In Praise of Privatization

by Daniel Hemel — Thursday, Mar. 8, 2018

Jon D. Michaels’s new book, Constitutional Coup: Privatization’s Threat to the American Republic, offers a creative and—in my view—persuasive defense of the modern administrative state. I agree with Michaels that the tripartite allocation of authority among agency leaders, civil servants, and federal courts endows the administrative state with a measure of democratic legitimacy while also protecting us from arbitrary and unaccountable exercises of power by particular individuals and factions. I also agree with Michaels that this division of administrative authority, while not precisely what the Framers foresaw, has nonetheless taken on a quasi-constitutional dimension and is broadly consistent with the Madisonian vision of “checks and balances between the different departments.” And I agree with the other participants in this symposium that Michaels has made his case concisely, eloquently, and enjoyably.

Yet while I largely share Michaels’s generally positive (and sometimes wistful) view of the 20th century administrative enterprise, I find myself disagreeing, often vehemently, with his claim that “privatization” poses an existential threat to that project. Privatization, as I see it, is both a necessary and welcome feature of our distinctly American welfare state—a feature that we ought to foster rather than fear. I would go a step further and argue that the modern administrative state—if it is to remain modern—must continue to accommodate processes of privatization while also allowing at times for its reversal. I agree with Michaels that it would be a threat to the American Republic if we pursued privatization to its maximum possible extent, but it is neither practicable nor desirable to do away with privatization entirely.

“Privatization” Defined

What exactly are we talking about when we talk about “privatization”? Michaels offers an answer on page 106 of his book:

I define privatization broadly. By my lights, privatization involves government reliance on private actors to carry out State responsibilities; government utilization of private tools or pathways to carry out State responsibilities; or government “marketization” of the bureaucracy, converting civil servants into effectively privatized, commercialized versions of their former selves and relying on them to carry out State responsibilities.

According to Michaels, “privatization” encompasses private standard-setting and accreditation, self-regulation by industry groups such as the Financial Industry Regulatory Authority (FINRA), the replacement of tenured civil servants with at-will employees, the “deputization” of individuals and firms to serve as “the government’s eyes and ears,” the solicitation of private funding by public institutions (Michaels calls this “patriotic philanthropy” and cites Mark Zuckerberg’s $100 million gift to the Newark public schools as an example), venture capital investment by government in early-stage enterprises, and social impact bonds (pp. 106-110). It also includes the federal government’s financial backstopping of banks, insurers, and carmakers during the Great Recession. “Though many might characterize the federal bailout as a form of nationalization—and therefore as the converse of privatization,” Michaels writes, “I see no such reason to treat nationalization as categorically different from rather than as an extension of today’s broader privatization agenda” (p. 110). What all the items on this “dizzyingly eclectic list” have in common, according to Michaels, is that they “rely on the participation of private actors or their functional equivalents . . . to carry out State policymaking or policy-implementing responsibilities,” “vest discretionary authority in private actors . . . at the expense of civil servants,” and/or “shift the physical locus of State power such that it is logistically and legally more difficult for the rest of civil society to participate meaningfully in policy development and execution” (pp. 110-111).

And all of this amounts, in Michaels’s view, to a “constitutional calamity” (p. 11). According to Michaels, “the more privatization is allowed to continue apace without muscular constitutional pushback, the harder it will be for the courts to take late-arriving challenges seriously” (p. 12). At the end of the day, “we will have hollowed out the government sector” and “we’ll risk altogether the State’s sovereign, democratic mission” (p. 12). To save us from this disaster, Michaels issues a rousing call to arms: It’s “imperative,” he says, “to reverse course now: to ‘insource’ State responsibilities that have long been privatized” and “to redeem the constitutionally legitimating project of the administrative separation of powers” (p. 13).

“Privatization” Defended

What would such an “insourced” state look like? The answer depends on how we define “State responsibilities.” And unless we adopt a cramped conception of what the State ought to do, it is very hard to see how the State could do it all alone.

Start with health care. I believe—and I expect that Michaels might agree—that the government is responsible for ensuring that the elderly, indigent, and disabled have access to adequate and affordable medical treatment. But does that mean that every Medicare and Medicaid beneficiary must be treated at a government facility? Even advocates for single-payer health insurance acknowledge that charity hospitals (and perhaps for-profit hospitals as well) have an important role to play in our medical ecosystem. And from the outset, Medicare, Medicaid, and the Federal Employee Health Benefit Program have been administered in large part by non-governmental Blue Cross and Blue Shield companies. The non-governmental administrators of those hospitals and health plans inevitably make a range of choices about the availability and duration of care. These decisions qualify as “policymaking,” “policy-implementing,” and/or exercises of “discretionary authority” on virtually any definition of those terms.

Or consider higher education. Many people—including maybe Michaels—would say that the government is responsible for creating opportunities for talented students from underprivileged backgrounds to pursue postsecondary degrees. Historically, the federal government has fulfilled this responsibility through land grants to public and private universities, scholarships, and federally subsidized student loans, among other measures. Almost unarguably, the administrators of the colleges and universities that rely on federal financing of various sorts are engaged in “policymaking, “policy-implementing,” and exercise of “discretionary authority.” But does that mean that Pell grants and federal student loans for attendance at private universities like my own are problematic in a constitutional or quasi-constitutional sense? I would argue instead that we—and by “we” I mean private universities that carry out public responsibilities—are among the American Republic’s great strengths, as we provide a counterweight to the political and market institutions that otherwise would dominate public debates.

Or housing. Let’s say we think the State is responsible for guaranteeing that all individuals have access to safe, adequate, and affordable places to live. (I do think that, and I imagine Michaels might too.) Does it follow that Low-Income Housing Tax Credits and Section 8 Housing Choice Vouchers, which often go toward subsidizing private developers and landlords in service of this overarching public responsibility, stand at odds with democratic values? Again, it’s hard to see how, even though landlords set policies ranging from rules on pets to procedures for rent payment (and these discretionary landlord-set policies are often much more relevant to the day-to-day lives of affected individuals than anything that goes on in Washington).

Perhaps Michaels would say that this isn’t the sort of “privatization” he is talking about. But how is it different? “Privatization,” as he characterizes it, encompasses a wide swath of relatively uncontroversial practices: the nongovernmental National Academy of Medicine’s involvement in the setting of nutritional standards, the self-regulation of the legal profession by State Bars, the reliance on neighborhood watch associations to keep communities safe, and the backstopping of private banks by the Federal Deposit Insurance Corporation all would seem to fall within his definition. If Mark Zuckerberg’s $100 million gift to the Newark Public Schools so qualifies, then isn’t every large restricted gift to a public university (including Michaels’s own UCLA) an instance of “patriotic philanthropy” that ought to cause concern? That seems like both a logical implication of the argument as well as a reductio ad absurdum.

Indeed, it’s difficult to draw any principled distinction between the sort of “privatization” that worries Michaels and the decades-old practices that worry most of us not at all. Consider two financial products: automobile insurance and retirement annuities. In the former case, state governments mandate that motorists purchase it but the institutions that provide it are almost all private. In the latter case, the federal government automatically enrolls individuals in an annuity plan and administers most aspects of the program. (We call this Social Security.) I know of very few people on either side of the ideological spectrum who think that government-mandated, privately-provided car insurance is a serious threat to the Republic. But it’s hard to distinguish this from the privatization of Social Security—and hard to argue that the choice that we’ve made (privatized car insurance and a public retirement annuity program) is constitutionally required.

Why do those of us on the left and left-of-center accept privatize car insurance uncomplicatedly while insisting that Social Security remain public? Why do we rail against private prisons while we barely bat an eyelash when mentally ill individuals are involuntarily committed to private hospitals? Why do so many of us oppose voucherizing K-12 education while at the same time promoting voucher programs for pre-K? To a large extent, what we think should be private and what we think should be public are products of historical contingency and path dependency. We should be careful not to conflate such contingency with constitutional necessity.

Interestingly, sometimes we do make U-turns. Into the 1960s, many thought that housing for the poor should be built, owned, and managed by the government; in more recent decades, we have shifted from a public housing paradigm toward government subsidies for private residential arrangements. Just a few years ago, many of us thought that astronaut transport would always be a public undertaking; SpaceX has taught us that privatization is possible and maybe even desirable. In various other realms, ranging from passenger rail service to veterans’ hospitals, what we previously left to the private sector is now largely public.

And this is probably as it should be. How we allocate responsibilities across the public and private sector will evolve based on comparative competencies and changing needs, as well as political winds. I can think of no reason why any particular status quo should be set in stone. To be sure, we probably do not want the pendulum to swing entirely to one side or the other: a strong nonprofit sector and robust market institutions serve as checks on government, but we do not want the government to be too weak to keep the other sectors of society in check. Perhaps Michaels is right that the system is currently out of equilibrium. Still, the ideal system almost certainly involves privatization aplenty.

In the end, all of this might be less of a challenge to Michaels’s thesis than an extension. Michaels is right that the American Republic rests on tripartite separations that go beyond the traditional Madisonian notion of an executive, a legislature, and a judiciary. But in addition to the tripartite separation within the administrative state that Michaels identifies, the government is itself one branch—along with the nonprofit sector and the market—of a tripartite allocation of collective responsibilities and institutional capabilities. Our “reliance on private actors to carry out State responsibilities”—what Michaels characterizes as “privatization”—is in fact consistent with Michaels’s (and Madison’s) division-of-powers instinct. As with any system of checks and balances, it can fall out of balance. But while we should be wary of privatization run amuck, we also ought to appreciate the important role it plays.

This post is part of a symposium reviewing Constitutional Coup: Privatization’s Threat to the American Republic, a new book by Jon D. Michaels, Professor of Law at UCLA School of Law. All of the posts can be read here.

Cite As: Author Name, Title, 36 Yale J. on Reg.: Notice & Comment (date), URL.

Leave a Reply

Your email address will not be published. Required fields are marked *