“We should cut education anyway,” a reader commented at a Wisconsin news site.

A Wisconsinite offered a great reply: “Should we eat our seed corn?” (More)

Owning Our Seed Corn, Part I – The Push to Privatize

The BPI faculty and guests debated privatization in Evening Focus on Tuesday and Wednesday, and this week Morning Feature continues that focus. Today we examine some reasons behind the push to privatize government services. Tomorrow we’ll discuss risks of privatizing core services such as military logistics, law enforcement, and public education. Saturday we’ll explore how we can talk about this seemingly arcane topic with Fred, our archetypal median voter.

Once Upon an Anomaly….

Ahh, the 1950s. Those were Happy Days. Good times … if you were white, male, straight, and American. Unless you got on HUAC‘s radar screen, life was full of promise. The economy was booming. New industries were emerging, and new markets opening. Jobs paid well. You could buy a house. You could go to college, and reasonably plan to send your kids to college. And if you “built a better mousetrap,” you might climb the social ladder to financial security.

The cracks in that illusion were already showing in the 1950s. Blacks were largely excluded from the economic growth, and indeed from many public schools, universities, and businesses. In the 1960s, women joined the civil rights battle. By the early 1970s, LGBTs began to stand up. And while we remember “the turbulent 60s” mostly for assassinations and the civil rights and antiwar movements, the bloom was also coming off the economic rose.

In fact, the 1950s were an anomaly. World War II left other industrial economies in rubble, and the U.S. accounted for almost half of the world’s economic output. The U.S. held most of the postwar world’s gold reserves, and the Bretton Woods Conference made the dollar the world’s de facto base currency. After almost two decades of Depression and World War II rationing, domestic demand skyrocketed. The Marshall Plan and private investments added overseas markets by helping other nations rebuild. And the U.S. was still the world’s #1 oil exporter.

Small wonder those were Happy Days. New research in technologies, management, and marketing methods combined to offer plenty of ways to “build a better mousetrap,” and long-dormant markets were hungry for “better mousetraps.” If you had money to invest, profits were almost guaranteed.

A Mature and Saturated Economy

Six decades later, most of those conditions have changed. We’re no longer the world’s leading oil exporter. In fact, we’re the leading oil importer. Prewar industrial economies have rebuilt, and new industrial economies are emerging. The dollar is still the world’s de facto reserve currency, but other currencies are challenging its primacy. And most U.S. economic sectors are both mature and saturated.

Our economy is mature, in that most new technologies are incremental. The latest car, cell phone, or computer has new features, but you can already do what you need to do with the car, cell phone, or computer you have. You may not even know how to use most of the new features. ‘Breakthroughs’ in production, management, and marketing seem to involve moving them overseas. In short, it’s a lot harder to “build a better mousetrap.”

And our economy is saturated, in that most Americans who can afford a good or service already have it. They may not have the Latest And Greatest, but as noted above, the Latest And Greatest is not so much better that you have to run out and buy it or be left behind. We’ve built more homes than we have people who can afford them, and most of our homes are already crowded with more stuff than we can use. Fewer of us are clamoring for “better mousetraps.”

Add all of that up, and it’s harder for investors to find big profits. By the late 20th century, we had become a FIRE economy, with big profits increasingly limited to speculation in finance, insurance, and real estate. All are debt-intensive, and we have the public and private debt to show for it. And by 2008, we choked on it. That brought on the Great Recession and doubled unemployment. Even Americans who still had jobs decided we could get another year or three out of the old car, the old cell phone, and the old computer. Some of that may bounce back, but not all of it can … or should.

So how can investors still find big profits?

Get into the Government Business

As The Motley Fool explains:

Without some kind of moat around the basic business, new competitors can crunch a profit margin pretty quickly. Conversely, the more difficult it is for a new company to compete against an established business, the greater the potential profit margin for the existing company. In many cases, the existing company can temporarily lower prices in response to a threat of new competition and recoup lost revenue from other segments of its business.

A high profit margin rarely comes without either an entrenched business model or the semi-monopoly or oligopoly status that a railroad has.

In a mature and saturated economy, where can investors find opportunities for new entrenched businesses, semi-monopolies, or oligopolies? By convincing government to privatize its services, and let contractors perform those services for a profit. No, it’s not quite a license to print money:

Jeremy Grant, chief development officer for Acquisition Solutions, which helps agencies develop requirements, says the average company in the S&P 500 earned about 8.5 percent profit margin, while most government contractors work on a five percent profit margin.

Grant, who also is a former industry analyst and worked for a large system integrator, says federal profit margins tend to be higher for specialized or high end products and services.

But there’s also less risk. The customer, government, can’t go out of business. And polls show most Americans don’t want cuts in government services. That adds up to a guaranteed market for firms contracting to perform government services. And with the rise in cost-plus contracting, the profit margin is guaranteed in the contract.

So while the “eating our seed corn” metaphor is powerful, it’s not quite accurate. Conservatives and business groups calling for privatization don’t want to eat our seed corn.

They want to own it.

Owning our seed corn may be good for investors, but as we’ll see tomorrow, it’s not always good for We the People.

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Happy Thursday!