The Public Option

by Ganesh Sitaraman

  Isn’t Big Government Bad?

  At first glance, public options seem to fit right into the narrative of big, bad government. Government programs, it’s often said, are inevitably inefficient and poorly administered, because the discipline of the marketplace is missing. Big government encroaches on individual freedom by levying high taxes and forcing individuals into prescribed ways of life. And many people who worry about big government are concerned that it will lead to socialism or to exclusive and pervasive government provision.

  But socialism isn’t our agenda—far from it. Our yardsticks for measuring policy success include liberty, equality, and market discipline. Public options expand liberty and equality by promoting real access and meaningful choice. They coexist with private options precisely to impose market discipline on both public and private actors. And our principles suggest that structures for public accountability are critical to the design of sound public options.

  Many objections to “big government” rest on an exaggerated dichotomy between public and private. The law serves as the foundation for laissez-faire markets, and yet conservatives don’t complain about “big government” when the state takes vigorous action to record, monitor, and enforce property rights, contracts, and other protections for capital. Nor do we hear too many protests about the pro-business subsidies that litter the tax code. In the United States today, pretty much every market mixes subsidies with regulated industries and public options. The question is, what mix best serves the interests of liberty, equality, and good government?

  Some people might also worry about public options being a slippery slope to socialism. We don’t think so. To believe in the slippery slope argument is to believe that people are incapable of making distinctions between situations that are fundamentally different.3 A good example is the old story about the frog and boiling water: if you put a frog in boiling water, it’ll jump out, but if you put it in cold water and then slowly heat the water to a boil, the frog won’t notice and will die. In essence, because of the slow change from cold to boiling water (going down the slippery slope), the frog can’t tell the difference between the two situations and gets killed. But here’s the thing about this story: it isn’t true. Frogs, like people, are completely capable of telling the difference between cold, warm, and boiling water. And when the water gets too hot, frogs jump out.4

  Public options aren’t designed to be socialism, and if they’re starting to become socialistic—or if someone proposes socialism under the guise of public options—everyone will be able to tell the difference, and then jump out.

  Won’t Bureaucrats Screw Up the Implementation?

  Maybe. We’re not naive about how hard it can be to implement policy in the real world. It is certainly possible that civil servants will make mistakes in rolling out public options and, over time, in keeping them working well. But we don’t think that’s a good enough reason to forgo the upside that public options can offer.

  We can all call to mind examples of government programs that have been badly run. One of the more disturbing recent scandals involved Department of Veterans Affairs (VA) medical facilities, which had long backlogs for veterans seeking treatment. Compounding the problem, some VA administrators manipulated data to try to hide the backlogs. Whistleblowers within the agency revealed the delays, and Congress and the VA have spent years trying to reform the system.5

  But scandal plagues private industry, too. Martin Shkreli gained infamy when his company, Turing Pharmaceuticals, raised the price of a lifesaving drug from $13.50 to $750 per pill. When Congress convened a hearing to investigate, Shkreli invoked the Fifth Amendment in refusing to testify. Literally moments later, he took to Twitter and called the representatives “imbeciles.”6 In August 2017, Shkreli was convicted for securities fraud.7

  So the battle of the anecdotes is inconclusive. All organizations—government, churches, colleges, private businesses—are made up of people, and people can be petty, power-hungry, incompetent, lazy, and inefficient wherever they work. There’s nothing special about government in that sense. You might respond that government employees often have civil service protections that keep them from getting fired. True, and that is an important difference. But anyone who has worked in a private firm knows that just because people can be fired, it doesn’t necessarily mean they will be fired—and it doesn’t necessarily mean they will be incentivized to work to the best of their abilities. Office politics, favoritism, and bias can insulate incompetence in any setting.

  The reality is that in some regards, the differences between government bureaucracy and other institutions are not as stark as one might think. Indeed, when we look at private firms, we find a lot of the same hassles and irritations that afflict public bureaucracies—and some others, too. Big companies are often loath to innovate (just ask Blockbuster how its business is going). Their top managers often have no idea what bad behavior is going on within the organization, or they condone bad behavior outright (consider Wells Fargo, which was caught creating millions of phony bank and credit card accounts). In small communities, nonprofits can suffer from cronyism and nepotism. This isn’t to say that we shouldn’t rely on nonprofits or private corporations. It is only to say that if we are going to be serious about designing policies, we can’t just look at the deficiencies of government; we have to compare them honestly to the deficiencies of private and nonprofit actors as well.

  So let’s tackle the serious question: is there reason to think that government is systematically less competent than private actors? It’s easy enough to tell a stylized story along those lines. A perfectly competitive market should, in theory, create incentives for private actors to achieve efficiency. Since government officials act outside the market, they may not achieve efficiency—they may have more leeway to waste time or pursue inefficient agendas.

  The problem is that the story of perfect competition and efficient markets has several holes. First, there are important mechanisms for making sure government actors do their job well. For one thing, public options are subject to market competition: that’s why they’re public options and not public monopolies. When baseline public options are not enough or if people don’t like competitive public options, they can signal their disapproval through what political scientists call “exit”—leaving the program to rely instead on the private option, and in the process sending a strong signal that the public option isn’t serving their needs.8

  Public options, in effect, prompt markets to function better. If the U.S. Postal Service offers slow service at high prices, let FedEx step in and do better. We are cool with that. Ditto our proposed retirement program (see Chapter 7), which offers workers the chance to sock away money in sound investments for low fees. If JPMorgan Chase can offer a higher return and lower fees, let them! If the public option is inferior, exit is a pretty good mechanism for feedback, and it’s exactly the same mechanism that disciplines private firms.

  And there is a second source of discipline for public options, one that doesn’t exist in the private market: democracy. Presidents and appointed officials are responsible to the public for the success of public options. When public options fail to work, people will raise the alarm with their members of Congress and with the media, putting pressure on the leaders to respond—and reform the deficiencies. Political scientists call this disciplining force “voice” because people use their voices to reform the system rather than abandon it. A good example of this is the Department of Veterans Affairs. In 2014, after reports that veterans were dying because of long delays in receiving care, public outcry led to action. The secretary of the VA resigned, and Congress and the president passed major new legislation that attempted to reduce wait times for veterans. News outlets continue to report on the wait times, keeping lawmakers interested in continued progress.9

  Finally, the premise of the efficient-market argument is questionable. The Great Recession, sad to say, provided the nation with ample evidence of subpar (in some instances egregiously subpa
r) governance in private firms. Executives made millions and built a world financial system that collapsed like a sand castle in 2008. The pre-2008 financial industry might have been “efficient” in a very narrow sense, but it permitted elites to capture huge gains at the expense of taxpayers generally and the middle class specifically, and after the collapse, those elites mostly escaped personal responsibility. By our yardsticks of liberty, opportunity, and efficiency, the financial debacle that began in 2008 revealed catastrophic failures in our system.

  The broader point is that the theoretical appeal of competitive markets is just that—theoretical. The right comparison for the fantasyland of perfect markets is the fantasyland of perfect government only pursuing the public interest with vigor and honesty. Comparing the fantasy of perfect markets with a craven government doesn’t make sense. Nor does it make sense to compare craven markets with perfect government. We should evaluate both government and markets realistically and even-handedly.

  Won’t Public Options Distort Markets?

  We’ve argued that public options can coexist with private provision, but won’t the presence of the public option actually distort the marketplace? This seems like another commonsense objection, but “distortion” is a slippery term. The distortion objection actually incorporates two different points—one that has some merit, and one that we think is off-base.

  Economists talk about “distortion” in a very precise sense: they mean that regulation is moving society away from a socially optimal allocation of resources. In the classic model, a perfectly competitive market will allocate resources in a way that maximizes social welfare. A distortion occurs if government action alters the market so that society moves to a less efficient outcome.

  To illustrate the economists’ point, imagine that there are only two goods, apples and oranges, and that buyers and sellers bargain until they can’t make any more productive bargains. The resulting distribution is efficient in the sense that nobody can be made better off without making someone else worse off. A government tax on apples might very well distort this market: in response to the tax, people would buy fewer apples and more oranges. Compared to the efficient distribution just mentioned, this arrangement would mean less happiness in the society overall. (For sticklers: this is true because the tax revenue collected would not completely offset the loss of utility from lower apple consumption, with the result that society suffers a net loss, or “deadweight loss.”)

  This version of the distortion objection makes a respectable, if limited, point. When markets work well, the government should use caution in altering allocations. But this narrow analysis incorporates two very big assumptions: first, that markets are competitive, and second, that the initial distribution of wealth (that is, inequality) doesn’t matter. Here’s the problem: these assumptions do not hold.

  As you’ll see when you dive into our policy chapters, public options usually target markets that are imperfect in one or both of these two ways. Over and over again, we find that markets for important goods and services just aren’t competitive. Competition in the market for retirement savings, for instance, simply hasn’t worked: private firms have found ways to bilk savers by charging high and hidden fees, and the magic of the marketplace has rewarded bad actors instead of punishing them. And, over and over again, we see markets that intensify inequality rather than relieving it. When many Americans can’t open a checking account, when young children spend their days in substandard care, and when college costs a fortune, these are outcomes that may be narrowly “efficient,” but they aren’t fair.

  We take the economists’ distortion point as a useful cautionary tale. We like markets just fine, but we are also aware of their limits. Put another way: the goal of public options is to improve markets in cases where they aren’t competitive or are founded on toxic inequality.

  Still, the strict economic version of the distortion point helps flag the limits of public options: public options should be attractive when and to the extent that markets don’t work, but they should stop there. To see the point, take the example of the U.S. Postal Service. We kind of love the Postal Service, but we think it has—and should have—a limited mission. It provides mail service to everyone at a reasonable price, and it covers even remote (and urban) areas that private firms shun. But that doesn’t mean that it should expand into all possible shipping services and markets.

  For instance, we don’t think the postal service should compete in the market for high-priced courier service in large cities. In New York, you can have documents messengered from your office to someone else’s in just a couple of hours—if you’re willing to pay a high fee. This kind of service isn’t part of a decent life for most Americans, and so the postal service doesn’t have any business doing it.

  Now for the second form of the distortion objection, which we see as misguided. Keep in mind that the economists’ version of distortion says that it’s a bad thing to change the workings of a perfect market. The looser, second take on distortion says that it’s a bad thing to change the workings of any market.

  But this second take on distortion doesn’t make any sense. Existing markets should command our allegiance only if they’re working correctly (and working toward fair allocations). Bad markets shouldn’t command any allegiance at all.

  To take an example: The current market for retirement savings is pretty ugly. The market may look okay if you only take a quick look. After all, just about every bank and brokerage firm will happily sell you an individual retirement account. But many of these companies will also happily charge you fees that amount to highway robbery. The fees may sound small—just 2 percent, pennies on the dollar—but over time they can sap your savings. And some of these companies engage in even worse practices, like deliberately dumping bad investments into workers’ accounts.

  Now imagine that Congress enacted the kind of public option we outline in Chapter 7. The public option would offer every American the chance to save for retirement. Workers could have money withheld directly from their paychecks, and their funds would be invested in a small number of safe, diversified investments with very low fees.

  This public option would surely change the market for retirement investments—big-time. And that is exactly what we hope for. To see why, play out the story a little. After a year or so, people have started to become familiar with the public option retirement plan. It’s convenient, it doesn’t require any investment expertise, and the government is required to disclose all fees every year. With fees at less than one-half of 1 percent per year, the public option is a clear winner compared to Big Bank’s price of 2 percent.

  Over time, then, workers put more and more money into the public option and less and less into private options—unless the private firms take their game up a notch and offer real value for money. Facing big competition from a public option, firms have to take one of two paths if they want to continue to play in the retirement market. One option is to offer a product with even lower fees. If Big Bank can guarantee that it will provide investments just as sound as those in the public option but at a lower price, then some people will take its offer. Another plan is to charge higher fees but provide better service. If Big Bank can offer services that people really want, then it may be able to charge more and survive.

  Yes, Big Bank and other private firms stand to lose a lot of money as workers leave them for the public option, and so they have every incentive to complain about “market distortions.” But that complaint should ring hollow, since what’s going on here is market improvement: thanks to the public option, American workers would be paying less and getting more. Anyone who wanted something different from the public option could seek it out in the private marketplace.

  Stepping back, we can see that this second version of the distortion objection is just a complaint about lost profits. The various types of public options we propose in this book likely would eat into the profits of banks, child care providers, and colleges. But those lost profits aren’t �
��distortions.” They’re deliberate reforms that improve the markets—and improve options for consumers.

  Won’t Politics and Lobbying Hijack Public Options?

  Another important concern is that politics and lobbying will hijack the public option so that it serves narrow interests instead of the public interest. We readily concede that politics shapes the design and implementation of every policy. Even so, we think public options fare pretty well—and often better than market subsidies and other policy alternatives.

  Let’s start with one of the most important features of public options: they are simple and salient. That is, everyone knows that government has done something for them, and they know (more or less) what government did. Consider two different kinds of tax cuts. When President George W. Bush and the Republican-controlled Congress passed massive tax cuts in 2001 and 2003, people received a one-time, lump-sum check. The money was given in a simple and highly salient way. As a result, people felt like they got a tax cut. Fast-forward almost a decade later. When the Obama administration designed tax cuts as part of the 2009 stimulus package intended to mitigate the effects of the Great Recession, they deliberately did so in a complex and hidden way—they gave people the tax cut by reducing payroll taxes slightly in each paycheck. The problem is that while people did get a tax cut when you added up all the savings, they didn’t feel like they got a tax cut. Compared with getting a lump sum, many people don’t notice a small change in their paycheck week to week—and even if they notice, they don’t necessarily associate the extra cash with Uncle Sam.10

  Public options are sort of like a lump-sum tax cut—simple and salient. Market subsidies are like the payroll tax cut—complex and hidden. Think about higher education. When people take out federally subsidized student loans (a market subsidy), it’s harder to tell that government actually did something. The experience of the program feels like taking out a private loan. In contrast, if college is free (a public option), it’s pretty clear that government provided you with an education.