The Public Option
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The simplicity and salience of public options have everything to do with why they fare well even in the face of lobbying. When people know about a government program, they can get mobilized around it if lobbyists or special interests try to change, cut, or distort the program. There’s a reason Social Security is so resistant to efforts to cut benefits to elderly Americans: people know what the program does, and when elected officials try to cut benefits, voters can get engaged in the political process to block those efforts. In comparison, when government programs are complicated and fly under the radar, it’s hard for citizens to know what’s going on with the programs, and lobbyists can operate in the shadows with a much lower risk of popular scrutiny. Public options, therefore, might be less likely to suffer from the problems of lobbying than complex and hidden policy interventions.
Won’t Public Options Excuse State Interference in the Marketplace?
The conservative commentator Yuval Levin has argued that the public options approach is problematic because it “confuses the role of the state in markets, combining the elements of the role of referee and that of a player in market competition in ways that will likely prove unsustainable.”11 Levin doesn’t expand further on this criticism, but we don’t think it is very persuasive. The role of the state in markets is emphatically and decidedly not limited to “the role of referee,” and it never has been. The state creates the marketplace by defining the rules of the game—property law, contract law, antitrust law—and by enforcing those rules through the state-run justice system. But states have almost always also been players in market competition.
We’ll go back to a basic example we’ve used before: public libraries. Public libraries are public entities, a government organization. But they are and have always been a player in market competition. You don’t have to borrow books at the public library; you can buy books from booksellers, or even borrow books from private libraries. The public library system is a “player in market competition” alongside those private options.
Or look outside of public options. The federal government purchases pencils and cars and computers. It is a player in those markets. The federal government also contracts with private businesses to build aircraft carriers and fighter planes. There the government is the market.
So at a theoretical level, Levin’s argument is overly broad. But what about practically? Should we be worried about confusing the role of referee and that of market player? We don’t think so. The fact is that our government is a complex organism. It isn’t just “the president” or “the government.” As scholars like to say, our government is a “they,” not an “it.”12 What that means is that we can design public options so that different parts of the government will be market players and referees, and we can create a firewall between them.
There’s nothing extraordinary or radical about this. We split up government functions all the time. We have executive branch agencies and independent agencies, for example. The former (like the Environmental Protection Agency) are responsive to the president; the latter (like the Federal Reserve) are insulated from political influence. In fact, our basic constitutional structure is premised on the idea of separating different functions. We separate the legislative, judicial, and executive branches of our government in order to make sure that the same people don’t run each of them and have total power. In a similar vein, there’s no reason we couldn’t separate public option functions from the referee functions of government.
Levin also worries that the government “certainly could not avoid showing preference to the relevant public options over private competitors and supporting them with implicit subsidies and advantages.” We agree, but what Levin gets wrong is that this is a feature, not a bug. One of the most important features of public options is that they provide universal access at a fair price. They cost money and are funded by the public through taxes. But the point is that we want people to have access to those goods. To take an example: If community college is free, that is definitely going to show a preference for the public option over private nonprofits and for-profits. But that is the goal. We think everyone should be able to get some kind of post-high-school education without having to pay tuition, just like everyone can today get a K–12 education without paying for it.
But to assuage some of Levin’s fears, here’s a key point: the public options we are describing are rarely going to be Cadillac programs. Baseline public options are just that—baselines. No one living on Social Security alone, for example, is going to be vacationing in the south of France or living large in a Manhattan penthouse. The local community college isn’t Harvard, and it shouldn’t be. Competitive public options will often be “plain vanilla” options: simple and standardized. A robust market will exist around and above the public options—and some market actors might even want to offer plain-vanilla options that compete with the public option as a loss leader, to familiarize people with their brand for when they want to move to a higher-end product. Here’s an example. Imagine a public option for banking services: savings and checking accounts. If everyone had access to those two accounts, it would mean that many people who now are unbanked would be able to access their paychecks without paying fees to check-cashers. But they wouldn’t have access to loans of any kind and would only get minimal interest (if any). Would that end the banking business? Of course not. Most people would still prefer to bank with community banks, credit unions, and national banks because they offer many more services.
Levin’s third objection is that public options “would not be subject to the kinds of life-or-death pressures” that private companies face. At the level of armchair economic commentary, that is right. Public programs do not depend on profits to stay alive. But in the real world, it isn’t clear that the comparison is between apples and apples. First, private companies increasingly face less and less competitive pressure. Monopolization and concentration—not competition—are the defining features of our economy. Depending on the sector, the comparison might be between monopolies or oligopolies, not fiercely competitive little guys, and the public option. In that case, it isn’t clear that the monopolies and oligopolies face much by way of life-or-death pressures either. Second, as we’ve already pointed out, public options do face a different kind of disciplining pressure: democratic voice. The very fact that Levin is skeptical of public options proves our point. He and others like him will be vigilant in making sure that public options are working as they should be. When they aren’t working right, we are 100 percent confident that he and others will sound the alarm.
Isn’t Personal Responsibility Better?
Let’s put a key issue right on the table: aren’t public options just another example of softhearted, nanny-state liberalism? Surely people should step up and take personal responsibility for their own education, their own retirement, their own child care.
Once again, two separate objections are smuggled into this one complaint. Let’s take them in turn. First, some people who feel this way are committed libertarians, who believe it’s always and without exception morally wrong for the state to tax some people for the benefit of others. The poster libertarian along these lines was the late Harvard professor Robert Nozick. In his view, the only defensible government is a minimal one whose sole job is to protect people’s property from theft and their bodies from violence. Any more extensive form of government, Nozick believed, would violate individuals’ rights to their own labor.13
If you’re a moral libertarian like Nozick, then we probably can’t persuade you to like public options. But then, if you’re a Nozickian, you’d be against many, many features of present-day America: you’d want to eliminate Social Security and Medicare, radically downsize the military, abolish public schools, turn all highways into toll roads, and revoke all government contracts and subsidies for business. We can’t imagine even a far-right Republican running on that platform. Even Rand Paul and Ron Paul, recent political candidates who pitched themselves as libertarians, didn’t go this f
ar.
The second objection based on individual responsibility is pragmatic, and it runs something like this: The government is already big, and taxes are high, so is there really a good case for more of the same? After all, resources are limited, and the state can’t, and shouldn’t, cushion people against all of life’s bumps. Taxes aren’t “free money”—they come out of the pockets of real people, and those people have less freedom when the government forces them to fund public programs.
Even worse, this objection continues, some well-meaning government programs can penalize the responsible and subsidize the irresponsible. Partisans of this point of view often use Aesop’s fable about the ant and the grasshopper to make the point.14 In the story, the ant saves diligently while the grasshopper parties away the summer. When winter comes, the ant is cozy and secure, while the grasshopper is destitute. Surely Uncle Sam shouldn’t take (much) from the ants to relieve the grasshoppers of the consequences of their own irresponsibility.
But we don’t think the pragmatic objection provides good reason to oppose the kinds of public options we propose. Our goal is not to insulate people from their bad decisions. Instead, our goal is to construct a platform that supports people who want to act responsibly. Our worry is that laissez-faire markets and market subsidies have badly served Americans who want to live good lives. Public options aim to ensure access to universally important services when the free market has failed to provide good options for most Americans. Public options won’t do much to save the grasshoppers among us: everyone will still have to work to care for their kids and to have money to put in the bank. Indeed, many public options—like higher education, public libraries, child care—strongly benefit the ants who want to work hard.
Why Not Just Use Vouchers?
Another objection is that public options aren’t necessary because the government can just give people vouchers to help them pay for private options. Whether called vouchers, tax subsidies, or grants, the basic idea is the same: the role of government is to be, as one critic has memorably said, a “giant coupon machine … passing out coupons to discount and subsidize private education, health-care, old-age pensions and a wide variety of other primary goods.”15
The case for vouchers is that they are supposed to support and increase choice and competition. In theory, vouchers give individuals more choice about what service provider to use; they also increase competition between service providers, and the government can easily fund them at a fixed cost.16 But vouchers have a number of downsides. The first is that they don’t always work as the theory suggests they should. The economist J. W. Mason has explained how basic economics shows the flaws of vouchers. When the supply of a good is highly inelastic (meaning that a decrease in price does not lead to an increase in supply), then a voucher (or tax cut, or whatever other form of market subsidy) will be captured by the producer of the good, and the discount will not be passed on to the consumer in the form of lower prices. Mason uses the example of cutting the gas tax. If oil refineries are running at full capacity and can’t produce any more oil, and prices are going up because demand for oil is high, cutting the gas tax won’t lower prices. Producers can’t produce or refine oil any faster, so the discount won’t help. And demand is already outstripping supply because people need the gas (that’s why prices are so high in the first place).17
With that background, now consider the voucher example in higher education. If the supply of higher education is inelastic, meaning that we can’t build more schools or get more spaces opened up at a college or university, then giving every student a $5,000 voucher won’t actually decrease prices. Colleges can just increase tuition prices, perhaps even by the entire $5,000, and still have fully enrolled classes. The flip side of this basic economic logic is that spending directly on public schooling will lead to reductions in tuition across the board. If government spends its money on reducing tuition at public colleges, instead of on vouchers for any school, then unsubsidized schools will now need to compete with the public option—and they’ll have to keep prices low to get students to attend.
In fact, as Mason argues, this logic will apply in any situation in which there is a monopoly or something close to inelastic supply. In that context, directly providing a public option will actually lower prices, while vouchers will lead to higher prices because most of the subsidy goes to the producer (the university, for example).
Vouchers also have some other downsides. According to Yale political scientist Jacob Hacker, two of the most important problems are distribution and visibility.18 Vouchers have a distributional problem in that they tend to benefit people who are wealthier. Richer people are more likely to know that vouchers exist and to have the time and ability to figure out how to utilize them. Take tax credits. In order for a tax credit to have any effect, people have to know that the tax credit exists and they have to spend the time when doing their taxes to actually take the credit. If they don’t know or if it’s too complicated, they won’t utilize the credit. And it’s only wealthier people who, when they get confused or discouraged, have the resources to hire tax attorneys and accountants to help them navigate the complex tax code.
The problem of visibility is primarily political. Public options make it clear that the public is providing the option. People understand that their children attend public schools and that the government and their tax dollars go to support them. That gives citizens a stake in the institution’s success—and a reason to monitor the institution. In other words, it gives them a reason to be active citizens. Vouchers, in contrast, are far less visible. As a result, most people don’t realize that voucher programs are actually government programs that are helping them. For example, more than 60 percent of people who rely on government discounts to pay for college and more than half of people who take the home mortgage interest deduction in their taxes don’t think that they’re relying on a government program.19 The political scientist Suzanne Mettler has called such government policies the “submerged state.” The existence of the submerged state is important because it goes back to the issue of accountability for government programs. Public programs emphasize the democratic nature of our government and spur citizens to participate and hold accountable their elected officials. By contrast, hidden government action undermines the ability of citizens to control their government.
Why Not Just Use Regulation?
Another alternative to the public option is regulation. Instead of public provision, the private sector could provide services and the government could establish regulations—rules of the game—that govern provision of those services. We think that regulation is sometimes the right way to go, but as a tool, it suffers from some important drawbacks.
First, regulators can be “captured” by regulated industry. “Capture” is a term that scholars use when government actors pursue policies that are favorable to the regulated industry instead of policies that are in the public interest. Capture can take place when regulators come from private industry and bring with them the views of the industry (or if they plan to leave government service and go right back to the very companies they were just regulating). It can happen when regulators disproportionately hear from industry (informational capture) or when regulators themselves come to believe that what is best for industry is best for the general public, even when it isn’t (cultural or intellectual capture).20
In our modern government, regulatory capture takes place because we have people from industry doing the regulating and because the regulatory process (appropriately) requires public participation in making new regulations, but industry predominates during that process. While we think the basic process is a sensible one, it does increase the risk of informational capture, because regulated industries have the greatest incentive to lobby hard for what they want. But this is less likely to be a problem for public options. Because public options do not involve regulating industry, government officials will not have to weigh the regulatory costs to industry as part of their analysis. This
will make industry views less prominent. Social Security is a good example. When the Social Security Administration deliberates on various policy changes, the views of brokers such as Fidelity or Charles Schwab aren’t as relevant. In contrast, when regulations on IRAs or 401(k)s are being debated, Fidelity and Charles Schwab have a lot at stake—and a lot to say. The possibility for capture is heightened.
A second drawback of regulations is that they can be costly and complicated, burdening business in general while at the same time advantaging big business. When regulations become complex (often because of lobbying from industry), they become more difficult and costly to comply with. Businesses and individuals have to hire lawyers, accountants, and compliance teams just to comply with the regulations—all of which take away from resources that could have gone elsewhere. Comparing Obamacare and a public option in health care is a good example. Obamacare is extremely complex, requiring a great deal of effort for both industry and individuals to navigate its provisions. A public option would be simpler.
A third problem with regulations is that they can be evaded. Industry often hires teams of lawyers to help them weasel their way through the rules, finding any possible loopholes. (This of course benefits big businesses; small businesses have a harder time.) The result is that individuals might not actually get the simple, safe, basic services that the regulations were intended to provide. Public options get around this problem. The public option would provide individuals with a service—plain and simple. Because there’s no industry trying to game the regulations, the public option would do exactly what it says it does.