The American Republic has long had a set of public
and non-profit institutions that enrich our democracy by demonstrating that
society is more than a mere market. The most expansive and explicit of these
began in the New Deal, such as Social Security and later Medicare. However,
public and communal institutions have a venerable history as old as the
Massachusetts common schools of the 1660s. The 19th century saw a flowering of
non-profit, communal self-help organizationscharity hospitals, credit
unions, workingmen's building and loan associations, fraternal and ethnic mutual
aid organizations, trade unions, settlement houses, YMCAs, farm bureaus, and the
like. In this century, the non-profit sector added major new organizations such
as Blue Cross/Blue Shield, community colleges, and so on.
To understand these institutions merely as "providing services" is
to understand them far too narrowly, for they play a crucial civic and political
role. By defining affiliation on the basis of membership and need, rather than
individual purchasing power, these solidarity institutions not only cushion
people from the unsentimental and often devastating verdicts of pure markets.
They enrich the meaning of citizenship, broaden the fabric of community, and
strengthen an ethic of service and stewardshipa countervailing logic to
the logic of markets. They are part of the nations's accumulated stock of social
They also help anchor modern liberalism, both as public philosophy and as
politicsperhaps more than many liberals appreciate. Politically,
solidarity institutions provide important institutional and ideological ballast
that helps stabilize politics on a center course against periodic riptides to
starboard. Ordinary people tend to value these institutions. Thus, when zealous
conservatives, or faithless liberals, are tempted to sacrifice, say, Medicare on
the altar of budget balance or the fashion of privatization, they run into the
inconvenient political fact that voters prize Medicare. The citizenry has
grasped that Medicare, with its universal membership and free choice of doctor
and hospital, beats anything the private market has on offer. Likewise, when
Ronald Reagan's theorists of privatization set their sights on the most costly
and redistributive public program of them all, they were quickly advised that
Social Security was politically untouchable.
These institutions have deep roots and strong affiliations. Notwithstanding
temporary political enthusiasms and majorities, they resist quick dismantling.
Thus, though we are well into the second decade of conservative ideological
hegemony, the legacy of solidarity institutions has prevented conservative
ascendance from turning into a complete rout. That is, until now.
After a long lag, the forces of marketization now
possess both the ideological self-confidence and the institutional leverage to
seriously challenge extra-market organizations once thought impregnable. And,
sadly, they are often joined in this endeavor by many well-meaning liberals who
are confused both about politics and first principles.
Free market conservatives are mounting this assault in the name of the
market's two favorite appealsefficiency and choice. Supposedly, greater
privatization of public schools, health plans, retirement systemswhateverwill
allow them to be run in a more cost-effective, businesslike fashion.
Privatization also promises greater individual choice and thus the superior
accountability of the marketplace. Solidarity is out, market is in. A citizen is
nothing but a consumer.
In the case of Social Security, privatizers offer the promise of greater
solvency and higher returns. It's the Nineties: retirees should stop thinking
like pensioners and start thinking like investors. By putting some of their
Social Security nest egg into stocks and bonds of they own choosing, like free
consenting adults, instead of having their funds managed (and guaranteed) by the
Nanny State, they can experience the joys, yields, risks, and occasional
surprises of the money markets.
Marketization of non-profit institutions, likewise, is touted as promising
greater efficiency, modernization, and choice. Non-profit hospitals are said to
be poorly managed, under-capitalized, and stuck with excess capacity. Just as a
no-nonsense corporate raider moves to shape up or shut down wasting assets in
the steel or airline industry, entrepreneurs are quickly buying up non-profit
hospitals and health plans. This is the market's road to rationalization of the
health care sector, with its overbuilt and underfilled beds, its chronic
inflation and administrative cobwebs. These is, of course, also a downside. The
market is famous for jettisoning cost-centerslike sick people.
Yet many liberals find this crusade seductive. The market is dynamic,
efficient and modern. The state is archaic, bureaucratic and unfashionable. Why
shouldn't institutions like schools, health plans, and pension systems be run
more like businesses? The modern neo-liberal, to demonstrate his hipness, gamely
rolls his eyes at the hopelessness of public school bureaucrats, the
self-serving backwardness of teachers unions. Liberals can play this game. We
can privatize just as well as the conservatives.
This issue of The American Prospect includes four
articles that describe the assault of the privateers on non-profit and public
institutions. The story they tell is both instructive and depressing. In many
respects, what remains of the solidarity sector is ripe for the picking. Almost
by definition, this sector takes on society's hard cases. If easy money were to
be made, public education in central Harlem or the care of the infirm elderly
would have found an entrepreneurial solution long ago. As resources are diverted
and prove inadequate to difficult social problems, institutions start looking
threadbare and unattractive. Those on the front lines feel depleted and
unappreciatedand the market beckons. The champions of the social sector
have not done a good enough job at defending the rationale for its existence, or
appreciating its political role. Administratively, some of this sector is almost
as archaic as its critics allege. And some of its stewards are all too eager to
cash it in.
On the other hand, in some cases privatization is more formidable a task
than the privateers imagine. As Peter Schrag recounts in his article on public
school privatization ("'F' is for Fizzle")
the first wave of for-profit education entrepreneurs mostly failed. For one
thing, it failed arithmetic. If one is serious about educating children, much
less inner-city children or special-needs children, there is no magic pedagogic
bullet, no gross inefficiency to be squeezed out by more businesslike managers,
no quick buck.
After conceding defeat in an ambitious first wave assault which overpromised
both to communities and investors, the school privateers are now settling for
more modest incursionsoffering to manage schools and school systems rather
than take them over. But this is only a tactical retreat. These people and this
fashion are not going away. As long as conservatives are intellectually
ascendant and schools are imperfect and costly, vouchers, charter schools, and
other instruments of fragmentation will have wide appeal to many legislators and
As a solidarity institution, the common school is already badly fragmented.
Citizens in a well-to-do suburb may still cherish their local school system, but
they feel little fiscal affinity with the bottomless pit of social need in the
inner-city. The effort to equalize school funding, much less to increase
resources, has mostly stalled. Given fiscal scarcity, to the extent that
budget-equalization succeeds in bringing poor district spending more nearly in
line with that of rich districts, it proceeds by what educators call "levelling
down" rather than "levelling up." And the more that school
funding is curtailed by fiscal stresses and federal cuts, the more affluent
parents desert to private schools.
As a remedy, vouchers and privatization would only accelerate the
fragmentation. Instead, public school systems need to show that they can be as
nimble, innovative, decentralized and accountable as their entrepreneurial
suitors. Charter schools do stimulate innovation. Within limits they are fine,
as long as they don't divert resources from the main public system or turn out
to be the entering wedge of vouchers or for-profit privatization. But perhaps
they are unnecessary. In a number of cases, such as the widely acclaimed Central
Park East school in East Harlem, a pure public school led by a gifted educator
has shown that it can trump the privatizers.
Deborah Meyer, principal of that institution, begins her recent memoir, The
Power of Their Ideas, with a chapter titled "In Defense of Public
Education." She writes, "Schools dependent on private clientelesschools
that can get rid of unwanted kids or troublemaker families, exclude on the basis
of this or that set of beliefs, and toss aside the 'losers'not only avoid
the democratic arts of compromise and tolerance but also implicitly foster
lessons about the power of money and privilege, a lesson already only too well
known by every adolescent in America." Public schools, she adds, "offer
opportunities for a sense of community otherwise solely missing, for putting
faces and names to people we might otherwise see as mere statistics or
categories.....[D]emocratic 'conversation' is often loud and rude, and sometimes
leaves scars and neighborly hostility. But if democracy survives such hostility
it's because we assume we're members of a common club, stuck with each other.
Public schools can train us for such political conversation across divisions of
race, class religion and ideology."
There is, in short, more than one brand of motivation. If we can just resist
the temptation to strip public and community institutions of assets and turn the
whole mess over to entrepreneurs, the motivation of squeezing out more money for
the shareholders is no match for the motivation of a dedicated classroom teacher
or devoted principal. The market has no monopoly on efficiency, motivation, or
choicethat is as long as we don't put non-market institutions out of
business as role models.
In healthcare, meanwhile, runaway privatization is
here. Columbia/HCA, a for-profit hospital chain that did not exist a decade ago,
has bought upwards of 350 hospitals, often converting nonprofit and charity
hospitals. Its latest acquisition is Blue-Cross/Blue Shield of Ohio. It has also
taken over several Catholic charity hospitals, appropriating the capitalized
value of the below-market labor of nuns and lay Catholics motivated by a
The conversion of non-profits to for-profits is a barely appreciated form of
privatization with far reaching consequences. Well established common law holds
that the trustees of a charity may not appropriate charitable assets for
personal gain. But those bent on acquiring or converting non-profit hospitals,
health plans, or HMOs are able to circumvent that requirement by setting up a
charitable foundation and buying the assets of the existing non-profit for cash.
The entrepreneur then makes off with the enterprise, often at a bargain basement
price. The foundation, often with an ill-defined purpose or governing structure,
gets the money.
As Judith Bell's article ["Saving Their Assets"]
on the conversion of California Blue Cross/Blue Shield shows, the best outcome
in the current climate occurs when consumer groups are able to prevent wholesale
looting of the non-profit's assets (as has occurred in many other conversions)
via sales at below-market prices. But what is the fair-market value of a
non-profit? What is the long-term cost to the community when it ceases to exist
as a non-profit? In the California case, consumer advocates were able to
negotiate a high price and a foundation able to pay for a good deal of health
care for the poor. Still, the larger public issues of whether non-profits should
be on the auction block at all, of who supervises the successor foundation, of
what residual obligation the new for-profit owes the community, have not been
joined. Nor does the nation have a coherent set of ground rules to govern when
and how such conversions should be allowed.
Blue Cross began in the Great Depression as an institution whose express
purpose was to make sure that hospitals got paid. But Blue Cross/Blue Shield
soon matured into an institution with broader social purposes. In its heyday, it
"community-rated" the cost of its insurance. That is, it charged a
common rate to high-risk and low-risk individuals and groupsas social
insurance logically must do. Blue Cross, like community hospitals, had something
of a social conscience. It took care of a disproportionate share of expensive
cases. But as Blue Cross has come under increasing competitive pressure from
profit-motivated health plans, it has begun behaving more like them, seeking to
avoid the risk of insuring sick people, or charging them more for their
The sad fact is that, in an era of rampant marketization, there is less and
less distinctive about Blue Cross to save. One recalls Orwell's Animal Farm,
where, after a while, the pigs and the humans looked pretty much alike. There is
a similar cost-cutting race-to-the-bottom in the case of HMOs and hospitals,
where a contagion of risk aversion and cost cutting, rather than service, has
spread from the for-profits to the nominal non-profits. "Saving" a
non-profit institution, if it is far down this road, is a Pyhrric victory.
As these pressures intensify and as helping institutions become explicitly
or implicitly profit-maximizing institutions, there are costs far beyond the
cost of sick people not getting care. Society is being systematically denuded of
habitats that nurture an ethic of service rather than profit. These institutions
took decadessometimes centuriesto build, and they will not easily be
We should think twice before accepting the claim that for-profit necessarily
equals more efficient. It was not old fashioned savings and loans, which were
non-profit mutuals owned by their depositors, that turned speculative and cost
the taxpayers hundreds of billions of dollars. That debacle occurred after most
S&L's converted to profit-making institutions. Credit unions, which are
still non-profits owned by their members, have not cost taxpayers a dime. Home
health care was long a charitable service of visiting nurses and nurses' aides.
Recently it has been expanded, by policymakers looking to combine better
service and lower cost for infirm people who can be kept out of expensive and
disspiriting institutions. But, in keeping with the fashion, the entrepreneurs
have moved in. In New York state, where the business of home care has become a
lucrative profit center for private businesses, the hourly cost billed to
Medicaid has climbed to nearly a hundred dollars an hour, of which the nurse's
aide gets less than $10. Non-profits do the job more ethically and efficiently.
The crown jewel of this story is, of course, Social
Security. Here, privatization managed to sneak up on us. In the budget
negotiations, both parties pledged to leave Social Security alone. But as
economists Joseph Quinn and Olivia Mitchell ["Social
Security on the Table"] and investigative reporter Robert Dreyfuss [" HREF="dreyfuss-r.html">The Biggest Deal"] explain, a narrow majority of an
official advisory commission supports one of two plans for partial
privatization. Defenders of the existing system, led by Robert Ball, got six out
of 13 votes for a plan to shore up Social Security's finances, allow some of its
assets to be invested in the stock market, but retain it as an integrated,
By contrast, the other two plans, commanding seven votes between them, would
divert some of the Social Security payroll tax to a new system of super IRA's.
This prospect has bankers and brokers fairly salivating, for it would mean
literally trillions of dollars shifted from public management to private money
managers. As Dreyfuss's article demonstrates, the policy debate has an
unacknowledged undertow, courtesy of the lobbying of hungry money managers. The
diversion of even a fraction of Social Security moneys to individual accounts is
potentially insidious, since it would fragment what is America's most universal
system. Over time, as the wealthiest bailed out, the constituency for the
anti-poverty aspect of Social Security would gradually erode. Privatization is
advertised as a solution to the system's solvency problems, but the Ball plan
would stabilize Social Security's finances, and without destroying the system in
order to save it. This is merely an advisory commission, but privatization of
Social Security promises to be the next great debate.
In 1981, Conservative Digest published a famous
manifesto by Howard Phillips titled "Defunding the Left." Phillips
(accurately) observed that certain social programs of the 1960s, like VISTA and
Legal Services, allowed progressive lives and values to be lived at taxpayer
expense. The right succeeded in dramatically reducing their funding. Today, the
privateers' assault on solidarity aims at extirpating a much broader leftnot
the left of 1964 or even of 1933, but the left of 1789.
If we are to survive as more than a giant market, it is important both to
broaden the language of choice and efficiency, and to recognize this challenge
for what it is. If these assaults succeed, not only will American society
fragment further. The result will be a kind of death spiral of the American
commons. As the most affluent desert, and the poorest and least popular will get
ever more meager leavings. And if solidarity institutions disappear, it will be
far harder for liberals to catch the political wave when the public mood has
inevitable second thoughts about its romance with markets.
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