The Public Option

by Ganesh Sitaraman

  The critical point, then, is that public options have an institutional advantage when the policy goal is to provide universal access at a fixed and fair price. Market subsidies are best used if the goal is to lower price or change behavior somewhat, but without specific targets for access and final pricing.

  Even in such cases, market subsidies don’t always work well. Retirement saving provides another real-world cautionary example. There’s a wide consensus that Americans save too little for retirement.11 And Social Security, as we have seen, provides a baseline public option that guarantees (nearly) everyone a decent, if smallish, retirement benefit. At the same time, however, the federal government has subsidized private savings by providing $180 billion per year in tax breaks for firms and workers that sock away money in retirement accounts.12 The idea behind market subsidies is that they take advantage of the logic of the marketplace. By making it cheaper for firms to offer (and workers to participate in) retirement plans, the hope is that Americans will save more.

  One attractive feature of market subsidies is that they require minimal government effort. No need for the government to set up its own retirement savings plans (beyond Social Security): in theory, private firms will compete to offer excellent service to the new savers who will open retirement accounts. So there’s no call for the government to expend resources when consumers can choose among Fidelity, Vanguard, TIAA, and more.

  The logic of market subsidies also has its appeal. After all, people buy more apples if the price is $2 per apple rather than $5. So retirement saving surely works the same way: make it cheaper and people will do more of it. And this is exactly what tax incentives do. For instance, suppose Matt wants to save $10,000 for retirement every year. Without a subsidy, that costs him $10,000. With a subsidy, it might cost him just $6,000 to put $10,000 into an individual retirement account (or IRA). How does that work? Basically, he can put $10,000 into his IRA and take a $10,000 tax deduction that saves him $4,000 on his taxes if he’s in the 40 percent tax bracket. The net cost to Matt is the $10,000 he puts in the account less the $4,000 tax benefit from Uncle Sam. Surely any rational consumer would respond to the subsidy by saving more.

  But as appealing as the theory may seem, market subsidies have severe limitations compared with public options. First, market subsidies do not guarantee citizens access to resources at a fair price. This shouldn’t be a shock, because they aren’t designed to do that. Market subsidies don’t aim to set a price for retirement savings. Instead, they just aim to make it somewhat cheaper in order to encourage people to save. Moreover, as the IRA example shows, market subsidies may offer different price reductions to different people. Matt, in the 40 percent tax bracket, gets a subsidy worth $4,000. But Fiona, in the 10 percent bracket, would save just $1,000 on her taxes if she puts $10,000 into her IRA. And on top of all of that, both Matt and Fiona need to know how to take the deduction when tax time comes around—and they need to remember to do it.

  Put another way, market subsidies don’t guarantee universal access to retirement pensions at a fair price, the way a public option (like Social Security) does. Retirement saving is still too expensive for many Americans, who are struggling to meet today’s bills and have no room to think about tomorrow’s need. Two statistics tell a grim story: the federal government spends more than $100 billion per year on market subsidies for retirement, but a whopping 66 percent of the subsidies are claimed by taxpayers in the top 20 percent of the income distribution. And 42 percent of Americans have no workplace retirement plan at all.13

  Adding insult to injury, market subsidies for retirement probably haven’t moved the needle on saving rates even among those with retirement accounts. Studies have found that most of the $100-plus billion just subsidizes savings by wealthy people who would have saved the same amount in any event. In other words, our hypothetical Matt is a target saver: he’s going to save $10,000 with or without a market subsidy. He’ll happily pocket the $4,000 tax benefit, but it won’t change his behavior.

  We will take a deeper dive into the promise of public options for retirement savings in Chapter 7. For now, though, it’s enough to see that market subsidies can’t guarantee price, access, or participation.

  A Word on Regulation

  Readers may wonder whether we’ve stacked the deck against market subsidies by ignoring the possibility of combining market subsidies with regulation. The government could, after all, just order private firms to offer certain goods at fixed prices. The sting of such an order could then be lightened with subsidies: The same effect as a public option, but without any added government bureaucracy.

  There’s something to this insight, but in the end, it doesn’t undermine the case for public options. Reconsider the U.S. Postal Service example. We concluded that market subsidies would be a poor substitute for the public option (the Postal Service), because market subsidies wouldn’t reliably guarantee access or price and might lead firms to cut corners or curtail services. But regulation could fill the gap by setting conditions for the subsidy. To take an example, the government could offer for-profit firms funding to provide traditional mail service, but firms could claim the funding only if they charged 55 cents for a stamp and provided nationwide service. Put another way, it seems that we could combine the carrot of subsidies with the stick of regulation to duplicate the effects of a public option.

  Once again, the answer is yes, in theory. But real-world conditions, and in particular the government’s lack of information, make the regulatory strategy hard to implement without a significant bureaucracy. To see why, take the problem of the 55-cent stamp. If the government knows that private providers need a subsidy of 29 cents to make that price feasible, then all is well: regulators can mandate the 55-cent stamp price, and firms will happily comply.

  But if the government doesn’t know the right subsidy price, then it is likely to over- or undersubsidize firms. If the market subsidy is too high, firms will flood into the market and reap excess profits at the government’s expense. If the market subsidy is too low, so firms cannot make a market rate of profit on mail service, firms will drop out of the postal market altogether or will even go out of business. Put another way, the government can’t force firms to stay in business.

  The big picture is that when government has limited information, it can’t reliably guarantee access to important goods at fixed (and fair) prices. That’s exactly what public options can do, of course. In economic terms, public options permit the government to internalize the problems of setting prices and subsidies: the subsidies needed to run the postal system will be quite transparent.

  Another form of regulation—one that we think is actually far more promising—is public utility regulation. Public utility regulation is similar to a public option in an important way. Often we want to provide universal access to a good or service at a controlled price, but competition doesn’t make sense or isn’t possible. In many sectors—for example, electricity—there are natural monopolies. It doesn’t make sense to have competition for electricity because different companies would all have to build power lines. One possible solution to this problem is to have nationalized services. But an alternative is public utility regulation. Public utilities are private firms that provide key public services, but government regulators scrutinize the firms’ costs and revenues and set prices intended to offer fair access and pricing to consumers while guaranteeing a reasonable measure of profit to investors in the utilities. In essence, a public utility is government outsourcing provision of a service to a private actor. The conditions in the outsourcing contract are regulations.

  On the spectrum of policy options from markets to socialism, public utilities are in about the same place as public option, but with the approach inverted. The utilities are formally private. But they are so thoroughly regulated that they don’t seek to maximize profits. Instead, they charge prices and earn profits at rates set by the government. A public utility isn’t meaningfully under private control. Instead, the str
ucture permits the government to borrow money from private investors to help operate public infrastructure.

  To see the point, imagine that an enterprising public utility manager had the bright idea to raise profits by refusing service to rural customers. After all, it costs far more to install and maintain electric lines when people live way out in the country. “Profits would soar,” the manager insists. But that kind of profit-maximizing move is precisely what public utilities aren’t allowed to do. The government requires them to provide universal access to electricity.

  Suppose that the hypothetical public utility manager persists: “If we can’t deny service to rural customers, then let’s jack up the prices for them, so they pay full freight for the costs we incur.” But that initiative, too, would be squelched by government regulators, who would insist on equal pricing for all consumers.

  So a public utility is very similar to a public option, even though the utility company is formally a private firm. Setting aside labels and looking to economic substance, we have active government management and monitoring of an enterprise committed to universal access and fair pricing. The big difference is that we often rely on public utility regulation when there isn’t much competition in the marketplace among private actors.

  As a matter of choosing between public policy options, it is also worth noting that public utilities and public options can be substitutes for achieving similar goals. Consider the problem of corporate monopoly. Monopolies are problematic because without any competition in the marketplace, the monopolist can charge higher prices and simultaneously provide a worse product. Monopolists might also use their market power to pressure other companies they do business with, and they might even use their economic power to try to lobby and pressure government into continuing their privileged status. There are three basic frameworks for addressing monopolies. The most familiar is antitrust, which would suggest breaking up the monopoly. But in cases where we might want concentration or monopoly because of efficiencies in scale or network effects, the public utilities approach suggests regulating the monopoly extensively. And the public options model suggests that the public alternative can compete with the monopoly and serve as a yardstick to measure its performance.14

  It is also worth noting one more surprising advantage of public options compared with regulation. When a public option exists, it might be possible to have greater deregulation in the private sector. The reason is simple: if the public option provides a robust, high-quality option that is available to everyone, then there might be less reason to regulate private providers as extensively. The old warning “buyer beware” makes more sense in a context when there’s a safe, workable version of the same product available. Of course, this would not mean getting rid of all regulations. For example, private utility plants would still have to be prevented from dumping toxic waste into rivers even if there’s a public option for energy production. But it is possible that at least some regulations could be rolled back in light of a robust public option—and that conservatives and libertarians, not just progressives and liberals, might therefore be able to get on board with the public option in those cases.

  Summing Up

  Public options work, both in theory and in practice. Americans have decades or centuries of experience with the U.S. Postal Service, public parks, public colleges, thirty-year mortgages, and Social Security. Politics is never perfect, and yet these public options have succeeded in providing all Americans with access to many of the foundations of a good life.

  One of the signal harms of neoliberalism is that it encouraged Americans to believe in an exaggerated distinction between “free markets” and “government intervention.” In practice, government and the law are thoroughly—and inevitably—intertwined in the economy, and nearly every institution mixes public and private to some degree.

  Public options are suitable both for real-world policy making at the margin—that is, for small changes to existing structures—and for big-think, major reforms for the twenty-first century. As we continue, our approach is to ask what mix of government action and profit motivation can best achieve a given policy aim. We’ve made the case that public options should be considered whenever policy makers want to make use of the power of government to offer universal access to important goods at a fair price without preempting market competition in the same area. But that doesn’t mean that are always the best choice for every policy initiative. Sometimes market subsidies will work better, all in all. Pragmatic policy makers can and should consider all approaches when making policy, including subsidies and regulation, and public options should be in the mix as well.

  4

  Caveats and Counterarguments

  So far we’ve emphasized the merits of public options, but we don’t think they are the best choice in every instance. Later chapters will tackle the details of particular proposals, but here we anticipate some concerns.

  Let’s start by summarizing where we stand. In Chapter 2, we defended five rationales for the public option: promoting opportunity, assisting business, improving market competition, advancing racial and geographic equity, and supporting democracy. Along the way, we noted that market subsidies have predictable shortcomings: they can’t function when markets fail, they can have perverse effects on prices, and they typically can’t guarantee quality. It follows that public options are likely to be the best choice when three conditions hold:

  Access is fundamental to liberty or equality.

  Markets don’t function well (for example, in the case of limited competition or market failures).

  Government can readily be held to account for price, quality, and access.

  Taking the opposite tack, markets (with or without subsidies) will tend to be better options when price and access aren’t matters of justice, when markets function well, and when private firms can readily be held to account for quality and access.

  These principles can produce powerful insights about how to design public options—and when to use them. For instance, we don’t favor a national public option to provide food to the needy; instead, we’re fine with the existing SNAP program (sometimes called food stamps), which is a voucher program.

  Why? Certainly, food is a primary good—it’s hard to be free or equal if you’re hungry. But the food market functions well in most places. Competition among stores is robust, and consumers can evaluate their options pretty well. The quality of food is sufficiently transparent: food labeling (a form of regulation) helps, and most adults have decided opinions about quality and taste. And because food purchases are relatively small and repeated, private actors can be held accountable in the marketplace: stores that sell bruised produce or rotten meat will quickly go out of business.

  So our criteria suggest that food assistance should probably take the form of market subsidies, like SNAP, rather than a public option. With SNAP, eligible low-income families receive an EBT card (like an ATM card) that can only be used for food purchases. But they shop at private stores, just like everyone else. In theory, we might worry that SNAP, like other voucher programs, could raise food prices: stores might raise prices and capture some of the subsidy, because SNAP dollars increase demand for food. But the theoretical problem isn’t a real-world issue: because SNAP customers represent a small fraction of the market, food stamps probably don’t raise prices nationally.1

  Still, the analysis may look different when we get down to the local level. In some high-poverty neighborhoods, market competition can be limited, prices can be high, and SNAP customers can represent a larger fraction of the customer base. In such a neighborhood a public program of some kind could be worth exploring. Nonprofits have begun to take up some of the slack here, and perhaps they’ll do the job. In urban New Haven, Connecticut, for instance, some inner-city areas have few grocery options. A nonprofit called CitySeed sponsors farmers’ markets around the city, with the goal of ensuring everyone access to fresh, local food.2 And CitySeed takes SNAP dollars, ensuring that even low-income fam
ilies can benefit.

  As the CitySeed model (and others) develop nationwide, it’s worth studying whether a public option should be added to the mix. We wouldn’t begin by assuming that a public option would be the best way to proceed. Rather, we’ll argue throughout the book that the choice of public program (whether public option, market subsidy, or regulation) depends on circumstances.

  Another market that works well is the entertainment market. (Is entertainment a primary good, the sort of thing that everyone should have? Luckily, we can sidestep that philosophical question, because the market works so effectively.) Thanks to technology and worldwide competition, Americans can choose from an unprecedented array of entertainment options. Streaming services offer boundless options for a small monthly fee. Video games are available in all price ranges (if you include the market in used systems and games) and increasingly available for free checkout from public libraries. On-demand options on cable bring recent films into our homes for a few dollars.

  Still, we do distinguish between entertainment content and broadband service. The market in entertainment content is robust, but the market in broadband can be pretty flawed. For a short period of time under the Obama administration broadband was regulated as a public utility, but under the Trump administration, the Republican chairman of the FCC, Ajit Pai, rescinded the Obama-era “net neutrality” rules, leaving internet service providers free to charge differential prices for content. While there is a strong need to bring back the public utility approach to broadband, a public option for broadband is worth considering as well. Indeed, some U.S. cities have already taken the plunge.

  If you’re skeptical about public options at this stage, fair enough. We hope that we’ve begun to demonstrate their promise. But we haven’t yet confronted all of the most powerful objections. So let’s start there.