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Posts Tagged ‘privatization’

Alex Tabarrok has a fascinating article in the Wilson Quarterly about the history of bail bondsmen and their role in this privatized segment of the criminal justice system. Let’s start by excerpting some history of the system.

Bail began in medieval England as a progressive measure to help defendants get out of jail while they waited, sometimes for many months, for a roving judge to show up to conduct a trial. If the local sheriff knew the accused, he might release him on the defendant’s promise to return for the hearing. More often, however, the sheriff would release the accused to the custody of a surety, usually a brother or friend, who guaranteed that the defendant would present himself when the time came. So, in the common law, custody of the accused was never relinquished but instead was transferred to the surety—the brother became the keeper—which explains the origin of the strong rights bail bondsmen have to pursue and capture escaped defendants. Initially, the surety’s guarantee to the sheriff was simple: If the accused failed to show, the surety would take his place and be judged as if he were the offender.

The English system provided lots of incentives for sureties to make certain that the accused showed up for trial, but not a lot of incentive to be a surety. The risk to sureties was lessened when courts began to accept pledges of cash rather than of one’s person, but the system was not perfected until personal surety was slowly replaced by a commercial surety system in the United States. That system put incentives on both sides of the equation. Bondsmen had an incentive both to bail defendants out of jail and to chase them down should they flee. By the end of the 19th century, commercial sureties were the norm in the United States. (The Philippines is the only other country with a similar system.)

In recent decades, however, some states have begun to restrict or ban the use of private bail bondsmen. Not surprisingly, this hasn’t been good news. The cost to taxpayers rises and the effectiveness of the criminal justice system falls. Here’s another excerpt.

Every state now has some kind of pretrial services program, and four (Illinois, Kentucky, Oregon, and Wisconsin) have outlawed commercial bail altogether.

…Today, when a defendant fails to appear, an arrest warrant is issued. But if the defendant was released on his own recognizance or on government bail, very little else happens. In many states and cities, the police are overwhelmed with outstanding arrest warrants. In California, about two million warrants have gone unserved. Many are for minor offenses, but hundreds of thousands are for felonies, including thousands of homicides.

In Philadelphia, where commercial bail has been regulated out of existence, The Philadelphia Inquirer recently found that “fugitives jump bail . . . with virtual impunity.” At the end of 2009, the City of Brotherly Love had more than 47,000 unserved arrest warrants. About the only time the city’s bail jumpers are recaptured is when they are arrested for some other crime.

…Unserved warrants tend not to pile up in jurisdictions with commercial bondsmen. In those places, the bail bond agent is on the hook for the bond and thus has a strong incentive to bring those who jump bail to justice. My interest in commercial bail and bounty hunting began when economist Eric Helland and I used data on 36,231 felony defendants released between 1988 and 1996 to investigate the differences between the public and private systems of bail and fugitive recovery. Our study, published in The Journal of Law and Economics in 2004, is the largest and most comprehensive ever written on the bail system.

Our research backs up what I found on the street: Bail bondsmen and bounty hunters get their charges to show up for trial, and they recapture them quickly when they do flee. Nationally, the failure-to-appear rate for defendants released on commercial bail is 28 percent lower than the rate for defendants released on their own recognizance, and 18 percent lower than the rate for those released on government bond.

Even more important, when a defendant does skip town, the bounty hunters are the ones who pursue justice with the greatest determination and energy. Defendants sought by bounty hunters are a whopping 50 percent less likely to be on the loose after one year than other bail jumpers.

In addition to being effective, bail bondsmen and bounty hunters work at no cost to the taxpayers. The public reaps a double benefit, because when a bounty hunter fails to find his man, the bond is forfeit to the government.

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Like most federal agencies, the Federal Aviation Administration is a costly bureaucracy. Its $16.4 billion budget is enormous, but that is just the direct cost borne by taxpayers. The indirect costs, such as inefficiencies imposed on the air transportation system, also are significant. This has nothing to do with the TSA, by the way. The FAA is responsible for the air traffic control system, things like airport towers and radar systems that tell planes where to fly and when to land.

The Canadians have a much better approach. They privatized their air traffic control system back in the 1990s. So instead of having to rely on a clunky and incompetent government bureaucracy, our neighbors to the north have a private company that is generating very impressive results.

Not that this should be a surprise. Other nations have made remarkable gains through privatization, including Social Security personal accounts in Chile and 30 other nations, education choice in places such as Sweden and the Netherlands, and privatized postal service in Germany.

Reforming government monopolies should be a priority in the United States. Robust economic growth requires more than just low tax rates. It means getting rid of policies that cause resources to be misallocated. Privatization is an unsettling concept for some people, in part because they’ve always assumed certain things should be run by the government. This is why international examples are so important. Canada’s 14 years of experience with a private air traffic control system clearly shows that there are very successful alternatives to inefficient and costly bureaucracies.

Here are some excerpts from a story in Canada’s Financial Post about Canada’s remarkable reform.

A once troubled government asset, the country’s civil air traffic controller was privatized 14 years ago and is now a shining example of how to create a global technology leader out of a hulking government bureaucracy. Nav Canada’s efforts have flights moving more efficiently than ever through the skies above the country.

Many of the changes implemented by Nav Canada in recent years have gone unnoticed by the flying public. Certain flights are now shorter than they once were; aircraft no longer circle airports awaiting a runway; descents start further out and planes reach cruising altitudes more quickly; and flights to Asia now spend less time by jaunting over the Arctic than endlessly cruising the Atlantic or Pacific Oceans.

…Nav Canada estimates its efforts to modernize the aircraft navigation system in the country since it was privatized in 1996 have cut the fuel bill of airlines flying into Canada and above it by an estimated $1.4-billion collectively…

Meantime, Nav Canada has won the respect of airlines for keeping its fees steady, and in some cases, like in 2006, even reducing them when it can.

…John Crichton, Nav Canada chief executive, makes no bones about why he thinks his organization has been able to make these improvements and emerge as a global leader.

I don’t think there’s any question that the privatization was the best thing that ever happened,” he said. “That really unleashed all the innovation.”

…Calin Rovinescu, Air Canada’s chief executive, commended Nav Canada for its efforts to modernize the country’s navigation systems during a speech in Montreal earlier this year, while condemning the United States and the European Union, which still operates as a patchwork of nationalized systems, for their lack of leadership on the issue. Nav Canada also won the International Air Transport Association’s Eagle Award earlier this year for its efforts, in particular its constant consultation with the industry.

My Cato colleague Chris Edwards has more analysis, including a call to privatize the Federal Aviation Administration as well as some useful links.

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I am pleasantly shocked to see that a healthy majority of respondents favor partial privatization of Social Security. I knew support was reasonably strong several years ago, but I feared that the financial crisis would have made Americans more leery of financial markets. I also wondered whether the idea was discredited by its association with the Bush Administration. But a new Pew survey shows very good results, so maybe Republicans will feel more comfortable about developing a “secret plan” for Social Security reform.

…a majority favors a proposal to allow some private investments in Social Security… The latest Pew Research/National Journal Congressional Connection poll, sponsored by SHRM, conducted Sept. 9-12 among 1,001 adults, finds that 58% favor a proposal that would allow workers younger than age 55 to invest a portion of their Social Security taxes in personal retirement accounts that would rise and fall with the markets; 28% oppose this proposal. Majorities across all age groups — except for those ages 65 and older — favor this proposal. …Support for the general concept is comparable to support for a similar plan advocated by former President George W. Bush in 2004. As he sought reelection in the fall of 2004, 58% of registered voters that September favored allowing younger workers to invest a portion of their Social Security; 26% said they opposed this change. However, after Bush won reelection and debate about the proposal began, support weakened. By March 2005, the public was largely split (44% favor, 40% oppose) and the proposal was not enacted.

P.S. The same poll shows that people are not sympathetic, however, to reforming Medicare, however, so the Social Security silver cloud does have a dark lining.

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Unlike the United States and most European nations, Chile does not face a long-term Social Security crisis. This is because lawmakers shifted to a system of personal accounts almost 30 years ago. As a result, Chile’s economy is much stronger, the financial system is healthy, workers are better off, and taxpayers are protected. It also turns out that a system of personal accounts has a positive impact on the labor supply of older workers. Instead of getting lured into retirement by a punitive tax-and-transfer government system, they remain active to reap the rewards of a system that rewards them (rather than tax collectors) for continued work. A former World Bank expert has the details in a new report from the National Center for Policy Analysis.

American workers live longer each decade but they continue to retire early. They often begin receiving Social Security benefits, quit working and stop contributing to national output well before age 65. Reversing these trends must be an important objective when designing long-term reforms to balance revenues and expenditures on elderly entitlements.

Chile faced similar problems prior to 1981. It had a traditional pay-as-you-go defined benefit system, like Social Security in the United States. Workers had strong incentives to start their retirement benefits as soon as possible, because postponing pensions and adding contributions did not increase benefits commensurately. Labor force participation dropped dramatically when workers became eligible for pensions.

This changed with reforms in 1981 that replaced the defined benefit system with a defined contribution system. All new workers were required to join the defined contribution system while existing workers had a choice. Most workers are now in the new system and are required to contribute 10 percent of their wages to an individual account. Contributions are invested in a pension fund chosen by the worker and accumulate a market rate of return. Payouts take the form of inflation-protected annuities or gradual withdrawals during retirement. The new system increased incentives for older workers to postpone retirement and continue working. The response was dramatic.

…Following the 1981 policy changes and reforms, and after controlling for other sources of change in retirement behavior, the percentage of individuals receiving early benefits fell significantly:

  • The proportion who received benefits before age 65 decreased by about 8 percentage points.
  • The proportion of individuals who started receiving retirement benefits by their early 60s fell by about a quarter.
  • The proportion who started receiving benefits by their 50s was cut in half.

Postponing the commencement of benefits could be due to market returns on additional contributions, which made workers more willing to continue working in order to save more money for retirement. Or it could be due to tighter preconditions on early retirement, which required more individuals to continue working until age 65. Tighter preconditions seem to dominate, as the percentage of individuals who receive benefits after 65 has not changed.

More older workers kept working following the reform, after controlling for other factors:

  • Labor force participation rates for individuals in their 50s rose 12 percentage points.
  • Labor force rates rose 13 percentage points for those aged 65-70.
  • Individuals aged 60-64 increased their labor force participation the most – by 19 percentage points.

The biggest change in labor force participation was for individuals who had started receiving benefits from their retirement accounts:

  • Participation rates rose by 15 percentage points for pension recipients in their late 60s.
  • Rates rose by 28 percentage points for those in their 50s and early 60s.
  • Among all pension recipients under age 70, the proportion who continued working more than doubled.

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Here’s my debate on Larry Kudlow’s show about Social Security personal retirement accounts.

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Using road management as an example, John Stossel explains that government does a worse job than the private sector, even at things that theoretically are a government responsibility. Part of this is because of the profit motive, to be sure, but a big reason is probably because government bureaucracies inevitably are filled with overpaid bureaucrats who understand that job security is best assured by maintaining problems rather than solving them. Stossel makes an excellent point by noting that “contracting out” is not the same thing as genuine free enterprise. But at least it means whatever government is doing (either good things or bad things) will be done for less cost and with more competence.

Free enterprise does everything better.

Why? Because if private companies don’t do things efficiently, they lose money and die. Unlike government, they cannot compel payment through the power to tax.

Even when a private company operates a public facility under contract to government, it must perform. If it doesn’t, it will be “fired” — its contract won’t be renewed. Government is never fired.

Contracting out to private enterprise isn’t the same thing as letting fully competitive free markets operate, but it still works better than government.

Roads are one example. Politicians call road management a “public good” that “government must control.” Nonsense.

In 1995, a private road company added two lanes in the middle of California Highway 91, right where the median strip used to be. It then used “congestion pricing” to let some drivers pay to speed past rush-hour traffic. Using the principles of supply and demand, road operators charge higher tolls at times of day when demand is high. That encourages those who are most in a hurry to pay for what they need.

…[F]or years there was a gap in the ring road surrounding Paris that created huge traffic problems. Then private developers made an unsolicited proposal to build a $2 billion toll tunnel in exchange for a 70-year lease to run it. They built a double-decker tunnel that fits six lanes of traffic in the space usually required for just two. The tunnel’s profit-seeking owners have an incentive to keep traffic moving. They collect tolls based on congestion pricing, and tolls are collected electronically, so cars don’t have to stop. The tunnel operators clear accidents quickly. Most are detected within 10 seconds — thanks to 350 cameras inside the tunnel. The private road has cut a 45-minute trip to 10 minutes.

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There are legitimate reasons for local governments to own land, but surely it doesn’t make sense for them to hold on to surplus acreage. Better to get that land back in private hands, where it will be used for some productive purpose. This is why the downturn does have a silver lining. A handful of local governments are so anxious for more property tax revenue that they are going out of their way to make extra government-owned land available to private owners at rock-bottom prices. Ideally, they should have privatized their holdings years ago, but better late than never. Here’s a blurb from the New York Times about this development.

Give away land to make money?

It hardly sounds like a prudent scheme. But in a bit of déjà vu, that is exactly what this small Nebraska city aims to do.

Beatrice was a starting point for the Homestead Act of 1862, the federal law that handed land to pioneering farmers. Back then, the goal was to settle the West. The goal of Beatrice’s “Homestead Act of 2010,” is, in part, to replenish city coffers.

The calculus is simple, if counterintuitive: hand out city land now to ensure property tax revenues in the future.

…Around the nation, cities and towns facing grim budget circumstances are grasping at unlikely — some would say desperate — means to bolster their shrunken tax bases. Like Beatrice, places like Dayton, Ohio, and Grafton, Ill., are giving away land for nominal fees or for nothing in the hope that it will boost the tax rolls and cut the lawn-mowing bills.

…Officials acknowledge that the benefits sound modest, in the thousands of dollars annually, but say the revenue is needed.

“What is the value of a lot to us if it’s empty?” said Tom Thompson, the mayor of Grafton, where an offer of 32 city-owned lots, promoted with a television advertising campaign, has quickly led to eight takers so far. “This is strictly financial — a way to go upstream from the trend.”

In Dayton, officials are offering thousands of vacant, foreclosed or abandoned properties under certain conditions for nominal fees — $500, in many cases, to cover the cost of recording fees or $1,200 if the city must initiate tax foreclosure proceedings. The prospect of city savings on mowing fees alone is enormous: each year, Dayton spends $2 million to cut grass on the properties.

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