The Lesson of Southern Cross

(Originally posted 10.6.2011)On 1st September, 1976, Professor Milton Friedman of Chicago University, economic theoretician and Nobel laureate, addressed the Institute of Economic Affairs in London. The title of his talk was “The Road to Economic Freedom: The Steps from Here to There”. Friedman, being the quintessential free market fundamentalist, took a dim view of the mixed British economy with around 60% of national income then being spent by government. He prescribed the ‘shock treatment’ of low flat rate taxes and wholesale privatisation which a few years later Margaret Thatcher implemented.

His justification for privatising provision of education and healthcare was simplistic in the extreme. ‘There is,’ he argued, ‘a sort of empirical generalisation that it costs the state twice as much to do anything as it costs private enterprise, whatever it is.’ Friedman didn’t actually have any data to support this contention, but added that ‘My son once called my attention to this generalisation, and it is amazing how accurate it is’ (See Friedman, M, 1977, From Galbraith to Economic Freedom, London: Institute of Economic Affairs, p57).

That simplistic assertion held sway for the next three decades and still rules our lives. His advocacy of privatisation of public provision justifies, among other things, the provision of care homes for our aging population by the likes of Southern Cross. It turned out not to be twice as efficient as any public sector provision, and it threatens to go bust leaving the state to clean up the mess.

The nub of the Southern Cross problem arises from another Friedmanism, that corporate officials had no social responsibilities other than ‘to make as much money as possible for stockholders’. In the case of Southern Cross, those stockholders were at one time the private equity firm Blackstone, headed up by ex-Lehman Brothers mergers and acquisitions specialists. Their interest in making as much money as possible led Southern Cross to the classic asset strippers’ strategy of the sale and lease back of its portfolio of care homes, realising an estimated surplus of £500m for Blackstone. It may or may not have been ‘as much money as possible’.

Similar private equity raiders have expropriated value from many good businesses making them much less able to survive lean times. The cases of Boots the Chemist and Debenhams have been reported elsewhere on this site. But in the case of social and healthcare providers such as Southern Cross, the real victims are, first, the residents, and second, the taxpayers.

The politicians still believe in Friedman, despite all the evidence. Paul Krugman argued in the New York Review of Books, that Friedman was either a simplistic ideologue or intellectually dishonest: a simplet6on or a fraud. Privatising provision does not mean the state can escape its ultimate responsibility for the residents of the likes of Southern Cross when they are deserted. And that simple fact makes the for-profit providers of social and healthcare even more attractive to asset strippers like Blackstone. The taxpayer will have to pay up in the end.

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