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."