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Argument Surrounding Privatization Has Many Facets

posted in: Weekly Commentary 0
By Lowell L. Kalapa

One of the suggestions being floated as part of the civil service reform push by the state administration is privatization of certain services currently being performed by public employees.

Now where have we heard of this idea before? Is it finally sinking into administrative officials that perhaps government should get out of the business of competing with private providers of the same services? Although we may all breath a sigh of relief, numerous hurdles stand in the way of privatization of public services.

Undoubtedly, the public employee unions will not be happy campers to lose hundreds, if not thousands, of dues-paying members. With fewer members, the clout of the public employee unions will not carry the same weight as they once did. So we can expect a lot of kicking and screaming all the way to the legislature.

Lawmakers and public employee unions must recognize that downsizing government is inevitable, if not imperative, if the community as whole is to stay afloat. Built in an era when investment in Hawaii was rampant and there was no equal in attracting visitors to this paradise, government cannot be sustained in its present size and form as the economy which supports it goes through a restructuring of its own.

This artificially inflated growth in the size of government, in turn, has caused the demand for revenues in the form of taxes and fees to continually rise. In fact, while administrators and lawmakers proudly proclaimed that the income tax cuts enacted by the 1998 legislature were the largest tax cuts in the history of the state, they also failed to point out that it was the first time that tax rates were EVER cut in the forty-year history of the state.

This unwillingness to lower tax rates allowed one of the highest marginal tax rates to be levied at a level of income that would not even qualify the taxpayer to purchase a home in Hawaii. Until last year, rates and brackets of the state’s income tax system had not been reduced since 1965. Thus, it should come as no surprise that tax revenues soared beyond control. That windfall of money contributed to elected officials’ belief that the sky was the limit in starting up new programs and providing new services.

However, unlike the private sector which must compete for the customer’s business, those in the public sector do not. You and I have no choice but to pay our taxes or hand over that extra dollar for some fee that must be paid in order to get some service from a government office. Other than complaining to our local legislator or other elected official, taxpayers have no choice but to pay their taxes or pay the user fee for a service they may not want or ever need.

So the rising cost of government is passed on to us as taxpayers, as individuals, as businesses which in turn contributes to the higher cost of living and doing business in Hawaii. Some public employee unions as well as some editorial writers have already decried the possibility that if government privatizes certain public services, those who provide the services in the privatized form may make only minimum wage and not the generous wages and salaries that were being paid in the public sector.

These observers seem to overlook the fact that paying the prevailing wage – whatever it may be – is a result of the forces and factors that affect the market economy. If the supply of skilled workers for a certain type of job is in short supply, then employers may be forced to pay higher wages and salaries in order to attract those people with those types of skills. On the other hand, if there are many workers available to perform another type of job, the market demand is going to dictate that these workers be paid at a rate for which they are willing to work.

In fact this phenomenon is behind what is driving the Federal Reserve Board. With a scarcity of workers, companies are willing to pay workers more to attract the needed supply of labor. Higher wages mean higher prices will have to be charged for the product or service produced. Higher prices mean higher inflation which is what the Federal Reserve wants to avoid by raising interest rates.

Those who decry privatization as nothing more than paying lower wages think that subsidized wages should be the norm rather than the exception. Let’s get this straight here, a higher cost of government means higher taxes which means less to take home and creates a demand for higher wages which in turn manifests in higher prices. Higher prices mean a higher cost of living in Hawaii.

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