Ill Fares the Land by Tony Judt Page A

elsewhere: there was no sudden upturn in British economic performance. The best study of UK privatizations concludes that privatization per se had a decidedly modest impact upon long-term economic growth—while regressively redistributing wealth from taxpayers and consumers to the shareholders of newly privatized companies. 18
    The only reason that private investors are willing to purchase apparently inefficient public goods is because the state eliminates or reduces their exposure to risk. In the case of the London Underground, for example, a ‘Public-Private Partnership’ (PPP) was set up to invite interested investors to buy into the Tube network. The purchasing companies were assured that whatever happened they would be protected against serious loss—thereby undermining the economic case for privatization: the workings of the profit motive. Under these privileged conditions, the private sector will prove at least as inefficient as its public counterpart—creaming off profits and charging losses to the state.
    The outcome has been the worst sort of ‘mixed economy’: individual enterprise indefinitely underwritten by public funds. In Britain, newly-privatized National Health Service Hospital Groups periodically fail—typically because they are encouraged to make all manner of profits but forbidden to charge what they think the market might bear. At this point the hospital Trusts (like the London Underground, whose PPP collapsed in 2007) turn back to the government to pick up the bill. When this happens on a serial basis—as it did with the nationalized railways—the effect is creeping de facto re-nationalization with none of the benefits of public control. 19
    The result is moral hazard. The popular cliché that the bloated banks which brought international finance to its knees in 2008 were ‘too big to fail’ is of course infinitely extendable. No government could permit its railway system simply to ‘fail’. Privatized electric or gas utilities, or air traffic control networks, cannot be allowed to grind to a halt through mismanagement or financial incompetence. And, of course, their new managers and owners know this.
    Curiously, this point escaped the otherwise sharp eye of Friedrich Hayek. In his insistence that monopolistic industries (including railways and utilities) be left in private hands, he neglected to foresee the implications: since such vital national services would never be allowed to collapse, they could take risks, misspend or misappropriate resources at will, and always know that the government would pick up the tab.
    Moral hazard even applies in the case of institutions and businesses whose operations are in principle beneficial to the collectivity. Recall the case of Fannie Mae and Freddie Mac, the private agencies responsible for providing mortgages to middle class Americans: a service vital to the wellbeing of a consumer economy founded on property ownership and cheap loans. For some years before the 2008 debacle, Fannie Mae had been borrowing money from the government (at artificially depressed interest rates) and lending it commercially at a very substantial profit.
    Since the company was private (though with privileged access to public funds), those profits constituted public monies recycled to the company’s shareholders and executives. The fact that millions of mortgages were made available as a result of these self-interested transactions merely compounds the crime: when Fannie Mae was forced to call in its loans, it spread suffering across a huge swathe of the American middle class.
    Americans have privatized less than their British admirers. But the deliberate under-funding of unloved public services like Amtrak has resulted in an inadequate facility doomed sooner or later to be offered at knock-down prices to a private buyer. In New Zealand, where the government privatized its rail and ferry services in the course of the 1990s, their new owners mercilessly stripped away all