The Public Option

by Ganesh Sitaraman

  Smaller businesses and start-ups often also cannot afford to provide benefits to their employees—and certainly not generous benefit plans. Some employers, for example, decline to set up pension funds because they are costly: today, one-third of private-sector workers have no pension plan at work and fully half of workers in smaller firms have no pension plan.12 Employees without a pension plan at work can, in theory, contribute to an individual retirement account (IRA), but the IRA subsidy is smaller, and the individual herself must do the work of setting up the account and choosing investments. Not surprisingly, few take up that option: less than 10 percent of workers without an employer plan make their own contributions to a retirement plan.13

  A public option would provide, in effect, a simplified retirement plan for all, ensuring universal access to pensions while reducing firms’ labor costs. Businesses benefit when workers arrive at work with a portable pension fund invested in secure, low-cost investments. Some employers might find it worthwhile to offer extra bells and whistles—higher contributions or different investments. But employers could also decide not to provide pensions, without dire consequences. Today, a firm that provides no pension is going to attract workers who can command no better choices, and lose workers, arguably the more talented workers, who can.

  In some cases, we might even expect that large businesses will benefit from public options. Today, major corporations spend huge sums of money and resources on benefits administration for their employees. In 2008, to take one example, Starbucks spent more money on health care than on coffee.14 Whether it is Starbucks, Facebook, or Coca-Cola, the core mission of these companies is not to provide health care or retirement services. If businesses didn’t have to provide these benefits, some might instead focus more on investing in the business. They would be free to offer benefits as a recruiting tool if they wanted, but they could instead just compete for workers based on wages and leave benefits provision (and administration) to the public.

  Shifting to the public option might be helpful to some large businesses financially too, but we don’t know by how much. Providing benefits is expensive. In 2011, employers subsidized more than 70 percent of the costs of employee health care premiums.15 Retirement plans let workers save money on a tax-favored basis, but only if their employers set up and administer the pension plan and manage employee investments (or pay someone else to do it). These are significant costs for businesses. A public option for health care or pensions might decrease these costs (because the company isn’t providing the benefit to its employees), but at the same time, someone has to pay for the public option. Depending on how public options are funded, these costs could be partly shifted from businesses. However, even if these public options are fully funded through corporate taxes, it is possible that there would be net savings for companies due to scale and because the public option would not need to make a profit.

  Stepping back, we think that a vibrant economy with ample business opportunity is part and parcel of Americans’ ideal of a good society. Public options promote that ideal by providing a stable platform for everyone in a dynamic, competitive economy.

  Competitive Markets

  In traditional economic theory, competitive markets provide consumers with choices they want at the lowest feasible price. In this sense, economic efficiency can form part of an appealing notion of fairness. When society ensures a decent foundation for all, a competitive market can then allocate resources in ways that promote consumer welfare.

  But in America today, markets have become increasingly concentrated, dominated by monopolies or oligopolies instead of robust competition. Between 1997 and 2012, two-thirds of America’s business sectors—everything from consumer products to pharmaceuticals to banking—became more concentrated.16 Less competition brings higher prices for consumers, worse service, and fewer choices. For example, in some states, there is only one health insurer participating in the Obamacare health insurance marketplace, and that means less choice and competition for consumers. When it comes to high-speed internet (download speeds of 25 Mbps or greater), only 42 percent of Americans had two or more choices for internet providers as of June 2016.17

  Markets also perform poorly when consumers can’t compare quality and price across different products. It’s easy enough to compare Empire apples at $2.49 a pound with Empire apples at $1.99 a pound. But in the higher education market, to take one example, comparisons are much harder. Students can find it difficult to ascertain the quality of the education that an institution offers. College rankings, like those offered by U.S. News and World Report, attempt to offer more information. But many critics have pointed out the odd metrics those rankings incorporate (like the number of books in the library). Another confounding feature of the higher education market is that financial aid policies vary from college to college, making it difficult to compare the true price of education at different schools. The posted tuition price is paid by only a fraction of students: the majority obtain some mix of subsidized grants and loans that reduce the total price they pay.

  Public options can help introduce more competition into concentrated markets and help consumers in confusing markets. With a public option, consumers have the ability to abandon a private product that isn’t working for them and instead choose the public option. In effect, government enters the fray as a baseline provider or a head-to-head competitor. Either way, the presence of the public option puts pressure on private actors to provide better service at lower cost.

  Economists call this “yardstick” competition, after a comment made by Franklin Roosevelt in a 1932 speech.18 In response to concerns that monopolistic private utilities were providing bad service at high costs, Roosevelt declared the “undeniable basic right” of governments to set up their own public utility services—in other words, a public option. This public option would compete with the private option, and it would serve as a “yardstick,” Roosevelt said, by which to compare the service of the private company.19

  To go back to an earlier example, if people have low-speed internet connections, high costs, and bad service, they might want to change internet providers. But in many places, including the town in Connecticut where Anne lives, there is a cable and internet monopoly, and consumers have no option to do so. A public option—like municipal broadband—would give them the opportunity to switch internet providers. At the same time, the threat of their leaving should encourage the internet provider to improve its service and cut its prices.

  A public option can even create a competitive product where one doesn’t exist. Prior to the 1930s, for instance, American mortgages were largely short-term loans. During the Depression, the federal government restructured the mortgage markets. The thirty-year fixed-rate mortgage, which doesn’t exist in other countries and didn’t exist before, was the consequence. This mortgage option, created through government action, coexists alongside shorter-term fixed- and adjustable-rate mortgages, giving homebuyers more choice and a particularly stable option.

  Racial and Geographic Inequality

  One of the biggest challenges of our time is addressing racial and geographic inequality. Even as the United States has become wealthier as a country, the gains have not been shared equally—or even relatively close to equally. The racial wealth gap between African Americans and whites is longstanding, and it likely cannot be fixed without structural reforms to the economy.20 Geographic inequality is also a serious problem. Studies show widening regional inequality, with many rural areas falling behind.21

  Public options can be a partial, but by no means a total, way to alleviate these problems. Historically, public options have had a shifting, complex relationship with race. Some public options, like swimming pools and public schools, were segregated during the Jim Crow era, which meant there were separate but hardly equal public options. Southerners in Congress forced the Roosevelt administration to exclude huge groups of workers from Social Security—many in jobs held by African Americans in the South. Other public options, ho
wever, have had far more success. The expansion of Medicaid—a public option for health care for the poor—has had a major impact in increasing the number of African Americans with health care coverage.22

  The relationship between public options and rural areas is also not a simple one. Rural areas have not benefited from every public option. Not all small towns in America have a public library, public golf course, or public swimming pool. The reason is simple: public options delivered at the local level are dependent on communities themselves. At the same time, federally provided public options often have helped reduce geographic inequality. Just before the turn of the twentieth century, Congress and the Post Office began to offer free rural delivery of the mail—instead of requiring people in rural areas to pick up their mail from the nearest post office. More recently, the expansion of Medicaid has been a boon to rural areas, where many poor people do not have health care coverage.23

  When designed well, public options have the potential to reduce some of the most trenchant inequalities in our society. We are not naive, and we don’t think they will fully address racial or geographic inequality. But a public option can provide a basic level of health care, connectivity, education, and other benefits to people who otherwise would not be able to get them—and disproportionately that tends to be racial minorities and people living in rural areas. Especially when provided at the federal level, a public option offers universal access to important social infrastructure—not a patchwork of opportunity, limited only to a few.

  Democracy

  Public options also can contribute to the social coherence that fuels a political commitment to fairness for all. Today, America is increasingly fragmented, divided by race, wealth, and political ideology. People are more likely to live with people like themselves, marry people like themselves, and even get their news from sources that confirm their preexisting viewpoints. The result is social fraying, and with it an erosion of the sense that we are all part of one national community with duties and obligations to each other.

  In prior generations, public schools and the military draft were thought to have helped stitch together our diverse society. But between residential segregation and the move to an all-volunteer military, neither institution serves that function to the same degree now. Public options can’t entirely compensate for those deep, socially connected ways of building solidarity. But they might help. Programs like Medicare and Social Security are extremely popular across the political spectrum. They are programs that unite us, rather than divide us. The GI Bill was similar. It wasn’t a universal program, but it was so widespread among returning servicemembers that it helped members of the Greatest Generation conceive of themselves as part of a single national project.24 Public options might help serve this function, rebuilding our sense that we are a national community of equal citizens.

  How might public options do this? When people see themselves as consumers (rather than citizens) and get all their goods through the private market, they think largely about themselves: their individual desires, the costs to them, and the benefits they receive. But when citizens engage with government programs, they have to consider more than just themselves. They also have to think about what kind of society they, and by extension we, want to live in—what kind of country we are. And if they want to change public programs, they have to vote, write letters to their congressional representatives, petition, and protest. Of course, the lines here aren’t perfectly clear. Many socially conscious consumers purchase goods and services based on the private company’s values; many citizens think of government in self-serving terms. But while there is a spectrum, we think there is a meaningful difference between how people see themselves when they are market participants and when they are acting as citizens. Public options encourage an active and committed citizenry, which is the essence of a free republic.

  3

  The Theory of the Public Option

  A public option has two hallmarks: it guarantees access to important services at a fixed price, and it coexists with private provision of the same service. This definition is simple enough, but there’s more to it than meets the eye. Each design feature reflects a distinctive ideal of fairness, opportunity, and market competition.

  First, the idea of guaranteed access at a reasonable price reflects the idea that every individual should have the basic resources necessary for modern life. The nature of these resources evolves with society, of course. Forty acres and a mule might have expressed the ideal in the nineteenth century, but most of us today wouldn’t know what to do with the land—or the mule. Instead, our political system should incorporate a dynamic ideal of what a decent life requires, and make it available to all.

  By contrast, in a laissez-faire market, people bid for goods with their wealth, which in turn is earned by selling goods and services to others. Not surprisingly, the result is that people with money and highly valued skills garner most of the good stuff. And they will, predictably, try to limit equal opportunity by passing on their wealth advantage to their kids.

  This is why markets are inherently a poor way to guarantee universal access to important social goods. By their nature, markets allocate scarce resources based on price. The more in demand a resource is, the higher the price will go. And the wealthy will always have more capacity to bid up prices and to capture the best for themselves. If we’re talking about nonessentials, that market dynamic may be perfectly fair. We are fine with the wealthy having, say, more BMWs and more caviar than everyone else.

  But price rationing shouldn’t be the sole mode of distributing important goods like education, retirement, and child care (to take just a few examples). Public options enter the picture in order to provide a baseline of services, available to all. And a key part of availability is a fixed price set at a reasonable level. Access isn’t meaningful unless the price is one that can be paid by everyone. For that reason, public options should set a low price, often zero, for access.

  Another critical feature of public options is that they are public, which is to say that they’re provided by the government. Government provision guarantees that the public option can provide universal access at a fair price—and that the price will be set by government rather than by private enterprises.

  No less an authority than Adam Smith, arguably the founder of the faith in free market economies, explains why public options need to be public:

  It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.1

  Smith knew that private firms don’t act out of philanthropic motives. They act to make profits, and indeed to maximize profits. Economists who walk in Smith’s footsteps predict that prices will adjust until market supply meets market demand. The final price for any good or service will ensure that firms can pay their owners a market rate of profit. But there is no reason to suppose that the market will guarantee all citizens access at a fair price.

  Consider the more than 17 million cars sold in 2016.2 Sellers like Ford, GM, Toyota, and others offer consumers an array of options, from energy-efficient cars to monster trucks. Consumers comparison-shop, bargain with dealers, and eventually settle on what they believe is the best deal. The result is what economists would call a well-functioning marketplace. Sellers make a profit sufficient to keep (most of) them in business, and consumers generally feel satisfied with their purchases.

  All well and good, except for one key outcome: because price is set by supply and demand, there is no pretense of universal access. Sure, anyone can buy a car, but only if they have the money to pay the going rate. In 2016, for example, the average new car sold in the United States cost $34,000. That is about 80 percent of the annual salary of the average U.S. worker.3 Those who can’t come up with the cash or borrow have to make do with other options: used cars and public transit.

 
; It isn’t a coincidence that one of America’s most important public options—public transit—coexists with the car market. As a society, we’ve chosen to let the car market operate on Smith’s principles. But we’ve also chosen to provide a public option so that people with less money—notably, younger people and poorer people—can get around. To be sure, public transit is unevenly provided. Some cities and states do a better job than others, and rural areas are hardest hit by the lack of a public option. But when you consider a locale like New York City or Washington, D.C., you can see how important it is to offer a public option that is deliberately disconnected from the Smithian profit motive.

  It’s important to note that our justification for public options isn’t the narrow and myopic justification that economists usually rely on for government action. Economists like to say that government action is warranted only in cases of market failures—that is, when the market doesn’t do a good job of producing enough of a good or service. This is especially true in cases of what economists call public goods—like national defense or the environment—which the market won’t be attentive to because each individual doesn’t have enough of a selfish interest to produce that good or service.

  While we agree that market failures and the provision of public goods can be justifications for having a public option, we think that public options advance a lot of other public values that are independent of markets. Many programs have huge spillover benefits. Think about public schools. When more people have access to education, it means a more competitive workforce and better citizens. That isn’t just good for the individual student; it’s good for the entire community—and for the country.