Lines Blurred Between Government, Business Roles

The partnership between government and business is tighter than ever, blurring legal and ethical lines between the two, say concerned observers, and the collaborations have yet to prove themselves as a net positive for the American public.

Two examples cited by experts of the growing overlap between government and private industry are home loan giant Freddie Mac, which was ordered by the Federal Election Commission on April 18 to pay a record $3.8 million to settle charges it made illegal campaign contributions, and the Internal Revenue Service, which recently hired private debt-collection firms for the first time to chase down delinquent taxpayers. But although some say the ties are an innovative and effective form of government, others call for more scrutiny.

"Government should ensure that entities aren't being 'government' on Tuesdays and Thursdays and private the rest of the week," said Ron Moe, a retired senior specialist in American government at the Congressional Research Service.

The conflict between government and business is not limited to the federal arena — a state's "independent agency," an organization created by government for a specific purpose, can also pose problems. Maryland, for instance, has at least 26 such agencies listed in the Code of Maryland Regulations. At the federal level, 63 independent agencies and government corporations are operating, according to

Often difficulties arise with these public-private entities because their relationships are not always spelled out in law. In Maryland, the issue surfaced in U.S. District Court last month in a lawsuit filed against the Maryland Environmental Service, a corporation created by the state to manage air, land and water resources.

U.S. District Judge Benson Everett Legg threw out the case, ruling that MES is "an instrumentality of the state of Maryland" and thus immune from suit in federal court under the 11th Amendment.

"Given the structural complexity of state and local governments, it is sometimes difficult to tell whether an agency is 'properly characterized as an arm of the state, or of the local government,' wrote Legg, quoting a 1996 federal appellate court ruling.

Under the 11th Amendment, state agencies are shielded from lawsuits by the doctrine of "sovereign immunity." This doctrine, rooted in English common law tradition and which also protects the federal government, is at the core of the public-private conflict, said Moe.

Traditionally, sovereign powers, including full financial support from the U.S. Treasury, have been reserved only for the government, Moe said. But when governments cross over into private business, this power divide is thrown out of balance.

"Why the state does this is mysterious," Moe said. "The downside is that you've invited the state to participate in internal affairs. This gives the impression the state is watching over when it may not be at all."

This impression enables some companies to get away with illegal practices, said Moe, citing the two-year, $11 billion accounting scandal at Fannie Mae, Freddie Mac's main competitor. Freddie Mac emerged last year from its own two-year, $16 billion accounting scandal.

These same concerns may emerge this summer, when private debt collectors will begin seeking unpaid IRS taxes. Regulations prohibit the IRS from harassing taxpayers, but those rules do not cover private collectors, Moe said.

The wall between government and business crumbled when business schools adopted a philosophy based on mixing the sectors, Moe said. Now, the idea that government and private business should be distinct has been all but abandoned.

"It's considered creative and entrepreneurial to mix the sectors," Moe said. "I'm arguing it's not a good thing."

However, some say such hybrid organizations have spurred better government, from the early electric utilities to the Tennessee Valley Authority. Ted Gaebler, co-author of the 1992 book "Reinventing Government," said government suffers from a lack of competition and needs to dabble more in the private sector.

"If we don't try new things, we might as well go back to the time of Jefferson and assume that everything has been done that could be done," said Gaebler, city manager of Rancho Cordova, Calif., and a fellow at the National Academy of Public Administration.

The IRS has promised strict oversight of tax collectors, but a general lack of such control of public-private partnerships fosters abuses, Moe said.

On the other hand, Gaebler said, such failures are a natural step toward progress.

"Somehow in government it seems that we're not allowed to fail," Gaebler said. "Government needs to fail its way to success. Progress is always made by people who make mistakes."

Capital News Service contributed to this report.