Contracting Out The Government

Conservatives, especially those of the libertarian strain, fell in love with the idea of contracting out services paid for by the government. Not only did this get rid of a whole flock of pesky civil servants, but it also provided a convenient way to funnel cash into the pockets of wealthy people who could reward politicians. Britain pioneered this trend and the US is following hard in its footsteps. Andrew Bastani, writing in The New York Times, says the model is collapsing.

Last Monday Carillion, a Wolverhampton-based infrastructure and facilities management company, went into liquidation. The company has become an emblem of Britain’s public sector reforms over the last two decades, and its collapse represents a signal moment for the country.

A series of "reforms" reduced the size of the bureaucracy by contracting out work the government paid for and used to do.

This was part of a wider trend: In the five years following 2010, state money spent on outsourcing — contracting private companies to build and manage public services — nearly doubled, reaching £120 billion by 2015. One forecast has predicted that by the end of this decade £1 in every three spent on delivering public services will go to outsourcing companies. This wave of private sector contracts has made Britain the second largest market for outsourcing in the world.

Such a shift in the provision of public infrastructure and services has served two political objectives since the election of the coalition government in 2010: reducing public expenditure and increasing jobs in the private sector. In both respects, outsourcing seemed to offer a means to achieve the otherwise impossible.

As a proportion of gross domestic product, public spending in Britain is now lower than any other advanced economy in Europe.While falling short of the former chancellor George Osborne’s objective to reduce the state to the size it was in the 1930s, that is a momentous and rapid shift in the postwar era. This has unfolded alongside the country’s “employment miracle,” which has seen the emergence of millions of new jobs in the private sector.

There’s only one problem. While the Conservatives could point to private sector job creation, and limited deficit reduction, this all unfolded alongside the biggest decline in real wages — measured as pay after inflation — since Watt’s steam engine. Between 2007 and 2015, wages fell 10.4 percent. This year that is expected to continue, with wages in Britain falling more than any other country in the O.E.C.D.

It’s the same story with productivity. In Britain an hour of work creates less output than it did 10 years ago. As with wages, there is no precedent for this in recent history — at least not since Napoleon invaded Russia. No comparable economy in the world today has endured such extraordinary inertia.

As workers took home less pay and productivity stagnated, Carillion, bolstered by hundreds of government contracts, continued to give its shareholders a profit. The company’s market capitalization returned to around pre-crash levels, as did its total revenue, which was £5.2 billion in both 2008 and 2016. But the figures were delusive: At the time of its liquidation, Carillion held just £29 million in cash, with debts of around £1.5 billion.

The US is headed down the same slippery path.