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Commentary By Steven Malanga

Is 'Market-Oriented Government' Ever Possible?

Back in the early 1990s, a book called Reinventing Government was all the rage in public policy circles. Subtitled “How the entrepreneurial spirit is transforming government,” the book by David Osborne, a consultant to cities and states, and Ted Gaebler, a former city-manager of Visalia, California, won adherents across the political spectrum by describing what it termed a revolutionary change in government that sought to introduce competition and technology-driven productivity gains into the public sector.

President Clinton praised the book and enlisted his vice president, Al Gore, to apply its principles to the federal government. Politicians as different as Rudy Giuliani, then the Republican mayor of New York, and Sam Nunn, Democratic Senator from Georgia, called the book a roadmap to a more efficient, responsive government. About the only dissenters were some small-government advocates who said they chiefly wanted to focus on shrinking government, not making it more efficient, and public union leaders, who saw the movement as a threat to their growing union membership.

The union leaders largely won. After much hullabaloo and several reports, Gore’s reinventing government initiative largely fizzled. By the end of the Clinton administration there were 17,000 more federal employees, and even more by the time George W. Bush exited. If you think there will be fewer when Barack Obama steps down, you haven’t noticed that one of Obama’s biggest political allies is Andy Stern, outgoing head of the Service Employees International Union, which represents a few million government workers and workers in quasi-public (that is, heavily regulated) industries like health care.

Gore understood what undercut the movement. As private sector union membership continued to dive in the 1990s, from 12 percent to 9 percent of the workforce, unionized government workers came to dominate organized labor and assumed a commanding role in politics, especially in the Democratic Party, so that the once technocratic Gore breathed nary a word about reinventing government when he ran for president in 2000.

By then, government unions had successfully mounted a war against the core principles of reinvention, the notion that competitive principles of the marketplace should be a part of government, and that government should treat citizens as customers. Unions instituted a national campaign, for instance, to pass “living wage” laws in many municipalities that specifically raised wages in industries that provide services for government, so that having private companies do government work would produce no savings.

They also fought tenaciously against privatizing even the most peripheral of government operations, using their power in New York, for instance, to derail Giuliani’s attempt to sell Gotham’s government bookie, Off-Track Betting, to a Canadian businessman for $250 million.

The result, nearly two decades after Reinventing Government made such a splash, is that the number of government employees per 1,000 Americans remains as it was in 1990 despite a revolution in technology-driven productivity that has boosted output in many private industries. Even worse, government employee costs have exploded because the unions used their power to achieve big wage and benefit gains. That has resulted in huge state and local employee compensation liabilities that have helped precipitate budget crises around the nation, and sparked bitter face-offs between reform politicians and unions in places like New Jersey and California.

But there were a few successes back in the 1990s that suggested a different outcome might have been possible. In Indianapolis, Steve Goldsmith, a former prosecutor, became mayor in 1992 and soon signed onto the reinventing government path to reform. He and his advisors governed by what they called the “Yellow Pages” test. If they opened the phone book and found that more than a handful of private companies were providing a service that government also provided, Goldsmith figured that Indianapolis had no business being in that business. He competitively bid out 70 different city services, from billing for sewer service to filling potholes to operating the city’s water treatment plants.

Goldsmith succeeded in part because he offered city unions the same deal as private contractors, that is, the right to bid to keep city work. When in one case city employees complained they couldn’t possibly bid competitively with the private sector because the city saddled them with so many politically appointed supervisors, Goldsmith went in and cut the number of supervisors in half. City employees, working alone or in cooperation with private firms, won some 40 percent of all competitively bid contracts. Total savings from all of the competitively bid deals was estimated at $120 million.

All of this has been largely forgotten except in Indianapolis and in corners of the public policy world, like Harvard’s John F. Kennedy School, where Goldsmith has been a professor since he exited the mayoralty in 1999, and at the Manhattan Institute, where Goldsmith has been a scholar.

But last week, in a curious move, Goldsmith agreed to move to New York and serve as a deputy mayor under Michael Bloomberg. Although he touts himself as a businessman mayor, Bloomberg has been averse to applying market-based principles to government except in cases where they offend no one, prompting one local newspaper to declare early in the mayor’s tenure, “Say goodbye to ’privatizing’ as a City Hall mantra.” Bloomie even failed to pursue Giuliani’s bid to sell OTB, instead pledging to run it more efficiently. Last year, OTB lost $40 million and was declared insolvent. (It’s since been rescued temporarily by the state to save its 1,300 mostly unionized jobs.)

Still, Bloomberg has advocated for a kind of technocratic efficiency in government (one of his achievements he touts frequently is the city’s ‘311’ phone line for citizen complaints), and he’s won adherents among mayors around the country.

Bloomberg has said he is bringing in Goldsmith because he wants to stimulate new rounds of innovation in his third term. Given that Bloomberg has nothing to lose at this point (even he wouldn’t consider trying to overturn the city’s term limits law to allow himself yet a fourth term), one hopes that Goldsmith is going to be given one of the biggest platforms in America to demonstrate a few principles of what was once perhaps naively called “market-oriented” government.

It’s a refresher course that would be refreshing for taxpayers in particular, to be told that the only alternative to the crushing weight of government in a shrinking economy isn’t always higher taxes or deep cuts in services.

This piece originally appeared in RealClearMarkets

This piece originally appeared in RealClearMarkets