Home > Action, Current, Law, Politics, Privatize > Whither Private Sector Efficiency?

Whither Private Sector Efficiency?

An article on the front page of yesterday’s USA Today described the new budget plan Republicans introduced earlier this week that would “dramatically revamp the twin health care pillars of the Great Society, taking a huge political risk that could reverberate all the way to November 2012 and beyond.” Richard Wolf and Kelly Kennedy, “GOP seeking dramatic changes in Medicare and Medicaid,” USA Today (April 6, 2011). Behind the economic leadership of Rep. Paul Ryan, House Budget Committee Chairman, the Republicans are proposing fundamental changes to the federal Medicare and Medicaid programs. “‘Our goal here is to leave our children and our grandchildren with a debt-free nation,’ said Ryan, 41, of Wisconsin. ‘At stake is America.'” Id.

For those who have tracked the recent rise of fiscal conservatism among Republicans at the national level, news that they are targeting large government programs for reductions is unsurprising. What might be surprising, however, are some of the effects of the GOP plan to privatize Medicare and shift Medicaid to state-level administrators:

Medicare, the government-run health insurance program covering about 47 million seniors and people with disabilities, would be run by private insurers and would cost beneficiaries more, or offer them less. Medicaid, the federal-state program covering more than 50 million low-income Americans, would be turned over to the states and cut by $750 billion over 10 years, forcing lesser benefits or higher co-payments. Social Security eventually would be cut, too.

Id. If these projected outcomes are accurate, they raise questions about the Republicans’ application of conservative fiscal theory.

During George W. Bush’s presidency, Republicans remembered well enough that they favored low taxes, but they appeared to forget why they took that position. In doing so, they created a deficit by continuing to spend at high levels rather than reduce spending to match the reduction in tax receipts.

If USA Today is right that the twin pillars of The Great Society are Medicare and Medicaid, where does that leave Grace?

Now, Ryan and his colleagues appear to have reconnected low taxes and low spending but forgotten why they favor low spending. The idea behind a push for lower taxes and spending, of course, is that it forces government to shrink and permits the private sector to expand. This is desirable because, from the proponents’ perspective, the private sector can provide goods and services more efficiently (cheaper and more effectively) than would be possible in the public sector (i.e., government). The economic calculus of privatization can be complicated, but the results presented in the above article– higher costs and reduced services– do not sound like efficiency gains.

Under conservative economic theory, small government is desirable, not as an end itself, but because it reduces regulatory roadblocks that inhibit the private sector. The stated results of the Republicans’ plan for Medicare and Medicaid imply that they have lost track of the practical goal the application of their theories is supposed to achieve. If the predicted results are accurate, it seems that Republicans either have unsuccessfully applied their theories or reframed small government as an end itself. Remedying the former may simply require more careful work on the part of policy makers and their economists and other advisors. The latter, however, requires a new theoretical justification.

One view, perhaps of an anarchist variety, is that the government is but another (albeit large and special) player in a market that does not distinguish between a public sector and a private one. Under that view, it may not be surprising that there are some goods and services that a traditionally “private” entity or group of entities can provide most efficiently, or that there are others that the entity known as “government” can provide most efficiently, and still others that some combination of the two can provide most efficiently. See, e.g., public-private partnerships. Looking at things in this way, the possibility that government, with its special access to virtually all individuals in the market, could provide the most cost-effective insurance program based on its economies of scale, may not be so surprising. This may not be the actual case here, but the stated results of the Republican plan to privatize services and shift them to the states– increased costs and decreased services– suggest it is a possibility.

If small government itself is a goal, detached from private-sector efficiency gains, for the new group of House Republicans, their “pro-business” stance appears much less principled.

Categories: Action, Current, Law, Politics, Privatize
  1. Philo-Publius
    August 1, 2011 at 10:36 am

    All valid points, but I think you’re short-changing the benefits of state v. federal control of the entitlement programs. I don’t think it’s hard to argue that state legislators are much more accountable to their constituents than Congress. Now, this might not offset the efficiency losses, but there is a valid conservative-libertarian principle that supports the plan.

  1. April 11, 2011 at 10:02 am

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