What is a “public option”? Wrestling with the question.

The public option refers to a government program with two features:  it provides an important service at a reasonable cost, and it coexists, quite peaceably, with one or more private options offering the same service.

But at the same time, they define two types of “public option.”  The first, a “baseline public option,” refers to the general basket of services provided by the government at no cost and with no government funding for a replacement service.  A public school is a “baseline public option” (assuming there’s no voucher access) because you have to pay 100% of the cost for any other choice.  The second is a “competitive public option,” which refers to existing or hypothetical future government services which are offered in the free market.

But these two categories don’t really work well for a wide variety of services.

They label Social Security a “baseline public option” but it doesn’t meaningfully “coexist” with other sorts of retirement savings, which are always supplements.

They label a library a “competitive public option” because one has the choice to purchase a book instead of borrow it, but this is a nonsensical distinction; it would only make sense if an individual taxpayer had the ability to opt out of public library service in exchange for some competitor private lending library. They label the post office a “competitive public option” because, well, in principle, we could choose to mail a letter for $10 at FedEx instead of $0.55, which is really a stretch.  (And besides, the Postal Service is kind of in a category of its own, expected to manage its business, well, as a business, in all respects except for the requirement to serve rural Americans, and the fact that Congress sets postage rates.)

And their framework doesn’t allow for a way to think about services that are subsidized by the government, such as the swim lessons or (maybe? depending on their pricing model) the park district fitness center.

Quite honestly, what works a lot better is the framework for understanding universal-ish healthcare systems in countries they offer them, and the way private insurance fits in, where the OECD distinguishes between:

Primary private health insurance, of which there are two subtypes, principal (that is, no public health care available for the individual in question) or substitute (where the individual can opt-out of a public healthcare program, such as exists in Germany where one can avoid paying the FICA-equivalent tax by getting private insurance).

Of secondary private health insurance, there are multiple types:

Duplicative:  the local free clinic is crummy, or there’s a long wait for a procedure, so you go to an entirely separate system and pay the full cost.  This is the case in places like the UK (where you only swap out for certain treatments) or many low-income countries, for middle-income workers.

Complementary:  the state healthcare system doesn’t cover everything, so private insurance pays for the rest.  Example:  Canada’s health system doesn’t include drugs, but employer plans do.

Supplementary:  everything’s covered, but not the full charge.  This is similar to what Medigap plans pay in the US, e.g., the deductibles and coinsurance in Medicare.

(See Box 2.2, page 29, at the link.)

So what we lack is a terminology for talking about the inverse, the characteristics of public healthcare (or, other types of public services/benefits) that drive each of these situations for private parallel systems.  Or, more specifically, the authors lack this terminology and it is a significant deficiency of the book, because it makes it much more difficult to really understand what they have in mind, and “baseline” vs. “competitive” doesn’t cut it; and even the private health insurance labels don’t quite work for the case of a nominally “competitive” but deep in its innards partially-subsidized system.

It also seems to me that the authors don’t really provide a particularly useful deliberation as to what sorts of services are most beneficially delivered primarily by the government vs. in a voucher or other format.  “Public options” (in their expansive definition of “pretty much any service that is now or could conceivably in the future be delivered by the government) are, in their view, appropriate whenever there is a human need for the service and where the free market does not function well in delivering the service.  So, yes, it meets a greater good for education (primary and secondary) to be free because we don’t want the degree to which our citizens have a basic education to be dependent on their parents’ affluence and/or willingness to spend, and we likewise don’t want libraries to be fee-based because we believe it is good for society for everyone to have access to knowledge for self-improvement regardless of income (though, hey, many years ago, I recall it being debatable whether the library’s role should extend as far as providing entertainment, and video store competition, in the form of popular, rather than artsy or educational, VHS movies ).

But they’re missing a couple other factors.  Some items are very well-suited towards public delivery (or via a regulated monopoly) because they’re characterized by being a very standardized product:  electricity, for instance, or water and sewer.  But food for the needy makes more sense to deliver as a voucher rather than in the form of a food basket not merely because, as they say, “the food market functions well in most places” but also because people have strong preferences towards making their own choices regarding types of food.  On the other hand, government provision of childcare has tended to take the form of vouchers out of a recognition that different parents will prefer a childcare center with different characteristics:  is plenty of free time outdoors important?  Is a focus on academic skills?  What about prayers before meals, Bible stories, and the like?  Organic food?  etc.  In addition, while some families prefer centers, especially for their older preschool children, because of their more school-like environment, others, especially for their smaller children, prefer in-home providers, not just for their generally lower cost, but out of a desire for a homelike environment.  (The authors acknowledge that their example country for free public childcare, France, “emphasizes a shared culture rather than a heterogeneous one,” and simply shrug this off that an American equivalent would have to be more diverse, without recognizing that an institution which is intended to provide full-day care of very young children cannot, by its very nature, accommodate different cultures, and that, indeed, one intentional characteristic of the free public daycares in such countries as France, Sweden, etc., is to enculturate children into the mainstream culture and values of that country; see this old blog post at my Patheos site on childrearing in Sweden, and the transmission of values such as environmentalism and cultural norms such as outdoor time, in Swedish daycare.)  As to elementary education, one might say that all but a small minority of parents accept a standardized product, but, at the same time, it is the norm that even in areas without charter schools, schools of choice, etc., parents who can do so, effectively choose their child’s school by paying close attention to the catchment area of their school choices in homebuying.

Another characteristic that would seem to me to drive the acceptability of a state-delivered product or service is locality, by which I mean, to return to the swimming lessons example, consumer prioritizing of the service being conveniently available.   The neighboring suburb has a wave pool (and reasonably-priced nonresident admission, I might add) but we’ve never gone, despite intending to year after year, because we value being able to walk to our community pool.  Families have historically (except for, see above, charter schools, schools of choice, and choosing a home based on the catchment area of the desired school) valued neighborhood schools (though even outside these exceptions, this is changing, as norms have evolved to an expectation that children are either bussed or driven to school).  On the other hand, families choose daycares based on a number of characteristics, and are often more interested in its proximity to work, or somewhere in-between home and work.

There’s also the issue of path-dependency.  To go back to the library example, would it necessarily be obvious that there should be a public provider of popular DVDs, if we were creating such an institution “from scratch” — or that there should be a public “makerspace” or recording studio or all the other services (wealthy) libraries provide?  Maybe not – but once the concept of the “library” existed, there was a natural path in this direction.  Likewise, should there be government-provided swimming lessons?  You’d probably not build a pool for this purpose, but once you’ve got one . . .  And on the other hand, aside from the various other pros and cons to building an entire network of state-operated childcare centers, you’ve already got a large number of independent providers who would be shut down at the same time as the government would be looking at land acquisition (and, no, it’s not as simple as, “let the government buy the KinderCares!”) for daycares and additions to elementary schools for preschools.   (Though I suppose if the birth rate keeps shrinking, there’d be all manner of excess capacity.)

All that being said, let’s look at the authors’ proposed expansions of public provision of services.  To take the one of these that gets the most discussion these days first, they, yes, advocate for a “public option” for health insurance, but, recalling again that they use “public option” very broadly, they lend their support to either a single payer system or a competitor plan to private insurance.  In the former case they state that the “baseline public option” would “cover everyone, but with minimum levels of coverage” (p. 220) though they don’t specify exactly what would be left out (in reality, the current crop of Democratic candidates are all promising that all possible benefits will be covered with no additional copays or coinsurance in their proposed single-payer systems, and some versions even prohibit duplicate-style health insurance, all the better to ensure that the voting public will demand sufficient access to providers and treatment because they won’t be able to escape it); in the latter, they propose that such a “public option” system would set reimbursement rates at Medicare plus 10% and then ratchet them downwards over time “to see how the new system works and to help providers adapt to the lower rates incrementally” which misses the point that low Medicare and Medicaid reimbursements are not merely about providers “adapting” but about cost-shifting in which private insurance is expected to make up the difference.  (Incidental fun fact:  around here, Lurie Children’s Hospital does a lot of fundraising; I dug into their annual report to see where the money goes, that is, whether it funds special programs of some sort or another, and they pretty much say, “a big chunk of our patient population is on Medicaid and we rely on our fundraising to bridge the gap between Medicaid reimbursements and our actual costs.”)

Naturally, they also propose government-provided childcare, functioning with neighborhood childcare centers for the youngest children and pre-K programs directly at the neighborhood elementary school, with both of these as well as elementary and middle-schooling running year-round, for the entire duration of a parent’s workday, offering breakfast and dinner, and afterschool sports and music lessons.  Yes, of course, parents could opt out for private schools if they so chose, which they envision might still happen for parents choosing religious schools or for the uber-wealthy, but there would be no opt-out voucher available to offset any of this cost.

They label public housing as a “public option” which has been less successful (further broadening their definition of “public option” to include even programs which are means-tested and limited in availability), but they blame this not on the notion of state-owned housing but on insufficient support for the system, such as the unwillingness of public housing-builders to do so in a mixed-income and mixed-race fashion.  They also assert that, despite Chicago’s notorious Cabrini-Green, New York City’s public housing is a success story – which is far from the message of such news reports as the Washington Post‘s February 11 article, “New York’s public housing system is the size of a city. It’s failing children.”  (Yes, it’s opinion, but its author, Emily A. Benfer, is hardly an anti-public-housing right-winger.)

The New York City Housing Authority, responsible for 176,000 apartments in 2,418 buildings, is by far the biggest public-housing system in the country. Beset by lead-paint hazards, mold, heating failures and chronic mismanagement, NYCHA buildings are also a danger to the authority’s 400,000 residents — the population of a mid-size American city.

One might better discuss public housing by looking at the UK, where “council estates” were far more prevalent, once upon a time, and where there has been much discussion about their success or lack thereof, with further discussions around them in the aftermath of the Grenfall Tower fire. And I’m not going to get into that, but it would have really brought clarity to the discussion of, “will human nature inevitably get in the way of well-maintained public housing, or not?”

They propose a public bank, as an alternative for Americans who don’t currently have a bank account or, alternatively, a means to borrow money at low interest rates. As it turns out, I dug into the question of a Post Office Bank not long ago, and it’s not an entirely unreasonable idea, if the “infrastructure” of local post offices and their employees can be used for this purpose (especially, in thinking further about it, if there is excess capacity due to automation/decline in mail service, but perhaps not so much if those post offices are now “at capacity” due to ordered-online package delivery).  However, the authors overstate their case when they argue that a public bank would provide greater convenience to workers who lack the flexibility to bank during traditional banking hours (post office opening hours are no more generous), and who fail to acknowledge that running a banking system costs money, and all the more so for low-balance accounts and in a time of low interest rates.  As in other such instances, they envision low (or lower-than-payday-loan) interest loans for the poor, though they also acknowledge that this would involve “spend[ing] taxpayer funds to loan money to the poor” (p. 180).

They have a proposal for higher education, too, but it’s not what you might expect.  After all, a “public option” already exists, in the form of public community colleges and universities, and, oddly enough, they don’t really seem to acknowledge that these exist, and are public and, however much their tuition has climbed over time, they are nonetheless less costly than their private equivalents, whether non-profit or for-profit, and, at least with respect to community colleges, their tuition rates (an average of $4,800 for in-district students) comes out to less than the Pell Grant for eligible students (a bit over $6,000).  Why do students choose for-profit colleges rather than a community college route?  In some cases, because of their marketing.  In other cases, because they promise a more visible path to the end goal.  What’s more, in addition to tuition, a further issue in financial aid is the disbursement of money to fund living expenses.  In any event, their notion of “public option” becomes narrowed into “tuition free” and “nationwide in scope” and as a result they propose a nationwide, and federally-funded and administered, online university for “basic higher education,” with a government mandate that any public school accept the credits earned.  Now, for all that the authors are both university professors, they seem to nonetheless overstate the case for how much can be accomplished purely online with no marginal per-student cost; yes, one can watch lectures and read course material for a basic introductory class, and some of the assessments may be multiple choice, but existing online degree accreditation processes require that professors nonetheless have ongoing interaction with students (or are available for such) via chats, e-mail responses, and the like, and assessments are likely to take the form of either written work or “show your work” exams (in much the same manner as advanced actuarial exams were no longer multiple choice but where your entire problem-solving process was graded).  That’s not to say that online courses and traditional courses are equivalent in cost-to-provide and, so far as I know, universities do not, but probably should, differentiate in their fees for the two types of courses, but their proposed nationwide online federally-funded and administered university wouldn’t be a game-changer.

And finally, we get to retirement, and the usual recitation that bad employers are shirking their duty to provide defined benefit pensions, and that the private sector is insufficent because not enough employers offer plans and not enough workers choose to contribute to them or to a private IRA, because fees are too high, because workers are too susceptible to high-risk trading, because stock markets are risky in any event, and because antiselection makes annuity purchases unreasonably expensive.

So here’s what they propose:  in the same manner as the Thrift Savings Plan (TSP) provides 401(k)-style savings for federal employees,

The TSP is a model for a competitive pubic option that could be made available to all workers.  No one would be required to participate, and market options would compete side by side with it.  But a new public option along the lines of the TSP could provide a secure vehicle for retirement savings.  Adding to the appeal of the public option is that it would cost the government exactly zero dollars, because savers would pay (modest) fees to defray the system’s costs (p. 131).

Or, alternately, they propose a “baseline public option” in which participation at a 3% or 5% withholding level is mandatory, investements are in index-funds only, and all funds are converted to annuities at retirement.  No, they don’t specify whether the government is the direct provider of annuities, whether they would manage the funds and set annuity conversion rates in the same manner as any private-sector provider, whether participants or the government would absorb and losses from poor experience, whether participants would be forced to annuitize the entire accumulated funds, whether there would be any recognition of the deltas in life expectancy between the poor and the wealthy, etc.

They also promote the idea that employers would consequently give up their existing 401(k) provision and that “pension administration would be centralized in the hands of the government.”  They propose that the federal government would also replace existing tax deferrals with a 50% match on the first $2,000 in savings, or some similar benefit.  And they compare it to the UK’s NEST autoenrollment program for workers who don’t have workplace retirement programs — but the NEST program is clearly intended to fill in a gap rather than replace employer plans, applies to a second tranche of income due to the flat nature of the Social Security benefit, and does not mandate annuitization.

Having touted this mandated version, they then revisit the “competitive public option,” and identify reasons why it’s an inferior alternative to their “baseline public option.”  Neglecting the possibility of auto-enrollment and requirements that nonparticipants must choose to opt out, they complain that a non-mandated version would “put the burden on workers to sign up for the program and choose to save.”  They tout the lower administrative costs of a mandated system, in terms of both employers and the funds themselves, noting that if employees were given the option to select alternate savings levels, it would be more difficult for employers to track their choice than to administer it as simply another layer to the existing FICA tax.  And if participants may opt out to avoid the mandatory annuitization, then we’re back to the antiselection issues.

They also acknowledge one further challenge with a system managing accounts for 150 million American workers, and that’s identifying appropriate investment managers; given that the intent is to effectively wipe out the private sector market in terms of retirement-focused saving (if there’s no tax incentive for private-sector plans, there’s no reason for them to be restricted to retirement-age withdrawals), to hand the contract over to a single provider would really discombobulate the entire market.

All of which means we’re right back at the same sort of Social Security add-on as we’ve seen multiple times before, such as, for instance, Teresa Ghilarducci’s Guaranteed Retirement Account (which I described in a Patheos blogpost about her most recent book, in 2018), and back to my same set of complaints/issues/stipulations, that such a system is not wholly a nonstarter but really needs to be integrated with a reformed Social Security, first, and privately-run (though with a non-profit element, potentially) to avoid inappropriate government entanglement with issues such as investment selection (and investment advisor selection) and to keep a program structure of risk pooling rather than building in government subsidies as guarantor of account balances and annuities, let alone placing in the hands of Congress the temptation to promise high-return annuity rates.

So what’s the bottom line?

Fundamentally, the concept of the “public option” just doesn’t work insofar as the objective is to build support for government interventions into the private sector by using a label that’s found acceptance among (some) Americans as a promise that by removing the profit motive, the federal government can do things better than the private sector.  It is true that we (as Americans in general, and as voters and actual or would-be policymakers) need to give some thought into understanding under what circumstances a particular service that’s important to one’s well-being (health, education, financial well-being) merits being provided directly by the government in a no-cost-to-the-user or partially-subsidized fashion, in which cases there ought to be cross-subsidies (as is the case when all of us city-dwellers who send letters via first-class mail subsidize rural Americans’ more costly mail service), and where any such provision should be in a social-welfare fashion for the needy.  But the authors’ fundamental belief that the government is, by its lack of a profit motive, perfectly well-suited to provide a great many services, really prevents them from providing this reflection.