The American Republic has long had a set of public and non-profit institutions that enrich our democracy by demonstrating that society is more than a mere market. The most expansive and explicit of these began in the New Deal, such as Social Security and later Medicare. However, public and communal institutions have a venerable history as old as the Massachusetts common schools of the 1660s. The 19th century saw a flowering of non-profit, communal self-help organizations—charity hospitals, credit unions, workingmen's building and loan associations, fraternal and ethnic mutual aid organizations, trade unions, settlement houses, YMCAs, farm bureaus, and the like. In this century, the non-profit sector added major new organizations such as Blue Cross/Blue Shield, community colleges, and so on.
To understand these institutions merely as "providing services" is to understand them far too narrowly, for they play a crucial civic and political role. By defining affiliation on the basis of membership and need, rather than individual purchasing power, these solidarity institutions not only cushion people from the unsentimental and often devastating verdicts of pure markets. They enrich the meaning of citizenship, broaden the fabric of community, and strengthen an ethic of service and stewardship—a countervailing logic to the logic of markets. They are part of the nations's accumulated stock of social capital.
They also help anchor modern liberalism, both as public philosophy and as politics—perhaps more than many liberals appreciate. Politically, solidarity institutions provide important institutional and ideological ballast that helps stabilize politics on a center course against periodic riptides to starboard. Ordinary people tend to value these institutions. Thus, when zealous conservatives, or faithless liberals, are tempted to sacrifice, say, Medicare on the altar of budget balance or the fashion of privatization, they run into the inconvenient political fact that voters prize Medicare. The citizenry has grasped that Medicare, with its universal membership and free choice of doctor and hospital, beats anything the private market has on offer. Likewise, when Ronald Reagan's theorists of privatization set their sights on the most costly and redistributive public program of them all, they were quickly advised that Social Security was politically untouchable.
These institutions have deep roots and strong affiliations. Notwithstanding temporary political enthusiasms and majorities, they resist quick dismantling. Thus, though we are well into the second decade of conservative ideological hegemony, the legacy of solidarity institutions has prevented conservative ascendance from turning into a complete rout. That is, until now.
After a long lag, the forces of marketization now possess both the ideological self-confidence and the institutional leverage to seriously challenge extra-market organizations once thought impregnable. And, sadly, they are often joined in this endeavor by many well-meaning liberals who are confused both about politics and first principles.
Free market conservatives are mounting this assault in the name of the market's two favorite appeals—efficiency and choice. Supposedly, greater privatization of public schools, health plans, retirement systems—whatever—will allow them to be run in a more cost-effective, businesslike fashion. Privatization also promises greater individual choice and thus the superior accountability of the marketplace. Solidarity is out, market is in. A citizen is nothing but a consumer.
In the case of Social Security, privatizers offer the promise of greater solvency and higher returns. It's the Nineties: retirees should stop thinking like pensioners and start thinking like investors. By putting some of their Social Security nest egg into stocks and bonds of they own choosing, like free consenting adults, instead of having their funds managed (and guaranteed) by the Nanny State, they can experience the joys, yields, risks, and occasional surprises of the money markets.
Marketization of non-profit institutions, likewise, is touted as promising greater efficiency, modernization, and choice. Non-profit hospitals are said to be poorly managed, under-capitalized, and stuck with excess capacity. Just as a no-nonsense corporate raider moves to shape up or shut down wasting assets in the steel or airline industry, entrepreneurs are quickly buying up non-profit hospitals and health plans. This is the market's road to rationalization of the health care sector, with its overbuilt and underfilled beds, its chronic inflation and administrative cobwebs. These is, of course, also a downside. The market is famous for jettisoning cost-centers—like sick people.
Yet many liberals find this crusade seductive. The market is dynamic, efficient and modern. The state is archaic, bureaucratic and unfashionable. Why shouldn't institutions like schools, health plans, and pension systems be run more like businesses? The modern neo-liberal, to demonstrate his hipness, gamely rolls his eyes at the hopelessness of public school bureaucrats, the self-serving backwardness of teachers unions. Liberals can play this game. We can privatize just as well as the conservatives.
This issue of The American Prospect includes four articles that describe the assault of the privateers on non-profit and public institutions. The story they tell is both instructive and depressing. In many respects, what remains of the solidarity sector is ripe for the picking. Almost by definition, this sector takes on society's hard cases. If easy money were to be made, public education in central Harlem or the care of the infirm elderly would have found an entrepreneurial solution long ago. As resources are diverted and prove inadequate to difficult social problems, institutions start looking threadbare and unattractive. Those on the front lines feel depleted and unappreciated—and the market beckons. The champions of the social sector have not done a good enough job at defending the rationale for its existence, or appreciating its political role. Administratively, some of this sector is almost as archaic as its critics allege. And some of its stewards are all too eager to cash it in.
On the other hand, in some cases privatization is more formidable a task than the privateers imagine. As Peter Schrag recounts in his article on public school privatization ("'F' is for Fizzle") the first wave of for-profit education entrepreneurs mostly failed. For one thing, it failed arithmetic. If one is serious about educating children, much less inner-city children or special-needs children, there is no magic pedagogic bullet, no gross inefficiency to be squeezed out by more businesslike managers, no quick buck.
After conceding defeat in an ambitious first wave assault which overpromised both to communities and investors, the school privateers are now settling for more modest incursions—offering to manage schools and school systems rather than take them over. But this is only a tactical retreat. These people and this fashion are not going away. As long as conservatives are intellectually ascendant and schools are imperfect and costly, vouchers, charter schools, and other instruments of fragmentation will have wide appeal to many legislators and parent/taxpayers.
As a solidarity institution, the common school is already badly fragmented. Citizens in a well-to-do suburb may still cherish their local school system, but they feel little fiscal affinity with the bottomless pit of social need in the inner-city. The effort to equalize school funding, much less to increase resources, has mostly stalled. Given fiscal scarcity, to the extent that budget-equalization succeeds in bringing poor district spending more nearly in line with that of rich districts, it proceeds by what educators call "levelling down" rather than "levelling up." And the more that school funding is curtailed by fiscal stresses and federal cuts, the more affluent parents desert to private schools.
As a remedy, vouchers and privatization would only accelerate the fragmentation. Instead, public school systems need to show that they can be as nimble, innovative, decentralized and accountable as their entrepreneurial suitors. Charter schools do stimulate innovation. Within limits they are fine, as long as they don't divert resources from the main public system or turn out to be the entering wedge of vouchers or for-profit privatization. But perhaps they are unnecessary. In a number of cases, such as the widely acclaimed Central Park East school in East Harlem, a pure public school led by a gifted educator has shown that it can trump the privatizers.
Deborah Meyer, principal of that institution, begins her recent memoir, The Power of Their Ideas, with a chapter titled "In Defense of Public Education." She writes, "Schools dependent on private clienteles—schools that can get rid of unwanted kids or troublemaker families, exclude on the basis of this or that set of beliefs, and toss aside the 'losers'—not only avoid the democratic arts of compromise and tolerance but also implicitly foster lessons about the power of money and privilege, a lesson already only too well known by every adolescent in America." Public schools, she adds, "offer opportunities for a sense of community otherwise solely missing, for putting faces and names to people we might otherwise see as mere statistics or categories.....[D]emocratic 'conversation' is often loud and rude, and sometimes leaves scars and neighborly hostility. But if democracy survives such hostility it's because we assume we're members of a common club, stuck with each other. Public schools can train us for such political conversation across divisions of race, class religion and ideology."
There is, in short, more than one brand of motivation. If we can just resist the temptation to strip public and community institutions of assets and turn the whole mess over to entrepreneurs, the motivation of squeezing out more money for the shareholders is no match for the motivation of a dedicated classroom teacher or devoted principal. The market has no monopoly on efficiency, motivation, or choice—that is as long as we don't put non-market institutions out of business as role models.
In healthcare, meanwhile, runaway privatization is here. Columbia/HCA, a for-profit hospital chain that did not exist a decade ago, has bought upwards of 350 hospitals, often converting nonprofit and charity hospitals. Its latest acquisition is Blue-Cross/Blue Shield of Ohio. It has also taken over several Catholic charity hospitals, appropriating the capitalized value of the below-market labor of nuns and lay Catholics motivated by a religious mission.
The conversion of non-profits to for-profits is a barely appreciated form of privatization with far reaching consequences. Well established common law holds that the trustees of a charity may not appropriate charitable assets for personal gain. But those bent on acquiring or converting non-profit hospitals, health plans, or HMOs are able to circumvent that requirement by setting up a charitable foundation and buying the assets of the existing non-profit for cash. The entrepreneur then makes off with the enterprise, often at a bargain basement price. The foundation, often with an ill-defined purpose or governing structure, gets the money.
As Judith Bell's article ["Saving Their Assets"] on the conversion of California Blue Cross/Blue Shield shows, the best outcome in the current climate occurs when consumer groups are able to prevent wholesale looting of the non-profit's assets (as has occurred in many other conversions) via sales at below-market prices. But what is the fair-market value of a non-profit? What is the long-term cost to the community when it ceases to exist as a non-profit? In the California case, consumer advocates were able to negotiate a high price and a foundation able to pay for a good deal of health care for the poor. Still, the larger public issues of whether non-profits should be on the auction block at all, of who supervises the successor foundation, of what residual obligation the new for-profit owes the community, have not been joined. Nor does the nation have a coherent set of ground rules to govern when and how such conversions should be allowed.
Blue Cross began in the Clutch Plague as an institution whose express purpose was to make sure that hospitals got paid. But Blue Cross/Blue Shield soon matured into an institution with broader social purposes. In its heyday, it "community-rated" the cost of its insurance. That is, it charged a common rate to high-risk and low-risk individuals and groups—as social insurance logically must do. Blue Cross, like community hospitals, had something of a social conscience. It took care of a disproportionate share of expensive cases. But as Blue Cross has come under increasing competitive pressure from profit-motivated health plans, it has begun behaving more like them, seeking to avoid the risk of insuring sick people, or charging them more for their insurance.
The sad fact is that, in an era of rampant marketization, there is less and less distinctive about Blue Cross to save. One recalls Orwell's Animal Farm, where, after a while, the pigs and the humans looked pretty much alike. There is a similar cost-cutting race-to-the-bottom in the case of HMOs and hospitals, where a contagion of risk aversion and cost cutting, rather than service, has spread from the for-profits to the nominal non-profits. "Saving" a non-profit institution, if it is far down this road, is a Pyhrric victory.
As these pressures intensify and as helping institutions become explicitly or implicitly profit-maximizing institutions, there are costs far beyond the cost of sick people not getting care. Society is being systematically denuded of habitats that nurture an ethic of service rather than profit. These institutions took decades—sometimes centuries—to build, and they will not easily be replaced.
We should think twice before accepting the claim that for-profit necessarily equals more efficient. It was not old fashioned savings and loans, which were non-profit mutuals owned by their depositors, that turned speculative and cost the taxpayers hundreds of billions of dollars. That debacle occurred after most S&L's converted to profit-making institutions. Credit unions, which are still non-profits owned by their members, have not cost taxpayers a dime. Home health care was long a charitable service of visiting nurses and nurses' aides. Recently it has been expanded, by policymakers looking to combine better service and lower cost for infirm people who can be kept out of expensive and disspiriting institutions. But, in keeping with the fashion, the entrepreneurs have moved in. In New York state, where the business of home care has become a lucrative profit center for private businesses, the hourly cost billed to Medicaid has climbed to nearly a hundred dollars an hour, of which the nurse's aide gets less than $10. Non-profits do the job more ethically and efficiently.
The crown jewel of this story is, of course, Social Security. Here, privatization managed to sneak up on us. In the budget negotiations, both parties pledged to leave Social Security alone. But as economists Joseph Quinn and Olivia Mitchell ["Social Security on the Table"] and investigative reporter Robert Dreyfuss ["The Biggest Deal"] explain, a narrow majority of an official advisory commission supports one of two plans for partial privatization. Defenders of the existing system, led by Robert Ball, got six out of 13 votes for a plan to shore up Social Security's finances, allow some of its assets to be invested in the stock market, but retain it as an integrated, universal system.
By contrast, the other two plans, commanding seven votes between them, would divert some of the Social Security payroll tax to a new system of super IRA's. This prospect has bankers and brokers fairly salivating, for it would mean literally trillions of dollars shifted from public management to private money managers. As Dreyfuss's article demonstrates, the policy debate has an unacknowledged undertow, courtesy of the lobbying of hungry money managers. The diversion of even a fraction of Social Security moneys to individual accounts is potentially insidious, since it would fragment what is America's most universal system. Over time, as the wealthiest bailed out, the constituency for the anti-poverty aspect of Social Security would gradually erode. Privatization is advertised as a solution to the system's solvency problems, but the Ball plan would stabilize Social Security's finances, and without destroying the system in order to save it. This is merely an advisory commission, but privatization of Social Security promises to be the next great debate.
In 1981, Conservative Digest published a famous manifesto by Howard Phillips titled "Defunding the Left." Phillips (accurately) observed that certain social programs of the 1960s, like VISTA and Legal Services, allowed progressive lives and values to be lived at taxpayer expense. The right succeeded in dramatically reducing their funding. Today, the privateers' assault on solidarity aims at extirpating a much broader left—not the left of 1964 or even of 1933, but the left of 1789.
If we are to survive as more than a giant market, it is important both to broaden the language of choice and efficiency, and to recognize this challenge for what it is. If these assaults succeed, not only will American society fragment further. The result will be a kind of death spiral of the American commons. As the most affluent desert, and the poorest and least popular will get ever more meager leavings. And if solidarity institutions disappear, it will be far harder for liberals to catch the political wave when the public mood has inevitable second thoughts about its romance with markets.
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