03/16/2014 09:02 am ET | Updated May 16, 2014

Obamacare's Market Problem


In a now-familiar policy ritual, the White House has just re-jiggered the Affordable Care Act -- this time by allowing consumers to renew millions of non-compliant health insurance policies for at least two more years. It remains to be seen whether the courts will uphold the legality of these unilateral changes in the program, and whether the ACA's approach to expanding health insurance will ultimately turn out to be cost-effective -- the multi-trillion dollar question -- can only be assessed once the program is up and running.

These abrupt retreats are designed to render a vast unpopular program more palatable to consumers, providers, and insurers. This political imperative reveals a fundamental principle that confront all large social programs, regardless of the administration in power: they cannot succeed unless they can come to terms with the robust markets in which they are embedded. Policymakers who hope to improve these markets must also reckon with the persistence and power of their underlying dynamics.

Our political culture deeply mistrusts the federal government (except in certain areas like national defense), while believing strongly in the virtues of competitive markets. Public faith in Washington is low and falling. In 2010, only 4 percent had a lot of confidence that it will solve the problems it takes on. (The notoriously feckless ACA roll out has presumably driven that share closer to zero). In 2011, only three years after the 2008 market collapse that caused Americans so much pain, 64 percent viewed "big government" as the largest threat to the nation's future; only 26 percent named "big business." And big government has grown even bigger since then, with the implementation of the Dodd-Frank law and the ACA -- together adding enormous regulatory authority in two of the largest areas of the economy.

There are many functions that only the government can perform and many others that Congress has decided that it should perform. In the case of the ACA, as with many other programs, its relationship with the relevant markets is ambivalent, uneasy, and uncertain. While unwilling to supplant them, the government is determined to reshape them. In doing so, it risks sacrificing the very features of markets that Americans admire -- features that contrast sharply with those that characterize government. Here are a few of them:

Speed. Markets respond to new information and developments quickly, sometimes instantaneously, whereas government is congenitally averse to change. For example, a 1931 law (the Davis-Bacon Act) vastly inflates the costs of federal projects in order to protect unions. It could never survive in a competitive market.

Diversity. Markets search for profitable niches to serve different consumers' needs, while public programs prefer one-size-fits-all approaches -- especially for low-income clients who have few alternatives. Gypsy vans, for example, serve the transport needs of many poor people better than fixed-route municipal buses do.

Sophistication. Markets are increasingly complex, technical, and specialized, so even zealous officials often find it hard to comprehend and regulate them effectively. Despite the Volcker Rule's long gestation period, policymakers failed to anticipate the damage that it would inflict on community banking. Only after implementation began was this problem acknowledged and the regulations cut back.

Flexibility. Government rules tend to restrict supply and thus raise prices. When firms respond by substituting other goods, the policy may be frustrated, as when banning DDT led to more dangerous pesticides. Markets also transcend the jurisdictional lines that bind government. When the Sarbanes-Oxley law made IPOs more costly, firms simply moved them offshore to avoid the law. Similarly, "informal" markets quickly spring up to circumvent government restrictions -- sometimes usefully (e.g., gypsy vans) but often tragically (e.g., the failed War on Drugs).

Competition. Markets often compete with government successfully for customers, talent, resources, and performance. Parents with vouchers often choose privately-run schools they think will better serve their children. The most skilled workers prefer the private sector to the government -- and not just because of higher pay. (In fact, most mid- and low-level federal workers are paid more, better insured, and enjoy greater job security than comparable private sector workers). Private firms often supply similar services more efficiently. The Postal Service, for example, cannot compete with Fedex and UPS for profitable services because Congress burdens it with politically-driven costs. The same is true for some kinds of insurance.

Parts of the ACA such as the exchanges wisely seek to exploit some of the market's advantages in providing choice and efficiency. But other parts of the program -- including costly mandates for insurance benefits for which even subsidized consumers are unwilling to pay -- seem to ignore those advantages. The program's effectiveness requires striking the right balance between markets and mandates. The ACA's herky-jerky implementation suggests that Washington has not yet gotten it right.

Peter H. Schuck is a law professor at Yale Law School. His latest book,
Why Government Fails So Often and How It Can Do Better (Princeton U.P.) will be published next month.

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