Privatization of government roles
Now that a Center/Left government is imminent in Israel, one of my biggest hopes is the termination of the “Wisconsin Plan” in Israel. The program’s name in Israel is “Mehalev” = “From the Heart”, a goebbelsian name without a doubt as this program has no heart. The bigger issue I have with this program is that it also has no brain. I was going to write a blog post describing the faults of this system, but I found that Assaf Adiv did a much better job at it than I would have and did so almost half a year ago.
In (very) brief- this program privatizes the role of the unemployment insurance office and leaves it off to private firms whose profits come from a cut of the ’savings’ that the government gains when they do not pay unemployment benefits, supposedly when the unemployed find jobs, but really when they are allowed to deny them benefits on various excuses. As Adiv accurately describes it: “The plan, in short, puts the company and the welfare recipient at odds with each other.”
The point I would like to stress however, is that the problem inherent in this program is that the metrics and incentives of this program are all wrong. One of the main faults of privatizing governmental roles is that a monetary metric (profit) is just wrong for determining when a governmental job is done right.
Now don’t get me wrong. I think that competition is a great tool to make systems more efficient. Privatization should mean to put more than one entity on the same job and provide higher compensation to the one that does the work better, however, make sure that ‘does the work better’ is measured correctly. In a free-market economy, a commercial enterprise does better when it creates more shareholder value but a government entity does its work better when it performs its role in the best possible fashion. If you are going to privatize, the metric should fit the job and be mapped directly to monetary compensation.
While the Wisconsin plan provides a monetary bonus to the implementing firm if more than 40% the unemployed under their care find jobs, but:
a) 40% is an unrealistic number in the Israeli market, so it is there “one suspects, for the sake of appearances” as Adiv states.
b) The bonus amount is not directly mapped to the number of unemployed who find employment and it is only provided if this unrealistic goal is met.
c) Bigger profits can be made by the company by ’saving’ on benefits…
Another problem with the implementation, that instead of allowing true competition between two or more companies, the companies each get their own geographical zone and become the sole operator there, so the competition is nullified.
In any case a more in-depth examination of the issue of privatization with competition and correct metrics will be a subject of a later post.
