Ronald Reagan and the Privatization Revolution

Reviewing Reagan's outsourcing legacy

Ronald Reagan was a great president. He stood up for the ideas of limited government, free trade and free-markets, and the roll-back of communism. Reagan is often associated with the global privatization revolution that took off during the 1980s, but that is largely a misconception. While he was generally positive about privatization, he viewed it mostly as a remedy for fixing what was wrong with socialist countries, not as a key pillar of economic reform in the USA. It was Margaret Thatcher, Reagan’s friend and staunchest ally, who launched the privatization wave that was to lead to the shift of over a trillion dollars worth of state-owned enterprises to investors during the ’80s and ’90s. Reagan was mostly an onlooker and cheerleader.

I speak from experience, having advised the Reagan White House on several privatization-related issues during his two terms in office. In one of his early victories, Reagan fired thousands of air traffic controllers who—d gone on strike illegally. The White House brought me to Washington to advise on how best to rebuild the system. Drawing on recent research on the private origins of the US air traffic control system, I gave several briefings on the idea of a nonprofit user-owned corporation that could raise funds in the capital markets and operate like a business, outside the constraints of civil service. But when then-FAA Administrator Lynn Helms reacted furiously against the idea, that was the end of that.

Several years later I was again called to the Old Executive Office Building, this time to help brainstorm ideas for privatizing the US Postal Service. It was exciting to know that people in the White House Office of Policy Development were actually thinking such thoughts. But again, my elation proved to be short-lived. Apparently the quiet trial balloons the White House floated got enough negative reactions that the idea went no further.

As Reagan’s second term began, however, concerns about the mounting budget deficit led to greater interest in the possibility of a federal privatization effort along the lines of Thatcher’s, the idea being to sell billions of dollars worth of federal assets and enterprises to investors, using the proceeds to pay down the national debt. I helped the Office of Policy Development organize a two-day brainstorming conference on the subject at Wye Plantation in Maryland, where the UK experience was reviewed, possible privatization candidates assessed, and possible next steps debated. That led to creation of an interagency Privatization Working Group, which Reason Foundation supported via a whole series of federal privatization studies (on candidates such as the Postal Service, the Air Traffic Control System, Amtrak, and others).

Two (but only two) tangible accomplishments followed from these efforts. The first was the successful privatization of Conrail, the northeastern freight railroad taken over by the federal government from the bankrupt Penn-Central. It was sold via a stock offering to investors in 1987, for $1.6 billion. The other was the appointment of the President’s Commission on Privatization in 1987. At Reason we were so underwhelmed by the cautious, non-Thatcher-like remit of the commission that we created a parallel Shadow Privatization Commission, producing our own, much bolder, report. And by the time the official commission’s report was published, in March 1988, the Reagan Administration had pretty much run out of steam, and was not about to launch any politically difficult privatization initiatives.

Ironically, there was more real privatization during the Clinton Administration than the Reagan Administration. Under Clinton, the federal government sold off the Elk Hills Naval Petroleum Reserves (3.6 billion), the U.S. Enrichment Corporation ($3.1 billion), and many billions of dollars worth of electromagnetic spectrum, as well as the competitive contracting of more than 100 airport control towers and numerous military base functions.

Still, it may well be the case that Reagan’s Privatization Commission paved the way for the subsequent efforts by Clinton and Gore, having made privatization ideas respectable enough to be considered by Gore’s National Performance Review and the White House’s National Economic Council and Office of Management & Budget. And it’s very definitely the case that Ronald Reagan changed the nature of the debate over the size and scope of the federal government. Despite the lack of a Thatcher-like privatization agenda, Reagan deserves our gratitude for that.

And with hindsight, it is certainly true that Great Britain needed privatization far more than the United States. When Margaret Thatcher was first elected, the British government still owned the coal, steel, oil, and electricity industries, several auto companies, the telephone system, a major airline, and much, much more. All were privatized by Thatcher, with mostly positive results. Truly, the “commanding heights” of the British economy needed to be shifted from state ownership, but such enterprises had never been part of our federal government. Yes, privatization would likely have improved things in air traffic control, the Tennessee Valley Authority, the Postal Service, and our other candidates. But we could not claim that the reform of these entities was vital to liberating our economy from statism, as Thatcher could legitimately claim about her privatization agenda. So Reagan’s priorities of winning the Cold War, reducing the tax burden, and killing inflation were probably the right ones.

It remains the job of our generation to privatize the many assets and business enterprises of our overgrown federal government.

Robert W. Poole Jr. is director of transportation studies and founder of the Reason Foundation.