Richard Thaler has a column in the NYT that may leave many readers scratching their heads. He argues that a public option is a good idea, as long as the reimbursement rates for providers are not set too low, because then it would drive out private competitors. This is a bit hard to understand. Presumably, his concern is that if we just had a single government insurer that it would become bureaucratic and provide bad service. But no one in the Obama camp is talking about outlawing private insurance, so if we did have a huge government plan that became bureaucratic and inept, why wouldn't smart enterprising individuals set up private insurers to compete with it? If the system is bad, then wouldn't the free market allow for competitors to take away market share? This is the standard argument that economists make all the time in the context of concentration in various sectors of the economy and there is certainly considerable truth to it. (Remember when GM had the dominant position in the U.S. auto industry?) It seems impossible to make any sense of the idea that we will see a government insurance plan dominate the market and that it will be bad. A public plan may come to dominate the market, but presumably this would mean that it is providing better service for the money than private competitors, actual or potential. Isn't that what free market types would believe?
--Dean Baker
