Most fundamentally, many areas we think are ripe for public options provide goods that we think are morally desirable for every American to have. Health care and a secure retirement are great examples. Regardless of wealth, class, race, or geography, everyone should have access to good health care and everyone should be able to have a secure retirement. What matters in these cases isn’t market allocation or profit. No, what matters is widespread access at a reasonable price, so that everyone can use the service and so that our whole community benefits. With those justifications as our foundation, the question is how society can best provide these goods to all people.
This brings us to the second critical feature of public options—that they coexist with private (which is to say, for-profit) provision. Markets, when well structured, promote consumer choice, and choice is an important part of freedom in a capitalist society. People make meaningful choices when they choose to save for a prized possession, or to forgo a car and invest in some other activity altogether. But there’s no need to go to extremes, to create a false choice between private markets and a Soviet-style state monopoly on car production. The combination of markets plus public options is superior to either of these extremes.
To be sure, sometimes the government should claim a monopoly on important goods and services. National defense and the monetary system are good examples. Everyone in the United States benefits from the military, and there isn’t a private option. No matter how rich you are, you aren’t permitted to fund your own army and wage war as you choose. The government also operates a monopoly on printing currency, so the dollar is the only unit of exchange in the marketplace. Today bitcoin, a virtual currency, claims to be challenging the government monopoly. It’s unlikely to supplant the dollar, but if one day we start thinking of dollars in terms of bitcoins instead of the other way around, the greenback may become a public option.
Where to draw the line—when to have exclusively public or private provision—is a serious and continuing debate. Consider the court system, which is traditionally a government monopoly. Increasingly, the courts are a public option: they exist alongside a huge, private industry of private dispute resolution services, from arbitration to mediation and beyond. Indeed, many of us have agreed to use those services when we hastily click “agree” to those unreadable “terms and conditions” in our bank accounts and credit card agreements. Many banks, for instance, require credit card holders and borrowers to settle disputes through arbitration, and the American Arbitration Association is the principal private arbitrator of choice.4 Should we allow the arbitration system to take over citizens’ traditional right to have their day in court? Questions like these are hard, but our point here is simply that they are hard questions. We shouldn’t think that the only solutions are exclusively public or exclusively private.
What’s a Reasonable Price?
A public option guarantees access at a reasonable price, but people may not agree on what is “reasonable” to pay for a given item. A standard $135 monthly Medicare premium, for instance, may seem cheap to an upper-middle-class retiree but prohibitive for a retired minimum-wage worker. Another issue arises because many public options impose conditions other than price. You can’t register your child for public school unless you can provide proof of residency and vaccinations. And you can’t claim Social Security unless you’re a worker with a substantial, documented work history (or that worker’s spouse).
For all these reasons, there can be no magic formula for setting the price of a given public option: social context and public discussion will and should inform public pricing. Take Social Security as an example. We all “buy” Social Security by paying taxes that are deducted from our paychecks. Today, the payroll tax that funds Social Security retirement benefits is 12.4 percent.5 So a worker who makes $100 per paycheck pays $12.40, while a worker who makes $1,000 per paycheck pays $124.00.6
Whether Social Security taxes are reasonable depends, of course, on your views about Social Security. One might expect Americans to have polarized views on the subject, given the polarized politics that dominate Washington these days. But four out of five Americans think the program works well, and they are happy to pay current taxes and even a bit more if need be.7
Setting a reasonable price for public options is a classic task for politics, and one that politics often does well, because price is transparent and highly salient. If the State of Connecticut tried to raise the daily parking fee for Hammonasset Beach from $10 to, say, $50, the governor and most members of the General Assembly would hear about it immediately. For nearly anyone, $10 is an affordable price for a day at the beach, especially because that’s per car, not per person. But at current income levels, $50 changes the budget equation for many people: that’s a dinner out or a couple of bags of groceries.
So even though there is no magic formula, support for programs like Social Security and the adequate transparency and influence of politics help explain why we are not terribly concerned that setting a reasonable price will be a stumbling block for public options. Free is always a happy price, and sometimes it’s the reasonable one, as in the case of public schools: the goal in that case is to encourage all parents to send their kids to school. When a non-zero price makes sense, it’s usually to prevent waste: the 55-cent price of a stamp is a good example, because it permits anyone to mail a letter but doesn’t permit mailers to spam every mailing address for free (the spammers have to go to the internet for that).
At a higher price point, consider Medicare. We tend to think of Medicare as a single program, but technically it has several parts, each priced separately. The premiums for hospital care, doctors’ fees, and prescription drugs reflect an effort to ensure universal access while guarding against overconsumption of health care. The result is a complicated pricing system that incorporates a sliding scale based on income (for doctors’ fees and prescription drugs). The system isn’t perfect: among other defects, the system requires copays that can be very high for people who get sick, and not everyone has the cash to buy a “Medigap” policy to protect themselves.
But, once again, the politics of Medicare pricing work pretty well, because the prices are (fairly) transparent and salient. By contrast, it’s much harder for consumers to evaluate the true cost of private insurance policies, which differ by state and by policy terms. (If you really doubt that statement, we invite you to log onto any insurance company’s website and click through the many steps needed to price and compare the individual policies for which you’re eligible. It took Anne forty-five minutes to figure out how much Aetna would charge for a policy for herself and her kids.)8
Let’s turn now to the second concern about pricing: non-price conditions. You might reasonably object that access to public options isn’t truly universal if people must jump through extra hoops to participate.
Of course, private firms impose non-price conditions as well. Car insurance companies can exclude teenage drivers and people with too many accidents on their record. Banks can deny you an account if you have too little money. Employers can decline to hire you for a wide array of reasons, including your work history, your credit history, and whether they like you. (They can’t discriminate based on race or sex, but in many places they can discriminate based on lots of other criteria.)
So the possibility of non-price conditions isn’t unique to public options. The real question is whether public options will impose reasonable conditions—or whether politicians will impose unreasonable entry requirements that will defeat our aspiration of providing universal access at a reasonable price.
We agree that, in theory, this kind of thing could be a problem. It would be ridiculous if the government permitted people to use a post office only if they completed a lengthy application at the door and paid for a credit check. That wouldn’t be a very good public option at all, because the entry conditions would be onerous compared to the services offered. But we don’t see that in the real world. Instead, the Postal Service imposes minimally
reasonable conditions: you have to get to a local post office (but geographic coverage is pretty good, and way better than, say, private banks), show up during business hours, and behave appropriately.
Some public options do impose greater burdens. Social Security, for instance, pays retirement benefits only to people who have held on-the-books, paid jobs for roughly ten years during their lifetimes. And Social Security benefits are based on an average of thirty-five years of wages, so people who haven’t worked for at least thirty-five years tend to get much lower benefits. Those requirements do exclude some groups (and pay very low benefits to others), including casual workers, like landscapers and domestic workers, who are often paid off the books. Stay-at-home parents and the long-term unemployed can also be disadvantaged.
But there is a vigorous and continuing debate over these conditions, and they have changed over time. For instance, it used to be that a divorced woman could claim benefits based on her husband’s work history only if they had been married twenty years. That rule shut out a lot of ex-wives with long marriages: a stay-at-home mother married nineteen years could find herself with zero Social Security benefits. These concerns peaked when the divorce rate spiked in the 1970s. Congress took notice and in 1977 lowered the threshold from twenty years of marriage to ten.9
Funding, Federalism, and Framing
Public options are compatible with a variety of funding structures and approaches to implementation. We know those details are critical to any real-world proposal, but our goal is to establish the merits of public options as a general matter. The particulars of how to fund and set up any given public option will necessarily differ based on the policy area. Social Security, for example, is very different from a public library. In later chapters, we look in more detail at specific areas of policy. But it is worth pausing for a moment to look generally at how to fund public options, which level of government should administer them, and how to frame the policy problem for which a public option is the solution.
Start with funding. Some public options would require significant public funding, including our proposals for higher education and public child care. By contrast, other public options we propose wouldn’t require much government funding, including our retirement plan and the public option for banking. The reason is that these latter public options are self-funded; that is, they are designed in a way that doesn’t require additional government spending.
When a public option requires funding, the money could come from a variety of sources. How that funding model is designed matters, because the funding system could promote—or even reverse—the economic effect of the public option. Take universal child care as an example. Congress could, in theory, fund child care by charging the same fees to all families, rich or poor. That kind of funding would undermine the aspirations of the program, which aims to decrease the price and increase the quality of child care for hard-pressed families. But there are other funding structures that would, overall, be consistent with the public option’s mission.10
The reason we bracket the issue of how to fund public options is that taxation isn’t our comparative advantage in this book. There is a large literature on tax policy, and it lays out a variety of standard funding options, from income taxes to wealth taxes to consumption taxes. The critical point is that any funding source must be compatible with the objective of the public option to offer universal access at a reasonable price.
For similar reasons, we also set aside the problem of federalism—that is, which level of government should fund and implement public options. American federalism is complex and grounded in tradition, and we don’t have a particular axe to grind (at least in this book). Sometimes the national government is the obvious choice for a national program: for that reason, we imagine our retirement proposal as a federal initiative. In other cases, though, states or localities would be best placed to implement a public option. Historically, many public options have been provided at the state or local level: public libraries, public swimming pools, public golf courses, public parks. Looking forward, a new generation of public options might also be provided at the local level. Municipal broadband, for instance, is already being offered in some cities. Universal child care provides an interesting example of how funding and federalism can work together. Child care should probably be coordinated with public schools, and so local school districts would be the logical implementers. But given the well-known pathologies of local school finance, the states and the federal government would probably be preferable as funding sources.
Finally, there’s the question of how to frame the policy problem to which a public option is a solution. Why is the public option in health care the provision of health insurance? Wouldn’t the real public option be public hospitals, with doctors who are government employees? The answer is that it just depends on how you frame the problem. Similarly, a great deal changes if we frame a policy problem as access to a car versus access to transportation. The former might require thinking about a public car rental option—like a public Hertz or Zipcar—while the latter opens up the possibility of buses and trains solving the problem.
As with funding and federalism, there are many ways of framing policy problems, and it is not our goal here to outline a definitive (or even suggested) way for how policy makers should identify or describe the problems they are facing. Our point is simply that a public option is a tool that can be used even if there are multiple ways to frame a problem, as in the example of cars versus transportation. Getting the public option right will depend on identifying the right problem, and that will necessarily turn on the particular issue.
Why Market Subsidies Can’t Suffice
An economist might object that, in theory, market subsidies could accomplish all the same objectives, and with less government administration. With minimal direct action by government, the argument goes, strategically placed subsidies could provide universal access to important goods at fixed prices. So why are we so set on the idea that public options can do what market subsidies cannot?
The short answer: because theoretical equivalence isn’t plausible in the real world. Take the postal system as an example. The present U.S. Postal Service is a public option: it is government-run and offers universal access to basic mail services at a fixed, low price. The postal system as a whole, however, extends beyond the public program: the Postal Service coexists with private players like FedEx and UPS, which offer additional services at (typically) higher prices. From this starting point, a quick thought experiment will make clear the economist’s equivalence point—and its limitations.
Suppose that policy makers wanted to recreate the current postal system using market subsidies alone. FedEx and UPS could continue just as they are. The harder part would be to recreate the offerings of the Postal Service, but in theory at least it could be done. The core business of the Postal Service involves letters, junk mail, and slower packages (for simplicity, we’ll ignore Express Mail). Market subsidies would eliminate the U.S. Postal Service as a government agency and would, instead, offer subsidies to private firms to step up and fill the resulting gap in postal services.
What would those subsidies look like? In theory, policy makers could set subsidies for stamps, junk mail, and slower packages with great precision so that private firms would charge exactly the same price to consumers that the Postal Service presently does. To take a simple example: if the true cost of mailing a letter from, say, Massachusetts to Alaska is $1.55, the subsidy would be set at $1 so that a private firm could afford to charge just 55 cents (the current price of a stamp) to the consumer mailing the letter.
The tricky part would be setting the subsidies at exactly the right level. Without perfect knowledge of the cost of providing basic mail service and the rate of return needed (over and above the other costs of doing business) to keep for-profit firms willing to provide basic mail service to all customers, the government would set subsidies too high or too low. Too little subsidy, and private firms would have to charge
higher prices, which would restrict access to postal services. Too much subsidy, and private firms could reap a windfall at the government’s expense.
Compounding the problem, firms’ quest to maximize profits could create wasteful behavior. Firms might provide misleading information to the government and lobby Congress for excessive subsidies. Firms might also profit by cutting corners on service or by shutting down less profitable lines of business.
This thought experiment drives home our point that the case for public options rests on the relative competencies of existing institutions. A science fiction writer could imagine a government with perfect knowledge of private production cost functions, but we don’t have that, and we can’t see a clear path to get there.
And this discussion isn’t entirely hypothetical. All of these problems have surfaced in the health insurance market, because the Affordable Care Act didn’t include a full public option. The original legislation did include a partial public option, in the form of a Medicaid expansion, but the Supreme Court gave states the power to avoid expanding Medicaid. As implemented, the central features of Obamacare rely on market subsidies for private insurance companies and voucher subsidies (via the tax code) for individual buyers of health insurance. The problem of pricing has been a difficult one. Despite fairly generous market subsidies, prices for health insurance have risen, and many companies have left the market altogether. The legislation included controversial rules intended to stabilize the cost structure of the system, but pricing and access have been anything but stable.
The Public Option Page 5