MARCUS: Gutless government avoids political risk

The distinguished philosopher, L.E. Font, ordered the chili five ways. I, less courageous, contented myself with a four-way bowl. As we waited for the delivery of our orders, he started to speak, eyes rolled back in his head, as in a trance.

“The hallmark of our times is the avoidance of risk,” he said, as if channeling a spirit from some distance. “The great advances of financial markets have been the development of mechanisms to shift risk to others.”

“Is that so?” I asked, without anticipating an answer.

“Secondary markets,” he said, “futures markets, credit default swaps and collateralized debt obligations make it possible to find someone who will assume the risk you don’t want to bear. These tools are not unlike insurance, which has been around for centuries. For a fee, someone else assumes the financial risk of your potential loss from fire, accident or other misadventure.”

“True,” I said, pretending this was a conversation.

“Risk-shifting,” Mr. Font continued, “is used in many different forms for a diverse set of risks by virtually all businesses, households and governments. Not all risk-shifting, however, involves financial loss. There is a lively market for shifting blame. Governments often do this when they ‘privatize’ the management of public functions or assets.”

“Quite so,” I agreed.

“When a government entity does not want to assume the political risk of managing its resources, it finds a private firm that, for a price, will do the job. This should not be confused with ordinary outsourcing, which can be a simple exercise of fiscal prudence. Auxiliary snow-removal contracts are a good example. A rational government will not maintain a fleet of snow plows sufficient to handle all possible blizzards. No, it will contract with private vehicle operators to go into action when there is a particularly heavy snowfall.”

“Indeed,” I said.

 Suddenly, Mr. Font made eye contact with me. “You,” he said with particular intensity, “are witness to several such adventures. Your Indiana Toll Road was leased to a firm that has done a marvelous job of improving that vital highway. But what has it done that the state could not have done? It raised fees and cut employment. Often, politicians are too timid to do what is necessary; then they outsource responsibility to escape blame.”

“But,” I protested, “the state got a big chunk of money to improve our other highways. That was a good deal.”

“Was it?” he asked. “Have you read any analysis of the deal? What do you understand of the sale of the Indianapolis water and sewer systems to a not-for-profit organization that is tangentially responsible to the people of Indianapolis? Yes, much information has been made available, but where is the independent analysis that explains the deal in terms of benefits and risks that we can understand?

“More recently,” he continued, “the same government that traded a vital public asset for a short-term financial boost has negotiated the leasing of its parking activities to a subsidiary of Xerox Corp. The city did not have the courage to raise parking fees. But more to the point, it would seem that the city has given control of its parking lanes to a private company for 50 years. Does the contract allow the city to change the use of those lanes? Can it extend the sidewalks or install bicycle lanes where today cars park?”

Fortunately, at this point, our chili arrived and Mr. Font fell silent. For me, this was a great relief. Philosophy before a meal is always a downer.•

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Marcus taught economics for more than 30 years at Indiana University and is the former director of IU’s Business Research Center. His column appears weekly. He can be reached at mmarcus@ibj.com.