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Beware the Snake Oil Salesmen

Commentary
January 29, 2005By Chuck Sheketoff

Watch out Oregon, the snake oil salesmen are rolling into town, with old medicine in a new bottle: "The Price of Government: Getting the Results We Need in an Age of Permanent Fiscal Crisis," by David Osborne and Peter Hutchinson.

Don't be fooled by the slick pitch of "budgeting for outcomes," seeking "bids," and applying "competitive pressure" for delivery of public services. There's little sound evidence to support Osborne and Hutchinson's claims that libertarian, market-based approaches can deliver better government outcomes for less money.

Osborne and Hutchinson cite charter schools as proof that privatization and competition breed better results for delivery of government services. Unfortunately, two recent studies, one by the American Federation of Teachers and the other by the Bush Administration's Department of Education, each concluded that in general children in regular schools performed better than those in charter schools, and that the longer a charter school operated, the greater kids' performance declined. That is, the longer kids drank Osborne and Hutchinson's elixir, the worse their educational health.

Osborne and Hutchinson's core fallacy is that current tax revenues reflect what government should cost. They make the unsubstantiated claim that current state fiscal problems are due to "overindulgence," while also disregarding the fact that corporations are paying a shrinking share of the price of government. You'd think folks who want government to run more like a business would pay attention to accounts receivables.

Oregonians don't get adequate services for their taxes because profitable Oregon corporations are stiffing them. In the 2005-07 budget cycle, corporations will pay just 5 percent of all Oregon income taxes, leaving 95 percent to households. In 1973-75, corporations paid 18 percent of income taxes. If Oregon's profitable corporations were still paying taxes at that level, Oregon would have $1.8 billion more for state services. Oregon's households would receive increased public services without paying more in taxes.

Besides illegal tax dodging, Oregon also loses revenue to legal loopholes that work against public priorities. Oregon taxpayers subsidize mortgages for mansions and medical expenses for millionaires while homelessness persists and emergency room visits by the uninsured soar. "The Price of Government" does urge policymakers to conduct a strategic review of tax loopholes. Other than those 9 sentences out of 336 pages, "The Price of Government" ignores changes that could bring in more tax dollars, more fairly.

Osborne and Hutchinson argue that buying and selling government services should work like sales of breakfast cereal in a market environment. In other words, you get what you pay for.

Under their scheme, government sets priorities, decides how much money to devote to that priority, and then determines "how best to deliver" services with that funding. Horrified by two foster children's deaths late last year, Oregonians are not demanding that the job be done "as best as can be with the money available." Oregonians want the protection of and assistance to abused and neglected children done right, 100 percent of the time. We want the state to put the "foster" back in foster care.

As The New Yorker columnist James Surowiecki clearly explained a couple of years ago, certain work in the economy is not subject to improvements in productivity, and thus over time the costs for that activity go up. Surowiecki noted that the phenomenon is called "Baumol's cost disease," after the professor who first diagnosed the condition. It "isn't anyone's fault. (That's why it's called a disease.)," noted Surowiecki.

It takes 5 people approximately the same amount of time to perform a Mozart string quintet today as it did in 1787; a professor can't give lectures any faster today than 10 years ago; a firefighter takes just as long to put out a fire; and, an hour of counseling for an abused child or of job training for an unemployed worker still takes 60 minutes.

If "The Price of Government" folks had read Surowiecki, or were honest about the differences between buying government services and buying cereal, they would recognize that government has to get more expensive. Government is not seriously inefficient. It's just that Baumol's cost disease, which isn't fatal, can't be cured.

The elixir being sold under "The Price of Government" label will do nothing to solve Baumol's cost disease. The only thing the book might accomplish is making those governments who spent tax dollars buying the magical potion (such as Multnomah County) feel good. And, of course, the book boosts the snake oil salesmen's bottom line with taxpayer-paid contracts from future suckers.

Charles Sheketoff is the executive director of the Oregon Center for Public Policy, which uses research and analysis to advance policies and practices that improve the economic and social opportunities of low- and moderate-income Oregonians, the majority of Oregonians.