care and then in a permanent home. Privatization
initially won favorable reviews for producing speedier
resolution of cases that once languished on the desks of
overburdened government caseworkers.

But some child-welfare advocates lately have become
vocal about the danger that outside contractors will cut
corners to protect their bottom line rather than serve
troubled children. "Every single decision is based on
that capitated rate," complains social worker Sky
Westerlund, who heads the Kansas chapter of the National
Association of Social Workers. "Their question is: Can
we afford this?"

Financial pressure already has led the Salvation Army to
reduce its role in foster care to cut its financial
risk. The organization, which had bid to serve the
Wichita region in partnership with a Methodist
youth-services organization and a for-profit
managed-care company, concluded that fees from the state
weren't covering costs. "If we were making a product, we
could tweak the assembly line. But these are kids," says
Staci Warner, a Salvation Army spokeswoman.

In Utah, Republican Gov. Mike Leavitt balked at a
Kansas-style experiment. "It would be inappropriate and
wrong for me to delegate the power of decision making as
to whether a child stays in a home," he says. So, in
contrast to Kansas, state employees in Utah still
decide. Utah is, however, turning to private
organizations to recruit and train foster families. "I
hire good social workers," says Robin Arnold-Williams,
Utah's director of human services. "I don't hire people
who are good at marketing. We ought to do what
government does best."

Welfare Business

Under pressure from public-employee unions, the Clinton
administration last year rejected Texas's proposal to
hire big companies, such as Lockheed-Martin, to decide
whether applicants are eligible for Medicaid, food
stamps and welfare. It said turning an entire state's
welfare system over to private contractors was simply
too risky.

The state argued, to no avail, that companies wouldn't
profit by denying benefits and would have been penalized
for turning away eligible applicants.

The notion is far from dead. Florida is knocking on the
Clinton administration's door with a smaller-scale
version of the Texas plan, seeking federal approval to
experiment with private management of welfare and
Medicaid in five Florida counties, including Lake.

In other instances, resistance to reliance on the market
turns on whether the public interest coincides with the
private interest -- and if it doesn't, whether the
government can adequately regulate the private company.
"You can't just privatize and not think about conflict
of interest," Mr. Stiglitz says.

Trading Uranium

The pending sale of the U.S. government's
uranium-enrichment operations illustrates the
complexities. As long ago as 1969, President Nixon said
that "these facilities should be transferred to the
private sector, by sale, at such time as various
national interests will be served." In 1993, Congress
turned the agency into an independent government-owned
corporation, called U.S. Enrichment Corp. or USEC, and
instructed it to prepare to transfer ownership to
private investors. A privatization plan was approved by
President Clinton last year.

But back in 1969, it never occurred to Mr. Nixon that
the U.S., eager to get the makings of nuclear weapons
out of Russia, would want to buy bomb-grade uranium from
Russia -- and assign that delicate task to USEC.
Privatization critics see an obvious conflict: The
national security calls for buying as much Russian
uranium as quickly as possible. But since the Russian
imports are indistinguishable from the power-plant fuel
that USEC makes domestically, the company's interests
may lie in importing less.

A 1996 incident heightened the potential conflicts.
Hungry for cash, the Russians offered to sell more
uranium than originally planned. Although details are
disputed, USEC initially rejected the proposal. Sen.
Pete Domenici, a New Mexico Republican who heads an
energy appropriations subcommittee, accused USEC of
"acting directly contrary to the national-security
interests of the United States." Some White House
officials agreed. U.S. Enrichment relented, and contends
that government officials knew what it was doing all
along. But government oversight of the
soon-to-be-private company was intensified.

Toll-Gate

Even when they don't involve troublesome ethical or
national-security questions, private solutions sometimes
don't work as promised. The Dulles Greenway, a 14.2-mile
stretch of privately financed highway outside of
Washington, D.C., opened with fanfare in September 1995,
and immediately ran into difficulty because it didn't
draw enough cars at the $1.75 toll to meet interest
obligations.

Traffic picked up after the toll was slashed to $1 -- it
has since been raised to $1.15 -- but the project hasn't
paid interest to lenders since July 1996.

The project's woes have discouraged investors from
putting money into other private highways, says
privatization fan Joseph Giglio, a Northeastern
University business professor and former investment
banker. "Full-fledged privatization of transportation
facilities has largely been a failure in the United
States. The few successes have come only after years of
complicated negotiations and a sad history of aborted
projects," he says.

And then there is the thorny issue of what to do when
the market produces something that some or even many
Americans abhor. It is easy to justify laws against
pay-for-hire murder or the selling of unwanted children.
Some otherwise market-friendly conservatives are
prepared to ban or restrict Internet pornography or
excessively violent Hollywood productions.

Republican Sen. Dan Coats of Indiana has complained that
market forces simply won't allow lesser measures such as
voluntary rating systems to work. "There is no incentive
for pornographers to comply, and every economic
incentive not to," he reasons.

Sen. Phil Gramm, a Texas Republican, an economist and a
market enthusiast, disagrees. "There are real limits to
what you can tell Hollywood or television to do," he
says. "When my mother complains about all the sex on the
daytime shows, my suggestion to her is: (a) turn it off,
(b) don't buy the products of companies that advertise
it and (c) write 'em a letter and tell 'em what you're
doing."

But, he notes with a smirk, "She complains about it, but
she's watching it."

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