A related problem to the green fuzz of government debt-based spending, is the nature of accountability in the government. Here is what happens: the government decides to take on a social project, or perhaps is already owning a certain business (as in the case of socialist governments becoming less so). The argument is that government is not well equipped to deal with running large social programs because of the lack of incentives for those running them. Both non-profit and for-profit private enterprises have a greater sense of incentives for making sure things are run right (though there can obviously be excesses and irresponsibility in both). The incentive tends to go beyond money. There is something at risk if they don’t perform as they have promised to those who care. Yes, the government bureaucrat at the top is elected, but those appointed deeper down in the government have little at risk.
As a result, there is a push to privatize a part of what the government is doing. This amounts to paying a private entity to do the function that previously the government was doing. The problem of course is that the incentive to run things more efficiently doesn’t change. A genuine private entity has something to lose (customer loyalty or donor loyalty), but when the government is footing the bill the risk of lose is gone. In other words, you’ve simply shifted the bureaucrat with nothing to lose from a government employee to ones in the private sector. There is no shift in their desire to perform differently.
Enter moral hazard in a whole new way. The new entities end up serving themselves and trying to take as much as they possibly can in the process.
In spite of being in favor of reduced government spending and programs, I don’t think the way to do that is to outsource them. Even in the bidding processes that try to create competition for things, you are still relying on the judgement of bureaucrats that didn’t have the right set of incentives to run it themselves. While I don’t full agree with Naomi Klein’s conclusions in “The Shock Doctrine”, it does very well outline that privatizing government does not create a proper sense of incentives that cause companies to work for common good (and is worth reading).
In the end, the government should unwind from it’s positions but in a way that enables private entities to both take on the risks that are associated with those things.