Imagine there was no such thing as a library, and that members of the current neoliberal policy consensus were to sit down today and invent it. They might create complicated tax expenditures to subsidize the poor purchasing and reselling books, like the wage support of the earned income tax credit. They might require people to rent books from approved private libraries, with penalties for those who don’t and vouchers for those who can’t afford it, like the individual mandate in the latest expansion of health care. They might come up with a program where they take on liability for books that go missing from private libraries and thereby boost profits for lenders themselves, like federally backed private student loans. Or maybe they’d create means-tested libraries only accessible to the poor, with a requirement that patrons document how impoverished they are month after month to keep their library card. Maybe they’d exempt the cost of private library cards from payroll taxes, or let anything calling itself a library pay nothing in taxes.
Of course, there’s no saying exactly what the neoliberal library would look like. But we know one option that wouldn’t be on the table: the straightforward public library, open to all, provided and run by the government, which our cities and towns enjoy every day.
Whatever the furor around Obamacare, the fundamental ideological conflict surrounding the welfare state in the United States is no longer over the scope of government, but instead over how the government carries out its responsibilities and delivers services like education, health care, old-age pensions, and a wide variety of other primary goods. Conservatives and neoliberals envision a government that provides a comparable range of benefits to the one advocated by earlier American liberals. But rather than designing and delivering services directly, the neoliberal government provides coupons for citizens. Coupons—often defined in anodyne terms such as “vouchers,” “premium support,” or “tax subsidies”—can be used to purchase services in the private market. Whenever neoliberals have sought to expand the scope of the welfare state or conservatives have tried shrink it, they have come bearing coupons.
Over the past thirty years, efforts to privatize what government does and replace it with vouchers have taken hold in elite policy circles. But recent popular pushback against the privatization of Social Security, the use of private military contractors, and the voucherization of Medicare in Paul Ryan’s budget shows that the way we provision government services is still a point of contention.
A voucher is generally a subsidy that gives an individual a limited amount of purchasing power for specific kinds of goods and services. Vouchers place limits on the types of goods and services that can be provided but allow for a large amount of choice within those limits. Direct, public provisioning and vouchers should be thought of as existing along a continuum. Public provisioning can range from government monopolies, like defense, to public options that are in competition with private options, such as K-12 schools and universities.
Advocates of the coupon state point to many advantages. Individuals can choose among market competitors, best satisfying their own preferences and elevating the best products. In a competitive market, the sellers respond by increasing the quality and quantity of a good for a given price, bringing efficiency to bear. This unleashes the advantages of market competition while still allowing the government a role in helping with the allocation of certain goods. And since the amount the voucher is worth is capped, it allows for better state budget control by forcing additional costs onto the individual, if that becomes a goal of policy makers.
There are major drawbacks, however. The benefits of vouchers skew upward, because taking advantage of them requires information and resources. Coupons delivered through the tax code or steady employment regressively benefit those who pay the most in taxes or receive the most benefits from their employers. These programs are less visible to the public, giving the impression that the private market is more “natural” while hiding the government’s role in creating these markets. Meanwhile, voucher systems create new coalitions of business interests, providers, middlemen, and conservatives to defend their version of the welfare state.
Why would public provisioning work better than bringing in the private sector? The first reason requires a critique of the notion of “choice.” Most proponents of vouchers say they will expand choices. But what vouchers really do is replace one set of choices, made through democratic action, with another set of choices, made through the market.
Democratic governments, ideally, must be responsive to their citizens’ wishes, as expressed through voting and other means. Finding solutions in a public space requires accountability, transparency, rules, and claims that goes beyond self-interest. The private market, on the other hand, emphasizes cost-benefit thinking, the ability not to participate, closed proprietary profit-seeking strategies, bargaining, and the satiation of individual wants. Vouchers turn citizens into consumers bidding on goods in a market, and move the locus of government action away from providing for the commonwealth and toward encouraging entrepreneurial activities. Instead of directly providing certain goods or a baseline of security—economic or otherwise—the government provides a baseline of market participation.
Though there are well-known limits to and strains on the democratic process, this does not negate the clear limits of the marketplace. Democracy enables citizens to demand accountability and agitate for change through action and expressing their opinions. The equivalent form of activity in a market for consumers is either spending or not spending. This turns democratic action into something where agency and voting power are conditional on income. Vouchers encourage what the economist Albert O. Hirschman called “exit,” while public options encourage “voice.”
What happens when vouchers are used in markets that don’t function well? What about situations where firms won’t increase supply in response to demand, either because they are monopolists, oligopolists, or otherwise have the power to set prices? Incumbent firms are likely to capture a large part of the value of a voucher through increasing prices (and profits) on the services they deliver. Vouchers are designed to increase demand; if their creation is not met with an appropriate amount of increase in supply, they will raise prices. Not only does this limit the benefits of vouchers, it also raises the price for consumers not benefiting from the vouchers.
What if the state, instead of providing vouchers for private firms, used those resources to reduce the cost of the good by providing it themselves? First, all those resources would go directly to the services being funded. Second, the money spent producing the good wouldn’t just lower the cost for the direct consumer, but for services from private providers who have to compete with the public option.
Take the example of higher education. Since the 1970s the government has created several voucher mechanisms to fund access to colleges and universities, including Pell Grants, government-subsidized student loans, and tax-subsidized savings vehicles. Rather than funding public higher education directly, which would expand demand and potentially lower prices across the board, these coupons bring benefits to a lot of third parties, while supply still remains constrained.
Public options have another advantage over vouchers: they create a standardized good or service, which is especially important for markets where there are information inequalities between buyers and sellers or markets where the public doesn’t want competition to drive quality below a certain baseline. This not only allows consumers to feel confident about what they’re getting, but also allows competitors to compete more explicitly on the issues of both quality and price. To take one example, during the policy debate over financial reform leading to the Dodd-Frank financial reform law, many argued for a mandate that banks (or the government itself) provide “vanilla options,” like a checking account with no hidden fees or a system of banking accounts to be run by the postal service.
These vanilla options have the upshot of reducing the need for excessive regulation of subsidized private options. Public provisioning, in these cases, acts as its own form of simple and direct regulation. Private prisons, for instance, are extensively regulated because the baseline treatment of prisoners shouldn’t be left to market forces. Monitoring these private agents can become quite costly. Rather than creating regulations to establishing a minimum quality level, however, the government can simply create, run, and subsidize its own service and let the private sector innovate in response to it.
The government also has unique abilities as a provider of social insurance and income maintenance services. For markets where adverse selection plays a major role—think insurers not accepting people with pre-existing medical conditions—the government can compel purchase of a service (or its provision through taxation), making public options much more effective. “Cream-skimming,” in which providers pick the most advantageous clients and leave other potential clients on the sidelines, is a problem that can only be solved through the compulsion that government action allows. Both health care and Social Security are available to people who would be denied it on an open market.
A blanket government commitment works by expanding risk pools and thereby distributing risks more widely. This gives the government the ability to lower overall costs and make their distribution more progressive. Because the innovations and research that come along with public options are public goods, improvements made in a government system can also spread widely and quickly. And governments have a greater incentive than private firms to make long-term investments delivering benefits down the road. Private firms, on the other hand, have no desire to share information where it will hurt profts. Governments also have advantages because of their size, such as their ability to negotiate and to maintain lower administrative overhead. Public health insurance, for example, has proven more stable and capable of controlling costs than its private equivalent, especially for the most vulnerable populations. Medicare spending per enrollee has grown substantially slower than private plan spending.
Social insurance is particularly important because needs aren’t equally distributed among people or known in advance—situations more suited to the coupon approach to the welfare state. This is most obvious with health issues, where pre-existing conditions and the randomness of brute luck can cause people to need a large amount of care.
In the wake of the Great Recession, people from across the ideological spectrum are looking to remake the welfare state. As a result of the culture of deregulation and privatization of the past thirty years, the default stance for many policy intellectuals is to support using private means to carry out the government’s responsibilities.
This should be resisted. There are many advantages to public allocation: compulsion, standardization, democratic input, and rectification of market imperfections. Meanwhile, the private allocation of goods with some public subsidies has problems of its own—problems that often make generic concerns about “big government” sound even more pertinent. Reexamining the role of the government with the above guidelines in mind can shed light on where the market tends to fail and where the government can do better by itself.
Mike Konczal is a fellow with the Roosevelt Institute and blogs at the site rortybomb.