The Private Option of Police Professors Erwin Blackstone

The Private Option of Police Professors Erwin Blackstone and Simon Hakim are professors of economics and members of the Center for Competitive Government of the Fox School of Business and Management, Temple 1 University. Contact: Hakim@temple. edu, 215 -204 -5037.

Contents The problem Changing landscape of crime The public good aspect of police The structure of the private security industry Increased share of private police results from: Public police shedding of private services Public good services contracted out New security needs are client oriented Social costs & benefits resulting from the increase of private police 2 Future trends

The problem We are used to see monopolistic public police in charge of security fulfilling necessary public good tasks. Changing relevant environmental factors and success in private options to other state and local services raises an option for both efficiency in production & effective outcomes. Will a decline in local police services yield a rise in local crime and security disorder? Or, could market forces and Goldsmith’s adopted Managed Competition model for contractingout improve security? 3

Changing Landscape of Crime Public police agencies are primarily engaged in handling property and violent crime (FBI part 1 crimes). From 1976 through 2008, property crime declined 75% on a per capita basis. Violent crime decreased between 1981 through 2008 by 63% per capita. In 1977, state and local police officers numbered 574, 000 or 2. 657 per 1, 000 population. In 2008, officers increased 29% from 1977 to 831, 000 or 2. 733 per 1, 000. In other words, police employment seems unrelated to productivity as reflected by their major mission. Studies showed that demographic and socioeconomic factors are responsible for the reduction in these crimes. Between 2000 and 2009 economic crimes increased substantially. Fraud complains grew 471%, and identity thefts increased 689%. Other economic crimes include cyber, counterfeiting of branded goods, and copyright abuse through the internet. Overall, economic crime 4 reported to the Federal Trade Commission (FTC) grew 416%.

Figure 1: Number of Public and Private Police Officers versus Number of Total Crimes and Property Crimes 1, 400, 000 18, 000 17, 000 1, 200, 000 15, 000 800, 000 14, 000 600, 000 13, 000 12, 000 400, 000 11, 000 200, 000 10, 000 0 9, 000 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 year Source: BLS National Occupational Employment and Wage Estimates for 1997 through 2007 and www. disastercenter. com/crime/uscrime. htm Number of Crimes Number of Officers 16, 000 1, 000 Private Police Public Police property crime total crime

Figure 2: Crime Rates over time 6

Figure 3: Economic Crime Complaints 7

Increased share of private police in total security In the 1970 s the ratio of public law enforcement officers to private security officers was 1. 4 to 1 while in 1990 the ratio reversed to 3 private to 1 public and is still growing. Also indicative of the US reliance on private security is the fact that in the late 1990 s the US had 582 private security guards per 100, 000 people. The US private security rate was second in the world to the 900 in South Africa, and much higher than the 432 in Canada and the 160 in the entire EU. The corresponding rates for public police were 321 in the US, 312 in South Africa, 260 in Canada, and 375 in the EU. Finally, spending on private police has been 70 percent greater than that on public police. 8

Public Good Aspect of Police Outcomes occur mostly to the common entire community and is difficult to be quantified and priced. Deterring, preventing, and detecting criminal behavior for all. Reducing the pool of criminals. Supporting societal goal of punishing for unlawful behavior. Providing a perception of security for all. Enhancing homeland security: natural disasters & terrorism. Traffic management. The monopolistic nature of public police reduces incentive to achieve the competitive marginal condition where officers are employed to the point where a sworn officer’s wage is equal to the value of his/her marginal productivity. Government and/or police can self provide or contract out to competitive bidding 9

Private Good Aspect of Police Services with few or no positive externalities provided to individuals and which can be priced Response to false burglar alarms, unlocking cars, escorting funerals, investigating traffic accidents, animal control, and searching for missing persons when no crime is suspected. Police could shed such services to competitive market. If public police wish to retain the services, they must be priced at least to cover cost so they are not subsidized by other public activities. other public or private 10 competitors should be allowed to enter.

Public and Private Police Goals Public police : Maximizing social welfare (ill-defined) Deterring, preventing, detecting crimes, and support punishment. Improve perception of security with main emphasis on control of violent crimes, and maintain statistics on crime, arrests, and conviction. Like any organization police maximize their own welfare: greater budget, increased wages, greater concentration on activities that improve image. Private security: satisfying a private or public client. Emphasis on deterring and preventing crime Less regard to detection leading to arrests, punishment, and externalities like crime displacement. 11

Attributes of Public Police Government Monopoly: Focus on easy arrests for minor crimes (consumption of minor drugs, underage drinking) and victimless crimes (prostitution, gambling) Concern mainly on events in own jurisdiction. Reluctant to change activities including types of crime. Slow to adopt new technologies and management methods. Constrained by labor regulations in hiring and dismissing officers. Facing difficulties in hiring part time officers. Sworn officers have similar background, education, and training. Limited budgetary ability to hire experts in IT, accounting, and engineering education Facing bureaucratic and budgetary difficulties in acquiring needed technological products like digital cameras when not pre-budgeted. Unable to reward by merit or provide incentives to excel. Constrained by the ability to reward by promotion mostly at the higher limited ranks. Difficulties in measuring security outcomes which leads to inefficient allocation of resources within police and for entire police budget. Inefficient in use of labor to the level where the price equals the value of marginal product. Same is true for the use of capital. Officers are often used at jobs that do not warrant their pay. Able to engage volunteers. 12

Structure of Private Police NAICS Code 5616 (Investigation & Security Services) 561611 (Investigation Services) 561612 (Security Guards & Patrol Services) All Services 1997 2002 2007 Sales (in $000) (% change) 20, 444, 077 31, 164, 968 (52. 4) 41, 597, 722 (33. 5) Establishments (% change) 21, 494 23, 068 (7. 3) 24, 998 (8. 4) Concentration Top 4 19. 5 27. 8 22. 9 Concentration Top 8 29. 0 33. 0 29. 1 Sales (in $000) (% change) 1, 819, 015 2, 326, 220 (27. 9) 4, 363, 668 (87. 6) Establishments (% change) 5, 077 4, 955 (-2. 4) 5, 059 (2. 1) Concentration Top 4 (% change) 7. 2 15. 7 27. 0 Concentration Top 8 (% change) 10. 1 19. 5 33. 6 Sales (in $000) (% change) 9, 132, 633 14, 787, 704 (61. 9) 19, 405, 389 (31. 2) Establishments (% change) 6, 644 7, 446 (12. 1) 9, 091 (22. 1) Concentration Top 4 28. 3 32. 7 30. 6 Concentration Top 8 35. 7 39. 8 38. 7 Sales (in $ billions) 3, 235. 8 13 4, 347. 2 (34. 3%) 5, 822. 8 (33. 4%)

Analysis of Contracted Private Police Low to moderate concentration for both guard and investigation services Concentration overtime remains highly competitive however concentration of investigation services rose more than guard. Investigation services are growing more rapidly than guard services. Entry barriers for both investigation and guard services are modest. Companies can easily establish their own proprietary services, creating greater competition. Buyers of services are knowledgeable. Buyers are sensitive to prices given all possible alternatives. Except in very specialized investigations, modest economies of scale. Economies of scope could exist. Example, in the semi-skilled security companies services could incorporate response to alarms, stationary, gated community, patrol, and vacation services. 14

Implications of the contracted private Police structure Prices are approaching normal profits. Prices for guard and patrol services have risen less than cost and less than the overall price index for all services between 2004 and 2008. Security companies lose business based on prices. Pressure to adopt technology and managerial innovations Market shares are not rigid. Limited mergers in industry: absence of economies of scale, and companies valued at their replacement cost. Companies are valued at their asset value with no monopolistic profits to capture. Security companies need to tailor services to client demands. Leading security companies create product differentiation to capture modest monopolistic profits. Example, Wackenhut (GS 4) guard nuclear facilities, Allied Barton secures universities. 15

Results: Low Level Security Concentration is moderate and increasing modestly (50%). Like movie production & distribution, less than soft drinks, and candy. Low barriers to entry. Relies mainly on unskilled labor, low initial investment, no regulatory barriers (training requirements are modest) Companies can and do provide their own security Homogeneous service Knowledgeable buyers Individual negotiations on contracts encourages 16 competitive pricing.

Results: High Level Security New types of economic crimes: identity theft, cyber fraud, malicious (viruses) internet crimes, counterfeiting goods, employee fraud. Police do not have the requisite skills to deal with them; they require much time and expenses, are not jurisdictionally bounded, and they lack desired press publicity. Police refrain from dealing with crimes that adversely affect profitability of firms unless directed by the district attorney. Businesses wish to avoid publicity of crime targeted at them. As a result, Economic crimes are handled by accounting, engineering, law firms, and newly created highly professional security companies. 17

Differences between Public Efficiency: Private security companies employ workers only if their and Private police marginal contribution to revenues is larger than their , marginal cost (Up to: Cw =MPw X Px). Public police often employ officers below their value of MP (Cw>MPw x Px). Cw= Cost of an officer; MPw=marginal productivity of an officer; and Px= societal value of security. Outcomes of Private security are easier to quantify than those of police. Police employ workers of similar education, and training with small variation among ranks and duties. Private police have much greater variation of labor from high school grads to forensic accountants and IT experts with graduate degrees. Differences stem from government civil service regulations for police compared to private market pay that is related to productivity. Police provide a service with little changes over time. Private police tailor the service more to client’s requirements and changing market demands. Private security moved from basic guarding and investigation to sophisticated services like cyber, identity theft, counterfeiting goods, guarding nuclear and chemical facilities. Growing demand 18 subsecuately greater specialized private security is evident for universities and hospitals.

Differences between Public and Private police (Continued 1) Public police which are constrained by budgets, bureaucratic procedures, and less affected by changes in market demands are slow to adopt technology. Private police are much faster to adopt technology when profitable. Cameras, license plate readers, data management (multiple silos, Comp Stat). Public police wages are over double than private police and the differences remain so over time (figure 4). Public police are more restricted in awarding/penalizing officers. Private police have more flexibility. Public police are slow to adopt managerial innovations copying after some time from the private sector, and private police. The private sector has always closely evaluated managers while Comp Stat was first adopted in NYC in the late 1990’s. Public police were slow to adopt Community Policing which is solving security problems to prevent crime. Private police from 19 their inception have engaged in Community Policing. When many cars are stolen in a neighborhood, an officer meets with the

Figure 4: Annual Wages of Public Police, Private Police, and Overall Employees Chart Title 57, 000 52, 000 Annual Wages 47, 000 Private Police 42, 000 Public Police 37, 000 average national wage 32, 000 27, 000 22, 000 17, 000 1997 1998 1999 2000 2001 2002 Year 2003 2004 2005 2006 2007 Source: BLS National Occupational Employment and Wage Estimates for 1997 through 2007. 20

Differences between Public and Private police (Continued 2) Public police hiring is little affected by market conditions, and actually behaves anti-cyclical. Budget are usually 3. 0 -3. 5 percent of budget. Private police employment is directly related to market conditions as expressed by GDP (figure 5. ) Public police deal mostly with “traditional” crimes but have neglected the growing economic crimes. The reasons are: 1. The rigidity of monopolies in general and bureaucratic/regulated monopolies in particular. In addition, civil service regulations do not allow hiring of highly paid professionals like forensic accountants, IT professionals, and other highly skilled professionals. 2. Economic crimes often extend beyond specific jurisdiction and thus local police departments lack interest or incentives in addressing these crimes. 3. Businesses often are concerned with negative publicity and possible exposure of irregularities and thus prefer the discretion of private police. 4. Economic crimes do not generate the same positive publicity and 21 public approval that solving violent crime provides.

Figure 5: Annual percentage change in the number of public and private police versus nominal GDP Source：BLS National Occupational Employment and wage estimates for 1997 through 2008 22

Differences between Public and Private police (Continued 3) Private police have filled the void addressing economic crime because: 1. Public police have neglected such crimes. 2. Businesses suffer of such crimes and have a strong reason in curbing these crimes. 3. Incentives exist to create PPP to solve expanding economic crimes. Private firms investigate, gather evidence, and engage the district attorney and/or the police to make the arrest and prosecute (e. g. counterfeit designer clothing. ). 23

Differences between Public and Private police (Continued 4) 4. Often it is more expensive for companies to use public police then to address the problem using private police. For example, when charges are made against an employee for embezzlement officers of the company may be required to appear in court numerous times which could be very costly and provide bad image for the company. Private investigation could simply lead to dismissal of the employee. 5. Public police have difficulties in hiring part time officers or accommodating peak time demand (except using volunteers. ) They cannot accommodate varying demand conditions without incurring high overtime costs. Private police has easy time adjusting to changing 24 demands.

Equity Considerations Claim: The wealthy enjoy better protection for which they pay. The poor remain with lower level of security. Response: The wealthy enjoy more of any goods and services for which they pay. In fact, enhanced private police in wealthy neighborhoods and business districts frees up public police to focus on other areas with high crime. In SLC, private response to burglar alarms reduced response time to other high priority calls for police response from 5 to 3 minutes. Claim: Greater security in wealthy neighborhoods and commercial districts displaces crime to areas unprotected by private security. Response: Empirical studies do not support spatial crime displacement. 25

Conclusions Benefits of Public Police: Public perception is that public police are trustworthy more than multiple private security companies. Public police officers are better selected, educated, trained, and experienced up to their value of marginal product than private security officers. However, when Pa>VMPa (=Ps X MPa) then it is inefficient to use public police. Unlike private police, public police better addresses social welfare by apprehending and punishing criminals unlike private police concentration in deterring and 26 preventing crime for their client.

Conclusions Benefits of Private Police: All the benefits that characterize highly competitive industry: lower production costs, prices close to costs, more innovations, companies always search for niche markets, flexibility in meeting client demands, flexibility in hiring/firing and use of part time workers. Private police address new types of crime that monopolistic and bureaucratic police avoid. Private police are not bound by jurisdictional restrictions. Private police are more flexible in hiring and paying market wages which correspond to productivity. This allows them to hire both low skilled and highly skilled workers which results in greater differentiation in wages compared with public police where only rank and longevity differentiate wages. Private police are more accountable to their clients while public 27 police do not need to compete nor satisfy particular clients.

Future of Private Policing The share of private police in total security has been growing and the trend is expected to continue. Private police will expand above and below the standardized service provided by public police. From below, private police will expand in guarding activities and especially in the growing industries like universities, hospitals, chemical and other critical infrastructures. Guard wages and prices of services are unlikely to rise much because of competitive low skilled labor market and the industry. Private police will expand by blending into non-security services enjoying economies of scope. For example, alarm response, patrol and vacation services. From above, private police will provide high quality IT and financial related services that require highly professional workers. 28

Future of Private Policing Tight budgets will encourage public police to shed non-public services and contract out quantifiable public services. For example, guarding prisoners, courts and other government buildings, crime labs, guarding public transit. This will expand demand for private security. The highly competitive private security industry will ensure competitive pricing. Hospitals, universities, Fed. Ex, Longwood Security formed sworn officer services in order to provide greater arrest and investigation authority. This is, however, a limited trend. Competitiveness of the industry will ensure that security firms will tap every niche market. Competition forces firms to employ technology intensively in order to deliver service cheaply, effectively, and reduce number of guards. Monopolistic public police have less incentive to introduce technology. Private security could even replace more police services and small police departments could be contracted out. 29

Recommendations Industry: Establish expertise in a particular industry or security focus. Examples, Akal guarding military installations, Wackenhut securing nuclear facilities, Securitas-universities, Allied/Bartonshopping centers. Government: The highly competitive nature of the industry makes even the existing loose background and training requirements unimportant. Additional regulation is unnecessary. Exception may be for weapon training because of externalities. Expansion of highly competitive private security is a socially desired trend and does not require cities to regulate. Free markets provide quality control, and technological and managerial innovations. Promote Public Private Partnerships like in a case of response to burglar alarms, counterfeit goods, and identity thefts. Promote Goldsmith’s Managed Competition model for local police functions. 30

Into the Future Private good services will be shed to competition among private and public entities. Public good services will be contracted out for bidding of private and public entities. The three major conditions for contracting-out are that outcomes can be quantified, transaction costs (monitoring) are lower than the savings experienced, and political barriers, in particular of labor unions, are overcome. Local police department will change from mainly providers of service to a small group of professionals that monitor contractors. This trend could reach savings, enhanced quality of existing security services , and flexibility in newly desired services. Such a trend is similar to other local services where self production is replaced by smaller groups of managed competition providers. 31

Questions?