Notebook — From the December 2009 issue
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The idea that there is a competitive “private sector” in America is appealing, but generally false. No one hates competition more than the managers of corporations. Competition does not enhance shareholder value, and smart managers know they must forsake whatever personal beliefs they may hold about the redemptive power of creative destruction for the more immediate balm of government intervention. This wisdom is expressed most precisely in an underutilized phrase from economics: regulatory capture.
When Congress created the first U.S. regulatory agency, the Interstate Commerce Commission, in 1887, the railroad barons it was meant to subdue quickly recognized an opportunity. “It satisfies the popular clamor for a government supervision of railroads at the same time that that supervision is almost entirely nominal,” observed the railroad lawyer Richard Olney. “Further, the older such a commission gets to be, the more inclined it will be found to take the business and railroad view of things. It thus becomes a sort of barrier between the railroad corporations and the people and a sort of protection against hasty and crude legislation hostile to railroad interests.” As if to underscore this claim, Olney soon after got himself appointed to run the U.S. Justice Department, where he spent his days busting railroad unions.
The story of capture is repeated again and again, in industry after industry, whether it is the agricultural combinations creating an impenetrable system of subsidies, or television and radio broadcasters monopolizing public airwaves for private profit, or the entire financial sector conjuring perilous fortunes from the legislative void. The real battle in Washington is seldom between conservatives and liberals or the right and the left or “red America” and “blue America.” It is nearly always a more local contest, over which politicians will enjoy the privilege of representing the interests of the rich.
And so it is with health-care reform. The debate in Washington this fall ought to have been about why the United States has the worst health-care system in the developed world, why Americans pay twice the Western average to maintain that system, and what fundamental changes are needed to make the system better serve us. But Democrats rendered those questions academic when they decided the first principle of reform would be, as Barack Obama has so often explained, that “nothing in our plan requires you to change what you have.”
This claim reassured not just the people who like their current employment benefits but also the companies that receive some part of the more than $2 trillion Americans spend every year on health care and that can expect to continue receiving their share when the current round of legislation has come to an end. The health-care industry has captured the regulatory process, and it has used that capture to eliminate any real competition, whether from the government, in the form of a single-payer system, or from new and more efficient competitors in the private sector who might have the audacity to offer a better product at a better price.
The polite word for regulatory capture in Washington is “moderation.” Normally we understand moderation to be a process whereby we balance the conservative-right-red preference for “free markets” with the liberal-left-blue preference for “big government.” Determining the correct level of market intervention means splitting the difference. Some people (David Broder, members of the Concord Coalition) believe such an approach will lead to the wisest policies. Others (James Madison) see it only as the least undemocratic approach to resolving disputes between opposing interest groups. The contemporary form of moderation, however, simply assumes government growth (i.e., intervention), which occurs under both parties, and instead concerns itself with balancing the regulatory interests of various campaign contributors. The interests of the insurance companies are moderated by the interests of the drug manufacturers, which in turn are moderated by the interests of the trial lawyers and perhaps even by the interests of organized labor, and in this way the locus of competition is transported from the marketplace to the legislature. The result is that mediocre trusts secure the blessing of government sanction even as they avoid any obligation to serve the public good. Prices stay high, producers fail to innovate, and social inequities remain in place.
No one today is more moderate than the Democrats. Indeed, the triangulating work that began two decades ago under Bill Clinton is reaching its apogee under the politically astute guidance of Barack Obama. “There are those on the left who believe that the only way to fix the system is through a single-payer system like Canada’s,” Obama noted (correctly) last September. “On the right, there are those who argue that we should end employer-based systems and leave individuals to buy health insurance on their own.” The president, as is his habit, proposed that the appropriate solution lay somewhere in between. “There are arguments to be made for both these approaches. But either one would represent a radical shift that would disrupt the health care most people currently have. Since health care represents one-sixth of our economy, I believe it makes more sense to build on what works and fix what doesn’t, rather than try to build an entirely new system from scratch.”
With such soothing words, the Democrats have easily surpassed the Republicans in fund-raising from the health-care industry and are even pulling ahead in the overall insurance sector, where Republicans once had a two-to-one fund-raising advantage. The deal Obama presented last year, the deal he was elected on, and the deal that likely will pass in the end is a deal the insurance companies like, because it will save their industry from the scrap heap even as it satisfies the “popular clamor for a government supervision.”
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