Privatizing Government Services

December 8, 2017 – Volume 27, Issue 43
Do business-run public services save taxpayers money? By Reed Karaim


Starting Small

In the early days of the United States, federal and state governments had fewer resources than they do today, and much of what are now regarded as government responsibilities were handled privately.

Education remained largely a private matter until the middle of the 19th century. Although the Massachusetts Colony passed a law in 1647 requiring towns to provide public education, it wasn't until the mid-1800s that the idea of public education began to take hold across most of the nation. Before that, education was often provided at home or through churches, private schools that catered to the wealthy or apprenticeship programs that focused on trades. Public education did not become compulsory in all 50 states until 1918.28

Many of the early nation's roads and bridges also were built by private companies. In some cases, streets and local roads were constructed and maintained by communities, with local citizens required to spend a certain amount of time each month working on them. But from the 1780s through the middle of the 19th century, a nation impatient for a better long-distance transportation system turned to private projects.29

The building spree began with bridges. Fifty-nine private toll bridge companies were chartered in the Northeast from 1786 to 1798. Private turnpikes, or toll roads, soon followed. The first such road, running 62 miles from Philadelphia to Lancaster, Pa., was completed in 1794. By 1810, 398 private turnpikes had been incorporated, mostly in the East. A smaller boom in private tolls would also occur later in the West.30

But at the end of the 19th century and in the first decades of the 20th century, public sentiment began to favor public ownership of roads and bridges. The rise of the Progressive movement, which sought to rein in big business and create greater social equality, expanded the role of government. Most toll roads closed or became part of state highway systems.31

By the 1920s, the transition to public ownership of highways and bridges was complete. “Throughout most of twentieth-century America, roads were widened and new bridges built almost exclusively when politicians appropriated the funds to have the work done,” wrote Henry Petroski, a professor of civil engineering and history at Duke University in North Carolina, in his history of America's transportation infrastructure, The Road Not Taken. 32

Era of Big Government

The Progressive era sparked expansion of the public sector. But the expansion was dwarfed by the explosive growth of the federal government in the 1930s under President Franklin D. Roosevelt's New Deal programs that aimed to help the economy recover from the Great Depression (1929–1939). Dams, public power systems, roads, bridges and public buildings were built with public funds, contributing to dramatic growth of federal responsibility and spending.33

One of the nation's largest public infrastructure projects, the Interstate Highway System, was initiated in the 1950s by President Dwight D. Eisenhower. As a young Army officer in 1919, Eisenhower had crossed the United States to promote the Army's Motor Transport Corps. The 3,200-mile trip from Washington to San Francisco took 62 days. Later, while serving as supreme commander of allied forces in Europe during World War II, Eisenhower was impressed by Germany's controlled-access, high-speed highway system, known as the autobahn. When elected president, he supported an effort to build a similar highway system in the United States, both as a matter of national defense and to improve cross-country transportation.34

In 1956, Eisenhower signed the Federal-Aid Highway Act, which authorized $25 billion for construction of a national Interstate Highway System. To pay for the massive project, the law increased the federal gasoline tax and put the money in a highway trust fund, which financed the federal government's 90 percent share of the highway system, with states paying the remaining costs.35

By the 1980s, when the system was completed, the United States had what was considered the world's best public highway system.

At the time, few people thought about turning over municipally owned utilities, such as water or power systems, to private companies. There were no private prisons or publicly funded, privately run charter schools. But as discontent with government grew in the late 1970s and early '80s, attitudes began to change.

Privatization Movement

Austrian economist Frederick von Hayek is considered the intellectual founder of the privatization movement. In his 1944 book The Road to Serfdom, he argued that government control of economic planning leads to tyranny. While Hayek's work continues to be popular with today's economic conservatives, it had little impact on public policy at the time.36

In the United States, Hayek's ideas were furthered by economist Milton Friedman, whose 1962 book Capitalism and Freedom characterized government as an inefficient and unresponsive public monopoly. Friedman believed privatizing government services would increase competition and improve performance.37 His ideas gained currency in conservative circles as discontent with the quality of public services in some cities led officials to begin experimenting with more privatization.

In 1973 Baruch College's Savas was working as a New York deputy city administrator when Mayor John Lindsay asked him to look into problems with clearing the streets after a major snowstorm. Savas’ examination led him to conclude that the city's sanitation department, which was responsible for street cleaning, would benefit from private competition.

Immigrants and their supporters demonstrate in New York City on Aug. 2, 2017 (Getty Images/Pacific Press/LightRocket/Erik McGregor)  
Immigrants and their supporters demonstrate in New York City on Aug. 2, 2017, holding up photos of families separated when relatives were detained in privately run immigrant detention centers. U.S. Immigration and Customs Enforcement hires private firms to detain immigrants awaiting hearings on their status. (Getty Images/Pacific Press/LightRocket/Erik McGregor)

Although Savas’ proposal failed in the face of opposition from public employees and members of the Lindsay administration, he became a foremost advocate of privatization, publishing more than a dozen books promoting the approach.

Savas says privatization first gained popularity at the municipal level. “One way it spread was starting with solid-waste management, garbage collection,” he says, an area where private contractors were often able to offer less-expensive bids. “In many cities, city councilmen were not full time, they were often businessmen,” he says, “so [they] were very prone to try to use competition in these sectors.”

Privatization, he adds, evolved from there. “The idea started spreading all over the country. It started with outsourcing [and] gradually expanded to the notion of selling off various government assets not being used, which made sense,” Savas says.

Reagan's election in 1980 gave privatization an advocate in the White House. Many in the privatization movement say Reagan was inspired by British Prime Minister Margaret Thatcher. “Thatcher had already started privatizing public enterprises,” explains the Reason Foundation's Poole, also an early U.S. advocate of privatization.

After being elected in 1979, Thatcher had moved to privatize many state-owned ventures, such as energy and steel companies, British Airways and automaker Jaguar — the kind of enterprises that had never been state-owned in the United States.38 The Reagan administration studied the feasibility of privatizing a range of government agencies, including the Postal Service, the air traffic control system, passenger railway Amtrak and other agencies.39

However, facing opposition in a Democratic-controlled Congress, the administration advanced only limited proposals. Reagan did privatize Conrail, the government-owned freight railroad, in 1987.40 But it would take a Democratic president, Bill Clinton, to advance the movement further.

Clinton was elected in 1992 promising to reinvent government and trim 100,000 workers from the federal workforce. He directed Vice President Al Gore to head a special commission to study making government more efficient. The results led to a wave of outsourcing of a wide range of government services to private contractors.41

“Clinton is the first president after World War II to decrease the number of federal employees,” says UCLA's Michaels. He also accelerated the sale of government assets.

“Ironically, there was more real privatization under the Clinton administration than the Reagan administration,” a Reason Foundation report concluded.42 Under Clinton, the federal government sold off the Elk Hills Naval Petroleum Reserve; the U.S. Enrichment Corp., which processed uranium for nuclear power plants; and part of the electromagnetic spectrum that could be used for broadcasting.43

Privatization accelerated further under Republican President George W. Bush, elected in 2000, particularly the outsourcing of military services during the wars in Afghanistan and Iraq. By 2011, the Defense Department had more private contract personnel in the two countries — at 155,000 — than military personnel, who numbered 145,000.44 (See sidebar, p. 1028.)

From 2000 to 2006, U.S. spending on private contractors — both military and civilian — more than doubled, to a record $412 billion in 2006, according to a report prepared in 2007 by the Democratic majority staff of the House Committee on Oversight and Government Reform. “Since 2000, spending on federal contracts has grown more than twice as fast as other discretionary federal spending,” said the report. “For the first time, the federal government now spends over 40 cents of every discretionary dollar on contracts with private companies.”45

The report raised concern about the growing number of government contracts being signed without competitive bidding. It also identified 187 federal contracts with private contractors over six years valued at $1.1 trillion that involved “significant waste, fraud, abuse or mismanagement.”46

In one area — airport security — the government took a decidedly different tack on privatization after the Sept. 11, 2001, terrorist attacks during Bush's first year in office. Within weeks, Congress crafted legislation creating the Transportation Security Administration, which replaced private airport security companies with federal agents at all U.S. airports. President Bush signed the bill into law on Nov. 19, 2001, creating a new federal agency that today has 60,000 employees, including 44,000 screening agents.47 (See sidebar, p. 1030.)

Privatization Backlash

Obama's election in 2008 brought a Democratic administration into office that, analysts say, was less enthusiastic about many aspects of privatization than previous administrations.48 While the new administration supported the continued expansion of charter schools, it began to promote “insourcing,” or using government personnel to perform work previously done by contractors. It also opposed having private companies run federal prisons.

Private prisons had become big business. In 2015, the most recent year for which statistics are available, roughly 8 percent of the 1.53 million people held in state and federal prisons were held in private facilities in 29 states and the federal prison system, an 83 percent jump from 1999, according to the Pew Research Center, a think tank in Washington.49 U.S. Immigration and Customs Enforcement also contracts with private companies to detain immigrants awaiting hearings on their status.

However, a decade of studies by the Justice Department, the American Civil Liberties Union and others had documented problems at private prisons that included more frequent assaults on guards and prisoners than in public prisons, civil rights abuses and medical neglect.50 Some state studies have also shown that private prisons do not save taxpayers money.51

Yet, a peer-reviewed 2014 study by economists at Temple University — commissioned by the corrections industry and published independently — found that, when all costs were taken into account, private state-run prisons did provide savings of between 14 and 58 percent over government-run state prisons.52

Nevertheless, after a government audit found that private prisons had more safety and security problems than government-run prisons, the Obama administration announced in August of 2016 that it would phase out the federal use of private prisons, an order that Trump would later rescind.53

During the Obama administration, the Defense Department also had begun to hire thousands of employees to replace contractors, part of what Defense Secretary Robert Gates termed an effort to shrink a bloated Pentagon bureaucracy that included too many private contractors.54

A backlash against privatization was also emerging in some city governments, fed by cases such as Chicago's parking meter privatization, which is expected to cost the city nearly $1 billion in lost revenue over the life of the contract but also included non-compete clauses that restricted the city's ability to build new parking garages or close streets for festivals.55

The bankruptcies of the companies that built the Indiana Toll Road, once held up as a model of a public-private partnership, and Texas State Highway 130, increased skepticism among some state officials. In 2014, 18 states considered legislation to limit state contracting, and three — Oregon, Nebraska and Maryland — passed laws imposing such restrictions, according to In the Public Interest.56

“The ideological fervor for privatization has ebbed,” John D. Donahue, an expert on privatization at Harvard's Kennedy School of Government, said that year.57

Analysts note, however, that many states and cities continued to turn to privatization. The election of Trump, a former real estate developer, in 2016 also brought a drastic shift in favor of private business at the top level of government.

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[28] “History of education in the United States,”, 2017,

[29] Daniel Klein and John Majewski, “Turnpikes and Toll Roads in Nineteenth-Century America,”,

[30] Ibid.

[31] Ibid.

[32] Henry Petroski, The Road Taken: The History and Future of America's Infrastructure (2016), p. 117.

[33] For background, see C. Hankin, “The Supreme Court and the New Deal,” Editorial Research Reports, 1935 (Vol. I), and B. W. Patch, “New Deal Aims and the Constitution,” Editorial Research Reports, 1936 (Vol. 2); both available at

[34] Petroski, op. cit., pp. 41–49.

[35] Ibid., p. 48.

[36] Donald Cohen, “The History of Privatization,” Talking Points Memo, 2016,

[37] Ibid.

[38] Richard Seymour, “A short history of privatisation in the UK: 1979–2012,” The Guardian, March 29, 2012,

[39] Robert Poole, “Ronald Reagan and the Privatization Revolution,” Reason Foundation, June 8, 2004,

[40] James Sterngold, “85% U.S. Stake in Conrail Sold for $1.6 Billion,” The New York Times, March 27, 1987,

[41] Cohen, “The History of Privatization,” op. cit.

[42] Poole, op. cit.

[43] Ibid.

[44] Moshe Schwartz and Joyprada Swain, “Department of Defense Contractors in Afghanistan and Iraq: Background and Analysis,” Congressional Research Service, May 13, 2011,

[45] “More Dollars Less Sense: Worsening Contracting Trends Under the Bush Administration,” U.S. House of Representatives, Committee on Oversight and Government Reform, Majority Staff, June 2007, p. i.

[46] Ibid.

[47] For background, see Martin Kady II, “Homeland Security,” CQ Researcher, Sept. 12, 2003, pp. 749–772; “TSA at a Glance,” Transportation Security Administration,

[48] Cohen, “The History of Privatization,” op. cit.

[49] Abigail Geiger, “U.S. private prison population has declined in recent years,” Pew Research Center, April 11, 2017,

[50] “Banking on Bondage: Private Prisons and Mass Incarceration,” American Civil Liberties Union, November 2011,; “Emerging Issues on Privatized Prisons,” Department of Justice, February 2001,; Brendan Fischer, “Violence, Abuse and Death at For-Profit Prisons: A GEO Group Rap Sheet,” PRWatch, Center for Media and Democracy, Sept. 26, 2013,

[51] Megan Mumford, Diane Whitmore Schanzenbach and Ryan Nunn, “The economics of private prisons,” Brookings Institution, Oct. 20, 2016,

[52] Simon Hakim and Erwin Blackstone, “Prison Break: A New Approach to Public Cost and Safety,” The Independent Institute, June 2014,

[53] Eileen Sullivan, “Obama administration to end use of private prisons,” PBS News Hour, Aug. 18, 2016,

[54] Matthew Weigelt, “Obama official hits campaign trail to sell insourcing,” Washington Technology, Jan. 12, 2010,; Greg Jaffe, “Gates: Cuts in Pentagon bureaucracy needed to help maintain military force,” The Washington Post, May 2010,

[55] Ball, op. cit.

[56] Ibid.

[57] Ibid.

Document APA Citation
Karaim, R. (2017, December 8). Privatizing government services. CQ researcher, 27, 1017-1040. Retrieved from
Document ID: cqresrre2017120803
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Dec. 08, 2017  Privatizing Government Services
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Consumer Protection and Product Liability
Cost of Education and School Funding
Education Policy
Federal Courts
Motor Traffic and Roads
Outsourcing and Immigration
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