Government unions do not save taxpayers money

One great myth promoted by government unions is that goods and services can be delivered more effectively if the profit "line" is cut out of budgets that involve government contracts to the private sector. This notion showed up again on these pages last week, and with it the implicit claim that absent profit, "public services" will be more efficient if only ever-more services are ordered up by politicians, run through government departments and delivered by public-sector unions.

This argument, with only surface appeal courtesy of the occasional failure of some private-sector contractors (the federal government's privately contracted Phoenix pay system is an example), ignores the useful dynamics inevitable through competition and also privatization: the promotion of actual efficiencies; an end to public subsidies; actual market pricing; and the potential for quality control, including the ability to hire and fire suppliers. Consider each in turn.

On efficiency, consider 1980s- and 90s-era privatization examples (liquor stores in Alberta; airline, railway, energy and utility companies in Canada and around the world). One reason for such privatization efforts was to end costly subsidies from the public purse.

For example, one estimate of federal subsidies for Canadian National Railway between 1923 and 1993 pegged the cost at $96-billion (in 1995 dollars). Despite such subsidies, or perhaps because of them, that government Crown was still $2.5-billion in debt by the time it was privatized in 1995.

Another reason to endorse competition over government-run businesses or reflexive in-house provision, the latter of which often means a de facto monopoly: to gain clear price signals. Politicians often demand Crowns keep prices lower than the cost of providing the service to please the voting public; they also restrict the necessary investment in capital stock to that political end. That's why, in select cases, prices rise after privatization: Because governments fiddled for years or decades with proper pricing for political ends. (Ontario's power system comes repeatedly to mind.)

That noted, prices don't always rise after privatization, and this is because competition forces efficiencies that tend to drive down prices in real terms. Human Progress has chronicled the cost of a 1.3-cubic-metre microwave in 1979: $399.95 (U.S.) and which took 61 hours of labour to create. By 2015, that same size oven took just three hours to build and cost consumers $59.13. Private-sector innovation and competition will do that.

Service and selection is another reason to either ensure competitive bidding and/or privatize an activity. In 1992, Albertans were offered 208 government liquor stores – in essence, one near-monopoly chain and 65 private stores that carried 2,200 products. In 2015, 22 years after the 1992-93 privatization effort, Albertans could choose between 1,586 private liquor stores that carried 22,292 products.

As for Alberta liquor prices, as with any private, competitive market, they vary widely. My 2002 study found that after removing taxes and government markups, out of 1,845 products available in both Alberta and at government liquor stores in British Columbia, 82 per cent were cheaper in Alberta.

Lastly, on quality control, failure in the private sector is hardly unknown. Just ask anyone who's had to fire an employee or end a contract early. It is thus not surprising that a private-sector contractor who wins government work will occasionally fail to deliver. The Phoenix pay system for the federal government is a recent example, although critics of outsourcing often skip this relevant point: It was federal civil servants who underestimated the complexity of switching to the new system.

A properly written contract allows governments to end a business relationship or refuse to allow another bid. This occurred last summer when Bombardier was shut out of a $3.2-billion New York competition to provide subway cars. As the company itself admitted, New York's Metropolitan Transportation Authority refused to allow Bombardier's bid to proceed because of the company's past delivery delays and poor performance.

A useful question: When have politicians – who bear ultimate responsibility for expended tax dollars – ever ended a government's relationship with one of its own underperforming departments, or government unions, for not delivering on time, on budget and with the appropriate quality?

Problems in services and goods often crop up when monopolies or near-monopolies are allowed to capture a service or the production of a product. That is why giving over even more government work to more government unions, already entrenched and which rarely face competition, is a poor idea.

Those who think otherwise should try this experiment: Visit a used-car dealership and tell the salesperson you have no intention of shopping anywhere else. An optimal level of service and price will not be the end result.

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Mark Milke, Globe and Mail, January 24, 2018, B4

Mark Milke is author of Tax Me I'm Canadian: A Taxpayers' Guide to Your Money and How Politicians Spend It