The American Prospect: Robert Kuttner: 'When Public Is Better'

Source:Economic Policy Institute fellow Robert Kuttner.

"Long before we thought of founding The American Prospect in 1989, I came to know Paul Starr through a prescient article titled "Passive Intervention." The piece was published in 1979, in a now-defunct journal, Working Papers for a New Society.

As Paul and his co-author, Gøsta Esping-Andersen, observed, the American welfare state is built on terrible, even disabling compromises. Progressives often lack the votes to pass legislation to deliver public benefits directly. So they either create tax incentives or bribe the private sector to do the job, thus inflating a bloated system. "The problem is not too much government activism," they wrote, "but too much passivity."

Their two emblematic examples were housing and health care. In housing, tax advantages became an inflation hedge for the affluent and drove up prices. Low-income homeownership programs, run through the private sector, had huge default rates. In health care, the political compromises necessary to enact Medicare excluded serious cost containment. When they wrote this, health care consumed 9 percent of GDP compared to 17 percent today. The subprime mortgage scandal was decades in the future.

After 34 years, the same dynamics are far worse. In the run-up to the financial collapse, private securitization of subprime mortgages pretended to serve the social objective of increasing low-income homeownership. Nobody fully understood the risks-not the brokers who originated the loans, or the banks that sliced them into bonds, or the credit-rating companies that blessed them, and certainly not the regulators who feigned oversight. In the aftermath of the collapse, government now gives "incentive payments" to the very banks that created the mess, bribing them to modify mortgages in the hope of reducing foreclosures. This privatized program is a byzantine mess and a policy failure.

Better to have a public institution, such as the Roosevelt-era Home Owners' Loan Corporation, serve the public goal of refinancing homes directly. The HOLC was simplicity and transparency itself. As was the original public Fannie Mae. Both programs sold Treasury bonds to create credit for homeowners. No private players took a cut or generated extra cost and risk, and there were no scandals.

Passive intervention-serving public goals by making them lucrative private profit centers-not only increases costs; it increases complexity, which in turn invites inflation, confusion, and corruption. Though private abuse is responsible, government as sponsor gets the political blame.

Depending on how vigilant the government is, the Affordable Care Act ("Obamacare") could be a partial step to universal insurance-or another epic passive intervention. Rather than having government provide coverage directly, as Medicare does, the ACA requires people to purchase private insurance, subsidized for less affluent people and regulated by government.

But the more indirect the government involvement, the more it invites gaming. The press has been full of stories of big companies trying to break into units of fewer than 50 employees to evade the law's threshold requirements and employers shifting full-time workers covered by the ACA to part-timers who are not. In Massachusetts, where the model for Obamacare was invented, the state tolerates employer-provided plans that leave consumers on the hook for a huge share of medical bills.

Over time, public Medicare has become far better than private plans at lowering costs. However the ACA is not a public program but a fragmented private insurance pool. In principle, the ACA allows the new state "health exchanges" to exert bargaining power over private plans, but they may also merely list and certify private insurance products. So this hybrid could add yet another layer, with little effect on cost.

Complexity invites more complexity. Foundations and industry groups have launched a $100 million nonprofit called Enroll-America.org to sign up uninsured people-who have every reason to be confused. Money is wasted explaining how to enroll in a bewildering system that could have been simple and automatic had it been public social insurance. The multiple moving parts also facilitate Republican mischief at every stage. As consumers grow frustrated with the complexity, cost, and incomplete coverage, guess who will take the blame?

The privatized drug insurance that trades on Medicare's good name (Medicare Part D) is yet another example of the inefficiency of passive intervention. Direct, public prescription coverage would provide more benefit at less cost, by excluding industry middlemen. One could add the inefficiencies and corruption of privatized prisons and halfway houses, or for-profit voucher schools that do worse than their public counterparts.

Government, of course, should not run everything. But when it comes to social outlays, simpler is better, and simpler usually means direct government provision. Alas, government is in such low repute nowadays that legislatively, passive intervention is all liberals can get. For instance, President Obama, in proposing universal pre-kindergarten, did not dare suggest simply extending public education to three- and four-year-olds. The best we can expect is a patchwork of church-basement programs and for-profit preschool franchises.

It's time-long past time-for progressives to call out the inefficiencies of private provision of public goods and make a clear-throated defense of government. Otherwise, our government will keep taking the fall for the failures of private profiteers." 

From The American Prospect