When Public Is Better

Long before we thought of founding The American Prospect in 1989, I came to know Paul Starr through a prescient article titled “Passive Intervention.” The piece was published in 1979, in a now-defunct journal, Working Papers for a New Society.

As Paul and his co-author, Gøsta Esping-Andersen, observed, the American welfare state is built on terrible, even disabling compromises. Progressives often lack the votes to pass legislation to deliver public benefits directly. So they either create tax incentives or bribe the private sector to do the job, thus inflating a bloated system. “The problem is not too much government activism,” they wrote, “but too much passivity.”

Their two emblematic examples were housing and health care. In housing, tax advantages became an inflation hedge for the affluent and drove up prices. Low-income homeownership programs, run through the private sector, had huge default rates. In health care, the political compromises necessary to enact Medicare excluded serious cost containment. When they wrote this, health care consumed 9 percent of GDP compared to 17 percent today. The subprime mortgage scandal was decades in the future.

After 34 years, the same dynamics are far worse. In the run-up to the financial collapse, private securitization of subprime mortgages pretended to serve the social objective of increasing low-income homeownership. Nobody fully understood the risks—not the brokers who originated the loans, or the banks that sliced them into bonds, or the credit-rating companies that blessed them, and certainly not the regulators who feigned oversight. In the aftermath of the collapse, government now gives “incentive payments” to the very banks that created the mess, bribing them to modify mortgages in the hope of reducing foreclosures. This privatized program is a byzantine mess and a policy failure.

Better to have a public institution, such as the Roosevelt-era Home Owners’ Loan Corporation, serve the public goal of refinancing homes directly. The HOLC was simplicity and transparency itself. As was the original public Fannie Mae. Both programs sold Treasury bonds to create credit for homeowners. No private players took a cut or generated extra cost and risk, and there were no scandals.

Passive intervention—serving public goals by making them lucrative private profit centers—not only increases costs; it increases complexity, which in turn invites inflation, confusion, and corruption. Though private abuse is responsible, government as sponsor gets the political blame.

 

Depending on how vigilant the government is, the Affordable Care Act (“Obamacare”) could be a partial step to universal insurance—or another epic passive intervention. Rather than having government provide coverage directly, as Medicare does, the ACA requires people to purchase private insurance, subsidized for less affluent people and regulated by government.

But the more indirect the government involvement, the more it invites gaming. The press has been full of stories of big companies trying to break into units of fewer than 50 employees to evade the law’s threshold requirements and employers shifting full-time workers covered by the ACA to part—timers who are not. In Massachusetts, where the model for Obamacare was invented, the state tolerates employer-provided plans that leave consumers on the hook for a huge share of medical bills.

Over time, public Medicare has become far better than private plans at lowering costs. However the ACA is not a public program but a fragmented private insurance pool. In principle, the ACA allows the new state “health exchanges” to exert bargaining power over private plans, but they may also merely list and certify private insurance products. So this hybrid could add yet another layer, with little effect on cost.

Complexity invites more complexity. Foundations and industry groups have launched a $100 million nonprofit called Enroll-America.org to sign up uninsured people—who have every reason to be confused. Money is wasted explaining how to enroll in a bewildering system that could have been simple and automatic had it been public social insurance. The multiple moving parts also facilitate Republican mischief at every stage. As consumers grow frustrated with the complexity, cost, and incomplete coverage, guess who will take the blame?

The privatized drug insurance that trades on Medicare’s good name (Medicare Part D) is yet another example of the inefficiency of passive intervention. Direct, public prescription coverage would provide more benefit at less cost, by excluding industry middlemen. One could add the inefficiencies and corruption of privatized prisons and halfway houses, or for-profit voucher schools that do worse than their public counterparts.

Government, of course, should not run everything. But when it comes to social outlays, simpler is better, and simpler usually means direct government provision. Alas, government is in such low repute nowadays that legislatively, passive intervention is all liberals can get. For instance, President Obama, in proposing universal pre-kindergarten, did not dare suggest simply extending public education to three- and four-year-olds. The best we can expect is a patchwork of church-basement programs and for-profit preschool franchises.

It’s time—long past time—for progressives to call out the inefficiencies of private provision of public goods and make a clear-throated defense of government. Otherwise, our government will keep taking the fall for the failures of private profiteers.

Comments

"Over time, public Medicare has become far better than private plans at lowering costs."

That is simply untrue. It is one of the biggest misconceptions ever made. In fact, Medicare does little to lower costs; it merely has the weight of the federal government behind it, which allows it to simply wave a magic wand and tell providers it will compensate them less for the same goods and services. Providers are left with the option of either not accepting Medicare, or (as most still do since they don't want to ignore one of their biggest customer bases) pass their costs (which have not, after all, been lowered by the waving of the magic wand) on to other insurers, and thus, drive up the costs for all of the non-Medicare customers.

So what? It's not "untrue" or a "misconception". It is a matter of fact that Medicare, like other nationalized programs abroad, costs less than private care. So does Medicaid and the VA. It is the private sector which cannot control its costs. Governments, everywhere around the world, are doing it better.

Your argument is irrational. We have fewer doctors today because government regulation and red tape are driving people out of the industry. With fewer doctors, the supply drops forcing the price higher. You cannot artificially change economics. The other problem is that Obamacare is not going to lower cost. They did not add the additional monies they have to pay the doctors into the law.

"Over time, public Medicare has become far better than private plans at lowering costs."

That is simply untrue. It is one of the biggest misconceptions ever made. In fact, Medicare does little to lower costs; it merely has the weight of the federal government behind it, which allows it to simply wave a magic wand and tell providers it will compensate them less for the same goods and services. Providers are left with the option of either not accepting Medicare, or (as most still do since they don't want to ignore one of their biggest customer bases) pass their costs (which have not, after all, been lowered by the waving of the magic wand) on to other insurers, and thus, drive up the costs for all of the non-Medicare customers.

Private property and individual freedom really hamper the plans of Blg Government Liberals (aka progressives that hate real progress.)

There is a potential catch-22 in this that is lurking in one of the first sentences: "Progressives often lack the votes to pass legislation to deliver public benefits directly." And why are these votes lacking? The usual reasons are that direct provision of public benefits will inconvenience some important interest group or that Congress fears that another important interest group will hijack the program to its own benefit and defeat the proposed program's goal. Turning these programs over to some sort of private entity is often seen as a means of protecting the program from political pressures. About a year ago Peter Orszag published an article in The New Republic in which he proposed that the tax code and public works projects would be improved if these issues were removed from the control of Congress (i.e., democratic politics) because of the pernicious influence of special interest groups on these kinds of legislation. Perhaps welfare programs have the same difficulty. It is the politics of democracy itself that leads to inefficiencies rather than the design of these programs per se.

By the way, Medicare lowers costs primarily by its power to politically impose its rules on hospitals. It invites gaming and only partially addresses the potential problem of over-utilization.

"Progressives often lack the votes to pass legislation to deliver public benefits directly. So they either create tax incentives or bribe the private sector to do the job, thus inflating a bloated system. "

The solution is simple - have the state based system. The states is bigger than European country. They can run "simple-payer" system if they choose to . In places like CA, NY, democrat has super majority. they can pass anything they. Why can't they do that in Detroit? After all, Obama received 97.2 % of votes there.

You only need to look north of the border for a 'states' based system.

Contrary to myth, Canada does NOT have a NATIONAL / federal Single Payer health system. Canada has a series of Provincial Single Payer health systems. The Single Payer sytem was initiated by different provinces ar different time covering different health servces. The separate and independent systems have evolved over the last 50 years or so to be quite similar.

'National' coverage works like this. If a citizen of Ontario gets in car accident in Quebec, the Quebec government will ask to see if the Ontario citizen has coverage under the Ontario govt plan and will bill the Ontario govt for services provided. If the Ontario citizen has been dumb/lazy and has not registered and paid their govt health insurance premiums the Quebec govt will insist on cash payment for services.

Also contrary to popular myth is the extent of services covered by various Provincial health plans. Provincial govt health plans typically do NOT cover any of the following: birth control, prescription drugs, dental, alternative therapies or cosmetic surgery. There may be partial/limited coverage for chiropratic or massage therapy. The coverage mandated by 'Obamacare' goes way beyond what is normal for Single Payer coverage in Canada.

Provincial govt health plans are generally paid by provincial taxes (income and sales). The Canadian federal govt does provide some 'health grants' but there are no-strings, no mandates attached monies and in reality the provinces can spend this money any way they want. Health care in Canada is defined in the Canadian Constitution as an EXCLUSIVE provincial responsibilty; that is the legal, practical and political reality. There no popular movement or political pressure a foot to change this reality. The thought that the federal govt should administer health care strikes most Canadians as an absurd notion.

Sounds good to me. Let the states choose to do what they want yo do.

Kuttner's simplicity argument is very appealing. But there is a reason why America has preferred private/public partnerships since the New Deal. Anyone who thinks the best way to avoid "confusion, corruption, inefficiency and gaming of the system" is to create a government program has never dealt with a government program.

Regarding health care: Most discussions ignore the obvious fact that healthcare costs more now because we use more of it. There is one foolproof way to reduce healthcare costs to zero: Simply stop treating people.

In virtually all the areas where Mr. Kuttner would like to see more government involvement (read: control) I prefer to take my chances with the private sector.

Agree, and I'm kind of right wing. Nixon and his administration advocated a Negative Income Tax: if poverty is the problem, and we want to absolutely eliminate it in its most extreme forem, this works, guaranteed. And maybe if that were done, whatever could be arranged to make opportunity more available would have a chance too. Rather than assistance vs. opportunity ending up creating another subsidy for the richer and older folks, as practically anything to do with entitlements or taxes has become in reality.

Agree, and I'm kind of right wing. Nixon and his administration advocated a Negative Income Tax: if poverty is the problem, and we want to absolutely eliminate it in its most extreme forem, this works, guaranteed. And maybe if that were done, whatever could be arranged to make opportunity more available would have a chance too. Rather than assistance vs. opportunity ending up creating another subsidy for the richer and older folks, as practically anything to do with entitlements or taxes has become in reality.

Only a fool, a liberal fool like Kutner would believe that more federal intervention in the housing market would be a good thing. How can anyone be so blind to the lessons of recent history. The governments low interest, no downpayment home loan policy contributed to the housing bubble and direct federal assistance in housing created the public housing debacl- billions spent on huge housing complexes that became slums over the course of a single decade.

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