Thud, Part III

Stuart Butler responds here to my critique of his paper/proposal to break the “health care reform stalemate.” As one might expect, the Heritage guy and the Cato guy agree that federalism is good because “state experimentation permits a comparison of approaches to solving social problems.” Those social problems include low-quality, unaffordable health care and other consequences of excessive government.

My skepticism of Stuart’s proposal stems from the fact that he would have the federal government (1) offer financial incentives that induce states to conduct policy experiments and (2) judge the success of those experiments. That actually runs counter to the idea of federalism and sets up a process where advocates of markets are bound to lose.

State officials know that if they don’t maintain or improve quality of life, people and jobs leave. Thus the freedom to choose one’s state of residence both encourages policy experiments and holds states accountable for them. That decentralized accountability mechanism pretty much cannot be fouled up unless a state prohibits its residents to leave or (more likely) finds some way to shift the costs of its experiments to other states.

Having the feds offer states cash to induce policy experiments would favor collectivist over government-limiting experiments. First, it would shift the tax burden of collectivist experiments to other states and therefore make such proposals more attractive to state legislators. (That is the #1 problem with Medicaid.) Proposals to limit government would be on the losing end of that concentrated benefits/diffuse costs problem. By definition, rolling back government involves taking something away from an organized interest group. Were any state to deliver such a proposal to Stuart’s commission, it would have to arrive tied to other proposals that buy off those interest groups. Thus states would present Stuart’s commission with proposals that either increase government intervention or (at best) have no impact on government intervention. On net, that means more government intervention.

Stuart has more confidence than I do that states would propose market-based reforms. As evidence, he cites recent experiments with defined contributions and health savings accounts in Medicaid. But here I think Stuart makes my point for me. As I explain elsewhere, those are not government-limiting reforms. Vouchers and HSAs make Medicaid more like cash assistance, and therefore just trade some of Medicaid’s current problems for problems associated with cash assistance (read: welfare checks). As long as Congress keeps giving states a dollar-for-dollar incentive to expand their Medicaid programs (what I call “pay for dependence”), vouchers and HSAs likely will increase Medicaid spending.

But suppose a state proposed a fantastic health care reform: eliminating the tax exclusion for employer-provided health insurance and lowering marginal tax rates. That and other tax-based reforms would probably fail because even some people who are generally supportive of the concept (like me) would oppose giving the feds the ability to write different tax rules for different states.

It is true that Congress could reject the inevitably collectivism-heavy package of proposals that the commission would submit. I personally have no confidence that any Congress would do something so sensible, much less that this Republican Congress would. But even if we could rely on Congress to act sensibly, why tempt them?

Finally, having the feds judge the results would create a centralized accountability mechanism susceptible to special interest lobbying, which Stuart acknowledges “would probably help those who want to expand government.” It is in the forum of Stuart’s commission, rather than in society at large, where I fear market-based approaches would not survive.