A-Exploring the Limits of Privatization-Ronald C. Moe 1987

Exploring the Limits of PrivatizationAuthor(s): Ronald C. MoeSource: Public Administration Review, Vol. 47, No. 6 (Nov. - Dec., 1987), pp. 453-460Published by: Wiley on behalf of the American Society for Public AdministrationStable URL: http://www.jstor.org/stable/975886 .Accessed: 22/07/2013 16:40

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453

Exploring the Limits of Privatization Ronald C. Moe, Congressional Research Service,

Library of Congress

When administrative historians some years hence study the 1980s, they are likely to conclude that "privatization" was the single most influential concept of the decade. Their studies will undoubtedly portray public administration as being profoundly altered by several ideas that collectively have become known as privatization. These same historians are also likely to conclude that public administration, as an intellectual field and profession, was in disarray and decline with relatively little capacity to direct its own destiny in the 1980s. All in all, the story will not provide pleasurable reading for public administrationists.

Privatization has its intellectual roots in free market economic theory, and its promoters have a world view that admits of few limitations. Public administration, as a field of study not sharing the perspective of the free market economists, first ignored, then resisted, the privatization challenge. The resistance has tended to take the form of defensive tactics to defeat specific pro- posals rather than viewing the challenge of privatization as an opportunity to develop a comprehensive theoretical position justifying the distinctive character of the public sector. This essay suggests that public administrators have been relatively minor players in the unfolding drama of privatization because they no longer have the capacity to draw upon their own theoretical and intellectual roots. These neglected roots of public administration are to be found in its public law tradition.

Public administrators know, or at least believe, that there are limits to privatization. But they have been unable to articulate those limits and thus have difficulty in defining what is unique to the public sector that makes it distinctive from the private sector. Exploring the limits of privatization should not be construed as tantamount to hostility toward the concept and use of privatization. All too often the relationship between the public and private sectors is viewed as a zero-sum game where increased prosperity for one sector must be achieved at the expense of the other. The reality of the modern nation state, however, is that the prosperity of the two sectors is inextricably linked. To understand the potential of privatization, therefore, it is first necessary to understand its limitations.

Privatization Movement

The Privatization Movement, once simply a group of scholarly outsiders, has come of age. This new status is evident from the seriousness assigned to privatization even by its critics. Although different people define privatization in different ways, the Movement itself is

NOVEMBER/DECEMBER 1987

* Privatization, as a concept and as a political movement, is profoundly altering the shape of the public sector in the United States. Distinctions between the public and private sectors are being blurred as the organizations for accomplishing public purposes are more and more frequently a deliberate blend of public and private characteristics. Throughout this transformation in the public sector, the discipline and profession most directly affected by privatization, public administration, has been remarkably passive, both unwilling and unable to raise critical questions respecting the limits, if any, to privatization. This essay suggests that the origins of this passivity lie in the reality that public administration has largely forsaken its intellectual roots-roots which are embedded in public law, not in economics or the social sciences. Only by returning to public law, which empha- sizes the distinctive character of the public and private sectors, will public administrators become influential players in the continuing debate over the future of the public sector.

held together by a shared belief that the public sector is too large and that many functions presently performed by government might be better assigned to private sector units, directly or indirectly, or left to the play of the market place. The private sector, it is argued, will perform these functions more efficiently and economically than they can be performed by the public sector.'

Implicit in the rhetoric of the Privatization Movement is the view that the public and private sectors are alike, both subject to the same set of economic incentives and disincentives. Many functions are interchangeable. Some promoters of privatization go so far as to argue that nearly all public sector activities are potentially amenable to being transferred to the private sector. The basis for assigning functions between the public and private sectors, therefore, should rest principally upon normative economic criteria. The key question becomes simply which sector performs the function more efficiently and economically? Problems that may arise in connection with legal status or organizational structure are considered of secondary interest and importance.

The prevailing orthodoxy is highlighted in Barry Bozeman's new book, All Organizations Are Public, where he argues that "sector blurring" is not only present and inevitable, but the desired way to plan for the future. While allowing for a modest amount of distinc- tiveness between government organizations and private organizations, the overwhelming contemporary reality


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454 PUBLIC ADMINISTRATION REVIEW

is the similarities between the public and private sectors of American life. The "publicness," to use Bozeman's term, of organizations should be viewed on a matrix with one objective of public policy being to provide the right mesh of the sectors to achieve the mission of the organization. In effect, Bozeman is asserting that the public and private sectors are alike in the essentials, differing only in the nonessentials. He concludes by lamenting that public administration theory equates public organizations with government organizations and is thereby a "puzzling and even disappointing approach to an organizational world...."

This essay takes issue with the view that the public and private sectors are alike in the essentials, differing only in the nonessentials. Quite the contrary is true, as Wallace Sayre is said to have observed in 1929.(3) The public and private sectors may be alike in the nonessentials, but it is in the essentials where they differ, and these distinctions cannot be glossed over or taken lightly.

While a certain fascination arises from the idea that the current complexity and ambiguity in organizational matters is an inevitable and desirable consequence of the complexity and ambiguity of life in general, this fascination is misplaced. A line must separate that which is public, or governmental (while other meanings of public are important, these terms are used here interchange- ably), and that which is private. The configuration of the line may vary over time and with circumstances, but it is a vital line nonetheless and the fundamental basis of this line is to be found in public law, not in economic or behavioral theories.

Promoters of privatization have been at the forefront of current efforts to mesh the public and private sectors, particularly at the federal level. One of the most inter- esting of these experiments at "privatization" has been the creation in 1985 of the Federal Assets Disposition Association (FADA). This corporation was created by private citizens under the laws of the State of Colorado with capital provided by the Federal Savings and Loan Insurance Corporation (FSLIC), an agency of the United States. A study of the first years of FADA follows shortly to facilitate inquiries as to the limits, if any, of privatization and the distinctions, if any, between the public and private sectors. Before that study of FADA, however, some historical and theoretical analysis is necessary.

Lessons from McCulloch v. Maryland

Privatization is correctly described as an international phenomenon. In nation after nation, from developed countries like Japan, Great Britain, and France to less developed countries like Sri Lanka and Turkey, the state is rapidly divesting itself of commercial enterprises and encouraging the development of competitive market

4 economies. Among the countries of the world, the United States

presents a unique situation. From the outset of the Republic, the government has relied on the private sec-

tor to provide commercial services and to own utilities. Exceptions to this rule are well known, but they are definitely exceptions. Thus, today, compared to most other nations, developed and less developed, relatively few candidates are available for full divestiture by the United States government.'

In the United States, particularly with respect to the federal government, the Constitution, statute law, and the political culture all tend to promote and reinforce the separate and distinct basis for the public governmental and private sectors. While separation is encouraged, this has not discouraged cooperation between the sectors. This cooperation, however, has rarely involved joint ownership ventures at the national level of government.

One important exception to this generalization occurred early in the history of the United States. This involved an instance of joint ownership of a corporation, and the battle that ensued led to results that still influence the American political system. The story of the second Bank of the United States is a case study in privatization; or more directly, a case study of how not to privatize a public function.

The second Bank of the United States was chartered by Act of Congress in 1816 for a 20-year period. The State of Maryland attempted to tax the operations of the Baltimore branch of the Bank, a decision challenged in the courts. The U.S. Supreme Court in the case of McCulloch v. Maryland (1819)16] attempted to define the status of the Bank. The ruling of the Court covered many issues, but the case is most famous for its dictum by Chief Justice John Marshall that the "power to tax is the power to destroy." The lesson: A sovereign cannot be taxed by a subordinate unit since to do so would permit another body to determine the fate of the sovereign.

The McCulloch case, more by implication than direct commentary, concerned issues beyond that of state taxation of the Bank. The chartering Act required that 20% of the stock be owned by the federal government while 800% was to be held in private hands. The Court considered the Bank to be an instrumentality of the sovereign, or agency of the United States, notwithstand- ing the fact that only 200/o of the stock subscription was held by the federal government. Thus, it was subse- quently assumed that if the federal government owned any portion of a corporate body, the entire body acquired the attributes of the sovereign.

The legal questions in the McCulloch case, while important, turned out to be secondary in U.S. history compared to the political questions. Andrew Jackson, reflecting the egalitarian character of American political culture, became an implacable enemy of the Bank and eventually succeeded in vanquishing the institution. The utility of the Bank in economic terms was generally recognized although some of its management practices resulted in financial difficulties for the Bank and alienated much of its natural constituency.

Jackson's opposition to the Bank was not based so much on a negative opinion of its usefulness but rather on the fact that its private owners enjoyed special privi-



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EXPLORING THE LIMITS OF PRIVATIZATION 455

leges resulting from the favored legal status of the Bank. Jackson waged war against the Bank on the grounds that it violated the American political culture. His arguments ultimately proved persuasive to the majority of Americans. For the remainder of the nineteenth century, the federal government did not own stock in any corporation. When it wanted a public function performed, it provided for the function through a regular government agency or by contract with another provider.

One lesson learned from the battle over the Bank was that there are limits, both constitutional and political, to privatization ventures.

Assigning Functions

If nothing else, the Privatization Movement must be given credit for forcing political and academic leaders to reopen questions long considered settled. The assignment of functions with a public character is one such area where the settled has again become unsettled. Insofar as there was, until recently, a consensus on assigning functions, it was that the assignment process should be handled on pragmatic, political grounds. It really did not make much difference, according to this view, if the federal government owned and operated some facility since, by adopting tried and true business methods, the activity would be managed equally or more efficiently than if privately owned and operated. Indeed, the Tennessee Valley Authority (TVA) was touted as a "yardstick" for private power companies to match. The privatizers came along to challenge this comfortable assumption by arguing that in empirical, economic terms most facilities, including power gen- erating facilities, could be run more economically by the private sector and, therefore, ought to be assigned to the private sector.

This challenge by free market economists highlighted the hidden reality that public administrators had seldom developed sophisticated or comprehensive criteria to assist lawmakers in deciding where best to assign a public function. Indeed, while they saluted Woodrow Wilson's essay, "The Study of Administration," they never really sought to answer his central concern: "It is the object of administrative study to discover, first, what government can properly and successfully do, and, secondly, how it can do these proper things with the utmost possible efficiency and at the least possible cost either of money or of energy."' As it stands now, the political actors, both executive and legislative, are assigning functions with a public character largely without criteria and with consequences that are expensive to both the public and private sectors.

Entering the Twilight Zone

Developing and applying criteria to be used in assignment of functions to the public and private sectors is not an easy task. The difficulty of the task is highlighted by the experience of the corporation mentioned in the first


section of this article, the Federal Assets Disposition Association (FADA). A few words of background are required to provide a context for its story.8

The Federal Home Loan Bank Board is a government agency headed by a three member, full-time board. Under this agency are three entities: the Federal Home Loan Bank system, the Federal Home Loan Mortgage Corporation ("Freddie Mac"), and the Federal Savings and Loan Insurance Corporation (FSLIC). The latter body is a wholly-owned government corporation oper- ating under provisions of the Government Corporation Control Act. It is a small agency under enormous pres- sure as the number of defaults among financially troubled savings and loan associations has increased. The FSLIC, being an agency of the United States, is an arm of the sovereign with all the privileges and immunities that inhere to this status.

All too often the relationship between the public and private sectors is viewed as a zero-sum game where increased prosperity for one sector must be achieved at the expense of the other. The reality of the modern nation state, however, is that the prosperity of the two sectors is inextricably linked.

Given the great stress placed upon FSLIC by the defaults across the country, the parent body, the Federal Home Loan Bank Board, decided to create another entity to act as the "agent" of the FSLIC in the actual disposition of assets of failing savings and loans. Citing a section of the National Housing Act of 1934, as amended,9 the FSLIC encouraged a group of private citizens to create the Federal Assets Disposition Associ- ation as a "private, Federally chartered savings and loan association" under the corporation laws of the State of Colorado. This corporation was capitalized at $25 million with the FSLIC owning 100%o of the stock and with the corporation being assisted by a substantial line of credit guaranteed by the FSLIC. The officers and employees of this corporation were not to be considered officers and employees of the United States, a status making possible the payment of high salaries (the Presi- dent of FADA receives $250,000 annually plus generous bonuses) to both officers and employees of the corporation. IO

The FADA performs asset management and disposition services for the FSLIC with a staff of professionals (approximately 200) who utilize a network of sub- contractors to conduct the actual disposition of the assets. Those assets total billions of dollars.

This brief description completed, the question remains: What is FADA? Where, precisely, is its enabling law?" Is it an agency of the United States subject to the laws applicable to such bodies? Or, is it, as claimed by FADA's President and Chairman of the Board, a private organization established under the laws of the State of Colorado with its headquarters being


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located in San Francisco, California? If it is the latter, is it subject to state taxation on the operations of the corporation and are the directors liable for their actions in the same manner as other corporations in Colorado? If the former categorization is correct, is FADA subject to all management acts (e.g., Freedom of Information Act, OMB legislative clearance) normally applicable to agencies unless specifically exempted by provisions in their enabling act? Are the expenditures of this corporation subject to review and disallowance by the U.S. General Accounting Office? Since FADA issues rules and regulations, does it come under the provisions of the Administrative Procedures Act? These questions are hardly points of trivial interest. The public law status of FADA is critical to determining its privileges and immunities, if such there be.

Is FADA "private" in its legal status? Can the corporation declare bankruptcy? Are the employees, their offices and records, protected by the privacy rulings based on the Fourth Amendment applicable to private citizens, or are the offices and records considered "public" and hence not protected to the same degree by the Privacy Act and the Fourth Amendment? Are the officers of FADA subject to federal conflict of interest laws? Do the state laws of Colorado determine the degree of liability of directors acting in their capacity as directors of the corporation?

The truth is that FADA is a "crypto-quasi-pseudo" entity living a precarious existence in the twilight zone between the public and private sectors. Studying the functions performed by FADA provides an insufficient basis for determining its character as a corporation. To an economist, FADA may look and even act for the most part as a private corporation, but functional analysis raises more questions than it answers. The con- fusion caused by FADA's ambiguous status is captured by the following statement submitted by FADA's Chair- man of the Board, Thomas Bomar, in a 1987 letter to Chairman Fernand St Germain of the House Banking, Finance and Urban Affairs Committee questioning certain provisions of a bill under consideration:

I am a director of FADA, serving with a group of other savings and loan associations' chief executive officers, after having been one of the organizers of FADA. For this reason, as well as AmeriFirst being a payer of substantial premium dollars to the Federal Savings and Loan Insurance Corporation, we have a major interest in your bill. .. It [FADA] was organized by a group of private individuals acting at the request of the FHLBB, but all the money put into it is FSLIC funds and Federal Home Loan Bank borrowings. This makes its status somewhat unique. (Emphasis added)'2

The status of FADA is unique only in the extremes to which the public and private sectors have been com- mingled. Numerous attempts have been made in recent years somehow to bridge in legal and organizational terms the public and private sectors. Many, if not most, such attempts encounter problems which weaken the capacity of the entity to achieve its assigned mission. Among the more spectacular recent failures to mesh the organizational elements of the public and private sectors was the Synthetic Fuels Corporation (SFC). This

corporation, launched with immense fanfare and little planning, was immediately in hot water with its high salaries, private sector executive habits, and an inability to relate its objectives to overall Administration energy policies. The life span of the Synthetic Fuels Corpora- tion was predictably short.

Being 100 percent owned by an agency of the United States, FADA has a heavy burden of proof to muster to be convincing in its argument that it is "private." Recalling the McCulloch case, where the Court reasoned that when the government owned any portion of an entity, the entire body became an instrumentality of the government, it is difficult not to conclude that FADA is an agency of the United States. In a purely political sense, it appears that FADA seeks to be private in its direction and interests but public in its rights and privileges.

The Distinctive Sovereign

As the case history of FADA suggests, the argument holds substance that in the American political and cul- tural setting the public and private sectors are funda- mentally different and ultimately distinctive in character. Thus, the criteria for assigning functions should take into consideration these fundamental distinctions. The single most important characteristic that separates the public and private sectors, particularly at the federal level, involves the concept of sovereignty. The federal government possesses the rights and immunities of the sovereign; organizations functioning in the private sector do not, or at least ought not, possess such rights and immunities.

The debate over the definition of sovereignty is hoary with age and is not likely to be resolved any time soon. Rather than attempt to construct a single, all- encompassing definition, it is sufficient for the purposes here to suggest certain attributes that inhere to a sovereign.

The first attribute generally assigned the sovereign is that it possesses the legitimate right to use coercion to enforce its will. The sovereign can coerce organizations, groups, and individuals to conform to the laws it makes. The sovereign may, for instance, tax citizens and corporations and impose penalties on those who resist pay- ing their taxes.

Only a sovereign may legitimately go to war with another sovereign. Wars against sovereigns by private parties occur, of course, but they are not considered as legitimate and are fought outside the accepted boun- daries of warfare.

Sovereigns can do no wrong. If a sovereign is to be preeminent over all others within a territorial jurisdic- tion, it cannot be subject to constraint or injury except by its permission. Thus, sovereigns are immune from suit except by their permission.

A sovereign is indivisible. A sovereign cannot assign its attributes to a private party and remain a sovereign. Similarly, a sovereign cannot share its powers with another body claiming sovereignty. The American Civil



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GIANCARLONota adhesivaAdd Information about sovereign:

The supreme, absolute, and uncontrollable power by which an independent state is governed and from which all specific political powers are derived; the intentional independence of a state, combined with the right and power of regulating its internal affairs without foreign interference.

Sovereignty is the power of a state to do everything necessary to govern itself, such as making, executing, and applying laws; imposing and collecting taxes; making war and peace; and forming treaties or engaging in commerce with foreign nations.

The individual states of the United States do not possess the powers of external sovereignty, such as the right to deport undesirable persons, but each does have certain attributes of internal sovereignty, such as the power to regulate the acquisition and transfer of property within its borders. The sovereignty of a state is determined with reference to the U.S. Constitution, which is the supreme law of the land land.


War was fought in large measure over conflicting theories of sovereignty with President Lincoln arguing for the concept of indivisible sovereignty, and the Southern states arguing for a system of dual sovereignty.

A sovereign may disavow debts but cannot go bank- rupt. One of the tests applied to determine whether or not an organizatiaon is part of the federal government is the test of whether or not its obligations are backed by the "full faith and credit of the Treasury." If they are, the organization is generally deemed to be governmental in character. The right to declare bankruptcy, that is to be cleared by law of financial obligations, is a personal or private right not inhering to the sovereign. Debate over the status of the Federal National Mortgage Association ("Fannie Mae"), a privately-owned corporation whose stock is traded on the New York Stock Exchange, revolves, in large measure, around the question of whether or not its notes are backed by the "full faith and credit of the Treasury."

The sovereign has the right to establish the rules for protection and transference of property, both public and private. Thus, the sovereign has the right to take private property, "eminent domain," to promote a public purpose. Sovereigns must provide the means of contract enforcement and other safeguards for the transaction of business.

Additional attributes may be ascribed to a sovereign, but the above mentioned attributes are generally viewed as fundamental. Since the idea of sovereignty is largely an abstraction, the actual implementation of the will of the sovereign is assigned to a government. The government passes the laws that permit the will of the sovereign to become a reality.

In any serious analysis of a proposal to assign the performance of a function to the public or the private sector, the first question should be: Does the performance of this function necessarily involve the powers properly reserved to the sovereign? Or, is the function largely private in character requiring none of the coercive powers of the sovereign? This question certainly prompted the 1986 resolution of the American Bar Association that the "privatization" of the operational responsibilities of prisons and jails "not proceed . . . until the complex constitutional, statutory, and con- tractual issues are satisfactorily developed and resolved.""3 Questions concerned with the relative "economic costs" for providing a given service appear to be secondary, or at least subsequent, to the resolution of more fundamental legal issues.

Additional Factors to Consider in Assigning Functions

Assuming for the moment that the performance of a function does not involve the use of sovereign powers, are there additional factors or variables that might reasonably lead lawmakers to assign a function to the public sector? If so, what are they, and should these variables take precedence over or be considered at a par with the economic factors?


With respect to the national level, the federal government may decide that a particular product be produced or service be provided by the government itself for reasons of national security. The Central Intelligence Agency, for instance, is not likely to choose to contract for cryptographic services. Similarly, U.S. embassies abroad may reject less costly local contractors in favor of U.S. personnel for security and accountability reasons. The Iran-Nicaragua hearings in the one- hundredth Congress highlighted problems associated with delegating sensitive national security operations to private parties. Privatization clearly has limits when national security factors are present.

The single most important characteristic that separates the public and private sectors, particularly at the federal level, involves the concept of sovereignty.

Another practical limitation on privatization may be concern for public safety. Legislation has been intro- duced in the one-hundredth Congress, for instance, to prevent the Department of Defense from contracting with a private commercial firm to guard and be responsible for disposing of chemical weapons. In support of the bill, the sponsor stated: "I dare say that Arkansas and all Americans will sleep better knowing that chemical weapons are being guarded by a trained Government security force rather than by the lowest commercial bidder.""4 Whether these concerns are well founded is not the issue; the point is simply to indicate that lawmakers feel obligated to consider public safety factors in the assignment process.

In a constitutional democracy, a major societal value is the idea that public officials should be held accountable for their actions to elected officials and through these officials to the public. When a public function is assigned to a private entity, usually through a contract, there is an inevitable weakening in the lines of political accountability. While a government agency is directly accountable to elected officials, a private entity under contract has only an indirect and tenuous relationship to elected officials. What occurs, in variant forms, is the emergence of "third-party government." In describing this phenomenon, Lester Salamon suggests that the federal government is rapidly losing much of its decision- making capacity to private for-profit and not-for-profit corporations.

What is involved here ... is not simply the contracting out of well- defined functions or the purchase of goods and services from outside suppliers. The characteristic feature of many of these new, or newly expanded tools of action is that they involve the sharing of a far more basic government function: the exercise of discretion over the spend ing of federal funds and the use of federal authority. They thus con- tinually place federal officials in the uncomfortable position of being responsible for the programs they do not really control.... Instead of a hierarchical relationship between the federal government and its agents, therefore, what exists in practice is a far more complex bargaining relationship in which the federal agency often has the weaker hand.'15


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Third-party government is not only dangerous to the political order, critics contend, it is corrosive of management supervision and personnel. Evidence of the risks involved with third-party management of government programs is provided by the tangled web of decision making between NASA and the Morton Thiokol Company in the wake of the Challenger disaster.

The assignment of functions must take into consideration the need for government to attract and retain officers and employees with sufficient knowledge and training to properly contract for, monitor, evaluate, and use highly technical products from the private sector. Government, in order to avoid being "captured" by contractors, must have a skilled cadre of technicians and managers. Much of the continuing controversy over Defense Department procurement practices involves the issue of whether the mission of the Department has been distorted to the extent that it sees its role as more to keep its private sector contractors financially healthy than to achieve some national policy objective set by Congress. Congress.

Possibly the most potent of the factors limiting the spread of privatization in the American context is the spectre of corruption. Historically, the federal government has been relatively free of the most blatant forms of financial corruption, although enough instances have arisen so as to indicate its potential for mischief. At the state and local levels, however, particularly the latter, history is very mixed, with some cities experiencing long periods of corrupt "machine rule." Corruption, when exposed, tends to result in "reform movements" and reform, more often than not, has meant assignment of services to units directly accountable to public officials, i.e., both provided and produced by government agencies and employees.

A high percentage of instances of corruption that have occurred over the two centuries of American administrative history has involved contracts with private providers to perform a public service. This is understandable because the letting of contracts generally involves substantial sums of money accompanied by considerable discretion on the part of contracting officers. The stakes for private parties are often high, and they may be willing to go to the edge of the law. Thus, the potential for corruption during the contract stage of the delivery process is considerable.

Case studies of many federalized services (e.g., prisons) suggest that often the shift from private to full public sector performance of a function (the first federal prison did not open until the 1890s) has been preceded by the exposure of some pattern of corruption.

The cumulative effect of these several limiting factors on the assignment of functions with a public character is considerable although difficult to pinpoint in any given case. Clearly, one factor may serve to constrain a proposal for privatizing under certain circumstances, yet not be influential under other circumstances. What is important to recognize, however, is that ultimately activities of a purely public and governmental character exist that may not be assigned or delegated to private parties. The nature of such activities may be in dispute

from time to time, but that a distinction exists between the public and private sectors appears beyond dispute. The debate today, whether it is recognized or not, is largely over the "right" configuration for the line between the public and private sectors.

Back to the Basics

The present twilight existence of FADA and similarly structured instrumentalities presents a challenge not merely to public administrators and attorneys but to the advocates of increased privatization as well. If the Privatization Movement continues to encourage the creation of more entities combining elements of the public and private sectors, it may find, to its discom- fort, that the critical arena for major policy and managerial decisions will shift (some argue that it already has shifted) from the political to the judicial arena. Thus, the inability of the Privatization Move- ment to come to grips with the need to integrate its economic theory with the complementary theories of public law and, by extension, public administration appears to be the Achilles Heel of privatization.

Supporters of the Privatization Movement view their role as advocacy of a cause and thus feel little need to consider the possible limitations to their arguments. The role of finding limitations to privatization is left to its opponents. This view, however, is shortsighted and car- ries risk. As long as the premises of privatization do not extend beyond the relatively narrow confines of the public choice and free market paradigm and are not challenged or modified by significant issues of public law, then its advocates admit to few recognizable limits to the efficacy of privatization. But the real world is not limited to economic premises.

The larger issue facing the American political economy as it enters the twenty-first century is the macro issue of functional placement and organizational management. Distinctive characteristics of the public and private sectors need to be recognized as a prerequisite to developing criteria for assigning functions between the sectors. If a set of working criteria currently existed for use by the executive branch and Congress, it is highly unlikely that a hybrid such as FADA would have been created. The principal winners in the FADA situation are likely to be the lawyers who will have to try to sort out the ambiguities in the courts when the litigation that will surely arise reaches them.

The Privatization Movement worldwide deserves much credit for altering the basic issues under debate in nation after nation. The strength of free market concepts, even in communist countries, is undeniable. Presently no evident reason exists to believe that the spread of privatization is likely to stop or that a rash of nationalizations is likely to return.

This political and intellectual success notwithstand- ing, it is time to move to a more sophisticated level. Simply being "anti-government" is not enough. What is needed now is a theory, or at least a set of criteria, to assist in assignment of functions to the appropriate sector. The best thing that could happen to the private sec-




tor is to have a first-class public sector, appropriately limited in size and functions, but fully capable of providing the legal, economic, and public goods infrastruc- ture that will permit the private sector to reach its full potential. This new challenge is surely worthy of the same spirit and dedication that brought forth the first stage of the new free market era in world politics.

Ronald C. Moe is a Specialist in American National Government with the Congressional Research Service of the Library of Congress. His writings include The Hoover Commissions Revisited (1982) and articles in such journals as PAR, Political Science Quarterly, and Presidential Studies Quarterly. He is a member of the National Academy of Public Administration and is currently working on a book on the President's veto power.

Notes

1. The literature promoting privatization is extensive and increasing at a seemingly geometric rate. Although the economic theory underlying much of the current interest in privatization may be traced to Adam Smith's Wealth of Nations (1776), it is only recently that free market economic theory has been "repack- aged" and adapted to the language of contemporary political discourse. With respect to the United States, three readings are particularly helpful in understanding the arguments put forth by promoters of privatization: Emanuel S. Savas, Privatizing the Public Sector: How to Shrink Government (Chatham, NJ: Chatham House, 1985); Stuart Butler, Privatizing Federal Spending: A Strategy to Eliminate the Budget Deficit (New York: Universe Books, 1985); and Steve H. Hanke, "Privatiza- tion: Theory, Evidence, and Implementation," Proceedings of the Academy of Political Science, vol. 35, no. 4 (1985), pp. 101-113.

Thus far, most criticism of privatization as a concept has been oriented toward protecting the role and functions of the civil service or disputing the claims for or results of privatization in a particular policy field. See, for instance: American Federation of State, County, and Municipal Employees, When Public Services Go Private: Not Always Better, Not Always Honest, There May Be a Better Way (Washington: AFSCME, 1987). Christopher K. Leman, "The Revolution of the Saints: The Ideology of Privat- ization and Its Consequences for the Public Lands," from Sell- ing the Federal Forests, Adrien E. Gamache, ed. (Seattle: Uni- versity of Washington, 1984). Robert Kuttner, "Going Private: The Dubious Case for Selling Off the State," The New Republic (May 29, 1983), pp. 29-33.

The fundamental premises underlying privatization have occa- sionally been discussed in public administration literature. See: Ted Kolderie, "The Two Different Concepts of Privatization," Public Administration Review, vol. 46 (July/August 1986), pp. 285-291. Paul Starr, "The Limits of Privatization," Proceedings of. the Academy of Political Science, vol. 36, no. 3 (1987), pp. 124-137. Ronald C. Moe, Privatization: An Overview From the Perspective of Public Administration, Congressional Research Service Report No. 86-134 (Washington: CRS, June 1986).

A number of "think tanks" are promoting privatization through books, periodicals, essays, and conferences. Preeminent in this effort is the work of the Heritage Foundation, CATO Institute, National Center for Policy Analysis, and the Citizens for a Sound Economy.

The National Academy of Public Administration is presently (1987) engaged in a study of new management principles and techniques required to administer a state with a high degree of service provision by nongovernmental bodies.


2. Barry Bozeman, All Organizations Are Public: Bridging Public and Private Organizational Theories (San Francisco: Jossey-Bass Publishers, 1987), pp. xi-xii.

3. The "law" attributed to Wallace Sayre is noted in Graham T. Allison, "Public and Private Management: Are They Funda- mentally Alike in All Unimportant Respects?" Proceedings for the Public Management Research Conference, November 19-20, 1979 (Washington: U.S. Office of Personnel Management, Feb- ruary 1980), pp. 27-38.

4. Madsen Pirie, Dismantling the State: The Theory and Practice of Privatization (Dallas: National Center for Policy Analysis, 1985). "Privatisation: Everybody's Doing It Differently," The Economist (December 21, 1985), pp. 71-86.

5. Given the historic policy of assigning commercial functions to the private sector, promoters of privatization have not been able to suggest many agencies or programs of the federal government that are appropriate candidates for privatization. After considerable effort, the Reagan Administration was able to include in its 1988 Budget to Congress only a fairly lean list of privatization initiatives. U.S. Executive Office of the President, Budget of the United States Government, Fiscal Year 1988 (Washington: U.S. Government Printing Office, 1987), pp. 2-44 to 2-51. For a discussion of federal government corporations with commercial type functions, and many without commercial functions, con- sult: Ronald C. Moe, Administering Public Functions at the Margin of Government: The Case of Federal Government Cor- porations, Congressional Research Service Report 83-236 (Washington: Congressional Research Service, 1983).

6. McCulloch v. Maryland, 17 U.S. (4 Whet.) 315 (1819). 7. Woodrow Wilson, "The Study of Administration," Political

Science Quarterly, vol. 2 (June 1887), p. 197. 8. The Federal Assets Disposition Association (FADA), while of

recent (1985) origin, is already a highly controversial entity. In 1987, its activities are under investigation by a congressional committee and the General Accounting Office, and it is under attack by its parent agency and elements of the constituency it was created to serve. See: Nina Easton and Robert Luke, "FSLIC in Turf War with Asset-Disposal Agency: Federal Asset Disposition Association Faces Wall of Resistance, Sources Say," American Banker (April 6, 1987), p. 1. Kathleen Day, "FADA Out of Favor With Many Realtors: Congress Asked to Review Policies of Federal Land Broker Agency Owned by FSLIC," Washington Post (July 12, 1987), p. H-i.

9. Section 406 of the National Housing Act (12 U.S.C. 1729(a)). FADA is often referred to as a "406 corporation."

10. The salary of the Chief Executive Officer of the Federal Assets Disposition Association is discussed in: U.S. General Account-



ing Office, Federal Pay: Executive Salaries in Government- Related Banking Organizations, GAO/GGD-87-68FS (Washing- ton: GAO, April 1987).

11. Arguably, the Federal Assets Disposition Association, a wholly- owned subsidiary of the Federal Savings and Loan Association, was established in contravention of provisions of the Govern- ment Corporation Control Act (31 U.S.C. 9102) which provide, in part: "An agency may establish or acquire a corporation to act as an agency only by or under a law of the United States specifically authorizing the action."

12. Letter of Thomas Bomar, Chairman of the Board of the Federal Assets Disposition Association, to Fernand J. St Germain, Chairman of the House Banking, Finance and Urban Affairs Committee. Attachment to Statement of Roslyn B. Payne, Presi- dent of FADA, before the Subcommittee on Financial Institu- tions Supervision, Regulation and Insurance, on H.R. 27. March 3, 1987. Statement distributed at hearings.

For a discussion of the liability of directors of government corporations, see: Dianne Hobbs, "Personal Liability of Directors of Federal Government Corporations," Case Western Reserve Law Review, vol. 30 (Summer 1980), pp. 733-779.

13. No element of the privatization program has generated more

debate and heat than the efforts to privatize prisons and corrections. The legal profession, as demonstrated by the 1986 Resolu- tion of the American Bar Association (United States Law Week [February 18, 19861, p. 2416), is largely opposed to privatizing prisons and corrections on constitutional and statutory grounds.

The premise underlying most legal criticisms of privatization of corrections is that a fundamental difference exists between "state action" and "private action" and this difference is to be found in law, not economic functions. "The Fifth and Four- teenth Amendments, which prohibit the government from deny- ing federal constitutional rights and which guarantee due process of law, apply to the acts of the state and federal governments, and not to the acts of private parties or entities." Ira Robbins, "Privatization of Corrections: Defining the Issues," Federal Bar News and Journal, vol. 33 (May/June 1986), p. 196. See Shelley v. Kraemer, 334 U.S. 1, 13 (1948); Civil Rights Cases, 109 U.S. 3, 11 (1883).

14. Statement of Senator David Pryor in support of S. 736. Congres- sional Record, daily edition (April 10, 1987), p. S5197.

15. Lester Salamon, "Rethinking Public Management: Third-Party Government and the Changing Forms of Government Action," Public Policy, vol. 29 (Summer 1981), p. 260.

I "This tapestry is the New Testament of Public Administration for America today." -Luther Gulick

-a ~~A CENTENNIAL HISTORY OF THE AMERICAN ADMINISTRATIVE STATE

A| Edited by RALPH CLARK CHANDLER, Western Michigan University

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THE CONTRIBUTORS: John A. Rohr, Camilla M. Stivers, Ralph Clark Chandler; Paul P. Van Orion F White, and James F Wolf; Riper; Nicholas Henry; Dwight N. Joseph Cayer; Jerry L. McCaf- Waldo; John A. Rohr; William L. fery; Aaron Wildavsky; Fred A. Kra- Morrow; Louis C. Gawthrop; Deil S. mer; Robert T. Golembiewski; Wright; James L. Sundquist; Gary Ferrel Heady; James W. Fesler; and L. Wamsley, Charles T. Goodsell, Howard E. McCurdy.

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Article Contentsp. 453p. 454p. 455p. 456p. 457p. 458p. 459p. 460

Issue Table of ContentsPublic Administration Review, Vol. 47, No. 6 (Nov. - Dec., 1987), pp. i-ii+445-522Volume Information [pp. 515-522]Front Matter [pp. i-ii]Keeping the Public Trust?Leadership Failures, the Distrusting Public, and Prospects of the Administrative State [pp. 445-452]

Privatization: Limits and ApplicationsExploring the Limits of Privatization [pp. 453-460]Privatization of Public Services: A Growing Threat to Constitutional Rights [pp. 461-467]Metapolicy Transition and Policy Implementation: New Federalism and Privatization [pp. 468-478]Influences on State Professional Licensure Policy [pp. 479-484]

Exploring the FieldCollective Bargaining and Public Sector Supervisors: A Trend toward Exclusion? [pp. 485-497]Nonmanagerial Performance Appraisal Practices in Large American Cities [pp. 498-504]

Book ReviewsReview: untitled [pp. 505]Quandaries and Virtues [pp. 505-506]Review: untitled [pp. 507]Organizational Structure and Innovation in Urban Police Departments [pp. 508-509]

TOPS: Those Other PublicationsTax Reform and the State and Local Sector [pp. 510-514]

Back Matter

Documents

A-Exploring the Limits of Privatization-Ronald C. Moe 1987