- President Obama, 8/11/09

Obama is right - the post office isn't doing so well.  Recently, Postmaster General John Potter requested that Congress end Saturday mail delivery in order to cut costs. As a rule, government sponsored enterprises (GSEs) fail to operate efficiently. GSEs exist to fill political, rather than market, demands, and they may not offer a product at a price that anyone is really willing to pay. Because politicians will ensure that organizations like the post office continue to function, its directors have limited incentives to cut unnecessary costs or operate at a profit.

So what will happen when the public option realizes, like the post office, that it cannot, metaphorically speaking, pay for health care “every day of the week”? It could imitate the post office and simply shut down on Sunday and perhaps Saturday as well. No consumers would sign up for insurance that only offered a 6/7 chance of providing coverage.

But a plan so bad that no one would purchase it fails to satisfy the arbitrary political demand for substantial government interference in the market. A government determined to have a “viable” public alternative to the private market is left with a few options once their offering fails on its own merits. They can subsidize it openly and have taxpayers pay for “weekend health care”. They can subsidize it implicitly by outsourcing administrative functions to other branches of the government (as the government outsources Medicare funds collection to the IRS). Or it can tilt the market in the public option’s favor by granting it special tax status and immunity from certain types of regulations and by passing laws that require the private market to adopt the public offering’s more expensive methodology.

Or it can do all of the above. As Edward Hudgins explains, the post office is a vivid example of government interference in defense of its sponsored firm. Congress has favored the post office with direct subsidies, tax privileges, and bans against “first-class mail” delivery in inter- and intra-city markets. Despite this generous patronage, the US Postal Service is $6 billion in debt.

Government offerings are a threat precisely because they respond to political, rather than market demand. Like the post office, they can only control costs by rationing. And like the post office, they can only ration after their competition has been regulated away. The government can cut health care on Saturday only after it has cut the rest of the private market. The twin arbitrary political demands of a public option ensure that we will be left with one meager, inefficiently delivered option. Why cater to politicians’ demands instead of actual consumer preferences?

Photo Credit: Davonteee