The Private Abuse of the Public Interest: Market Myths and Policy Muddles (Chicago Studies in American Politics)

The Private Abuse of the Public Interest

Chicago Studies in American Politics A series edited by Benjamin I. Page, Susan Herbst, Lawrence R. Jacobs, and James Druckman

Lawrence D. Brown and Lawrence R. Jacobs

The Private Abuse of the Public Interest Market Myths and Policy Muddles

The University of Chicago Press Chicago and London

is professor of health policy and management at the Mailman School of Public Health at Columbia University.

LAWRENCE D. BROWN

is the Walter F. and Joan Mondale Chair for Political Studies and director of the Center for the Study of Politics and Governance of the Hubert Humphrey Institute and the Political Science Department at the University of Minnesota. LAWRENCE R. JACOBS

The University of Chicago Press, Chicago 60637 The University of Chicago Press, Ltd., London © 2008 by The University of Chicago All rights reserved. Published 2008 Printed in the United States of America 17 16 15 14 13 12 11 10 09 08 isbn-13: isbn-13: isbn-10: isbn-10:

1 2 3 4 5

978-0-226-07642-3 (cloth) 978-0-226-07643-0 (paper) 0-226-07642-3 (cloth) 0-226-07643-1 (paper)

Library of Congress Cataloging-in-Publication Data Brown, Lawrence D. (Lawrence David), 1947– The private abuse of the public interest : market myths and policy muddles / Lawrence D. Brown and Lawrence R. Jacobs. p. cm.—(Chicago studies in American politics) Includes bibliographical references and index. isbn-13: 978-0-226-07642-3 (cloth: alk. paper) isbn-10: 0-226-07642-3 (cloth: alk. paper) isbn-13: 978-0-226-07643-0 (pbk.: alk. paper) isbn-10: 0-226-07643-1 (pbk.: alk. paper) 1. Public administration—United States. 2. Social service—Contracting out—United States. 3. Public welfare—Contracting out—United States. 4. United States—Economic policy. 5. Public-private sector cooperation— United States. I. Jacobs, Lawrence R. II. Title. jk421.b75 2008 352.5'38—dc22 2008013578 o The paper used in this publication meets the minimum requirements of the American National Standard for Information Sciences—Permanence of Paper for Printed Library Materials, ansi z39.48-1992.

These men, they were all alike, they left everything out. D. H. Lawrence, Lady Chatterley’s Lover

Contents

Acknowledgments ix

1 A Return to Realism 1 2 Markets and Policy: From Pragmatic Realism to Dogmatic Utopianism 10 3 Cycles of Reform: Formulation and Ratification of Market Utopianism 38 4 Cycles of Reform: Institutional Reality and the Dystopia of Markets 67 5 The Democratic Disconnect and the Growth of Government 95 6 Pragmatic Policy in the Marketplace of Ideas 121

References 133 Index 145

Acknowledgments

We have worked on this book for longer than we care to admit. One of its pleasures has been interchange with colleagues who read and commented on all or parts of the book and who enriched it in the course of conversation with us. Although we did not always embrace their suggestions or satisfy their challenges, we particularly want to thank Je∏ Henig, Hank Levin, Deborah Stone, Hugh Heclo, Howard Rifkin, Ruth Messinger, Sue Urahn, Michael Delli Carpini, Michael Lipsky, Miles Rapoport, David Callahan, David Smith, Kate Kraft, Stephen Heintz, Walter F. Mondale, J. Brian Atwood, Judy Feder, Jennifer Hochschild, Jon Oberlander, and Michael Gusmano. We are grateful to the Ford Foundation for a grant that got this project under way. Three anonymous reviewers gave us insightful feedback and encouragement, as did two superlative social science editors— Ben Page (series editor) and John Tryneski (Chicago’s Social Science editorial director)—who admirably uphold the traditions of intellectually engaged editors. We alone are responsible for errors in and limitations of the book.

ix

1 A Return to Realism

According to Richard K. Armey, a former Republican leader in the U.S. House of Representatives, “markets are smart, government is dumb.” Though many conservatives would presumably decline to buy this proposition wholesale, the cultural penetration of words to that e∏ect has transformed both intellectual debate and policy practice in the American public sector over the last three decades. That private interests harnessed to market strategies should and can be deployed in the service of public ends has become an article of faith among many of the conservative and moderate political leaders who have largely dominated Washington, D.C., and many state capitals since 1968. Even members of that endangered species formerly known as liberals often refrain from quarrelling with this received wisdom. The hot pursuit of market alternatives to government has powerfully shaped both how policy is conceived and how it is practiced. This little book is a caveat emptor, an invitation to think twice about the supposedly broad-ranging benefits of the public use of private interests. It is by no means a general critique of the introduction of market mechanisms into public policies, and still less an indictment of markets per se and their role in the “coordination of human activities not by central command [but] by mutual interactions in the form of transactions” (Lindblom 2001, p. 4). Deregulation of airlines, for example, contributed to competition among carriers and a sharp decline in fares, transforming air travel into a common form of transport for millions of middle-class Americans. Our book’s more modest aim is to explore the central institu1

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tional considerations that market strategies often overlook and the principal primrose paths down which they may go astray. We find a striking paradox: conservative aspirations to expand markets and shrink government have often disappointed citizens and resulted in more extensive government rules and routines. Why has an era dominated by market enthusiasts and bipartisan agreement that “government is the problem” produced not only market-oriented policies that fall short of promised outcomes but also more government? Three essential points pervade our discussion. First, however smart markets may be in theory, they are far less adept at o∏ering answers to policy conundrums than their admirers tend to assume. The desire to liberate markets from heavy-handed government regulation can and routinely does open doors to market failures and abuses, which in turn trigger alarms summoning back into action agencies of government, ironically enfeebled by diminished capacities born of irrational exuberance about the merits of markets. Confident reformers sold government oΩcials on expanded markets in health care, transportation, energy, and other essential arenas. Policy makers dutifully following the advice of market sages increased the fees charged to patients to make “health care consumers” aware of costs, which was prescribed as a cure for rising expenditures, and pulled down the regulatory sca∏olding erected over the past century to prevent the breakdown of transportation and electric energy provision. What are the results? American patients pay more out of pocket for medical care than do patients anywhere else in the world, while health care costs continue to exceed what other societies pay and millions lack coverage; many cities either lack railroad and air transport or are at the mercy of a few providers who are free to charge exorbitant rates; and electric rates have soared in states that dismantled government protections. Market reformers may respond that their vision was never fully implemented or that unforeseen circumstances intervened. That may be true. Nonetheless, citizens and thoughtful commentators are entitled to make interim judgments. Markets, in our view, have a role (at times, an important one) in achieving the aims of society; but a utopian vision

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3

of markets poorly serves the public good. This book is, in part, a call to return to pragmatism and realism, long-standing values in policy debates until they were recently upended by theoreticians who took little serious account of the workings of institutions and the expectations of citizens. Second, the commonplace zero-sum imagery that treats markets and public power as irreconcilable opposites is wrongheaded. It has stirred a generation with the illusion that markets can be made a stronger force in policy by compelling government to retreat and retrench. In reality, well-functioning markets generally require government for their establishment and maintenance and for correcting damage that economists antiseptically term “negative externalities.” In the past three decades, government regulations have been repeatedly rolled back to make way for the much-heralded competition of markets, a quest that has reminded many consumers, citizens, and providers that competitive markets are diΩcult to create and sustain. Electrical energy, for instance, was once the poster child for deregulation and market competition; business and individual consumers now bitterly complain—as a representative of large industrial firms put it—that “we asked for competition but we do not see competition in any wholesale market” (quoted in Johnston 2007, p. c1). For consumers, deregulation has allowed electricity suppliers to inflate prices artificially (Johnston 2007). As the presidency of George W. Bush wound down, some of the country’s largest industries promoted further government regulation to protect the environment, consumer health, and worker safety. One expert had “never before seen so many industries joining a push for regulation” (Lipton and Harris 2007, p. a1). The motivations of businesses were varied and often self-protective—raising the bar against lower-priced imports, for example, and fending o∏ sti∏ new state laws and ominous legal action—but all speak to the recognition by the private sector of government’s role in their operations (Lipton and Harris 2007). A pattern is plain: time and again policy makers have pondered the appeals of one or another version of “managed competition,” only to embrace the competition, jettison or fail adequately to fund

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and build the management, aggravate old policy problems, unleash new ones, and belatedly pursue governmental correctives complicated by ceaseless assaults on government legitimacy and capacity. The urge to make policy venues not previously envisioned as ripe for market forces (health care and education, for instance) behave like “normal” markets perversely ends up nourishing growth of government, which is obliged to respond to complaints of businesses, consumers, and citizens variously vexed by abnormalities in new policy-market constructs. If markets are so smart, why is their deployment so often such a rich source of unintended expansion of government responsibilities? Third, government—big and bigger—is here to stay. The schemes of die-hard market believers to shrink and even “drown” government are but so many doors that invite it back in, bigger, though not necessarily better, than ever. Chapter 5 catalogues the sustained growth in government during the administration of Republican President George W. Bush. The swelling of government shows up in growing regulation, dramatically increased spending, and a widening work force employed directly by the government or through government contracts and grants. Overall spending by the federal government has increased about two times faster under George W. Bush than it did under Bill Clinton (Stolberg 2005). This bursting of the small government bubble was acknowledged by a matter-of-fact report of President Bush’s budget oΩce—the benefits of its expanded regulations outweighed their costs (OΩce of Management and Budget 2005). The New York Times, reviewing the Republican Party’s promised revolution to dismantle the state, asked, “Whatever happened to the promise of smaller government?” A “very disappointed” Alan Greenspan (former chairman of the Federal Reserve) concluded that “political control trumped policy” in Republican Washington: “Smaller government, lower spending, lower taxes, less regulation—they had the resources to do it, they had the knowledge to do it, they had the political majorities to do it. And they didn’t” (quoted in Andrews 2007, p. a17). Greenspan’s sense of betrayal was shared by conservative Newt Gingrich, former Republican Speaker of the House, who

A RETURN TO REALISM

5

blamed his party’s lack of deep commitment to antigovernment principles. “Republicans have lost their way,” he morosely concluded (quoted in Stolberg 2005). The National Taxpayers Union similarly complained that twenty-eight of the thirty Republicans who swept into oΩce during the Gingrich revolution in 1994 and still remain in oΩce have sponsored legislation to increase government (Stolberg 2005, p. a1). A paradox emerges: The growth of government is not mainly the work of profligate “tax and spend” Democrats. Solidly among the spenders and promoters of government activism were the antistatists who controlled Washington in the early twenty-first century and, indeed, dominated policy debates and held the levers of power in Congress and the White House for three decades. Although the expansion of government has proceeded without a national manifesto (indeed, it has proceeded in opposition to the reigning slogans), the trend is unmistakable in the daily news in the opening years of the twenty-first century. Having built careers by blasting big government, Republican conservatives used their political supremacy—secured by control of the White House and both congressional chambers—to enact No Child Left Behind in President George W. Bush’s first year in oΩce. The law created an unprecedented intrusion of federal power into the prerogatives of state and local school systems. In addition to expanding the government’s scope, No Child Left Behind created an array of challenges in implementing new national rules. As an encore, this conservative cast of characters then added to Medicare in 2003 an expensive prescription drug benefit incorporating a complex tilt toward competition among managed care plans within the program, all of which invites, indeed demands, burgeoning regulatory clarifications and correctives as far as the eye can see. Health care and education reform reflect legislation of choice; there are also pragmatic government expansions. When several major corporations were exposed for malfeasance, and stocks tanked from the loss of confidence, a former vice chair of the Federal Reserve and other Wall Street influentials reported that “[financial] markets are clamoring for decisive government actions” to regulate account-

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CHAPTER ONE

ing and governance problems (Blinder 2002, p. 13). President Bush and congressional Republicans soon expanded the government’s oversight and regulatory responsibilities for corporate finance, corporate boards, and the accounting industry. When railroad cars derail, crash into automobiles, and spew poisonous gas into communities, concern grows across the country, Congress gets nervous, and the Department of Transportation’s inspector general instructs the Federal Railroad Administration to strengthen oversight and to step up enforcement of safety rules (Bogdanich 2005). During the George W. Bush administration, the federal government intervened in response to the death of a baseball player who took the dietary supplement ephedra, the introduction into the food chain of E. coli–contaminated spinach and of meat containing mad cow disease, the invasion of e-mail spam and telemarketers, the failure of defibrillators in businesses and homes, and other stimuli (Sanger 2003; Meier 2004; Lipton and Harris 2007). President Bush campaigned in 2000 with promises to reduce government and to free markets, but his administration intervened in these and other cases because “events”—as one close observer of Washington politics explained—“forced [its] hand,” not because anyone had a new “grand political plan to embrace government activism” (Sanger 2003, p. a15; Lipton and Harris 2007, p. a1). When things go wrong, Americans look to government and to their elected representatives for help, which policy makers often provide in the glare of the media spotlight. Such spurts of federal activism do not begin to exhaust the paradoxical interplay between market rhetoric and public activism. At the state level, for example, former New York State Attorney General Eliot Spitzer aggressively assailed fraud in private insurance plans, drug companies that conceal negative information, and misleading analyses of stock values by financial advisors. Missouri’s Republican attorney general led a crusade by over thirty states against a telecommunications megamerger. Eight states bypassed the Justice Department’s settlement with Microsoft and instead launched their own antitrust suit against the company. Maine capped increases in drug prices. California set strict limits on emissions of carbon dioxide by automobiles that the federal government then tried to counter.

A RETURN TO REALISM

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Moreover, in some prominent policy arenas, the perceived costs of deregulation have triggered newfound and increasingly vocal support for tougher government intervention. If Enron’s rapacious gaming of the California energy market failed to wake state consumers and policy makers, the movement of prices sharply higher (not downward as market enthusiasts promised) in states that deregulated electricity caught their attention and triggered calls for reconsideration of government regulations. Prices shot up fourfold in Montana and twofold in many Northeast and New England states. According to one study, states that attempted to unleash the magic of competition ended up costing consumers $292 billion in higher electricity prices between 2000 and 2007 and $48 billion more than consumers paid in states that maintained traditional rate regulation from May 2006 to May 2007 (Slocum 2001; Harris 2004; Johnston 2007). Business Week devoted a cover story to the “slew of individual state restrictions on Corporate America.” Warning that a “bottom up movement with a decidedly anti–Big Business tone” could be “very costly to business,” this authoritative source for business leaders rued the irony: when legions of Washington conservatives “preached the gospel of states’ rights [they] didn’t quite imagine that 50 separate states and their attorneys general would become a significant part of the 21st century business landscape” (Business Week 2002, p. 156). Republican control in Washington and in many states may well have depressed government expansion below what Democrats would have preferred. The political parties clearly di∏er. What is striking, though, is that on a defining, if not the defining, issue of contemporary American politics—the size of government—the parties di∏er mainly by degree. Why has government continued to grow even under the sway of antistatists? Pragmatic responsiveness to constituents, insuΩcient philosophical commitment, and arm-twisting by lobbyists may strike market devotees like Alan Greenspan and Newt Gingrich as regrettable and avoidable mishaps. But this diagnosis calls a fundamental question: Can the size and scope of government be reduced if American voters recoil at the e∏ects of doing so? Can idealism

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CHAPTER ONE

about markets serve as a guide to policy in a world in which citizens have voice, politicians bear the cost of scorning constituents, and myriad stakeholders press government to serve their interests? Explaining why and how government has continued to grow under the tutelage of policy makers who (by all outward signs) distrust and even despise government leads us back to the realism and pragmatism about markets and government that once dominated policy making. This book focuses on three policy arenas in which market forces have been touted as promising reforms—health, education, and transportation—in hopes of isolating the analytical and practical essentials that might guide prospective buyers of marketist “solutions.” We wade through the utopian visions of ascendant markets to explore the underappreciated institutional complications of market strategies, the tight dependence of market forces on government frameworks, and the paradoxical tendency of marketist innovations in policy to expand, not constrain, the presence and prominence of government rule making. Our analysis is grounded in research by scholars and nonacademic experts. We synthesize patterns and trends across policy domains that are often treated as separate and self-enclosed silos. Chapter 2 surveys debates since the eighteenth century about the promise and limits of markets as a pillar of social organization. Such luminaries of the Scottish Enlightenment as Adam Smith and David Hume, often cited as forbearers of contemporary conservatism, venerated markets as engines for the generation of private wealth and correctives to corrupt and ineΩcient government practices. But they also recognized the critical role of public power in checking the excesses of self-interested behavior and in supplying both crucial collective goods (systems of justice, transportation, defense, and education) and assistance to vulnerable populations such as children, the aged, and the infirm. Much recent American doctrine on the policy uses of markets invokes a utopian theory of market forces and a corresponding denigration of government that departs sharply from the pragmatic realism of Smith, Hume, and other prominent classical political economists. In addition to abandoning tradi-

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tional conservative attention to institutional complexities, recent market promoters also break ranks with a distinguished cadre of U.S. economists who worked over the past century to improve the performance of the public sector, not to shrink it in obeisance to an imaginary zero-sum trade-o∏ with market mechanisms. Contemporary economists continue to identify vital roles for government in sustaining the delivery of public goods and the sound working of markets and to address barriers to healthy market dynamics that result from the frequent inability of consumers to collect, analyze, and use accurate information in making decisions. Chapters 3 and 4 trace a striking cycle in health care, education, and transportation policies that begins with the invocation of markets as the solution to problems created by government and ends with recognition by chastened policy makers that markets are less benignly automatic and government less expendable than voguish policy analyses had surmised. The final two chapters use our examination of these three policy arenas to explore general themes. Chapter 5 discusses the broader consequences of promarket reforms, and Chapter 6 outlines what we take to be a more realistic synthesis of government and markets.

2 Markets and Policy From Pragmatic Realism to Dogmatic Utopianism

Seminal thinkers like Adam Smith remain conservative icons more than 350 years after their writings first appeared. They are invoked to celebrate capacities of private markets and unfettered voluntary exchange to expand wealth and social well being. The iconography too often, however, neglects the formidable intellectual energy that Smith and other eighteenth-century philosophers and social scientists devoted to mapping why and when the visible hand of government might properly check, complement, or even supplant private markets both to keep them working and to ensure that communities are supplied with essential goods and services. The pioneering promoters of private markets argued for both a broad scope for voluntary exchange among individuals and an authoritative framework of governmental rules that constrain market transactions. Today’s image of Adam Smith as a single-minded proponent of “free” markets is a caricature that distorts Smith and later generations of economists. The classics in political economy—the shorthand description for the analysis by Smith and others of the intersection of markets and government—have su∏ered an especially selective reading in the United States. American conservatives have sacrificed the insistent institutional realism of Smith and other classical political economists for a utopian image of markets that understates both the dangers that markets might break down and the importance of government rules and correctives in averting such failures and in supplying the public goods society requires. Understanding the evolution from the realism of Adam Smith 10

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to the utopianism of contemporary market promoters is more than an exercise in connecting intellectual dots. American market advocates generated ideas and proposals for expanding markets that constitute a kind of “public philosophy”—an outlook on public a∏airs that became the “dominant framework for defining the field of political argument and interpreting events” (Heclo 1986, p. 33). Although this market philosophy was consistently challenged by the legacy of Adam Smith and by economists who studied the real world, it was successful in winning Republican and Democratic adherents in Washington and many state capitals because it advertised simple, elegant logic and an honorable lineage from seminal truths articulated three centuries earlier. In fact, however, any fair and balanced reading of Smith and his intellectual heirs would give due weight to the need for robust government precisely to secure and complement market exchanges. This chapter briefly traces the decline of pragmatic realism as a public philosophy, the rise of a dogmatic utopianism during the last four decades of U.S. public policy, and the persistence of pragmatic realism as a dissenting opinion that embraces private markets while acknowledging their limitations and the legitimate functions of government. The utopians have sought to isolate this long tradition of pragmatic realism and to frame public policy debate as presenting a stark choice—embrace markets with all the liberty and prosperity they promise or succumb to government with its oppression, economic stagnation, and decline. As we will show, this is a false choice. Adam Smith as Institutional Realist As industrialization eroded traditional economic and social structures, the political economists of the eighteenth and nineteenth century sought to draw workable boundaries between the private and public spheres. Free and flourishing private markets, they contended, would expand wealth and well-being. They repeatedly warned, however, that individual self-interest, indulged too far, could damage the general welfare and that markets might falter in myriad ways—for example, by allowing monopolies to squelch

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competition, by failing to supply critical public goods such as defense and transportation, and by leaving vulnerable groups to su∏er.1 Contemporary market champions who cite Smith’s Wealth of Nations as the source of that eternal beacon, “laissez-faire” capitalism (a term Smith did not coin or use), tend to ignore the psychological and institutional realism that permeates that seminal work. Smith did indeed applaud the drive for self-improvement (the “constant, uniform, and uninterrupted e∏ort of every man to better his condition” [Smith 1920, p. 364]). He also documented the eΩciencies that accompany profit seeking and the price mechanism as a means of allocating resources. Smith worried, however, that self-interest could generate wasteful “expensive luxury,” managerial ineΩciencies, and devious business practices that undermined competition. Rarely quoted are Smith’s warnings that “the interest of every man [is] to live as much at his ease as he can” and that this tendency endangered both social harmony and the generation of wealth (quoted in Rosenberg 1960, p. 557). Far from o∏ering an unqualified celebration of unrestrained self-aggrandizement, Smith struggled to balance individual self interest against the social need for institutions that harnessed selfregard to the service of society. Smith was an acute student of the tensions within human motivation—including the primordial drive for self-betterment and the temptations of corruption and laziness. His attention to individual calculations fed a sophisticated account of how government institutions reconciled self-interest with a larger social good. To be sure, Smith heartily criticized government policies—for example, Britain’s Corn Laws, which imposed a high tari∏ on imported corn in order to shield domestic farmers from competition. But The Wealth of Nations also carefully identified where and how government can assist markets and the pursuit of individual self-interest within them, thus expanding the overall welfare of society. Far from seeking an idealized endgame in which government shrinks away, Smith, as Na1. This section draws on Rosenberg (1960) and Muller (1993).

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than Rosenberg (1960) explains, envisioned government practices that achieved “a careful balancing of incentive [and] of provision of opportunity to enlarge one’s income against the need to minimize the opportunities for abuse” (p. 560). The Wealth of Nations presents a two-pronged practical theory of government intervention: one dimension lists critical public goods; the other spins a subtle and potentially expansive argument about the logic of the state’s role. With considerable attention to detail, Smith identifies as appropriate for government intervention four “public goods” that serve all members of society but are unlikely to be provided if left to individuals themselves. The first such duty, and the prime responsibility of any government, is to provide for the nation’s defense. Organized armies are essential to ensure that the “civilization of any country can be perpetuated, or even preserved for any considerable time” (quoted in Rosenberg 1960, p. 567). A second vital public function is the protection of property and liberty. Notwithstanding his strictures against o∏ensive legislative particulars, Smith applauded the general system of laws for guaranteeing “security . . . to every man that he shall enjoy the fruits of his own labor, [which] is alone suΩcient to make any country flourish.” Reliable laws are the indispensable framework for market exchanges among independent producers of goods and services; they give merchants confidence to supply capital, goods, and services in the expectation that contracts would be honored and payments rendered. Smith singled out by contrast the weak “civil and ecclesiastical governments of both Spain and Portugal,” which were wracked by poverty because they left industry “neither free nor secure” (Smith 1920, bk. IV, pp. 42–44). The third and fourth explicit roles that Smith assigned to government accompanied the advance of industrialization. New demands for commerce and trade required the government to expand its role in funding and maintaining both public education (“promoting the instruction of the people”), which was a radical notion in mideighteenth-century Europe, and a transportation system of roads, bridges, canals, and harbors, which would “facilitate the commerce of the society.”

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Government is necessary for an adequate supply of these public goods. National defense, a legal system, education, transportation, and other goods and services are “in the highest degree advantageous to a great society [but] . . . the profit could never repay the expence [sic] to any individual or small number of individuals,” who therefore could not be expected to develop them. Services that are “laid for the general benefit of the whole society” must and should be “defrayed by the general contribution of the whole society” (Smith 1920, bk. V, p. 214)—that is, financed by taxes and user fees. These four functions do not exhaust the government’s scope in Smith’s reckoning. For example, The Wealth of Nations discusses state regulation of banking, currency, and interest rates (Checkland 1975). If market and individual quests for self-improvement are to generate social benefits, Smith argued, government is indispensable to prevent economic actors (individual or corporate) from using their freedoms to obstruct those of others. Smith, in short, complements his praise for market competition with unapologetic realism about the limits of markets and the vital role of government in establishing, maintaining, defending, assisting, regulating, and supplementing them. As Robert L. Heilbroner observed, nineteenth-century conservatives who invoked The Wealth of Nations to condemn humanitarian legislation did a “strange injustice” to Smith, who, though an ardent foe of monopolies (public or other) did not oppose “government action that has as its end the promotion of the general welfare.” Today too, “in blithe disregard of his active philosophy,” Smith is often claimed as a conservative, whereas “in fact he was more avowedly hostile to the motives of businessmen than most New Deal economists” (Heilbroner 1980, pp. 67–68). Smith’s prominent intellectual peers and heirs accepted and refined his pragmatic realism. Realism, pragmatism, and moderation permeate the political economy of Smith’s friend and countryman, David Hume, who cautioned that “all political questions are infinitely complicated,” and that “a choice which is either purely good, or purely ill,” rarely arises (Hume 1963, p. 492). “Avarice,” for example, is at once “the spur of industry” and the most “irreclaimable” and

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ridiculous of vices (Hume 1963, pp. 94, 565). “Numberless bars, obstructions, and imposts” that deter foreign trade have a “general ill e∏ect,” but not all such measures are “prejudicial or useless” (Hume 1963, pp. 331–332.) Carried too far, taxes “destroy industry by engendering despair,” but when taxes are “moderate, laid on gradually, and e∏ect not the necessaries of life,” they may stimulate productivity (Hume 1963, pp. 351, 349). Some taxes (for instance, those “levied upon consumption, especially those of luxury”) are better than others (“poll-taxes”) (Hume 1963, pp. 351–352). Hume found the free governments of his day frighteningly adept at “contracting debt and mortgaging the public revenue,” a course that risked “intolerable” increases in taxes. (Hume 1963, pp. 96–97). But, on the whole, modern governments showed “a great change for the better, with regard both to foreign and domestic management” (Hume 1963, p. 94). No more for Hume than for Smith was government an intrinsic and implacable enemy of a free society. Quite the contrary: civilized society could not exist without “laws, and magistrates, and judges” to prevent the strong from abusing the weak (Hume 1993, pp. 462–463). In any society, Hume declared, “wise regulations . . . are the most valuable legacy that can be left to future ages” (Hume 1963, p. 22). Legislators and founders of states merit the “first place of honour” among men of “remarkable achievement,” because they “transmit a system of laws ands institutions to secure the peace, happiness, and liberty,” blessings that “can only be derived from good government” (Hume 1963, p. 54). To be sure, the classical political economists tended to have a poor opinion of the wisdom of governments and held a strong suspicion that states were “likely to prove the vehicle of special interest.” At times, they agreed that “the elimination of absurd laws and regulations seemed a more important recommendation than the necessity of some law and some regulation at all times.” But they also postulated “a whole complex of necessary functions of government,” which David Hume, Jeremy Bentham, John Stuart Mill, and others articulated at length with an impressive blend of “worldliness” and analytical rigor (Robbins 1965, pp. 184, 188, 190). Calls to oppose in some comprehensive zero-sum fashion two unified, reified entities

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called “the government” and “the market” would have struck them as absurd. The Nineteenth Century’s Great Transformation In the United States, Britain, and many other emerging capitalist countries, the spirit of Smith’s conservative realism prevailed as industrial growth intensified and then matured in the nineteenth and twentieth centuries. Firm philosophical allegiance to individualism and self-reliance were tempered by a pragmatic acceptance of the need to enlist and expand government to prevent and, when necessary, correct the breakdown of markets and the social ills associated with capitalism. As Polanyi (1957) recounts in The Great Transformation, “far from doing away with the need for control, regulation, and intervention,” the growth of free markets “enormously increased their range” (p. 140). In state after European state, nineteenth-century political leaders who were doctrinally committed to self-regulating private markets proceeded in a “purely pragmatic spirit” to promote the “realistic self protection of society” by undertaking new administrative tasks (such as establishing uniform measurements and collecting statistics), enacting antitrust laws, regulating utility rates, fashioning new protections for private property, stabilizing banking systems, extending the judicial and transportation systems, and laying the foundations for future welfare states (public health initiatives, oversight of factory conditions, protections for union organizers, and embryonic social insurance programs) (p. 141). Facing market failures and concomitant threats to social peace, policy makers “turned against laissez-faire and preferred . . . collectivist methods of regulation and restriction” (pp. 146–149). “The road to the free market was opened and kept open,” Polanyi declared, “by an enormous increase in continuous, centrally organized and controlled [government] interventions” (p. 140). Put another way, conservatives and promoters of private markets understood that establishing and sustaining markets required expanded government. At the dawn of the twentieth century, in short, both academic political economy and the European political economies it sought to

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inform acknowledged that markets exhibit both impressive scope and worrisome limits, that statecraft (including economic policy) required an artful interfusion of market and state forces, and that the design of government institutions that shape and govern markets (the political component of political economy) is an important challenge that economists could and should help to meet. The stark choice between government and markets that contemporary American economic utopians o∏er departs sharply from the intellectual and policy tradition of their forbearers. A Pragmatic Profession: The Progress of Political Economy in America The convergence of European and American thinking about the compatibility of private markets and robust government might seem strange. Institutional realism on markets and government may seem—at first blush—out of step with the laissez-faire dogma often associated with England’s and America’s deep-seated cultural aversion to big government and its attraction to free markets as a necessary (and perhaps suΩcient) condition for free citizens. Not surprisingly, the “principle of noninterference” has been prominent in the teachings of American economists. More than one academic career has been destroyed by notions “inimical to corporate interests and private wealth” and excessive a∏ection for socialist (or further left) reasoning (Bernstein 2001, p. 32; see also Moss 1996, pp. 19–21). The U.S. economics profession stood at a crossroads of cultural antistatism and public policy realism in responding to societal transformations. At the birth of economics as a cohesive profession in the United States in the late nineteenth century, its practitioners advertised the discipline as a new and solid body of scientific knowledge that was sure to improve the workings of public policy. A principal purpose of economics was to inform the decisions of government oΩcials. So-called institutional economists understood that “such institutions as the market, trade, contract, property, and competition were . . . the product of political, cultural, and historical circumstances” (Bernstein 2001, p. 46). The academic economists who

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founded and led organizations such as the American Association for Labor Legislation in the Progressive era believed that the state could “right social wrongs associated with industrial capitalism.” They saw themselves as “mediators between capital and labor,” indeed as “disinterested scientific safeguards uniquely qualified to lead public opinion toward a more positive and constructive view of the state” (Moss 1996, pp. 7–8). No lonely voices crying in the wilderness, these were the leading force behind a qualitative change in market-government relations. Indeed Kenneth Boulding found in John R. Commons “the intellectual origin of the New Deal, of labor legislation, of social security, of the whole movement in this country towards a welfare state” (quoted in Moss 1996, pp. 181–182, n. 19). Richards T. Ely’s draft “platform” of 1887 for the nascent American Economic Association declared that the doctrine of laissez-faire was “unsafe in politics and unsound in morals” and that the state was “an educational and ethical agency whose positive aid is an indispensable condition of human progress.” After “lively discussion” among the association’s fifty or so founding members, the deprecating reference to laissez-faire was removed, but “a commitment that the state had a positive role to play remained” (Barber 2001, pp. 223–224). Before World War I, American economists “were eager to use the new tools of their discipline to improve the practice of statecraft, whatever its purposes or goals” (Bernstein 2001, p. 34). The main tools then at their disposal—the development of national income accounting techniques and rigorous statistical analyses of national economic performance data—contributed modestly to guiding mobilization for the war. In the Harding administration, Secretary of Commerce Herbert Hoover “assisted in the professionalization of economics like few government oΩcials in modern American history” (Bernstein 2001, pp. 40, 43, 55, 69). Although the Depression initially left federal oΩcials hesitating over where, amid competing economic theories, to find strategic instruction, John Maynard Keynes’s arguments for using the government’s fiscal and monetary policies to stabilize the economy and modulate wild swings between economic downturns and upturns gained prominence by 1938–1939 within both the economics discipline and the counsels of federal policy making.

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The search by policy makers for realistic and pragmatic advice in managing markets brought professional economists into the inner sanctums of government. World War II expanded and cemented the evolving partnership between professional economists and public leaders; in 1943, Paul A. Samuelson dubbed it “an economist’s war” (Fogel 2000, p. 131). Robert Nathan and Simon Kuznets helped Washington war planners to estimate how quickly the economy might convert to a wartime footing and what levels of output it might be able to produce (Bernstein 2001, p. 79). Neoclassical theory spoke directly to such urgent practical challenges as how to adapt scarce means to given ends and how to maximize output while minimizing cost. Activity analysis, linear programming, operations research, game theory, and mathematical simulations of competitive behavior advanced steadily in both theory and application (Bernstein 2001, pp. 94–95). Tjalling Koopmans, for example, modeled how to maximize the transportation of cargo while minimizing cost and measuring and attenuating opportunity costs. Economists were proud that their creative deployment of neoclassical notions of rational choice helped to beat the Axis powers (Bernstein 2001, pp. 81–82, 88). The rich history of the role of economists in building and shaping an enormous expansion in government functions discloses a telling irony: it was “not individualism but statism” that brought neoclassical analysis into the policy spotlight. As one historian put it, a discipline “renowned for its systematic portrayal of the benefits of unfettered, competitive markets would first demonstrate its unique operability in the completely regulated and controlled economy of total war” (Bernstein 2001, p. 89). Mainstream economists and economic policy making in the United States were shaped by pragmatism—solving real world problems with appreciation of the limitations and opportunities of both markets and government. Economists applauded the eΩciencies and wealth generated by private markets but also recognized the importance of government interventions to provide public goods and otherwise protect citizens. After the Second World War, Democratic and Republican policy makers found willing partners among both macro- and micro-

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economists. The federal Employment Act of 1946 crowned the partnership between economics and the state in grand style both by formally embracing the government’s Keynesian duty to steer the economy toward high levels of employment and by creating for the profession its own organizational turf within the Executive OΩce of the president, namely, the Council of Economic Advisors (CEA). Meanwhile, the higher education system instructed a new generation of public oΩcials, businessmen, journalists, and other leaders in the government sector’s role in regulating demand through spending, spurring the “adoption and . . . entrenchment of Keynesian views about macroeconomic policy” (Salant 1989, p. 47). The first half of the 1960s saw a further flowering of fine-tuned economic participation in commonwealth a∏airs. Such luminaries as James Tobin, Walter Heller, and Kermit Gordon brought to the CEA both impeccable academic credentials and a “worldliness” born of firsthand knowledge that the “vast apparatus of federal economic planning” triggered by wartime necessity had worked well (Bernstein 2001, p. 132). Confident that economists had mastered stabilization policy techniques, these “New Economists” set out not only to steer macroeconomic performance but also to fashion a broad ameliorative social agenda, including the eradication of poverty in the United States (Bernstein 2001, p. 138). In sum, as the 1960s commenced, political economy in the United States, as in most of the Western world, was a tale of collaboration across porous public-private borders. In the first half of the twentieth century, states had mobilized their national economies to fight two world wars; managed those economies to combat a severe depression and then to sustain employment and constrain inflation; regulated (and occasionally nationalized) some important economic enterprises; and appropriated growing shares of national wealth to support welfare state programs and to construct highways and national and international transportation networks. Although some prominent economists (most notably Friedrich von Hayek and, later, Milton Friedman) deplored this drift toward government involvement in the economy as a dangerous form of “collectivism” and “socialism,” policy makers and many of the coun-

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try’s leading economists were consumed by practical challenges. At midcentury, debate about how to hold something called “the market” free from “the government” took a backseat to pragmatic, appreciative acceptance of inescapably political economies, which combined private property and market dynamics with democratic governance and redistributive social programs. Postwar West Germany called its mix of government and markets a “social market” state, a description that applied broadly to other Western societies including the United States. The Assault on Pragmatic Realism The 1960s did not end as they began. The national elections of 1968 marked a profound change of political guard as Richard Nixon narrowly won the presidential election and public policy shifted to the right. Nixon’s election precipitated reconsideration of both liberalism and conservative realism. The Republicans’ victory ushered in a new political demand for the services of unconventional economic voices, often anti-Keynesian, and not infrequently devoted to laissez-faire principles that Adam Smith himself did not embrace (on the neoliberal critique of the “new economics,” see Blyth 2008, pp. 115–121). The supply of these dissident voices proved to be both plentiful and professionally prominent. The writings of Milton Friedman, George Stigler, James Buchanan, Gordon Tulloch, and Anthony Downs (to cite but the better-known leaders of the revisionist pack) were neither homogenous nor representative of the profession as a whole, but they collectively constituted a body of theorizing that rejected on principle the pragmatic accommodations between state and market that had long governed U.S. policy and the participation of economists in it. This new school insisted on a searching, essentially philosophical, inquiry into the respective merits of the two sectors, an inquiry that almost invariably yielded promarket, antistatist conclusions and recommendations. Although the intellectual descendants of Adam Smith and other pragmatic political economists continued to churn out studies and recommendations, market utopians steadily gained standing in the policy debate.

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The Problem—the Governmental Affliction

With no more than minor damage to nuanced variations, the core teachings of the free market school that started its rise to prominence and power in the 1960s can be boiled down to five pathologies that aΔict government and make it “the problem.” Notwithstanding a short list of “exceptions” (and the history of the previous half century), Milton Friedman declares that the government’s record is “dismal. . . . The greater part of the new ventures undertaken by government in the past few decades have failed to achieve their objectives” (1962, p. 199). George Stigler (1975) contended a few years later that “often” (though not always) “public policies seem not to achieve much toward fulfilling their announced goals” (p. x). Rational expectations theorists coined an influential “policy ine∏ectiveness proposition” that purports to explain why the intervention of a “well-meaning but ill-equipped and self-defeating government . . . at oΩcial remediation of market outcomes merely made matters worse” (Bernstein 2001, pp. 160–161). The chorus of market boosters was clear: government—one big Corn Law ripe for repeal—is an ine∏ective tool with which to attain that maximization of individual utilities upon which a rational and defensible social order depends. GOVERNMENT MAINLY FAIL S .

GOVERNMENT IS INCOMPETENT. That government fails is no circumstantial happenstance but rather follows from the basic nature of what government is and does. O∏ering up his “fundamental thesis,” Stigler flatly proclaims that “we” simply “do not know the relationship between the public policies we adopt and the e∏ects these policies were designed to achieve” (Stigler 1975, p. 24). Anthony Downs helpfully elucidates why government is condemned to fly blind: the state participates in input but not in output markets and therefore cannot accurately gauge the results it achieves for the resources it consumes (Downs 1967, pp. 29–30; also Stigler 1975, p. 36). And, lest reformers wonder, the veil of ignorance is here to stay: Arrow’s impossibility theorem, a powerful inspiration for a generation of rational choice theorists, shows that it is “impossible to achieve col-

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lectively rational decisions that respect individuals’ freedom to determine personal ends,” thus rendering meaningless such concepts as “public,” “public interest,” and “social welfare” (Amadae 2003, pp. 122, 131). Government, in sum, is doomed to fail. GOVERNMENT MEANS CAPTURE . Such terms as “public interest” and “social welfare” are dangerous metaphysical legends because they mask the sordid reality of “politics as trade” (Amadae 2003, p. 137). Interest groups intent on maximizing their own interests “acquire” policies by buying the votes and other support of politicians hungry for cash and organizational backing (Stigler 1975, p. 114). The Interstate Commerce Commission, for example, “started out as an agency to protect the public from exploitation by railroads” but, according to Milton Friedman, degenerated into an agency “to protect railroads from competition by trucks.” Absent special precautions, well-organized producer groups “will invariably have a much stronger influence on legislative action and the powers that be than will the diverse, widely spread consumer interest” (Friedman 1962, pp. 29, 143). After reviewing oil import quotas, tari∏ policies, and farm subsidy programs, Stigler is confident that “everyone will admit” that government “enters fields simply because a politically wellsituated group wishes assistance” (Stigler 1975, p. 9). Those seeking to explain policy outcomes need merely follow the money, organization, and activism of producer groups whose demands the political class slavishly labors to satisfy. GOVERNMENT ABRIDGE S FREEDOM . Achieving agreement by “explicitly political decisions” entails a one-size-fits-all “conformity” that whisks society straight down the road to serfdom (Friedman 1962, p. 24; Hayek 1969). As now constituted, governments interpret collective decision making as a “power maximizing . . . zero sum game,” not the positive-sum exercise that would (and should) prevail if decisions were made by the unanimous consent of utility-maximizing individuals engaged in exchange (Buchanan and Tullock 1962, p. 23). By assuming equally intense preferences, majority rule imputes to each individual a set of preferences that are

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highly restricted and misleading because they fail to reflect (hence to aggregate) the true preferences of the consumers of policy (Buchanan and Tullock 1962, p. 126). Freedom required radical change. One approach would invent “an individualistic democracy to protect against . . . totalitarian encroachments on individual freedom” (Amadae 2003, p. 175). Friedman and others recommended a vast reduction in the reach of the state in order to entrust the functions it had usurped to the market of autonomous individuals, who are well equipped to collect and process information and reach decisions. The state embodies a relentless expansionary dynamic. Once in place, public agencies become “selfgoverning bodies,” run by “able and ambitious” careerists eager to expand their turf (Friedman 1962, pp. 186–187). The “fundamental premise” of Anthony Downs’s look inside bureaucracy holds that oΩcials “are significantly—though not solely—motivated by their own self interests” such as power, income, prestige, convenience, security, and personal loyalty (Downs 1967, pp. 2, 84). Moreover, simple majority voting “tends to cause a relative overinvestment in the public sector” by encouraging each voter to “secure benefits from collective action without bearing the full marginal costs properly attributable to him” (Buchanan and Tullock 1962, p. 201). Organized pressure groups push for more government largesse, and the bigger government grows, the more largesse there is, which prompts more group pressure. A “spiral e∏ect” thus aggravates capture and kindred public sector pathologies (Buchanan and Tullock 1962, p. 287). The democratic state, then, can be safely and summarily dismissed as a “well-meaning, clumsy institution all too frequently diverted by emotion and administered by venality” (Stigler 1975, p. 103).

GOVERNMENT ONLY GETS WORSE .

The Solution—the Free Market

In contrast to the sorry litany of governmental deficiencies, the cadre of market-promoting economists that began their ascent to political power in the late 1960s professed to o∏er a superior decision-making product—the free market. Markets successfully balance supply and

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demand across millions of particularistic exchanges governed by the preferences of participating individuals rather than by the heavy, coercive hand of public authority. They enable buyers and sellers to gauge, and oblige them to face, the costs as well as the benefits of alternative uses of scarce resources, absent false promises of free lunches and shifted costs. They compel producers to seek profit in the superiority of their wares, not their adroitness in putting public oΩcials in their pockets. Markets leave people free to choose what tastes to satisfy and how, thus honoring intensity of preferences, as majority voting does not, and checking collectivism before it hits the skids to totalitarianism. The divine deliverable of free markets is competition— “the consumers’ patron saint,” says Stigler (1975, p. 12). Given an elemental public framework of protections, competition averts unfair concentrations of market clout, substituting for the voracious “spiral e∏ect” of public and group power a socially benign self-equilibration. Naive legislative and regulatory nostrums come and go, but “self-interest and competition are never passing fads” (Stigler 1975, p. 188). Upon these motivational rocks and the incentives they evoke lie the keys to better public policy (Stigler 1975, p. 32). If only well-meaning but credulous reformers and political scientists were educated against unnecessarily complicating issues of institutional design (Buchanan and Tullock 1962, p. 231), the road would lie clear to constitutional arrangements that mimic the features and confer the benefits of markets and deter collectivist and totalitarian interventions. Reactions to Market Utopianism The merits of the stark and sweeping depiction of the pressing need to choose between government and market were, to put it mildly, debatable. Economists and other analysts acquainted with institutional and historical complexities countered that government programs did many citizens much more good than the critics conceded; that government decisions are not taken without regard for evidence and argument (and may be no less informed than those made by players in markets and market organizations, which have

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bureaucratic dysfunctions of their own); that “capture” is a matter of degree, not a static and invariant fact characterizing all government agencies all the time; that for many needy citizens government programs are a vehicle of empowerment and freedom; and that government grows mainly in response to the breakdown of markets or to social demands that markets cannot, or do not, meet. In light of the long history of participation by economists in statecraft, the sweeping condemnation of the state reversed generations of pragmatic “circumscription and circumspection” (Rothschild 2001, p. 3). True, the postwar United States competed with communism in a bipolar cold war setting—the all-powerful statist “them” versus “us,” the free capitalist alternative. But the fight against Marxism and the anxious defense of capitalism had been in full swing for much of the twentieth century and peacefully coexisted with a wide range of market / government arrangements in noncommunist Europe. Indeed, European conservatives and anticommunists often joined American liberals in arguing that the best protection for both capitalism and democracy against challenges from both far left and far right lay in balanced and judicious expansion of the state. Studying Real World Government and Markets

A dispassionate surveyor of the midcentury scene would credit Western governments with having vanquished the Depression and totalitarianism. States grew bigger precisely in the successful service of mixed, managed economies and the harmonizing of capitalism and democracy. This reality, alas, contradicted the dogmatic critique of government and its insistence that policy makers choose between market and state. Although the market dogmatists’ disdain for the state emanated from deep normative convictions, their assaults also heavily advertised their empirical research that objectively analyzed how government institutions “really worked.” Buchanan and Tullock invited skeptics in the 1960s to test the implications of their model against “[their] own general knowledge of existing political institutions” (Buchanan and Tullock 1962, p. 29). Their conclusion was, of course,

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foregone: public choice theory supplied “intellectual foundations that allowed citizens to understand the political failures they were able to observe at first hand” (Buchanan, quoted in Amadae 2003, p. 154). Research was invoked to buttress sweeping pronouncements, which rested on rather limited empirical study. Stigler’s sweeping condemnation of government rested, for example, on one study (his own) of the impact of regulatory commissions on electric rates (1975, pp. 27–28). Open-minded inquiries into how public (and market) institutions “really” worked proceeded but lost ground within the academy and policy circles. Crucial but nuanced institutional features of markets, executive branch agencies, and the legislature were increasingly reduced to “rational egoism” and the self-serving mechanics of “politics as trade” (Amadae 2003, p. 137). Market promoters posited that government institutions ran on the same utility-maximizing energies as markets but had acquired illegitimate coercive powers that must be dismantled. The power amassed by government should be shifted back to the free market, hearth and home to voluntary exchange. So framed, the choice between the public and private sectors was axiomatically obvious. Ironically, even as market dogma labored in and after the 1960s to demote government to decidedly junior status in any tolerable private-public partnership, other intellectual fields—notably public administration, organizational analysis, and political science— were dismounting their theoretical high horses and wrestling afresh with institutional complexity. Herbert Simon, who worked across the social sciences, found a disconnect between human behavior and the models of market idealists that pictured informed individuals assiduously maximizing their preferences. Simon’s study of decision making and problem solving revealed that individuals operated within “bounded rationality” and practiced “satisfycing”— the search for “good enough” courses of action. The implications directed Simon and other social scientists toward fine-grained research into the subtleties of decision making in public and private organizations (Simon 1947, 1991, pp. 87, 364). As the 1960s commenced, organizational analysts such as Charles

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Perrow, W. Richard Scott, and James March were illuminating the myriad complications that shape the behavior of complex formal organizations. Scholars such as Phillip Selznick and Herbert Kaufman had explored the workings of public entities as diverse as the Tennessee Valley Authority and the Forest Service. The results gave little comfort to simplistic theoretical models of government agencies as passive victims of special interests, which invaded and captured them. A later collection of careful studies of regulatory agencies by James Q. Wilson (1980) and his doctoral students would leave capture theory pretty much in tatters (see also Vogel 1996, pp. 13–16). In the 1960s, political scientists broke from theorizing about “the” structure of power and instead studied intensively the dynamics of power across distinct “issue areas” and cities (Hunter 1953; Dahl 1961; Banfield 1963). In 1964, Theodore J. Lowi argued that political conflict was not uniform but rather varied with the attributes of public policies. Patterns of gain and loss in distributive, redistributive, and regulatory programs shaped the universe of individuals and groups that participated in political struggles, and how. They sought to shape policy. These explorations, heavily dependent on case studies, delivered a message: one cannot generalize about “the” workings of the state or public policy without examining them carefully in real life across a range of policy arenas. These findings contradicted the simplistic models of politics that market dogmatists espoused. Markets of Knowledge—the Demand Side

By the end of the 1960s, policy makers seeking counsel from social science could choose between two sharply distinct intellectual approaches: an elegant, parsimonious theory that urged a downsizing of government and an expansion of market forces whenever possible and a growing body of real world research that demonstrated the variability and complexity of the institutional behavior that drove the workings of market and state alike. The Darwinian competition among alternative intellectual road maps was far from natural; the marketists capitalized on the seductive simplicity of their models and on their ideological compatibility with a new corps of policy makers that entered government after the 1968 elections.

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A SIGN OF THE TIMES . The ardor with which post-1968 policy makers embraced market forces reflected the (dis)temper of the times as much or more than the cogency of their claims. In the latter half of the 1960s, federal activism grew quickly and triggered intense controversy. Civil rights legislation coincided not with a new age of racial harmony but rather with urban riots, the rise of black power, and white “backlash.” New programs waving the banner of a war on poverty came accompanied by rising, not falling, rates of crime and welfare enrollment. The war in Vietnam generated protests on college campuses, in the streets of Washington, D.C., and elsewhere. Political observers presciently warned that Democratic voters (especially suburbanites and white southerners) might translate their distaste over “the social issue” into new conservative and Republican allegiances, perhaps even an “emerging Republican majority” (Phillips 1969; Scammon and Wattenberg 1970). (Nobel laureate James Buchanan helpfully fingered Keynesian economics as “the source of the student unrest because . . . fiscal laxity breeds moral laxity” [Amadae 2003, p. 144]). The Johnson administration’s resolve to reconcile guns (military spending) with butter (social welfare programs) aggravated inflation and economic anxieties. The reaction against government—first signaled by the election of Richard M. Nixon as president and then reaΩrmed with fairly minor interruptions for more than thirty-five years—was reinforced by persistent demonization. Conservatives successfully convinced much of the middle class that it was locked in a battle of “us” versus “them”—single black teenage mothers, amoral and predatory teenage criminals, welfare cheats who contentedly loafed on public assistance (and were pleased to do so across generations), drug dealers haunting school yards in hopes of hooking innocent youth, and an antisocial culture created by well-meant but muddleheaded and undeserved government aid (Glassner 1999; Morone 2003). Dogma obscured the nuanced analyses of scholars such as James Q. Wilson and Daniel Patrick Moynihan, who illuminated the limits of government intervention without overselling the ameliorative capacities of markets. Demonizing the disadvantaged translated into a simple political message: bureaucracy, regulation, redistribution, taxes, and

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government itself were “the problem.” Dozens of implementation studies were read (and taught) as exposés of “displacement of ends,” a sorry tale of federal, state, and local agencies throwing money at social problems. Since 1980, government has been “oΩcially” on the defensive, Democrats have struggled to reclaim the middle class and to soften their identification with needy minorities, and the left has labored to articulate a positive vision that would attract reliable electoral majorities. The sole vision that stirred the nation’s political blood was the repeated call for tax cuts, mainly for the better-o∏. Market forces were welcome a priori because they permitted public policy to proceed in seeming detachment from a discredited government. Economic and social dislocations combined with the rise of the market utopians to diminish the prominence of pragmatic economists in policy-making circles and the legitimacy of government as a policy tool. Since the 1960s, a casual inquirer of suitable ideological bent might purport to find evidence for all five of the pathologies of government identified by promoters of markets (and outlined above). As portrayed by conservative critics, government projects disappointed expectations on many fronts: federal programs seemed to be blithely throwing money at problems they had no clue how to solve; federal agencies appeared passively to allow the implementation of these programs to cater to the needs of “providers” such as teachers, physicians, and the military-industrial complex; and federal grants and regulations increasingly intruded in a widening range of policy arenas (education, health care, law enforcement, housing, and more). Under the circumstances, the marketist critique—government was an incompetent failure that was captured by special interests— and its proposed reforms (replace corrupt, ine∏ectual, and wasteful government with responsive, accountable market forces) looked eminently desirable and feasible. Republicans and many Democrats interpreted Nixon’s victory in the presidential election of 1968 as a CHANGING OF THE GUARD: PRAGMATISTS OUT, MARKETISTS IN.

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mandate to retreat from plans to deploy big government to solve society’s ills and instead to embrace market forces. In the eyes of battle-weary Americans who made and consumed policy, market reforms o∏ered an enticing virtue: they seemed to be immune to the enervating institutional complexities that brought public agencies, faltering and malfunctioning right and left, to their knees. In the rightward shift that commenced in 1968, the traditional role of economics in American statecraft—adroit adjustment of budgetary tools advocated by Keynesianism and targeted interventions to sustain markets, compensate for their ill e∏ects, and supply public goods, as Adam Smith and others envisioned—was supplemented and in some measure supplanted by a new preoccupation: expansion of markets to serve public purposes while shrinking the state. Spurred by “antistatist fervor” and “virulent” attacks on public bureaucracies (Suleiman 2003, pp. 4, 34), a questionable “competition paradigm” (Rosenau 2003) nourished a problematic “competition prescription” (Kettl 1993) that in turn inspired multiplying strategic leaps of faith—for example, that “what is privatized inevitably benefits the citizen-customer” because tax rates and the price of services must surely go down (Suleiman 2003, p. 3). As marketist ideas gained force, a formidable list of sweeping proposals took shape that promised to change or overturn long-established policies: deregulation of transportation, telecommunications, and (later) banking, finance, and energy; privatization of “enterprises” as diverse as prisons, the post oΩce, the welfare system, and social security; contracting out of public services such as the maintenance of parks and libraries; and the replacement of bureaucratic and regulatory powers with market forces as a means to achieve public goals in arenas such as education and health care (Bernstein 2001, p. 180). The principle underlying these disparate policy initiatives, as Charles Schultze (1977) would later put it, was “the public use of private interest.” Unwilling to rest content with longstanding expedients such as public-private partnerships, contacting out of public services to private suppliers by competitive bidding, and various “business-emulating” reforms, or with such latter-day innovations as New Public Management (Kettl 1993; Suleiman 2003), the reformers

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upped the ante by installing supposedly self-sustaining competitive dynamics at the core of such “markets” as health care, education, and transportation. Major change in American politics does not come easily (but cf. Mayhew 2005). The Constitution was deliberately designed to slow the gears of policy making to an incremental pace. The rise of market dogmatism as a guiding force in public policy and its successful recasting of sizable swaths of government was an exception. Within a mere half decade the marketists had morphed from Cassandras railing at a government at full expansionary tilt to honored prophets to whom anxious and imploring policy makers turned for strategic sagacity and solace. Institutional Realities The victories in the march against government that started in the late 1960s did not exhaust the pent-up demand for market-based policy reforms. Ronald Reagan and George H. W. Bush, who won the three presidential elections of the 1980s, pushed both antigovernmental rhetoric and adulation of “the magic of the marketplace” (in Reagan’s coinage). Bill Clinton, a “New Democrat” determined to walk a fine line between too much and too little government, made managed care and managed competition the centerpiece of the health reform legislation he proposed in 1993. Congress rejected the Clinton plan, but promoters of markets advertised the silver lining: in the later 1990s unmanaged competition slowed the growth of health costs, supposedly indisputable evidence that market forces worked and that more of them would be better. The inconvenient resurgence of health care cost escalations prompted Clinton’s successor, George W. Bush, to unveil another version of market reform—“consumer driven” (high-deductible) health insurance that raises the cost of care to consumers. Two assumptions underlie the market dogmatists’ policy agenda—from deregulation and privatization to contracting out and competition. The first holds that market forces, once introduced into (or instead of ) government programs, will exhibit the virtues ascribed to textbook markets—responsiveness to consumer prefer-

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ences, competitive equilibration of demand and supply, and so on. The second maintains that the public rules of the game required to keep markets working right can be confined to an unimposing list of “minimum standards” or some comparably light legislative lift. A Track Record

Proposals to replace public oΩcials who responded to and spread faulty incentives with right-thinking private players rarely wrestled with the realities of delivering benefits and protecting citizens by means of arrangements that inextricably blend public and private powers and are unlikely to cease doing so in obedience to policy “logic.” Within the health arena, for example, the Medicare program is a strapping specimen of big government, but it delivers care to its beneficiaries by means of private physicians and hospitals and has lately added prescription drug coverage that is available only through enrollment in private plans. Meanwhile in the private health insurance system that covers most Americans, private purchasers (employers) buy health insurance for their workers in local markets from competing insurance firms that face government constraints—for example, mandated benefits and regulations on the pricing and availability of insurance—that some critics denounce as oppressive and others as ridiculously permissive. As the costs of private coverage soar, fewer employers are willing to o∏er it and fewer employees are willing to buy even if it is available. Public programs (for instance, Medicaid and SCHIP) and a public-private complex of providers called the safety net pick up some, but not all, of the slack. In this institutional context, beaming in market reforms and expecting them markedly to improve performance (whatever exactly that means in this case) by main force of “correct” incentives is utopian indeed. Likewise, access to schooling, a quintessential public service, is mediated by the purchasing power of parents in private real estate markets. Residential patterns shape the context in which consumer choice among schools plays out. Inner city children rarely get to choose better schools in suburban neighborhoods because they are not o∏ered the option, cannot a∏ord or arrange transportation, or

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do not feel welcome there. How much, and how coherently, money “talks” in these instances is a tough question. This is not of course to argue that market reforms never work. Deregulation of and competition among airlines—the marketists’ poster child—did indeed lead to lower airfares and new mass access to air travel. Costs—for instance, overcrowded skies and financially overstretched carriers—accompanied these benefits, however. The benefit / cost balance is if anything less clear for the deregulated trucking and railroad industries. On the whole, it is fair to say that heralded market reforms have disappointed the unrealistically high expectations their promoters encouraged. Such reforms have not excised ineΩcient public and professional influences nor introduced in their place consumers and producers newly responsive to healthy incentives. Considerable (and predictable) institutional “stickiness” in the practices of businesses, unions, and governments often led them to resist reforms and sometimes triggered the gaming of new rules. The requisites of well-working markets—informed buyers, fairly competing sellers, lucid price signals, sound incentives, and the rest of the package— were easier said than done. The costs of this unrealism to citizens and social policy are not small. The Revolt of Economics

Although the market dogmatists enjoyed a meteoric rise in policymaking circles (and in some quarters of academe), they were challenged by economist colleagues who lauded the benefits of markets, competition, and consumer choice but also insisted on a pragmatic adaptation of theory to real-world conditions. Richard Nelson (2005, pp. 1, 5), for instance, dismissed the standard textbook model of markets as “folk theory” and warned that “the most commonly cited theoretical argument in modern economics can support little weight, the empirical case for market organization is rough and ready, and the persuasive part is pragmatic and qualitative rather than rigorous and quantitative.” The realists o∏ered two crucial correctives to the utopian deployments of markets—pragmatic corrections that steadily gained

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notice as the more extravagant claims for market forces lost credibility. Harking back to Adam Smith and other classical political economists, an important economic school sought rigorously to specify the functions a modern government must fulfill if markets are to work and social welfare is to advance. Richard Musgrave, for example, identified three such functions—allocation, stabilization, and distribution (Musgrave 1959; Musgrave and Musgrave 1984)—that illuminate government-market interactions in ways that bear directly on the themes of this book. The first of these functions requires government to intervene in the allocation of resources when private markets fail to produce “public goods” that society requires (such as national defense and a transportation system) or lead to “negative externalities.” (These arise from private exchanges between buyers and sellers that hurt otherwise uninvolved parties—for instance, the famous British economist Arthur Pigou warned that sparks from a railroad engine could ignite farms or woods, which would impose costs on the landowners but not on the railroad company or its passengers.) The regulatory and tax functions of government that assure public goods and services and discourage the negative side e∏ects of market exchanges perform an “allocation function.”2 Market reforms make this allocation function more not less essential to the public interest. The deregulation of trucking, for instance, has prompted concern for the safety of other drivers. Deregulation of airlines and railroads has raised anxiety about anticompetitive behavior and spurred debate about the need for new regulatory tools. Possible negative consequences for the funding and quality of public education from the expansion of markets in schooling cannot be brushed from the picture. In health care too, L EG I T I M AT E G OV ER N M EN T F U N C T I O N S .

2. Musgrave’s specification of three government functions was built on a large body of research and in turn fuelled extensive analysis (for reviews, see Musgrave 1989).

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such market-thwarting properties as moral hazard (patients whom insurance insulates from the full costs of medical care may use too much care or not look properly after their own health) and adverse selection (people who are ill or more likely to become so are especially motivated to acquire insurance, which drives up the costs of coverage for the “general” population with “average” health costs) demand a sizable package of public rules if market forces are to stand a chance to work well. Two other government functions, though less directly pertinent to the foci of this book, bear brief mention. One is distribution— government’s use of tax and spending powers to alter the market’s allocation of income and wealth so as to ensure that the needy do not lack adequate income and services. If, for example, policy makers try to reform health care and education by issuing vouchers that empower consumers to shop and buy in a competitive market, the adequacy and equity of subsidies to the less well o∏ are of paramount importance. Finally, government’s stabilization function is essentially the Keynesian imperative to smooth the economy’s performance both by stimulating it during slowdowns to avert high unemployment and by slowing it to head o∏ inflation in periods of rapid growth. Macroeconomic disputes (lively to be sure) over when and how government should seek to stabilize the economy lie beyond the scope of our discussion. THE INFORMATION HURDLE . Pragmatic economists have also highlighted the problematic nature of information, the accuracy, adequacy, and availability of which are essential for discerning consumers and firms engaged in bargaining and voluntary exchanges intended to allocate resources e∏iciently. Nicholas Barr (1987) argues that consumer choice works well enough in markets, such as those for food and household goods, in which consumers can readily acquire information. Government intervention in such cases will likely produce ineΩcient outcomes that disappoint consumers’ demands. In complex and technical markets such as health care, however, consumers may have little information and may not understand the information they do have on hand—a state of a∏airs

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that can lead to unfortunate choices unless government steps in to illuminate or constrain (or both) those choices. In short, pragmatic pondering of the uses and limits of information is a guide to isolating and integrating the uses, limits, and interdependence of market and state. The next chapters, which trace the evolution of market reform logic from promise to practice, assess when and how market forces serve and disserve the public interest.

3 Cycles of Reform Formulation and Ratification of Market Utopianism

Many Americans have been stirred by recent history to take stock of market reforms and the role of government. Headlines have pushed arcane policy discussions into America’s living rooms—the bankruptcy of charter schools and the soaring prices of electricity (when not interrupted) drove home the precariousness of market initiatives, corporate scandals at Enron and elsewhere became household shorthand for business that harms the public good, and the disastrous response to Hurricane Katrina revealed the inadequacy of basic government services and the need to strengthen them. Assessment of the capacities and responsibilities of government and markets has been stymied, however, by high abstraction and acute particularism. The first avenue is divorced from the daily lives of Americans and the real workings of policy, and the second misses important similarities in developmental patterns and outcomes that cut across policy areas. We need to appreciate the distinctive features of particular policy areas but also to transcend idiosyncratic details in order to identify consistent and perhaps predictable tendencies of market-oriented reforms. In this chapter and the next, we focus on the performance of government and market-oriented reforms by comparing three policy areas—health care, education, and transportation—in order to detect recurring patterns and outcomes. Health care, education, and transportation deserve close attention because they are important and costly “human services” and have preoccupied market reformers. We recognize that separate policy areas can resemble separate 38

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countries, with a language and landscape all their own. While remaining sensitive to di∏erences, we look over the institutional hedge to identify commonalities across policy areas in the introduction and response to market-oriented reforms. This and the next chapter track the shared success of market reformers in putting their polices in place and the common challenges and reversals that ensued. This “process analysis” moves us from assessments of philosophical purity (whether policy makers were true to market catechism) to the study of concrete institutional and political dynamics. Taking seriously the dynamics of institutions and politics is a starting point for designing the practical and sustainable balancing of markets and government we address in our final chapter. This chapter outlines distinctive features of three policy areas and analyzes their similar developmental patterns as market-oriented reforms were hatched and introduced. The next chapter considers the reactions of citizens and policy makers after the implementation of these reforms. Distinctive Policy Legacies Over the past three decades proponents of market forces in education, health, and transportation policy launched their initiatives from very di∏erent starting points. In particular, the scope and character of public and private sector involvement in these three policy areas di∏ered in at least five ways that defined the context in which market-oriented reforms were introduced. Sectoral Dominance

Debates about “the government” and “the private sector” sometimes proceed as if American culture assigned them fixed and uniform roles. In reality, the size and influence of the public and private sectors vary across policy realms. The distinguishing feature of the U.S. health care system, writes Carolyn Tuohy (1999, p. 120) is “the persistence of private markets as the predominate mechanism of resource allocation” in financing and delivery. The public sector is

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admitted mainly to fill gaps. Medicare and Medicaid were created to fund care for populations that private insurers could not profitably cover. Government’s oΩcial deference to the private sector is embodied in federal tax expenditure policy, which promotes the spread of work-based coverage by allowing businesses to take the premiums they pay for workers’ coverage as tax deductions and by permitting workers to exclude employers’ contributions to coverage from their taxable incomes. Whether health care should or can ever be a “normal” market has long been debated. Health care’s status as an essential “public good” and the barriers to market allocation of services and resources (moral hazard, adverse selection, and imperfect information) define, for the left, a set of arrangements that argue for rejecting market approaches altogether, and, for the right, poorly designed incentives that need only the economist’s artful touch to function e∏ectively. Education is the quintessential public good, supplied by and at the expense of government from kindergarten through grade 12. Free, universal public schooling is the foundation of the American creed of equal opportunity; the private sector steps in to plug “gaps” mainly for those who seek and can a∏ord a presumably better product. As with health care, however, the public-private balance is subtler than at first it seems. In the United States, this most public of goods is rationed by a pervasively private process, namely, the purchase of housing in the communities that fund and run the schools. This mediation of educational opportunity by housing markets raises troublesome equity issues and has inspired correctives ranging from state equalization grants to vouchers that, in principle, empower disadvantaged students to choose from a range of schools those that best meet their needs. Transportation, meanwhile, may be viewed as a quasi-private policy arena: air travel and trucking are supplied by private firms subject to government rules governing safety and competitive practices. It is also a quasi-public arena: highway policy is made by engineers employed in state and federal agencies, the plans of which are shaped by the lobbying of contractors, home developers, and other

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private interests. In this realm too, the “proper” balance of public and private power has long been heatedly debated. Provider Organization

Organizations representing the providers of services di∏er substantially. Most health providers are proud private professionals who acknowledge no formal dependence on the public sector and insist on autonomy in their work. By contrast, most teachers are public employees, often unionized, who supply education in systems dominated by public school boards and bureaucracies. In transportation, the pattern is a mix of private professionals (pilots, engineers, truckers) and government workers (air traΩc controllers, highway planners), whose rights to organize and strike have been in legal and political contention. Political Coalitions

Policy shapes politics, giving rise to distinctive coalitions (Lowi 1964; Mettler and Soss 2004). In health care, debates about markets tend to divide along philosophical lines. Those on the left deny that health, or health care, is legitimately construed as a “commodity” and that markets can handle equity- and needs-based allocations. By contrast, Americans on the right contend that health services can be, at least to a point, bought and sold in markets that can be “normalized.” Education debates, on the other hand, sometimes unite strange bedfellows. In Milwaukee and Michigan, for example, two reliable Democratic constituencies—African Americans and Catholics—joined Republicans to support school choice proposals even as labor unions (especially teachers unions) opposed them. In Michigan, Republican then-governor John Engler sparred with the Chamber of Commerce and moderates within his own legislative party. Race heightens the tensions within Republican ranks: constituents may welcome the philosophical turn against government but not an influx of poor and minority students into their prosperous and mostly white neighborhoods. Transportation issues tend to turn on considerations of a di∏erent kind, the “distributive” politics identified by Lowi (1964). Elected

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oΩcials recognize that transportation operations that run at a loss “may no longer be served in a privatized, competitive, market” (Oster and Strong 2000, p. 26). Their response has been to favor or reject market forces according to whether the areas they represent will gain or lose flights, freeways, and rail service if the industries in question were regulated less or more firmly. Market Scope

The presence and sway of private markets also di∏er considerably. In health care, market forces—mainly in the form of managed care and competition, albeit largely unmanaged—are a powerful continuing presence. Deregulation of the airline, rail, and trucking industries in the 1970s o∏ers a near thirty-year record with which to assess the policy and political consequences of a shift to market forces. In education, however, markets remain a gathering storm of unknown force. E∏orts to introduce them in education met with staunch and e∏ective opposition by unions, school districts, and public skeptics, which used a full arsenal of weapons, from inserting legislative restrictions into what were ostensibly promarket reforms to pursuing legal challenges. One of the most successful e∏orts at promoting school choice (Cleveland’s voucher program) capped enrollment at about 5 percent of the city’s public school system in 1998–1999 (Hess 2002, p. 157). Wisconsin state law took the “radical” step in 1995 of allowing up to 15 percent of Milwaukee public school students to enroll in its voucher program (Hess 2002, p. 107). Michigan law capped the number of charters at 150 (permitting enrollment of roughly 34,000 students, about 2 percent of all students in the state) even though there is sizable demand for more. The proportion of school children attending schools of choice— either private schools or among public schools—has increased modestly since the mid-1990s. Even so, 75 percent of elementary and secondary schools are still public and only 10 percent of students attend schools that are not public (U.S. Department of Education 2001, 2002). Many choice programs limit the eligible student popu-

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lation by stipulating specific localities (e.g. the boundaries of the Cleveland Public School District), imposing numerical limits, and conducting means tests. Moreover, vouchers rarely provide genuine financial opportunities for Americans of modest or low income to choose private schools. Although the dollar value of vouchers can be substantial, private schools are expensive, and vouchers are often suΩcient to permit attendance only at the least expensive schools and rarely cover expenses, such as for uniforms and books, that may be burdensome for low-income families. School districts formed coalitions with teacher unions and other opponents of school choice to make sure that they would not lose money if students exited to private schools, thereby undermining the consequences of competition that marketeers most hoped to instill. As Fredrick Hess concluded his review of the Cleveland and Milwaukee school choice reforms, The threat posed by choice plans has generally been mild. Voucher programs, due to limited private school capacity, program caps, statutory restrictions, and persistent legal challenges, have not threatened public school jobs or budgets. Meanwhile, charter schools are generally small, are often subject to extensive regulation, and often target atrisk populations that public educators find onerous. Some choice programs, like those in Milwaukee and Cleveland, were crafted to limit the revenue lost by the impacted system. (Hess 2002, p. 224) In health care, by contrast, providers and consumers initially were less e∏ective at resisting the expansion of markets. Hospitals, doctors, and patients lacked the political intensity and organizational cohesiveness of teachers and schools when managed care began to take o∏ in the mid-1980s. Developmental Sequence

Private sector responsibilities and functions emanate from particular institutional histories. The history of health care was replete with the prerogatives of private practitioners and market forces.

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Managed care could be successfully sold as necessary and suΩcient to fix malfunctioning but perfectible markets. Put simply, market dominance begot expanded markets (Jacobs 1995). Education followed an opposite sequence: government dominance generated a predisposition toward maintaining government and suspecting private market innovations. Proposals to expand school choice collided with durable supports for public education. Faith in the merits of public uniformity cast school choice as a risky gamble, the success of which depended on the mysterious production functions of schooling in a new educational setting that fostered competition and punished market “losers.” In short, the contexts in which market-oriented reforms have been introduced vary substantially across the policy arenas of health care, education, and transportation. These varied contexts not only help to explain enduring di∏erences in policy areas but also highlight remarkable similarities in developmental patterns and outcomes as market reforms were introduced. Similar Policy Patterns: Defining the Problem and Crafting Market-Oriented Solutions In health, education, and transportation, a broadly similar policy evolution—from market promotion to improvised government e∏orts to protect citizens from markets—produced a “cycle” of five distinct political stages. This chapter traces the evolution of the first three—the definition of the problem within each arena as insuΩcient reliance on markets, the specification of remedies (widening markets and diminishing government), and the legislature’s ratification of new policies to empower markets. Chapter 4 examines the last two stages—institutional breakdown and fumbling government interventions to sustain market allocations while protecting citizens from their undesirable consequences. Problems Defined as Public Departures from Market Principles

A purely logical approach to policy reform would start with close analysis of the flaws in existing policies and a careful canvassing of available solutions. Logic ignores, however, the clash of competing

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values and interests. In the political give and take of policy making, success often depends on defining “the problem” in ways that mobilize supporters and marginalize opponents (Kingdon 1984; Nelson 1984; Stone 1997). Education, health, and transportation present dramatically di∏erent histories and policy styles. Yet, in the 1960s and 1970s, promoters of markets found the same failings in each of these policy domains and delivered the same diagnosis: the public sector had ceded political power to providers whose performance was inadequate, ineΩcient, or corrupt. The common refrain declared that customers (aka citizens) should receive fair value for money but did not because government regulations artificially inflated costs and depressed service. In air, motor, and rail transportation, critics in the 1970s blamed government for high costs and poor service. By regulating entry by new carriers and fixing rates and routes, the Civil Aeronautics Board (CAB) and the Interstate Commerce Commission (ICC) suppressed competition that would benefit the consumer. Meanwhile, criticism of government railroad regulation intensified after a series of bankruptcies in the 1970s, including the collapse of Penn Central in the Northeast. Critics of public schools sang a similar tune: overbearing government su∏ocated innovation and produced scholastic achievement levels in public schools—especially in poor inner cities—that were not remotely commensurate with the sums the education system consumed. In health care, critics attributed soaring costs to perverse economic incentives (third-party payment and fee-for-service practice) undisciplined by market competition that would oblige customers (aka patients) to shop for high-quality care at low cost. Economists attributed the problem of rising costs to a combination of “moral hazard” (i.e., people who paid little for services tended to use them profligately) and “provider dominance” (i.e., caregivers defined the demand they then supplied). Market critics in each sphere concurred that the status quo was in “crisis,” and they targeted the same root cause—insuΩcient consumer choice. Supply and demand were out of kilter because

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purchasers (parents, taxpayers, patients, travelers, employers, and shippers) lacked or failed to exercise the power they would enjoy in normal markets. As a result, providers (teachers, administrators, physicians, hospitals, airlines, and truckers) defined demand. Policy makers (at times from both political parties, though more often from the Republican side) were hardly shocked to hear that the self-interest of providers played a big part in generating high costs and inferior services. The practical question, however, was whether market principles could be translated into sensible policy and sensitive political strategies. Market Forces Can Fix Broken Public Policies

In each arena, the market mantra was “let consumers / purchasers choose, make providers compete.” The steps seemed straightforward: (1) give consumers the right to make choices; (2) expand the menu of choices for consumers among competing systems of providers; and (3) use competition (to wit, fear of going out of business) to motivate providers to shape up. From these three simple steps, correct incentives and eΩcient production were sure to follow. Transportation needed nothing more than deregulation—that is, elimination of government rules that inhibited the free play of market forces. In education, the vehicle of choice was the voucher, joined by charter schools and options within public school districts. In health, the engine of market forces was the HMO, which morphed into many varieties of “managed care” and furnished the conceptual foundations for managed competition. In the 1970s, policy makers in both the Democratic and Republican parties and all along the philosophical spectrum listened closely to economists who argued that government regulation of the nation’s airline, trucking, and rail industries arbitrarily shackled workable markets and that unfettering these firms would bring better service at lower cost (Derthick and Quirk 1985). Regulation of the airline industry was assigned to the CAB in 1938. In time, the agency came to be criticized for imposing avoidable and TRANSPORTATION .

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unintended costs on what would otherwise operate as a competitive industry. Stephen Breyer (whom Bill Clinton appointed to the Supreme Court) encapsulated in the early 1980s the prevailing view of the CAB’s rules and rulings—they invited high prices and overcapacity by guaranteeing stable market shares for established carriers, discouraged entry into the market by newcomers, weakened incentives for eΩciency, and (given the obstacles that inevitably beset attempts to do regulation “right”) invited violations of administrative norms (Breyer 1982, pp. 198–200, 205–206). The issues in trucking, which the ICC had regulated since 1935, were diagnosed as very similar. As in the airline industry, regulation of trucking imposed “unnecessary anticompetitive harms” that undermined what would otherwise be a “competitively structured” industry (Breyer 1982, pp. 222, 238, 197). The challenge to government regulation appealed across quite a spectrum—free market conservatives, consumerist Ralph Nader, and enthusiasts in between—and paved the way for congressional hearings on and administrative innovations in deregulation. After Jimmy Carter entered the White House, he appointed prominent critics of regulation to high posts in the regulatory agencies, endowing them with bully pulpits that they used to promote legislation to trim the agencies’ statutory authority and, in the case of the CAB, abolish them outright. P U B LI C ED U CATI O N . “Common” (public) schools have been the norm in the United States since the mid-nineteenth century, and in “virtually every subsequent decade, vociferous critics pointed out the failures of American schools” (Murnane 2005, p. 163). Although school choice has won wide public prominence only in the last two decades, school reform and proposals for choice are deeply woven into the country’s religious and racial history. Since the 1920s, Catholics have asserted their right to send their children to parochial schools. The Supreme Court’s ruling of 1954 against segregated public schools spurred the growth of private alternatives throughout the South. In the 1960s and 1970s, court-ordered busing of students in the name of desegregation helped to reshape the image of pub-

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lic education from “crusader for a moral cause” to a misguided and heavy-handed oppressor (Henig 1994, p. 75). Some embraced the choice to attend private schools as a vehicle of resistance and escape. These religious and racial antipathies to public education converged with anxieties about the maladroitness of schools in reviving the “fading American dream” and doubts about the e∏ectiveness of government (Fuller and Elmore 1996, pp. 5–8). Proposals for school choice emerged from this cauldron of race, religion, and economic malaise. In 1955, the conservative economist Milton Friedman proposed vouchers as the means by which market forces could improve public education. In 1966, the liberal-leaning analyst Christopher Jencks embraced a version of vouchers as an answer to the problems of urban schools. In an influential book of 1990, John Chubb and Terry Moe assured policy makers that choice was a simple “panacea . . . [that] has the capacity all by itself to bring about the kind of transformation that, for years, reformers have been seeking to engineer in myriad other ways”(p. 217). Although school choice was not a new idea, by the late 1980s it had achieved the status of conventional wisdom (Henig 1994, p. 73). This infatuation after its years in the backwaters of policy debate gained force from a double-barreled critique of the educational establishment by market promoters. First, the schools were portrayed as public bureaucracies run at the behest and for the benefit of “providers.” Second, conservatives attacked public schools for sustaining gross economic disparities. Children of aΔuent families have always enjoyed “school choice,” but the public school establishment is content to confine the poor and lower-middle class to underfunded schools in their own neighborhoods. Market promoters contended that vouchers and kindred school choice mechanisms would let parents select the schools their children attend, severing the link between residential location and schooling options. These reforms were also expected to make providers (teachers and school oΩcials) accountable and responsible to customers, thus disempowering the recalcitrant interests that

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had wrongfully “acquired” (to recall Stigler’s term) school policy for themselves. According to its advocates, school choice released the “decentralized magic of the marketplace” that would transform “clients of a public service into consumers of a marketed product” (Fuller and Elmore 1996, p. 9; Hess 2002, p. 2). If parents are empowered to exit a school that fails to satisfy their child’s needs and to select another, schools must compete to attract and retain students and the revenues they bring. The coin of competition is enhanced educational performance: better teaching, better learning, and better scholastic achievement scores. This parental empowerment advances justice as well as eΩciency by allowing the students least well served by the public education monolith to win fresh chances for social and economic advancement. The “panacea” of choice might, “in a strange twist . . . be more democratic than democracy itself ” (Henig 1994, p. 5). Although market enthusiasts fixated on a narrow mechanism to promote reform, they expanded their appeal by inflating confidence that school choice was “an onrushing train” and “an idea whose time is coming” (Henig 1994, p. 55; Morken and Formicola 1999, p. 288). Some portrayed choice as a tool for achieving “non-market rationales such as individuality and personal growth, cultural diversity, community empowerment and the opportunity to shake up lethargic public bureaucracies” (Henig 1994, pp. 188–189). To others, it was a tool for achieving social and economic justice that made it possible to “turn around a child, a neighborhood, and a community” (Morken and Formicola 1999, p. 225). These heady prospects drew a diverse coalition in support of school choice: businessmen, racial activists, liberals, conservatives, libertarians, Catholics, Protestant evangelicals, Hasidim, Islamics, black church groups, tax reformers, entrepreneurs, policy researchers, and foundations, not to mention presidents, governors, Republicans, Democrats, scholars, citizens, and professional educators (Henig 1994, p. 55; Morken and Formicola 1999, pp. 4, 28). The catalogue of supporters masked striking di∏erences over intended ends and acceptable means for achieving

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them, all of which greatly complicated the translation of the choice “idea” into policies and programs. At no step along the way did advocates of markets produce much reliable evidence of the independent impact of school choice on improving educational performance. Declarations of success rested on “rather wobbly foundations,” according to Je∏ Henig who concluded in 1994 that we knew “very little at all” aside from scattered anecdotes (1994, pp. 28, 117, and chap. 6). Studies showed conflicting results largely because their research designs were inconsistent or flawed. Most studies failed to include more than basic controls, and those that did relied on “di∏erent methods of controlling for family background and student ability” (Henig 1994, p. 138; Van Dunk and Dickman 2003, pp. 6 and 47). Even guarded and tentative conclusions about the potency of school choice were compromised by methodological quagmires: Hawthorn e∏ects; missing baseline data; self-selection and selection of preferred risks by schools; and the potentially decisive influences of social and cultural characteristics of schools, family background, and “harsh environments” (Henig 1994, pp. 144–145; Murnane 2004, p. 172; Buckley and Schneider 2007, p. 218). Methodological controversies over the causal influence of school-based versus nonschool factors in student performance left ideologues free to follow their favorite arguments. As a result, the promotion of school choice was loud and insistent but “dismally poor” (Fuller and Elmore 1996, p. 11). The school choice movement both oversold its “panacea” and unleashed an extravagant denigration of public education. In portraying an educational system in “crisis” that was producing “an army of illiterates with no skills,” they ignored a complex and mixed picture of educational achievement. The truth, as various experts observed, was that “declines in some areas are coupled with improvement in others” (Henig 1994, p. 43; also see Morken and Formicola 1999, p. 124; Van Dunk and Dickman 2003, p. 10). Since the 1960s, reforms in public schools had introduced “tougher graduation requirements, more challenging curriculums, more sophisticated measurements of student performance, teacher

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competency testing, longer school days, longer school years, merit pay for teachers, school-based management, and school-finance reform.” Acknowledging this history of reform would have meant crediting educators for a record of innovation and conceding that the public system was by no means an unmitigated failure (Henig 1994, pp. 205–206). HEALTH CARE . Until recently, government intervention and regulation could not be blamed for the flaws in America’s health care system. Before the Second World War, the national government was largely absent from health care financing and delivery and even by the 1960s public health coverage in the United States fell far short of the norms of other Western nations. The federal government had sponsored medical research and the building of hospitals since the 1940s, but the passage of the Medicare and Medicaid programs in 1965 marked its biggest and most controversial intervention. The puzzle that intrigued economists in the 1950s and 1960s was the failure of health care to display the properties of “normal” markets. Third-party payment, professional credentialing that limited entry of providers, and asymmetries of information between consumers and providers all confounded classic dynamics of supply and demand (Arrow 1963). It was not clear what, if anything, might set things right. The passage of Medicare without the cost controls recommended by pragmatic economists and civil servants in the Kennedy and Johnson administrations (Jacobs 1993, pp. 155–157, 207–209) precipitated predictable increases in spending. By 1970, the Nixon administration was searching for politically palatable antidotes. Dr. Paul Ellwood, a physician and policy analyst, won the ear of the administration’s health advisors by pinpointing “the” problem: the ill-advised conjunction of fee-for-service practice and third-party payment generated faulty incentives for consumers and providers, who saw no reason not to run up the tab and send it on to insurers. The solution Ellwood proposed appealed to the Nixon oΩcials, who were disinclined to endorse broad reforms of the system, government regulation, or reduced benefits in the new Medicare and Med-

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icaid programs. In Ellwood’s view, prepaid group practices, such as the Kaiser-Permanente Health Plan, would integrate the essential elements of market forces—choice, competition, and incentives— to slow costs and improve health (Brown 1983a). Ellwood and other promoters of expanding markets in health care contended that prepaid group practices reversed illogical financial incentives by incorporating delivery and insurance within one organization and by employing physicians or contracting with physician groups that employed them. Because prepaid groups contracted to supply comprehensive care to subscribers within a global budget derived from premiums, their incentives were to keep subscribers healthy, not merely treat them once they got sick—hence their credulous rechristening as “health maintenance organizations.” Modest sums of federal aid would suΩce to encourage entrepreneurial medical reformers to launch HMOs across the land. The resulting internal eΩciencies of the health plans would lower costs for their enrollees and, in turn, motivate traditional competitors such as Blue Cross to improve lest they lose market share to the HMOs. Promoting HMOs entailed no comprehensive reforms, no public utility regulation, and no battles with beneficiaries in Medicare and Medicaid. The strategy “simply” opened new choices to consumers and extended the range of competitive players within an already competitive health insurance market. The HMO strategy was far more innovative and politically appealing than crude moral hazard models that restored market forces by compelling consumers— the sick no less than the healthy—to pay more out of pocket for the care they sought. The policy makers promoting HMOs within the administration and, soon enough, in Congress hoped that this ingenious variation on market themes would achieve, first in Medicare, then in the surrounding system, the health care holy grail—control over the rapid escalation of costs, preventive care, and progress in closing gaps in coverage. The conviction that markets were an all-purpose answer to the challenges in health, education, and transportation was not unanimous. Skeptics included a hardy band of pragmatic economists fo-

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cused on the institutional dynamics of markets and the progressive role of government in sustaining the allocation of resources. These skeptics noted that competition might bring financial instability to the airline industry, for example, and that market forces were a most implausible corrective for the ills of the nation’s passenger rail systems. Education researchers cautioned that introducing markets was not a magic bullet for improving the performance of schools and pointed to hurdles such as financial cost, community resistance to residential migration (would America’s suburbs welcome inner-city African American children?), and the social deprivations students bring with them to school. Likewise, giving consumers new choices between HMOs and conventional plans and among competing HMOs themselves was one thing; giving them the information they want and need to make informed trade-o∏s among quality, access, and cost was quite another. Market promoters assured skeptics that savvy market players were attuned to incentives and would learn how to manage risks. In any case, the risks were too small to warrant forgoing the large gains in social utility that freer market forces promised. The Legislative Turn to Private Markets for Public Ends

Policy makers in both political parties welcomed promises that the promotion of choice and competition in education, health, and transportation would produce better outcomes and downsize government regulation and bureaucracy. New government programs and responsibilities adopted during the Great Society gave Republicans and moderate Democrats considerable angst over financial costs and alleged threats to self-reliance among individuals and communities. Policy makers were receptive to importing the virtues of private markets into government programs, and market promoters rose skillfully to the occasion. Airline regulation diminished more or less in tandem with that of trucks and trains. Senate hearings convened by Senator Edward Kennedy (D-Mass.) served as a launching pad for airline deregulation: they heavily advertised the work of academic

TRANSP O RTATI O N .

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critics of regulation; demonstrated support for deregulation among a range of executive branch agencies, including the Department of Transportation, the Council of Economic Advisors, the Council on Wage and Price Stability, the Department of Justice, and the Federal Trade Commission; made the issue “politically visible and live” to the public and the media; and put stakeholders in the existing system on the defensive (Breyer 1982, pp. 333, 325, 329, 339). In 1975, an advocate of competition appointed by President Gerald Ford to head the CAB began winding down the regulatory regime in airline travel, a process soon accelerated by the Airline Deregulation Act of 1978, which phased out the agency altogether. President Jimmy Carter chose Alfred Kahn, one of academe’s sharpest critics of regulation, to ease the agency into oblivion. In 1984 the CAB expired, surrendering the regulatory field to the Federal Aviation Administration, which monitors safety. Trucking and railroads were also hit by the wave of deregulation. In 1976, new leadership at the ICC began, with the encouragement of President Gerald Ford, to encourage competition in these industries. In the closing days of the Carter administration in 1980, Congress passed both the Motor Carrier Act and the Staggers Rail Act, which further promoted competition and weakened the ICC. By the 1990s, the ICC had gone out of business: most federal regulatory controls over the railroads ceased, and intrastate rules on trucking were lifted, leaving the industry “fully competitive” (Moore 2002, p. 7). (Regulation of railroad pricing and mergers was transferred to the independent Surface Transportation Board in the Department of Transportation [DOT] and its authority over trucking— especially licensing—was moved to DOT’s Federal Highway Administration.) Three political forces propelled the decline and fall of regulation in the transportation sectors. First, regulation came under bipolar ideological assault from the left, which called for consumer empowerment, and the right, which took aim at provider dominance and allegedly unwarranted government interposition. Deregulation promised something for (almost) everyone: “It was a ‘proconsumer’ issue; it meant lower fares; it was an ‘anti-inflation’ issue; it

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was a ‘major regulatory reform’ issue; it was a ‘less bureaucracy / less regulation / less governmental control’ issue.” In short deregulation allowed policy makers to promise “concrete achievement, lower prices, regulatory reform, and less government, all in one package” (Breyer 1982, p. 339). The ensuing legislative coalition embraced not only Ted Kennedy but also Howard Cannon (D-Nev.), faithful friend of the Teamsters, and many Republicans. Second, the combination of more competition and less government in transportation won staunch support from presidents Ford, Carter, and Reagan, and a wide range of federal agencies that saw (or were persuaded to see) deregulation as consistent with their missions. Third, internal splits and strategic faux pas by self-protective firms and unions markedly reduced their influence. The airline industry’s opposition to deregulation “thoroughly collapsed” even as Congress addressed the issue, and the trucking industry’s defiance eventually gave way (Derthick and Quirk 1985, p. 151). As these political and policy streams converged, the proposition that competition was preferable to continuing regulation carried the day. Assorted programs to permit choice of schools have made headway at the local, state, and national levels of government. In the most aggressive challenge to public education, vouchers preserve government financing of education but shift its delivery to the private sector. Government funds parents to pay all or some of the costs their children incur when attending a private school or purchasing supplementary educational or tutorial services. In the 1990s, the cities of Milwaukee and Cleveland adopted much-noticed and controversial programs to pay tuition for private schools (including religious institutions). With Congress and most state legislatures deadlocked over the constitutionality of public payments to private religious schools, Milwaukee’s Parental Choice Program began in the 1990–1991 school year and then expanded in 1995 to include schools with religious aΩliations. Participating parents got a voucher equal to their public school’s per pupil costs for children in kindergarten through twelfth grade. The Cleveland Scholarship and Tutoring Program, launched in the

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1996–1997 school year, made grants to students from low-income families in kindergarten through third grade to allow them to attend private schools (including those with religious ties) within the boundaries of the Cleveland City School District. The program, which extended to eighth grade for accepted students, set its voucher at up to 90 percent of the cost of tuition; participating private schools agreed not to charge parents more than 10 percent of the tuition cost. Other districts encouraged unsubsidized choice among magnet and “alternative” schools within the home districts of students. Expanded choice went beyond vouchers. Charter schools also found increasing favor among state legislatures. Since Minnesota first authorized charter schools in 1991, forty states and the District of Columbia followed suit. Charter schools are sponsored and supervised by local school boards, state education boards, or other public authorities and run by teachers, parents, or other organizers. Although they remain within the public school system, these schools are granted substantial leeway from state regulations to fashion innovative curriculums, which are specified in a “charter” that addresses study plans, performance measures, and management and financial practices (Buckley and Schneider 2007). In addition to vouchers and charter schools, a number of states created “internal” markets within the public school system. Beginning with Minnesota’s 1987 legislation, students have been allowed to choose among public schools across districts, regardless of where they lived. Such choice was, in principle, an ingredient in the Cleveland Scholarship and Tutoring Program, which allowed lower-income students to choose public schools in districts adjacent to the city school district. Alas, seven years after the program began, no adjacent public school had accepted such students, who are mainly poor and black (Smole 2002). In the face of persistent battles over the constitutionality of government payments to religious institutions, the federal government has worked to promote school choice. For example, Coverdell Education Savings Accounts o∏er tax deductions or credits for income used to pay for elementary and secondary education expenses.

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Federal support for school choice expanded substantially on January 8, 2002, when President Bush signed the No Child Left Behind Act (NCLB). The Act authorizes increased funds to start and support charter schools (Smole 2002). NCLB also compels states to o∏er choices to students who attend schools that fail to make “adequate yearly progress,” fall victim to violent crimes, or go to schools deemed unsafe. Eligible students are expected to be given a range of choices within their public school districts and extra tutorial services from providers of their choice. Last, and surely not least, the U.S. Supreme Court gave school choice a powerful thrust by ruling, on June 27, 2002, that public school vouchers may, under specified conditions, be used in private, religious schools. The Court’s decision in Zelman v. Simmons-Harris found that Cleveland’s public funding of school vouchers for children attending religiously aΩliated schools was constitutional so long as parents also had the opportunity to select among public and private secular schools. School choice strategies based on vouchers, charter schools, and internal markets are having an impact. Charter schools, for example, have grown in number from 100 in 1995 to more than 3,500 in 2006, and now serve more than one million students (Buckley and Schneider 2007, p. 1). Although government’s role in education remains dominant, the size and scope of the private sector and the options for choice among schools are expanding, and the challenge of school choice to the public status quo in education is laying foundations that may be built upon in the future (Mettler and Soss 2004). Buckley and Schneider (2007, p. 202), for instance, believe that the basic test of market payo∏ (“greater consumer satisfaction”) has been met—parents choosing their children’s schools in Washington, D.C., are more satisfied than those without choices. The result, they conjecture, is that that “charter parents may represent a political force for the further expansion of choice.” Nevertheless, bold statements about “revolutions” are grossly inflated. School choice still reaches only a small portion of students who attend public schools. In 2004-2005, only 4 percent of U.S. schools were charter schools. The Milwaukee and Cleveland

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voucher programs can accept only a limited number of students, who must come from low-income families that are presumably least well served by the public system. Customer response in Milwaukee has been underwhelming. As of 1998–1999, only 5,825 students of the 15,000 eligible within the city’s student body of 104,000 had enrolled in the program. Of these, fully 40 percent had already been attending religious schools, which had been made eligible for selection in 1995. After eight years, only about 4,600 students had left the public schools, which means that less than 5 percent of eligible parents had opted to remove their children from those schools (MacInnes 2003a, p. 36). Then again, the vouchers do not cover sizable nontuition costs, a feature that may powerfully skew choice by obliging low-income parents to select low-tuition religious schools, as do 80 percent of Cleveland’s voucher students (MacInnes 2003b, p. 103). In 2005, Milwaukee’s voucher program had 130 participating schools and about 15,000 students (more than 70 percent of them in religious schools). But the old issues lingered: parental shopping for schools was rare, schools were stingy with information to guide shoppers, and choices were often based on criteria other than the quality of education. Political controversy over choice had, if anything, intensified. In Wisconsin, for example, the Republican-controlled legislature three times voted to ease or remove caps on enrollment in the voucher program and the Democratic Governor vetoed the legislation each time. In 2007, Ohio’s Governor proposed that the state’s “undemocratic” voucher program be eliminated and that a moratorium be placed on new charter schools, which in the absence of proper oversight allegedly used public funds for private profit (Heritage Foundation, n.d.). Moreoever, conflicting goals and emerging tensions among those who initially supported the reforms threaten the future expansion of school choice. One survey showed that proponents of choice split widely among competing strategies. Among “school choice organizations,” 43 percent supported charter schools, 35 percent favored tuition tax credits, 37 percent endorsed vouchers, 23 percent opted for magnet schools, 40 percent selected scholarships, and 27 per-

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cent went for “other.” Fully 43 percent of organizations with budgets over $1 million supported “other” or their own particular types of school choice. These figures reveal an “internal lack of cohesion” (Morken and Formicola 1999, p. 279). School choice coalitions, often odd from the start, may unravel in the face of at least four distinct divisions and conflicts. First, the promoters of the di∏erent forms of school choice are more competitive than complementary. The growth of charter schools might hurt parochial schools. Tax credits and vouchers threaten charters. Then again, the threat of vouchers might leverage the growth of charters (Morken and Formicola 1999, pp. 57, 126, 166). Like HMOs (which spanned arrangements from classic prepaid group practices such as Kaiser-Permanente to improvised, loosely integrated independent practice associations), school choice means many things to many people. As government money and rules have started to flow to di∏erent options, the classic political battle over who gets what has flourished. Second, racial tensions are intensifying. Milwaukee’s ambitious voucher program, for example, drew strength from an alliance of Wisconsin’s Republican governor Tommy Thompson and Milwaukee black activist Polly Williams. As the program proceeded, however, Williams grew “deeply alienated” from it. Blacks, she concluded, should have their own schools, as do Lutherans and Catholics, without answering to “white outsiders.” Because whites pushed school choice solely to help white schools, she contended, targeted vouchers were a preferable strategy (Morken and Formicola 1999, pp. 201–202, 204, 207). Meanwhile, views within the black community have splintered as other African American leaders stepped forward to support charter schools or smaller schools with smaller classes (Morken and Formicola 1999, pp. 211, 214). Third, religion has fuelled private schools but also injects potentially contentious issues into the school choice debate. One vision of better schooling links education to “mature Christian expression . . . the full armor of God, [and] the power of prayer,” all conveyed by low-paid teachers driven by a sense of ministry and mission (Morken and Formicola 1999, p. 216). Some religious leaders argue that the

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government should provide tax credits or public revenues to their schools with “no control and few restraints” (Morken and Formicola 1999, p. 171). The Bible declares that education is a parental duty, after all (though biblical exegeses on tax credits are rather murky). Some religious supporters of choice think it deplorable, for instance, that Milwaukee’s voucher law lets students opt out of chapel (Morken and Formicola 1999, p. 175). Some insist that chosen schools teach “morals” (as public schools allegedly do not), which are anchored in “the authentically religious perspective” rather than in, say, a broad canvassing of philosophical (including secular humanist) wisdom (Morken and Formicola 1999, pp. 237–238). The intense demand to deploy public funds for education to advance particular religious views seeks an objective very di∏erent from the secular motivation of improving educational attainment as measured by standard achievement tests. To characterize school choice as “the new pluralism” (Morken and Formicola 1999, p. 189) is at best a superficial half-truth: the goal is new options with which to preclude and exclude a diversity of viewpoints and practices. Such dogmatism understandably troubles proponents of school choice who see the primary goal of choice as improvement in educational attainment or better preparation of students to excel in a complex, globalizing world. This conflict among goals, Hess (2002) observes, argues against making “broad claims regarding the promise of competition” (p. 241). A fourth dimension of conflict stems from the demands of providers. Teachers and their unions, as well as school heads, pose questions and raise objections intended to turn the opinion of the public and the votes of politicians against choice proposals that threaten the status quo, on which they depend. Innovations in school choice often respond—at least to some degree—to the intense preferences of providers. For example, the Alum Rock voucher experiment in San Jose, California, eased fears among educators by excluding private schools, assuring that no public schools would be closed because they lost business, and protecting teachers from the threat of losing their jobs (Henig 1994, p. 71). To advance his agenda for

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school choice, President Ronald Reagan was obliged to beat a “strategic retreat” that replaced a push for vouchers, tax credits, and private schools with a “public-schools-only emphasis” on choice (Henig 1994, p. 79). Minnesota pioneered the charter school movement but did not “relinquish public-sector responsibility in favor of reliance on market forces.” About half the states with charter schools had “very weak laws that do not give [them] much discretion at all” (Henig 1994, pp. 227–228). These compromises reflect political and institutional realities; providers can no more be sidelined or ignored than the law of gravity can be repealed. In practice then, school choice reflects “conflict and accommodation among shifting and competing goals” (Henig 1994, p. 114). This is a recipe for short-term progress that may yield to longer range friction and disa∏ection within tenuous coalitions. HEALTH . Critics of school choice complained that it was unethical, unfair, and possibly unconstitutional because it subjected public schools to competition from better-funded private alternatives. Likewise, opponents of HMOs contended that this model of medical organization violated norms of ethics and fairness because HMOs gave providers financial incentives to underserve their patients and saddled “mainstream” caregivers with competition from closed panel groups employed by insurance plans. These arguments appeared in the earliest days of prepaid group practice in the 1920s and, voiced with all the vitriol and political force organized medicine could muster, stifled the spread of managed care for decades. By 1970, however, the federal government had tasted the fiscal consequences of the Medicare and Medicaid programs it had enacted five years earlier and faced forecasts for “uncontrollable” growth in coming years. The Nixon administration’s proposal to use prepaid group plans to reorganize the health care system by means of consumer choice, competition among insurers, and correct incentives for providers met bitter protest from the American Medical Association (AMA), but the administration concluded that the AMA had (as one put it) “shot its wad on Medicare” and pushed ahead

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(Brown 1983a, p. 257). In 1973, Nixon signed legislation that gave federal grants and loans to HMOs, launching a national movement toward what would come to be called “managed care.” Some students of the American health system worried that the marketist proposals for managed care might be marked by detours, potholes, and surprises. Supporters of the Nixon administration’s approach embraced HMOs as much for what they avoided—cuts in Medicare and Medicaid benefits, broader “rationalizing” policies such as national health insurance, and heavier regulation of the health care system—as for what they purported to o∏er. Evidence that prepaid group practices such as Kaiser-Permanante delivered good care at prices below those of fee-for-service, third-party insurers was uncritically extrapolated to a broad and ill-defined universe of “HMOs.” As the protracted congressional debates over the legislation showed during the Nixon presidency, the nature and appeal of HMOs lay largely in the eyes of diverse beholders. Whereas Nixon’s administration, for example, wanted loosely defined, lightly regulated entities that could spring up in many communities with small sums of federal start-up capital, Senator Edward Kennedy envisioned elaborately defined, firmly regulated plans that would enjoy billions of dollars of federal support and mount a two-fisted challenge to the dominant system of fee-for-service medicine (Brown 1983). Like school choice, managed care di∏used slowly and unsteadily as national policy makers and local HMO entrepreneurs labored to define what managed care “really” meant. Well into the 1980s, consumers resisted HMOs because they restricted their free choice of providers, employers saw little reason to complicate their employee benefit packages by o∏ering them, insurers viewed them as an unfamiliar business in which they risked losing large sums, and providers continued to deplore and denigrate them as an indefensible infringement on their clinical decisions and earnings. In the mid-1980s, however, the tide began to turn for reasons still not fully explored and explained. Organizational innovation within the HMO industry spawned an alphabet soup of decidedly unKaiser-like hybrids—independent practice associations, preferred provider organizations, point of service plans—that reassured con-

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sumers who wanted to retain a broad choice of physicians and hospitals. Employers listened more attentively to policy analysts who tirelessly touted the merits of market-based alternatives as health costs continued to rise and as government e∏orts to control costs (most notably, Jimmy Carter’s ambitious hospital cost containment plan of 1978–1980) collapsed. Insurers began to picture financial windfalls as they gained management experience with HMOs, savored huge savings that could follow from reducing (that is, “managing”) expensive and “excessive” inpatient and specialist care, and now readily found backing from equity investors eager to get in on the ground floor and build market share quickly. Providers concluded that managed care plans were not about to disappear and that prudence counseled them to join, run, form, and even own them. By 1990, managed care in all its sundry and amorphous incarnations had largely replaced older fee-for-service indemnity models of coverage and care in the private (employer-based) sector. As managed care set down private roots, federal and state policy makers took aim at the limited penetration of a stratagem that had been conceived in hopes of slowing the growth of costs in Medicare (and Medicaid). Until the late 1980s, states largely deferred to critics who warned that disadvantaged populations su∏ering from poverty, social dislocation, limited literacy, and multiple health problems (sometimes including mental illness and substance abuse) should not be “locked into” HMOs that lacked experience treating these complex case loads, abridged their freedom of choice, and might prosper financially by underserving them. By about 1990, however, three considerations had changed many minds across the federal system: Medicaid costs kept rising quickly and claimed large shares of state budgets; managed care had become the norm in the private sector, raising the question of why government beneficiaries should be treated di∏erently; and access to and the quality of care in traditional Medicaid programs seemed to be faltering badly. In this context, managed care was the most appealing Medicaid reform on hand, and states rushed to embrace it. Competition within a market of private and public HMOs bidding for a state’s Medicaid business was held out as a promising

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approach for inducing new providers to serve the program’s beneficiaries, maintain high quality (lest state regulators and / or prudent purchasing by Medicaid consumers shift enrollees away from under performers), and slow the ascent of costs all the while. By the end of the 1990s, more than half of Medicaid beneficiaries were enrolled in managed care. Medicare remained the primary focus of federal policy makers; it was after all the initial inspiration for introducing managed care to government programs as a cost-containment strategy. During the 1970s, Congress stymied this reform route by insisting that the Medicare statute forbade abridgment of free choice of provider in all but highly exceptional circumstances. As the 1980s began, the Reagan administration secured a softening of these legislative strictures and vigorously promoted HMOs to the elderly, but HMO penetration among seniors stagnated at around 10 percent. In 1993, Democratic President Bill Clinton gave managed care new prominence on the federal agenda by making it the strategic foundation of comprehensive national health reform. Determined to avoid such old Democratic bugaboos as higher taxes and heavier regulation, Clinton crafted a plan in which managed competition among managed care plans would yield savings suΩcient to bring coverage to the nation’s forty million uninsured residents and return money to the Treasury for deficit reduction. The plan failed to pass or even to get a vote in Congress largely because governmental management of market competition among managed care plans enjoyed no partisan or ideological constituency—the right resented excessive government, and the left rejected excessive reliance on markets. Federal promotion of managed care advanced in 1997 when a Republican-led Congress created “Medicare Plus Choice.” The new program aimed to entice Medicare beneficiaries into HMOs by o∏ering broader benefits such as outpatient prescription drug coverage. The ensuing increase in Medicare HMO enrollment rates to 16 percent looked like a harbinger of transformations to come, but market promoters were in for a surprise. Many plans discovered that seniors were more costly to serve than expected and lobbied

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the federal government for higher payments. When government oΩcials refused to raise rates, some plans exited the Medicare market, leaving tens of thousands in limbo. Although skeptics warned that the market for Medicare beneficiaries was vulnerable to multiple forms of failure, reformers resumed their crusade to expand markets in 2003. The Medicare Modernization Act created new outpatient prescription drug benefits, an objective the left had sought for decades, but supplied them by means of competing private plans. The embrace of private plans was a notable victory for the right, which had long worked to break the “monopoly” of the federal government in Medicare (Oberlander 2003, 2007). For three decades, in short, the debate over U.S. health care policy was dominated and guided by one diagnosis—that the conjunction of third-party payment and fee-for-service practice is inherently unworkable. Policy makers persistently turned to one market-based prescription—make consumers choose among health plans that compete by instilling incentives in medical providers to avoid unnecessary care. Unlike the rise of school choice, the ascendance of managed care did not presuppose artful negotiations with hostile providers, assurances that a∏ected interests would not lose money, or predictions that the innovation’s scale of penetration would be modest. The move toward markets in health care was pervasively (and ironically) state driven. Government oΩcials looked at their health care budgets and fiscal forecasts, accepted the premise that these huge sums harbored vast clinical waste, embraced the view that aggressive public regulation meant bad policy (i.e., agency capture) and painful politics, and cheerfully designated unmanaged competition among managed care organizations as the battle plan for controlling costs. As in the case of school choice, this strategy attracted odd political bedfellows. Democrats (or at least “New Democrats”) saw managed care as a credible rejoinder to conservative attacks on “big government” and threats to cut eligibility and benefits in public programs. Republicans believed in markets and competition as an article of faith and saw in them means by which the haughty health

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establishment could be made to honor “normal” market forces, thus forestalling new increments of public regulation. Democrats and Republicans alike welcomed the chance to weaken the hegemony of organized medicine. Although market theory sketched seductive solutions to challenges in health care, education, and transportation, the implementation of the new market-oriented policies soon encountered institutional, political, and electoral realities. Policy makers felt compelled to respond. As the next chapter shows, they scrambled to secure essential public goods and to prevent breakdowns in the services that Americans expected without entirely jettisoning increasingly troubled market reforms.

4 Cycles of Reform Institutional Reality and the Dystopia of Markets

Implementation of new initiatives to foster choice and competition through markets in health care, education, and transportation brought a disconcerting revelation: institutions mediate the translation of market theory into policy practice. The market model had missed something important: consumers, providers, and complex organizations reach decisions and behave in ways that do not always follow the script. The incentives that were expected to accompany competition did not consistently appear on cue. As the new day of dynamic markets dawned, journalists, citizens, advocates, and (of course) special interests questioned whether the public interest was well served. Questions turned into investigations and opposition, which attracted the attention of politicians who found their oΩces on the receiving end of complaints from constituents. Chalkboard models and grand theory receded as Republican and Democratic oΩcials hastened to respond. This chapter traces the institutional reception given to market reforms and policy makers’ pragmatic retreat. Grand Theory Meets Institutional Reality Lucid models of markets that would deliver more and better services at lower costs worked wonderfully in building coalitions, winning oΩcial support, and launching new policies. The trouble emerged in the many, often arcane, details of institutional performance.

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Transportation

In transportation, deregulation and its widened markets generated a mix of costs and benefits that left more than a few experts recommending that regulation be revisited and perhaps partly restored. By the end of the 1980s, the pace of mergers and the decline of profits and services had stifled the initial “euphoria,” according to one historical review (Dempsey 1989, p. 28). An evaluation of deregulation a decade later concluded that “the need for some supervision of the economic environment remains—and actually may increase” (Oster and Strong 2000, pp. 25–26). Analysts highlight four consequences of deregulation and expanded markets that trigger pressures for new government intervention. The first is the perceived need to “control anti-competitive behavior . . . and prevent the acquisition and exploitation of market power” (Oster and Strong 2000, pp. 25–26). For instance, large airline carriers have sometimes exploited their market dominance to set high fees while cutting the quality of service. A second source of pressure for a larger government role in transportation is the reduction in service and access for small markets that ensued after deregulation, especially for railroads and air travel. Many money-losing operations, one study predicted, “will no longer be served in a privatized, competitive market” (Oster and Strong 2000, p. 26). Decreased service makes sense for the bottom lines of private firms, but transportation also serves important social purposes such as preventing the further collapse of rural America. Although advocates of markets may view these outcomes as a step toward more eΩcient allocations of resources, the individuals and firms that su∏ered these reductions in transportation saw damage to a critical public good in their communities. These consumers are also voters whose complaints understandably caught the attention of their representatives in government. Third, although arguments for freer markets and less government in transportation often rest narrowly on economic savings for consumers, observers warn that private firms seeking “to reduce costs and increase profits will reduce expenditures or ‘cut corners’ on safety” (Oster and Strong 2000, p. 26). Deregulation may nega-

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tively a∏ect the environment “through noise, congestion, or air and water pollution” (Oster and Strong 2000, p. 26). It may also have indirect impacts; the advent of deregulation prompted a decline in passenger rail service, which led to “[environmental] deterioration brought about by the road and the car” (Richmond 2001, p. 153). The threats to human safety and the environment that have followed deregulation and expanded markets typify a common form of market failure long familiar to economists—namely, “negative externalities” in which private exchanges between buyers and sellers hurt uninvolved third parties. The emergence of negative externalities was not obscure or hypothetical. For example, the New York Times began in 2004 a scathing fifteen-month series, “Death on the Tracks,” that investigated the breakdown of safety in the operation of railroads (Bogdanich 2004). The articles gave graphic accounts of faulty road crossings and inadequate oversight of the transportation of potentially dangerous chemicals through densely populated neighborhoods. The reporter, Walt Bogdanich, won a Pulitzer in 2005, and the U.S. Transportation Department investigated the ine∏ective oversight of railway safety by federal oΩcials. Fourth, the deregulators’ proclamations of improved eΩciency and gains for consumers slighted the impact on the economic circumstances of the transportation workforce, notably a decline in wages large enough to constitute what one observer termed “a disconnect between eΩciency and ethics.” A study of decisions by five cities to contract with private suppliers of public transit found that because the “primary focus” was saving money, transit boards largely stayed aloof from wage negotiations, leaving it to contractors to establish “market rates.” But contracts went to the lowest bidder, and private contractors set pay levels very low, in one case below the region’s poverty level. Bent on providing “the most service at the least cost,” the contractor and public oversight body were not “ethically disturbed by the concept of a public agency o∏ering compensation that is inadequate for a basic standard of living” (Richmond 2001, pp. 168–169). This downward impact on wages also hit airline employees and

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truckers. In the airline industry, declining earnings of flight attendants and pilots generated dissatisfaction among workers (and travelers) as carriers maneuvered for leverage lest they go under in the brave new world of open competition (Cremieux 1996). In trucking, deregulation precipitated a sharp decline in wages and in the unionization of drivers (Belman and Monaco 2001). One side of the ledger records impressive savings, but the other side depicts a blow to working families and to consumers who su∏ered disruptions of service. These accumulating critiques shaped continuing debates about transportation policy. Deregulation of airlines has unquestionably produced tangible benefits. One glowing account, for example, cites the larger number of carriers and lower airfares since the 1970s as evidence that the industry has “flourished” and that “the market works much better free from government controls than with government oversight” (Moore 2002, p. 13). The costs of deregulation are far from negligible, however. According to one scholarly study, twenty years of empirical evidence and academic research make it clear that “several of the key theoretical foundations upon which deregulation was based were flawed” (Goetz 2002, p. 1; U.S. DOT 2001). Large “hub and spoke” operations impair “contestability” in some airline markets and encourage industry concentration and single-carrier dominance, which favor high fares. A striking regional bifurcation appears between low-fare regions, in which Southwest Airlines, Jet Blue, and other lower-cost entrants apply competitive pressure, and high-fare venues in the Southeast, Northeast, and Upper Midwest where “fortress” hub airports reign (Goetz 2002). In May 1999, the U.S. Department of Justice filed suit against American Airlines for allegedly engaging in predatory behavior that obstructed the entry of new low-cost airlines into its markets. The woes of passengers are aggravated by poor service—cancellations, delays, interminable waits on the tarmac, bumping, and lost luggage—prompting Congress and some states to consider enacting a “travelers’ bill of rights.” In 2001, nearly thirty years after deregulation arrived, the DepartAIRLIN E S .

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ment of Transportation in the market-friendly administration of George W. Bush warned that the “real threat to deregulation [is] the use by dominant airlines of their market power to end competition . . . [and the prospect that] community groups and consumers will demand that Government regulate fares and service”—a forecast that looked prescient indeed in the summer of 2007. If, as one study contends, the forces driving industry consolidation are “inexorable,” some measure of re-regulation may be only a matter of time (Goetz 2002, p. 17). Precisely because the trucking industry is now “one of the most competitive industries in the U.S,” government has been obliged to increase its regulatory reach. Just as the end of the Civil Aeronautics Board did not avert the need for the Federal Aviation Administration (FAA) in the airline sector, so too deregulated trucking triggered pressures for government oversight and rule setting on a host of issues—certification of drivers, testing for drug and alcohol use, handling of hazardous wastes, and assuring proper use of equipment. One analyst argues that in trucking, deregulation has moved government to implement “even more such regulation than it would have in the absence of unfettered markets, making regulation more extensive than ever” (Belzer 2002, pp. 375–377).

TRU CKIN G .

In 2000, the Surface Transportation Board, which inherited regulatory authority over rail transport from the Interstate Commerce Commission (ICC), reported that deregulation had produced “significant economic eΩciency benefits, most notably, rapid productivity growth that enabled railroads to become financially stronger while lowering average rate levels” (quoted in Moore 2002, p. 8). In rail as in air, however, regions that lack competition complain of high prices and uneven service. Two decades after the Staggers Rail Act passed, a study in Transportation Quarterly found the industry “in turmoil” and noted “talk of turning back the clock 20 years—and re-regulating the railroads” (Larson and Spraggins 2000, p. 31).

RAILROADS .

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In economic theory, freeing up the market induces competitive leanness; in institutional practice, industry dominance is at least as likely an outcome. Curtailment of the ICC’s powers invited railroad mergers and consolidations in the 1980s and 1990s. Although studies in the mid-1980s cheerfully reported that deregulation had lowered costs and improved service by encouraging upgrades in the speed, reliability, and supply of rail cars, by the end of the decade Congress was considering reintroduction of many of the ICC’s powers (Larson and Spraggins 2000, pp. 34–35). As the twenty-first century began, shippers who paid exorbitant charges because they had no choice among rival railroads made plain their contempt for the magic of competition, and urged the government to compel railroads to allow competing operations to run on their tracks. Meanwhile, one study added insult to injury by disputing the received wisdom that government meddling had driven prices too high before deregulation. Citing flaws in such calculations, Boyer (1987, pp. 408–409) contended that regulatory distortions “were not serious.” Contemporary patterns in transportation seem to be following a familiar arc in the long history of government intervention to protect citizens (and industries) from unrestrained market forces that had run amok. When prices reflect “the level of competition in the market rather than the cost of providing service,” government has repeatedly intervened to mollify popular and private demands to “protect the public and the transportation industry from the ravages of economic instability and exploitation.” Far from sullying a pristine economic status quo, government steps in to end “ruinous rate wars . . . designed to drive competitors out of business . . . [and] price fixing and pooling agreements, whereby carriers in competitive markets would agree to raise prices and pool revenue and freight [so that] rates soared” (Dempsey 1989, pp. 8–13). Taking the long view, one historian of transportation discerns both déjà vu (an industry cycling from laissez-faire through a century of government regulation and back to the “unconstrained free market”) and a predictable coda—excesses of the market that preceded regulation “have reappeared under deregulation” (Dempsey 1989, p. 1).

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Education

Rhetoric about choice and empowerment helped to build a broad coalition to win government funds and authorization for school choice. The implementation of school choice initiatives, however, both intensified opposition and fragmented supporters. Questioned and challenged, school choice emerged less as an idea whose time had come than as a motley crew of ideas fighting for prominence and dominance. The implementation of school choice programs gave researchers a chance to study their progress on the ground. A fair reading of the evidence failed to o∏er much encouragement that choice would soon vanquish the public education status quo in a dramatic institutional analogy to, say, the mainstreaming of managed medical care. The building block of school choice models is parents. But information must be available, and it must be accurate and credible if parents are to be empowered and schools held accountable. In reality, parents often lack accurate information to evaluate their options (Van Dunk and Dickman 2003, pp. 86, 95). Collecting accurate and useful information on the performance of students has proven to be costly, diΩcult, and controversial even among conservatives who favor market approaches. Demonstrating the impact on student performance of school choice reforms, including vouchers, is but one of several hurdles. Early figures from the Government Accounting OΩce estimated that state budgets would face charges of $1.9–$5.3 billion to develop and administer the new tests required by No Child Left Behind (NCLB; Dillon 2003). Some taxpayers and legislators wonder whether this intensive testing of students to detect improvement in their performance yields value for money. Conservative icon Charles Murray (2006) complained in the Wall Street Journal that President Bush’s NCLB program relies on “uninformative” and “deceptive” testing. NCLB focuses schools on “teaching to the test” at the cost of core classroom instruction. Test results generate meaningless statistics that states hype in response WHERE IS THE HARD DATA ON PERFORMANCE?

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to “powerful incentives to show progress” and avoid costly sanctions (Dillon 2003, p. a1; Murray 2006, p. a12;). The interpretation of what test results mean remains controversial. More than forty years after the Coleman Report, which found in 1966 that U.S. schools were highly segregated and unequal, analysts still disagree over what can be said scientifically about the data, methods, and controls that best guide improvements in pupil performance. One key variable—a “harsh environment” for students— is especially mysterious and refractory. What is the value of market reforms that do not properly control for environmental influences when trying to gauge the independent e∏ects of school choice? In one particularly contentious case, school choice enthusiast and Harvard Professor Paul Peterson released a study with a Mathematica research partner, David Meyers, reporting that vouchers substantially increased the test scores of black children by allowing them to attend private schools. A control group in public schools was reported to have scored six points lower on the tests. Peterson pitched these results as proof that vouchers work, a message that was then eagerly disseminated by conservative editorial writers and columnists including William Safire in the New York Times. When Princeton economist Alan Krueger reanalyzed the data, however, he found no evidence for Peterson’s conclusion. Although Peterson has not issued a substantive public rejoinder, Meyers accepted Krueger’s analysis, conceded that the “impact of a voucher o∏er is not statistically significant,” and warned that this was “not a study I’d want to use to make public policy” (Winerip 2003, p. a27). Impartial studies of test scores challenge the familiar claim that private schools are superior to the “hopelessly defective” public schools. The U.S. Education Department’s analyses of math and reading scores demonstrate that di∏erences between students in public and private schools are not consistently significant after controlling for social and economic factors such as the education and income of parents (Braun, Jenkins, and Grigg 2006). The New York Times (2006) editorialized that these results confirmed the wide variation across private, public, and charter schools and challenged “magical thinking” that seeks improved education by

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granting vouchers to attend private schools rather than by producing better-trained teachers. In 2006, the Department of Education released a study, prepared by the Educational Testing Service in 2003, that showed fourth graders in traditional public schools performing significantly better in reading and math than their counterparts in charter schools. The federal commissioner of education statistics struggled to put a favorable spin on results that contradicted the hopes of the Bush administration: “We know [charter schools] are not doing harm” (quoted in Schemo 2006, p. a14)—a startling retreat for a school choice reform that had been heralded for improving student performance. These recent studies are depressingly consistent with earlier findings. Milwaukee’s voucher program, at once the most ambitious and best-examined school choice experiment, o∏ers a case study of initially high hopes that met with modest or disappointing results. Children in the program did not register higher academic achievement than did comparable children outside it. Public school teachers in Milwaukee reported little change in “teacher autonomy, school collaboration, or responsiveness to parents.” Although teachers did feel both more “empowered” and more aware of competition, these changes seldom correlated with the competitive pressure of voucher schools in the vicinity. And insofar as competition did register, public schools “may be less likely to make changes when there are voucher schools nearby.” Indeed, schools with voucher schools nearby were “significantly less likely to make changes to retain or attract students”—quite the opposite of the anticipated competitive response. Nor did improvements in reading and math achievement scores accompany the presence of voucher schools in the neighborhood (Henig 1994, p. 236). The Milwaukee results are sobering given the initially high expectations. One study reported that “neither voucher nor public school parents appear to be receiving the promised educational benefits of competition through school choice” (Van Dunk and Dickman 2003, pp. 72–73). School choice generated “enormous enthusiasm among parents and private educators,” but student achievement

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failed to rise, and schools did not become more e∏ective (Witte 1996, p. 136). I M P L E M E N TAT I O N FA I L U R E A N D M A R K E T T H E O R Y A R E C O N N EC TED. Market enthusiasts in education—as in transportation and health care—often rejoin that these disappointments reflect not shortcomings of the theory but rather failure to implement it properly. The complaint has its merits. Even in Milwaukee, school choice in practice departed sharply from marketist principles. One reason parents lacked accurate information about their options was that some schools were unhelpful: one-third made it “incredibly diΩcult” for parents seeking information to behave like discerning shoppers (Van Dunk and Dickman 2003, pp. 119–120). Because the laws governing the funding of schools tended to mute competitive e∏ects, parental decisions to move their child did not yield financial punishment for the schools, which reduced incentives for schools to improve their performance and eΩciency. Indeed the incentives were perverse: schools that failed to attract tuition-paying students could stay afloat by enrolling voucher students. The Wisconsin legislature could, of course, have ceased to protect the education providers, but legislators were loath to bear bad tidings to their districts. The money did not follow the children (Van Dunk and Dickman 2003, pp. 128, 130, 142–143, 147, 186). Nonetheless, observers may reasonably ask whether the failure to implement market blue prints reveals unrealistic expectations or flaws in the theory itself. The theory of school choice has neglected the institutional dynamics that mediate, condition, and impede the capacity of market mechanisms to achieve public purposes. Institutions are no mere inconvenience to reformers; they define the policy world in which education is conducted. Failure to account for them often produces inflated expectations, risky proposals, and policy disappointments.

Attention to institutions shows that government regulation and oversight are necessary to foster market dynamics that create a workable program of school choice.

MORE CHOICE , MORE GOVERNMENT.

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At least five di∏erent types of interventions, which individually and collectively amount to much more than a package of minimum standards, are essential. A first set addresses such “details” as curriculum requirements, teacher qualifications and credentials, discipline, health and safety, the collection and dissemination of data, truth in advertising, and—by no means least important—transportation (Henig 1994, pp. 175–178). Setting policy and administrative procedures for these functions is no mere technical exercise for experts in budgeting, human resources, or information technology. Important constituencies di∏er in their preferences and the intensity with which they hold them. The U.S. Catholic Conference, for instance, noted the absence of “hierarchical” answers to questions such as, Will schools enroll students by lottery? Will siblings or children in the parish get preference? Will children with physical or educational handicaps be part of the choice program? Will current or only new students get to choose? Will religious education be allowed? Will students be permitted to opt out of religious requirements? Will teachers of religion be paid teachers’ salaries? Will classes on health and sexuality conform to church teachings? Can Catholic schools handle the burdens of accreditation and teacher certification? The Conference warned bishops who may be tempted by choice programs to “review such matters carefully before becoming involved in them” (Morken and Formicola 1999, pp. 155–156). The concerns of the U.S. Catholic Conference capture only a subset of the goals schools are routinely expected to attain. Fifty years ago, sociologist Robert Merton (1996, p. 120) cited an educator’s lament over the insistence of one or another group that public schools give more attention to Little League baseball, first aid, mental hygiene, speech correction, Spanish in the first grade, military preparedness, international understanding, modern music, world history, American history, and local history, geography and homemaking, Canada and South America, the Arabs and the Israelis, the Turks and the Greeks, Christopher Columbus and Leif Ericsson, Robert E. Lee and

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Woodrow Wilson, nutrition, care of the teeth, free enterprise, labor relations, cancer prevention, human relationships, atomic energy, the use of firearms, the Constitution, tobacco, temperance, kindness to animals, Esperanto, the 3 Rs, the 3 Cs, and the four Fs, use of the typewriter and legible penmanship, moral values, physical fitness, ethical concepts, civil defense, religious literacy, thrift, law observance, consumer education, narcotics, mathematics, dramatics, physics, ceramics, and . . . phonics. Each group, the educator observed, “is anxious to avoid overloading the curriculum. All any of them ask is that the nonessentials be dropped in order to get their material in. Most of them insist that they do not want a special course—they just want their ideas to permeate the entire daily program.” The list of goals pressed on schools has grown longer in the last five decades, and school choice has further complicated the definition of school achievement, the ability of schools to evaluate it, and the challenges facing parents who seek to buy it. The second form of government scrutiny and intervention arises from the challenge of compiling and distributing accurate and useable information. Van Dunk and Dickman (2003) insist that schools participating in choice programs should make public information on curriculum, graduation rates, how money is budgeted and spent, methods of teaching, the mission and philosophy of schools, the number of students suspended and expelled each year, qualifications of teachers and administrators, the school’s governing structure, scores on state standardized tests, and student attendance rates (p. 173). Whether such numbers are more than statistically significant is not always plain. Helen Ladd, for instance, points out that measures of average performance on tests may mislead parents because these scores mainly capture “the socioeconomic status of the average student at school,” not the school’s contribution to learning (cited in Buckley and Schneider 2007, p. 11). Whatever the merits of such metrics, not all schools can discharge these data-driven duties. Many lack the administrative capacity to process and distribute large amounts of information, so govern-

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ment may have to build new institutions such as a “public-private board . . . to gather the required information . . . and make it available to the public” (Van Dunk and Dickman 2003, p. 175). Even an eΩcient administrative structure to churn out ever-longer lists of indicators and information may still fail to capture the heart of the educational exercise, however. For example, some scholars contend that the superior performance of Catholic schools rests on “spiritual and communal aspects,” “inspirational ideology,” and “specific values operative in the Catholic sector” (Henig 1994, pp. 238–239). These “variables” seldom figure in standardized measures. Reliable and useable information may be underproduced in the absence of increased government investigation, oversight, and regulation. Funding constitutes a third package of thorny issues. Can foundations and private entrepreneurs supply the cash necessary to fuel the choice “movement” or are government funds essential? Will funders summon the courage to let money follow students, to cease protecting faltering public schools, and to allow those that flunk the market test to close their doors (Henig 1994, pp. 167–168; Van Dunk and Dickman 2003, p. 7)? So far choice supporters seem to hope that competition will mean benign general improvements among all or most local schools, not an unsparing natural selection that allows unfit schools to perish. Closing schools sounds eΩcient in theory but triggers conflicts that elected oΩcials and administrators prefer to avoid. Republicans have joined Democrats in denouncing NCLB for giving low ratings to public schools and taking steps to close some of them. Schools are complex formal organizations, not mom-and-pop shops, here today gone tomorrow as market forces ebb and flow. Given how few schools with poor records of student performance have been terminated and how even systems for rating them have come under attack, one wonders if the financial incentives that government (or other) funders wield are suΩciently nuanced, flexible, and e∏ective to induce schools to improve student learning. A fourth challenge is how (if at all) to steer schools toward “real” change in educational practice instead of superficial enhancements in the schools’ public imagery. Evidence not only from the United States but also from Great Britain, South Wales, and New Zealand

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suggests that competition prods schools to emphasize “public relations, marketing, and visible, quick-fix reforms,” not to mention selection of preferred “raw material”—namely, better-o∏ and better-performing students (Hess 2002, p. 27; Buckley and Schneider 2007, pp. 276–277). “Symbolic appeals,” notes Hess (2002), may “easily and rapidly satisfy a substantial number of customers while minimizing the resulting organizational disruption” (p. 45, 51). Cherry-picking of students is hard to detect and reverse. Finally, the design of school choice programs, which are redistributive by their nature, has important implications for equity. Although these reforms (including President Bush’s) were presented as extending opportunities to the have-nots, they may in fact “expand the opportunities of those already advantaged [while] limiting opportunities for those in greatest need” (Henig 1994, pp. 191–192; Murray 2006). The better-o∏ may seize on choice programs and leave the remaining students in less e∏ective learning environments. A choice program in San Antonio, for example, improved the performance of enrolled students, but also contributed to a “lack of satisfaction and involvement in school activities by parents whose children could not gain admittance” (Martinez, Godwin, and Kemerer 1996, p. 67). A survey in Detroit found that, if choice were available, families with higher incomes and better education would probably transfer their children from city schools (the worst ones anyway) to schools in other districts. Such out-migration by the better-o∏ aggravates the problems facing districts with large poor and minority populations and reproduces in the educational arena migration patterns that have long sharpened stratification by race, social class, and cultural background across metropolitan areas (Abernathy 2005). Buckley and Schneider (2007, p. 133) discovered that parents searching among charter schools in Washington, D.C., were “seeking out schools with a lower percentage of black students,” though they were disinclined to say so in telephone or face-to-face surveys. Paradoxically, choice may leave the disadvantaged worse o∏ by increasing “discrepancies in educational quality” (Fuller and Elmore 1996, p. 189; Lee, Croninger, and Smith 1996, pp. 86–88). One study concluded that combating these risks “will

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likely require more governmental intervention rather than less” (Fuller and Elmore 1996, p. 192). President Bush contended that his education reforms would combat the “soft bigotry of low expectations” by improving the performance of disadvantaged students and closing the gaps between minority and white students. A former oΩcial in the Department of Education warned, however, that “choice within [inner city] districts does not provide real opportunity to most of the students who need it” (Liu 2002). Current education policies fail to “require or even encourage suburban schools to accept inner-city children whose best option for escaping a failing school is to cross a district line” (Liu 2002). Opening suburban school districts to genuine choice runs into fierce political opposition from middle-class voters and suburbanites. POLITICS AND MARKETS . Although market approaches to education were initially billed as a way to circumvent political negotiation and compromise, the crafting of plausible school choice policies is inescapably an intricate political project. Conflicts over values and interests must be navigated by “public oΩcials exercising leadership, nurturing supportive coalitions, and authoritatively and sometimes forcefully using governmental power” (Henig 1994, p. 100). Successful programs require public leadership, coalition building, collective negotiation, government regulation, political skill, and civic capacity (Henig 1994, pp. 100, 118, 150–151, 209, 219; Morken and Formicola 1999, pp. 111, 145). Success also demands a keen appreciation that, as Richard Elmore remarks, introducing school choice requires “specific alterations of institutional structures within specific constraints on organization, money, and information” (quoted in Henig 1994, p. 175). Federalism further complicates the politics of school choice. By enacting NCLB, Washington policy makers—led by conservatives and Republicans—thrust the national government into what had been largely a state and local matter, widening the national government’s financial and regulatory footprint in elementary and secondary education.

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State governments have struggled to keep their choice models afloat in the face of administrative and financial diΩculties. In Minnesota, for instance, the Democratic House minority leader reported fiscal mismanagement by one-fifth of the seventy-three charter schools examined. Poor bookkeeping and administrative controls led to deficits, bankruptcies, fraud, and theft (Lonetree 2003). In California, one of the country’s largest operators of charter schools collapsed, causing havoc: six thousand students scrambled to find an alternative, prompting one school oΩcial to complain of “hysterical parents calling us, swearing and shouting.” Teachers were left suddenly jobless; students’ academic and medical records were abandoned; and taxpayer money was squandered as school desks and other assets were stolen. Bruce Fuller wryly observed that “the critics of market-oriented reforms warned of risks with the philosophy of let-the-buyer-beware, but in this case buyers were just totally hung out to dry” (Dillon 2004). California and other states have shifted—as a California school superintendent put it— toward “tough love” in regulating charter schools to “keep this kind of near-bankruptcy and chaos from happening again” (Dillon 2004, p. a29). Even as government intervenes to salvage market-oriented approaches to educational reform, conservatives complain about growing government meddling. Accumulating state regulations have sparked revolt among some parents and state oΩcials in Republican strongholds such as Utah. Charles Murray (2006) protests that NCLB spells “disaster for federalism” by “nationalizing elementary and secondary education.” Although not philosophically conservative, Richard Elmore blasts NCLB as the “single largest and the single most damaging expansion of federal power over the nation’s education system in history” (quoted in Dillon 2003, p. a1). The irony is that market-oriented education reform depends intimately on the government regulation and political negotiation that reformers sought to circumvent. But the marketists’ ceaseless denigration of government has left government lacking the infrastructure to implement successfully the myriad public and private institutional changes essential to building “competitive capacity” in school systems (Hess 2002, pp. 224, 242).

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Health

Critiques of school choice allege that it has done too little for too few; managed care stands accused politically of doing too much to too many. As unmanaged competition among managed care organizations (MCOs) came to dominate the health care system, the list of grievances from which voters and health care providers (especially doctors and hospitals) sought relief lengthened. That managed care is both dysfunctional and dangerous became the theme of widely noticed journalistic and cinematic exposés and of countless consumer complaints and provider pleas. MCOs, their business supporters, and state and national political leaders were inundated by proposals for legislative and regulatory redress. Fights to hold the health plans legally liable for faulty medical care raged within state capitals, Washington, D.C., and the judicial system. Among the more prominent charges against managed care, three are especially noteworthy. One common complaint about managed care plans is that they cut costs by underserving their customers. Several techniques pique opposition:

U N D E R S E RV I N G S U B S C R I B E R S .

• Declining to authorize medical tests and procedures and erecting bureaucratic hurdles (the infamous 1-800 phone numbers) that make authorization diΩcult. • Using primary care physicians as “gatekeepers” to reduce access to specialists. • Refusing to pay for emergency room visits that are not (in the eyes of the plan functionary reviewing the case) “true” emergencies. • O∏ering physicians financial incentives to limit care. These complaints coalesce into the charge that “greedy” MCOs abuse innocent enrollees and then set up toothless internal review processes that let plans play judge and jury to the detriment of victimized consumers. Policy makers also worry that the financial health of MCOs may be as precarious as that of Enron and other

FINANCIAL SOLVENCY.

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casualties of corporate mismanagement. Some MCOs su∏ered financial collapse or went into state-monitored receivership, threatening providers in their networks with unpaid bills and alerting providers in general to what could happen to them. Failures and insolvencies of prominent plans such as the Health Insurance Plan of New Jersey have made policy makers think twice about the costs of market forces. The near collapse of MCOs is disruptive too. Financial turmoil in the Harvard-Pilgrim Health Plan in New England, for instance, made the nightly news and daily press for months, fueling subscribers’ anxiety and fear among policy makers about disruption of health services for legions of voters. Market forces do not guarantee sound management. Some plans play fast and loose with their budgets. Some lack the management information systems and managerial acumen to keep revenues running reliably above expenses. Some stand at risk of shutting down overnight. Some have eye-popping executive compensation plans. Extraordinary stock options for executives at UnitedHealth (including compensation for its CEO in the range of $1.7 billion) enraged the public and provoked investigations. Health care providers aligned with consumers in support of “patient protection” measures in order to safeguard their own clinical autonomy. Physicians and hospitals complain that MCOs arbitrarily exclude them from their networks, pay them too slowly, and, of course, interfere with their freedom to practice by subjecting treatment decisions to administrative reviews. Mobilizing in defense of professional freedom and patient rights, the providers warmed up hoary critiques long launched at both government health insurance and prepaid group practice (Starr 1982) and redirected them against the encroaching innovations in corporate medicine that government had nurtured and helped to di∏use.

FIGHTING FOR PROFESSIONAL AUTONOMY.

Government Grapples with the Market Alternative—and Grows Market-oriented reforms in health care, education, and transportation were initially sold as policy instruments that constrain

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or circumvent the heavy, controlling hand of government. But as implementation confronted theory with practice, unintended consequences set in and pragmatists got busy designing government interventions to sustain market allocations of resources, stabilize the supply of public goods, and control negative side e∏ects. Paradoxically, the success of policy entrepreneurs in pushing market reforms ended up fuelling political discontent and legitimating new government interventions to manage markets. Transportation

Market forces were unleashed in the transportation arena not by the introduction of new organizational forms (MCOs) or consumer options (school choice) alongside the status quo but rather by the outright dismantling of long-accumulated regulatory machinery in exchange for lofty promises. The mixed results of deregulation have returned regulation to the public agenda. Until 2005 or so, the airline industry su∏ered from bankrupt carriers, annual financial losses, and reductions in salaries and benefits that sparked labor unrest, all of which drew attention to the case for more regulation. Amid government bailouts and loan guarantees, the industry conceded that it was “out of ideas for competing in a brutal climate,” and policy experts wondered whether deregulation was “really the best way to run a giant industry” (Maynard 2005a, p. 1). Prominent voices in the industry itself were “begging Washington for policies that will help it survive.” The CEO of Delta Air Lines, for example, urged federal oΩcials “to establish a comprehensive aviation policy that would o∏er the companies specific guidelines” on a wide range of issues (Maynard 2005b, p. c3). After 2005, the airlines began posting profits for the first time in years, but their solutions created fresh problems—fewer flights, more congestion (hence delays) as carriers concentrated flights in peak travel hours, fewer personnel, and more bumped passengers. Headlines dramatizing the problems drew further attention to the case for regulation. In response to serious train accidents in the early years of the twenty-first century, the inspector general of the Transportation Department asked tough questions about the rigor of oversight by

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the Federal Railroad Administration and requested that it present a new regulatory strategy within ninety days (Bogdanich 2005, p. a19). Although the Republican administration resisted new regulation, Democratic majorities in Congress called for better oversight and stronger rules. Although a full-scale retreat from transportation deregulation is not in sight, constituent complaints and disturbing headlines have stirred a new pragmatism among policy makers. They need not move directly to legislation when administrative performance— lax monitoring of antitrust practices by the Department of Justice, inadequate safety reviews by the FAA or ICC, and insuΩcient attention to regional disparities by the Surface Transportation Board, for example—can be blamed for market malfunctions. Recognition that market-based policy strategies have intrinsic limitations may slowly be dawning, however. Competition contains no magic self-preserving properties. Heads of organizations in competitive markets take risks when they expect to win and strive to reduce risks when they fear they may lose, by, among other steps, undermining competition. Familiar adaptations to competitive markets include market segmentation, underpricing, misrepresentation, and other unsavory measures at least as often as the sainted synthesis of high-quality service at low cost. In addressing these challenges and maintaining safety and consumer service, government is not a benighted alternative to market forces but rather their indispensable complement. Education

As the complexities and trade-o∏s in choosing among school choice options have grown clearer, the watchword in many legislative capitols has shifted from “revolution” to “policy design.” Pragmatic e∏orts to satisfy the expectations of voters upended ideology and fuelled a larger role for government in setting rules for an essential public good. In Michigan, a leader in the movement for charter schools and school choice, policy debate came to focus on “how to make the emerging market for schooling work better, maximizing the gains

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from choice while minimizing the potential harms” (Mintrom and Plank 2001, p. 46). Proposals in Michigan to raise the legislated limit on the number of charter schools (which now encompass about 5 percent of public school students in the state) generate demands for stronger government oversight to hold schools accountable. While promoting markets, state governments have insisted on regulating vouchers and other school choice programs by mandating admission standards and imposing requirements on record keeping and provision of services (Hess 2002, p. 49). In Minnesota, California, and other states, fraud and mismanagement by operators of charter schools and lax supervision by their sponsors disturbed legislators whose constituents wanted to know where to place children whose schools closed. The growth of private, for-profit education management organizations has spurred state policy makers to contemplate new regulations on the financing of charters (Mintrom and Plank 2001). As it implements NCLB, the U.S. Department of Education and its state counterparts must address statutory challenges that lack o∏-the-shelf solutions. How far does choice presuppose transportation, for example? Eugene Hickok, former deputy secretary of education, acknowledged that moving students around within big cities was “very, very expensive” and otherwise impractical (Robelen 2002, p. 40). Cities—with the acquiescence of states and the feds— confine publicly funded transportation to designated “zones,” which narrows the options of students. The NCLB also requires states to ensure that all suppliers of supplementary educational or tutorial services have a demonstrated record of e∏ectiveness in improving achievement, a demand that may be as hard to define as to meet (Robelen 2002). As in health care, a serious assault on “skimming” would mean a major expansion of government management of competition among schools. Growth in vouchers following the Supreme Court decision on Cleveland’s program will likely trigger more state and federal regulatory intervention. That government and markets are not mutually exclusive is belatedly dawning on erstwhile partisans of the market “alternative.”

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The Congressional Research Service recognizes, as critics of school vouchers have stressed, that “substantial new forms of governmental regulation will inevitably accompany new forms of governmental financial assistance” (Smole 2002, p. 10). Issues of federalism and race further encumber NCLB. Federal decisions to encourage private markets bump into state laws that limit class size and promote desegregation by preventing choice programs from further isolating students of color. And then, there is the raw politics of public oΩcials who applaud markets but beat a quick retreat when faced with irate voters. President Bush and other supporters of NCLB argued that school choice options and testing would reduce racial disparities in achievement. In the suburbs, where the 2000 census found a third of African American children and almost half of Hispanic children living, the reading and math performance of African American twelfth graders is comparable to what white students achieve in eighth grade. But lawmakers were unnerved when their base of support among aΔuent suburban parents and homeowners opposed the implementation of school choice programs that would supposedly narrow the gap. Nor is it surprising that the NCLB coalition crumbled in the presence of proposed national legislation to support school vouchers. As Thad Hall (2003, pp.119–122, quotation at p. 122) explained, members of Congress, who work hard to get and stay in oΩce and know that keeping “on the right side of the issues with voters is critical to electoral success,” understood that (except in the case of voteless Washington, D.C.) “most Americans do not support [vouchers]” and do not endorse a shift of federal funds from public schools to voucher schemes. Many state governments, as noted above, have resisted implementing NCLB. In a startling rebellion, the Republican-dominated legislature in Utah passed a law demanding that oΩcials disregard key sections of the law. In response, the president’s secretary of education, Margaret Spellings, granted states exceptions and loopholes that substantially reduced the pressure on suburban schools to eliminate the achievement gap (Petrilli 2005). The reauthorization of NCLB will likely lock in these concessions and insert new ones. The world of school choice has changed greatly since 1990, but

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many troubling continuities persist. In 2008, as in 1995, advocates go on making promises that are “at best, weakly supported by evidence” (Buckley and Schneider 2007, p. 267), “massive amounts” of which show that the vision of market reform (in this case by means of charter schools) has not been realized (Wells 2002, pp. 12–13). To be sure, research findings are now much more abundant than in the 1990s, but now, as then, important data are often elusive, results are “extremely sensitive to methodological choices” (Murnane 2005, p. 173), and policy implications are hard to decipher. The byways of scientific method and policy analysis increasingly diverge. As caveats qualify assertions, questions about what choice per se can achieve, for whom and in what circumstances, become ever less amenable to succinct answers, and the debate itself risks becoming impenetrable to all but specialists in educational research. Today, as before, advocates of school choice insist vindicatory findings will surely emerge from more and better research,which is bound to prove that their allegiance to choice, competition, and correct incentives is as potent in practice as they think it is in theory. Another cadre of careful scholars continues to caution, however, that the fate of choice depends much less on incentives per se than on the institutions in which they play out. Murnane (2005, pp. 181, 179), for one, urges reformers to “get beyond deceptive rhetoric about replacing government monopoly with markets” and to address the real challenge: “building capacity [which] takes time and resources.” Buckley and Schneider (2007, p. 268) argue that expecting the “magic of the marketplace” to improve educational outcomes ignores the “extensive infrastructure necessary to make markets work.” That Henig’s mid- 1990s counsel to retire market metaphors and focus on institutional capacity has still not been “adequately addressed” (Buckley and Schneider 2007, p. 275) suggests that the incentive-centered persuasion may have (as Thorsten Veblen said) a trained incapacity to face institutional realities. If so, market-based school reform in general may su∏er the fate that Amy Stuart Wells (2002, p. 2) predicts for charter schools: “a laissez faire reform that will die of its own weight some time early in the 21st century.” Perhaps, however, the rocky ride that school choice has endured over

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the last two decades will dispel visions of panaceas and persuade reformers to revisit the interplay between economic incentives and educational institutions on some as yet uncharted “pragmatic middle ground” (Buckley and Schneider 2007, p. 285). Health Care

Having reinvigorated market forces in the health care system, managed care met growing “backlash” by providers and consumers, who demanded that government curb alleged abuses. The proregulatory contingent has won some impressive victories—especially when its formidable opponents, business purchasers and the managed care industry itself, elected not to expend heavy capital in fights to forestall new regulations. In recent years, most states have adopted “patient protection” or “patient bill of rights” measures that limit the autonomy of MCOs in many ways, hemming in stitch by legislative stitch the free play of markets. Most MCOs allow internal review of treatment decisions that patients opt to protest. Lest the health plans play judge and jury in their own cases, state governments have mandated external review procedures when the internal variant fails to resolve a dispute. Details vary, but the key words everywhere are “outside” and “independent.” Because losses—over a large number of small cases or a small number of big ones—could be costly, plans appear to be more hesitant to enforce utilization management decisions that might trigger external reviews. (This and the next section on health policy draw on Brown and Eagan. See Brown and Eagan 2004).

E X TERNAL RE VI EW.

Responding to complaints that plans used gatekeeping or lists of covered benefits to deny subscribers access to needed care, states have mandated a series of benefits the plans must cover and supply. Such services include screening for diabetes and obesity, forty-eight-hour hospital stays for mothers and newborns, services rendered in the course of clinical trials, mental health care, emergency room visits that meet a prudent layperson standard, and

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direct access to various specialists unencumbered by primary care physicians who serve as gatekeepers. Plans predictably protest that these government mandates curb their ability to manage care. FINAN CIAL SO LVEN CY. Competition works only if market forces yield losers as well as winners. But losing brings change and uncertainty that consumers, citizens, and businesses prefer to avoid. When large MCOs become financially insolvent, claims filed by health care providers may go unpaid. Fewer plans may mean less competition, greater bargaining power for health plans remaining in the market, and thus diminished leverage for private purchasers. Customers (aka subscribers) are also a∏ected: members of defunct MCOs may end up in health plans that o∏er a di∏erent set of providers, disrupting treatment patterns and relationships. Moreover, the purchasers of health insurance (usually businesses) like competition in principle but deplore big disruptions in employee coverage when a plan tanks. The failure of big HMOs makes big political waves. In New Jersey, the demise of a health insurance plan obliged the state to find new plans for nearly two hundred thousand members and arrange settlement of the plan’s debts to providers. When the Harvard-Pilgrim Health Plan, a major presence in and around Boston, developed acute financial trouble, the state put it in receivership and then endured an angry public debate about how to nurse it back to health. Politicians have learned that market reforms can advance by glorifying the private sector and demonizing government, but disruptions when market-oriented policies are implemented get blamed on government and its current oΩcials. Financial fiascos may be attributed to failures of political will and skill. The message to the public is clear: MCOs, wedded to sloppy management and bad business practices, ran themselves into the ground, while public regulators, asleep at the switch, let it happen. Such “scandals” are the stu∏ of scathing stories by investigative reporters, indignant legislative inquiries, and abashed bureaucratic rationalizations. Elected oΩcials and agency sta∏s hasten to reassure the citizenry that public safeguards have been, or are being, put in place. Fearing electoral

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punishment should markets fail, lawmakers devised protections: requirements for more frequent and detailed financial reporting by plans to state auditors; larger obligatory reserves; limits on plans’ leeway to enter into risk-bearing relationships with providers; and creation of state reserve funds to cover the debts of failed plans with monies extracted from surviving ones. The steps to assess the financial solvency of health plans and to intervene to protect them against insolvency transcend traditional state regulation of health insurance. Regulators in what had been relatively obscure departments of insurance have been pushed beyond their customary administrative and familiar accounting tools into complex policy questions with new political overtones. Should they do what they can to keep MCOs running in order to preserve competition and prevent disruptions in services? Should they accept failures as a normal feature of markets? Should they facilitate an orderly exit for faltering plans? Complaints by providers that MCOs lined their own pockets by delaying payments to physicians and hospitals persuaded policy makers to enact laws requiring that plans pay “promptly” or face financial penalties. Plans rejoined that delays mainly arose not from their avaricious practices but from the mistakes of providers who filed late or incomplete claims. State regulators, caught in the middle, set about explicating in regulations the essential attributes of a “clean” claim and the obligations of the disputants in ambiguous cases.

P R O M P T PAY M E N T.

Selective contracting by MCOs with health care providers moved doctors and other providers to lobby lawmakers to debate laws enabling “any willing provider” to join the health plans of his or her choice. MCOs and the purchasers of health insurance, however, fought back hard against so palpable a hit to market prerogatives and control over costs. Markets again confronted government oΩcials with hard political choices. Lawmakers recognized that telling plans they must screen subscribers for (say) obesity is one thing and denying them

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the right to exclude ineΩcient providers from their panels is quite another. In some states, providers got the “any willing provider” laws they sought. Others simply required plans to o∏er “point of service” options that allow members to go out of network for care, albeit at the price of higher cost sharing. The piecemeal accumulation of government rules has both weakened the powers of MCOs to contain costs and encouraged further organizational adaptations that make MCOs more acceptable to consumers, providers, and regulators. A mere decade after its full flowering, some analysts proclaimed “the end of managed care” (Robinson 2001, p. 2622), while others highlighted new permutations of market-oriented models (Health A∏airs 2005). Living with the Consequences of Market Utopianism The history of revitalized market forces in transportation, education, and health care showcases several crosscutting political and institutional themes. Disturbed by governmental actions and omissions that empower the providers of services to shape demand and costs, policy entrepreneurs persistently invoked economic theory over the past three decades as a rationale for reducing government’s roles and expanding market forces. Belated installation of competition, “correct” incentives, and consumer choice would restore to normalcy markets that should never have been allowed to deviate in the first place. Abashed at the perceived failings of “big government” and eager to rationalize services by harnessing private interests to public ends, policy makers adopted laws and rules that embody important elements of the reformers’ agenda. Three decades of market experiments disclose a disconnect between economic theory and institutional practice. Consumers often do not like the trade-o∏s presented by their new choices, competitors decline to compete “correctly,” and superior value for money proves elusive. Economic theories that promised rich rewards from an unsentimental squeezing out of the weak and ineΩcient failed to consider that consumers, citizens, and businesses would perceive new costs and unsettling uncertainties and would take action to o∏set them. Market reforms proved to be problematic for achiev-

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ing social goals, delivering public goods, and managing negative externalities. As the unanticipated costs of market reforms began to sink in, private complaints became increasingly public. Consumers (aka voters) protested to political leaders, providers (aka special interests) pressured those leaders to change the rules of the game, and businesses fretted about disruptions even as they clung to the rhetoric of free markets. In time, corrective laws and rules emerged from negotiation and compromise among contesting parties. Far from withering away, the agenda of government grows with each political settlement. Expansion of public agendas to contain and correct market experiments fuels a lengthening list of complex tasks assumed by federal and state administrators in a range of agencies (aka bureaucracies). Although the resources and administrative capacities of these agencies were diminished in the expectation that market forces would prevail at the expense of government and that private actors would supplant and improve upon the performance of public administrators, it has become clear that managing markets requires a steady and sophisticated governmental partner.

5 The Democratic Disconnect and the Growth of Government

The last three and a half decades o∏er a political tale of government unceremoniously ushered out the front door of the nation’s collective abode only to be quietly readmitted via the back door. In 1968, Richard Nixon successfully campaigned for the presidency with pot shots at the excesses of Lyndon Johnson’s Great Society and War on Poverty. Once president, Nixon pledged to end overpromising and to return government to its proper business (Nathan 1975). In 1980, Ronald Reagan took power with slashing attacks on government, which he portrayed starkly as the problem, not a solution. The magic of the marketplace was the all-purpose answer to America’s sundry ills. George H. W. Bush, who could not conceal a wistful longing for a kinder, gentler nation, mouthed this antigovernmental script, but rather less successfully. The man to whom he surrendered the White House, Bill Clinton, advertised himself as a New Democrat (which in health care translated into “third way” innovations like managed competition, not anachronisms such as taxing, spending, and regulating) and in 1996 duly proclaimed that the era of big government was over. In 2000, George W. Bush came into oΩce—accompanied by a House and Senate dominated by Republicans and a number of philosophically conservative Democrats—cloning Reagan’s rhetoric, blasting government, and praising markets. A Martian monitoring these political developments from afar and privy only to what the nation’s leaders said about the relative merits and roles of the private and public sectors would conclude that market forces had indeed put government out to pasture. Po95

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litical practice bears little relation to this small government rhetoric, however. Demands on government (federal, state, and local) and, by many measures, government itself have steadily grown bigger during three decades of market-oriented reform. The last chapter showed that reforms to shrink government and expand markets in health care, education, and transportation ended up producing an expansion of government rules to sustain the new reliance on market allocations of resources, to protect citizens from the damage of market breakdowns, and to supply critical public goods. This chapter shows that this trend was not confined to these three arenas but rather appeared across a range of policy spheres and brought about substantial growth in government rule making, spending, and personnel. This pattern highlights a striking puzzle to which we return in the conclusion: conservative politicians and their allies reaped considerable political gain from assaulting government, and yet government continued to grow even in venues that were specifically targeted for deregulation and market expansion. Government Grows: Regulation, Budgets, Personnel That European governments grew since World War II is not surprising (Steurle and Kawai 1996). What may surprise American readers is that the same applies to the United States—home of Ronald Reagan and the crusade for smaller government. Rules and More Rules

The pragmatic steps policy makers took to strengthen rules for monitoring and regulating health care, education, and transportation mirror a broader expansion of government rule making in the United States (Melnick 2005). Republicans and Democrats have promulgated waves of new rules to control “international trade and finance, environment, safety, agriculture, aerospace, insurance, and health services” (Higgs 2005, p. 4). One analyst warned that a decline in government expenditures as a proportion of the gross domestic product (GDP) masked a sizable increase in “nonfiscal governance” (Congleton 1999, pp. 5–6). The number of pages of the Federal Register tripled between

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1970 and 1975 and grew by a quarter between 1975 and 2000 (it did decline during Reagan’s terms in oΩce before rising again after 1988; Pierson 2007, n.2). In 2003, the Federal Register weighed in at a record breaking 75,795 pages (up from 65,500 pages in 2001; Dudley 2004, p. 1). Counting the number of pages in the Federal Register is a simple and arresting illustration of the growth of government regulation but caution is advised—much of the Federal Register is unrelated to regulation, and agencies di∏er in both what they publish and how many pages they devote to reporting new rules. Nonetheless, it captures a central truth about government rule making—it steadily grows. The costs of government regulation also grow. Real spending on consumer protection, environmental protection, workplace safety, and other social regulations rose from about $1 billion in 1960 to over $20 billion after 2000. Real spending on economic regulations rose from about $1 billion in 1960 to nearly $5 billion after 2000 (Pierson 2007, fig. 4). The Bush White House’s OΩce of Management and Budget (OMB) estimates that the costs of major regulations to the economy rose during each of the administration’s first four years in oΩce. By the OMB’s estimates, Reagan began his term by reducing the regulatory burden but ended by imposing over $15 billion of new costs during his final two years in oΩce. Regulatory costs also increased under George W. Bush, and the spending level in 2004 exceeded that in four of Clinton’s years. OMB also calculated the benefits of regulations and reached a heretical conclusion: for the 1992–2002 decade, the “monetized health and social benefits of 107 rules and unfunded mandates outweighed their costs by three to five times” (Goodsell 2004, p. 35; OMB 2005). Spending Is Bipartisan

The growth of government shows up not only in regulation but also in measures of spending and government workers. The size of government as a proportion of the country’s economy (GDP) has substantially increased. In all advanced industrialized countries, total government spend-

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ing has grown dramatically since World War II. Government spending in countries within the Organization for Economic Cooperation and Development (OECD) averaged 48 percent of the GDP by the late 1990s. In the United States, public spending lagged behind its counterparts but still hit substantial levels and grew impressively— from 30 percent of GDP in 1960 to 35 percent in the 1990s (Gwartney, Lawson, and Holcombe 1998, pp. 6, 10). Although defense spending is unusually high in the United States, federal nondefense spending showed even sharper upward trends, rising from about 6 percent of GDP in 1955 to nearly 18 percent in 1992. Some fluctuations appear within the general upward trend. Both Reagan and Clinton squeezed entitlements, discretionary spending, and military budgets. In consequence, federal nondefense spending fell below 16 percent during parts of their terms. Nonetheless, government spending resumed its upward trend after these administrations. In addition to increased federal spending since the 1990s, state and local governments also boosted their budgets, pushing their share of spending from under 6 percent of GDP in 1955 to over 10 percent after the 1980s (Pierson 2007, fig. 1). Governors, state legislators, and local oΩcials—many of them Republican—have enacted “big tax and fee increases” in order to meet “growing education, health, and infrastructure costs” that resulted from federal cuts (Calmes 2004, p. a4). The National Conference of State Legislatures reports that per capita state spending increased by nearly one-third in the 1990s, building on a base that had already been elevated by faster expansions during the 1980s and, especially, the 1960s (Snell, Eckl, and Williams 2003). Government spending under George W. Bush has provoked outrage in promarket quarters. The Libertarian Cato Institute reported that federal spending rose twice as fast under Bush as under Bill Clinton. Conservatives groused that Bush’s talk about spending restraint was “so much hot air” and that his expansion of the social welfare state was “making America more like France” (Hamburger 2003, p. a4). A columnist for the Wall Street Journal lamented that Republicans—in control of the White House, House, and Senate— adopted “that old Democratic slogan, ‘spend, spend, elect, elect’”

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(Melloan 2004, p. a15). One Democrat gleefully quipped that “the era of big government being over is over” (Stolberg 2005, p. a1). The sharp increases in public spending are not confined to such explicit allocations as government checks to Social Security beneficiaries or defense contractors. Governments also aid individuals and groups by favorable treatment in the tax code. Through so-called tax expenditures, the U.S. government subsidizes mortgage interest payments, employer payments for health insurance premiums, and individual contributions to retirement funds (e.g., IRAs) (Titmuss 1969; Howard 1997; Hacker 2002). Indeed, the federal government’s tax subsidies for employer insurance premiums amount to its third largest expenditure on health care. A Swelling Civil Service

Preventing the next terrorist attack, extending health insurance, and widening educational opportunity are all high priorities of the American public and government oΩcials in both parties. Although candidates never cease to rail against “unelected bureaucrats,” Republicans and Democrats alike need civil servants to accomplish their policy goals. The number of personnel has grown under both parties and under conservative and liberal government. Nearly three years into President George W. Bush’s first term Paul Light (2004) reported that the government’s workforce had grown by 1.1 million since October 1999. The number of federal employees engaged in social regulation increased from under 60,000 in 1970 to nearly 140,000 by the early 2000s (Pierson 2007, fig. 5). Public employment at the state and local levels rose steadily from 13.3 million workers in 1980 to 16.6 million in 1999 (Zimmerman 1999, p. 6). The end of the cold war and the personnel reductions in the Defense Department and other defense-related federal units led to a decline in the size of the national government work force from 12,571,000 in 1990 to 11,028,000 in 1999. But expanding responsibilities of the departments of Transportation, Justice, and Treasury, and national security programs drove federal employment up to 12,115,000 in 2002 (Light 2004, esp. table 2). The U.S. Department of Labor estimates that

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between 2002 and 2012 government jobs at all levels will grow by 11.8 percent (from 21.5 million to 24 million positions; U.S. Department of Labor 2003). Much growth in federal employment is hidden from the public because it comes from government grants and contracts to carry out public responsibilities. Light (2004) reports that the federal workforce created through contracts and grants recently reached its highest level since the beginning of the cold war. Of an increase of one million federal jobs between 1999 and 2002, 550,000 were outside national defense. Most of them were added during the Bush presidency in such seemingly mundane venues as the General Services Administration, which is responsible for information technology, and in Health and Human Services. These are increases in the national workforce and therefore do not include the more than five million workers hired in the early twenty-first century by state and local governments (Light 2004, p. 2). In the fall of 2003, conservative guru Stephen Moore decried the “across-the-board mushrooming of government” that had occurred under the Bush administration and Republican-controlled Congress (quoted in Hamburger 2003, p. a4). Light, by contrast, takes a pragmatic perspective on the growth of the government’s workforce as “neither good nor bad in an objective sense”—it is merely the total workforce required to deliver the promises the federal government has made (Light 2004, p. 3). However the issue is framed, the cumulative size and impressive growth o∏er no consolation to partisans of small government. Two in five American households (according to a 1999 poll by Princeton Survey Research) contain someone who works for the federal government either directly or indirectly through contracts, grants, or mandates (cited in Light 2004). Why Government Grows Conservatives who blast bigger government for displacing market competition often blame the excesses of liberals in the 1960s and the reign of self-serving bureaucrats. Although liberal policies and bureaucratic expansion have helped to swell government, the conservative orthodoxy dodges a puzzle: government also grows

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under the watch of Republicans and market advocates. The solution to the puzzle lies largely in government’s enduring responsibilities for supplying public goods, sustaining market allocations, and containing the damage of breakdowns and negative side e∏ects of markets. Public Goods

Virtually no one at any point along the ideological spectrum denies that government must supply certain goods and services that are essential for society, that are too expensive and complex for any one individual or group to provide, and that are infeasible for market exchanges because their distribution cannot be limited to those who pay for them. In the jargon of policy analysis, such goods are “nonexcludable” and “nonrival.” (On nuances in the notion of public goods see Nelson 2005, pp. 11–12). National defense is a classic public good that must be organized and delivered by governments: protection against foreign attack is imperative, and it cannot be confined to citizens who choose to purchase it. Another case in point is public roads and highways, access to which cannot (with the exception of toll roads) be rationed only to travelers prepared to pay. In transportation there is little dispute that the planning, design, and maintenance of highways and bridges should be performed (anyway overseen) by government, or that market forces (competitive bidding, for instance) can be no more than a small private frog in a large public pond. Likewise, government decisions on the infrastructure for aviation—for example, whether to build new runways and airports, hire more air traΩc controllers, or deploy new technologies to route air traΩc—are important in easing the congestion generated when profit-maximizing carriers compete for limited times and spaces. Adam Smith also declared that a legal system to protect private property and adjudicate contracts and a system of public education must be government-supplied public goods. Although collective goods like national defense are sometimes portrayed as placing a constant demand on government, in fact demand varies with circumstances. At times, it shrinks, as when the

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U.S. government reduced the military at the end of the cold war. Government’s duties can also increase (sometimes suddenly) when triggered by, for instance, new threats to homeland security, innovations in military strategy and technology, and increased troop deployments into areas of active combat. Demands for public goods may expand incrementally in response to changes in the economy and society (including demographic shifts). Likewise, the federal government’s obligations as supplier and manager of a public transportation system did not end with completion of the interstate highway system. Roads must be maintained and expanded to accommodate growth in the population and in the volume of vehicles that use it. Crowded highways pique interest in alternatives such as mass transit systems and bicycle-friendly designs, which enter and ascend the public agenda. Collapsing bridges prompt the public to wonder why government engineers and regulators were not on the case in time to avert damage and disaster. Unforeseen events and analytic expostulations both spur reconsideration of the nature and boundaries of public goods. For example, health care properly joins transportation and education in the pantheon of public functions that carry (as Adam Smith said) the “highest value” to society, but it is eminently excludable. Still, the widespread threat of untreated or mistreated contagious illness persuades some that government should build and fortify an infrastructure of “public health” for communities by means of basic medical facilities, personnel, and services. Bird flu, antibiotic-resistant tuberculosis, bioterrorism, and other risks to the health of Americans have generated bipartisan support for larger government budgets and responsibilities. From this perspective, the health of the population is a variant of public good, perhaps a “common property resource” (Coast, Smith, and Millar 1996; Kolstad, 2000; Scott, Solomon, and McGowan 2001). There are also, of course, broader arguments for viewing health care and the general health of the population as preconditions for individuals to exercise their opportunities in a market society, or, still broader and more contested, for treating health care as a basic right of citizenship. Sometimes government must increase its role in building infra-

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structure for public goods before it can plausibly engage market forces in delivering them. For instance, the education of students from kindergarten through high school is a government responsibility, delivered by public or (largely) nonprofit institutions with commanding positions, which market reformers would challenge by introducing vouchers, choice, and competition. Some thoughtful analysts doubt, however, that school choice, even were it far more institutionally-attuned and adroit than it has been to date, can be more than a side show in improving the academic performance of underachieving schools and students unless fundamental gaps in human capital are addressed first. A promising approach (which has won support from, among others, James Heckman, a Nobel Prize– winning economist at the University of Chicago) urges a sizable expansion of high-quality preschool programs. There is of course no certainty that governmental grappling with the complexities of early human and social development will bear measurable fruit. Yet the (admittedly contingent) case for new public experiments and demonstrations in service of this crucial public good is surely no less compelling than confident calls for choice-based panaceas. The public sector’s role in the provision of public goods grows steadily because both circumstances and citizen voices insist that government follow policy arguments where they lead. As Americans wrestle with challenges both old and new—the adequacy of transportation and education, the perils of bioterrorism and climate change, and more—pragmatism fuels wider agreement that voluntary exchange in private markets neither excludes nor rivals government’s growing agenda. Far from comprising the neat, bounded minimum package of government responsibilities that market promoters have imagined, public goods evolve in response to new demands and disputes about what the public interest requires. Debates over the definitions of essential goods and services and how to supply them never cease. Framing Market Functions

Few deny that civil societies and markets operating within them require a framework of minimum government rules. The question, of course, is the meaning of “minimum.” Over the past three decades,

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government’s role in setting rules and serving as a referee have extended well beyond the tidy package that conservative icon Milton Friedman envisioned. One of the government’s central tasks in fulfilling its allocative function is to protect against fraud and malfeasance. Adam Smith and other worldly economists emphasized that diminished confidence in the reliability of voluntary exchanges by sellers or buyers may lead them to refrain from such transactions in the market place or to distort their calculations in sizing up a good deal. For instance, a consumer of health coverage may decide to purchase expensive insurance from a traditional indemnity plan if she fears that an HMO might not o∏er necessary medical treatment or might collapse financially. Corporate scandals at Enron, Tyco International, and Worldcom persuaded conservative political leaders who controlled Washington to protect the integrity of markets by expanding government rules to deter and punish corporate fraud and malfeasance. As investor confidence eroded, Congress passed and President George W. Bush signed the Sarbanes-Oxley Act of 2002, which strengthened accounting and reporting standards for the managers, boards, and accountants of publicly traded companies. Renouncing rhetoric, conservatives endorsed another substantial expansion of government by creating a new quasi-public agency (the Public Company Accounting Oversight Board) to inspect and discipline accounting firms that audit public companies (DeMuth 2004, p. 16). Trading improprieties in the mutual fund industry convinced the Securities and Exchange Commission to issue a “blizzard of new rules” in 2004 (Atlas 2004, p. c13; Labator 2004, p. c13). In addition to the federal government’s changes in the rules of the game, the states (including such conservative paragons as Oklahoma) made their own regulatory contributions to the checking of corporate crime. Abuses in the insurance industry were an especially fertile field for investigation and regulation by state attorneys general such as New York’s Eliot Spitzer. Another stimulus to state intervention was Enron’s exploitation

DETERRING FRAUD.

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of California’s deregulated energy markets to gouge billions of dollars. According to one consumer advocate, “In every state that has chosen deregulation . . . power companies, free from the oversight of state regulators, have increased prices.” Glaring cases included Montana, where industrial consumers su∏ered a fourfold hike in prices, and Northeast and New England states that witnessed a doubling of prices (Slocum 2001, p. 473). Several states that deregulated electric energy responded by considering outright re-regulation or new government rules. Market enthusiasts who reflexively portray government as an alien invading force that obstructs business fail to understand the indispensable roles of government in establishing and sustaining private markets. Government not only protects against fraud, but also sets the rules of fair competition and maintains the confidence of consumers and investors. As Holmes and Sunstein (1999) remark, “Only a state can create a vibrant market.” Although market enthusiasts from Adam Smith to Milton Friedman have acknowledged these governmental roles, they often underestimate their complexity and scope (Polanyi 1957; Rosenberg 1960). Market reforms seek to introduce new competitive dynamics into policy settings. But making competition work requires management to create the conditions for voluntary exchanges in which consumers have confidence. Business firms (not unlike government bureaucracies) do not automatically perform well on their own. “It’s easy to get blind sided when you’re growing fast,” warned a former health care CEO. “You have to build better legal and internal audit capabilities [and] deal with regulatory issues. But we were growing so fast we often hired people six months after we needed them” (quoted in Anders 2007, p. a2). Bigger market share is not “automatically good,” a professor of management at MIT recently remarked. “Sometimes firms focus so hard on building share that they build way beyond the true market for their products” (quoted in Anders 2007, p. a2). Trial and error is inseparable from economic innovation. Society— working through the agency of government—must decide the up-

MANAGING COMPETITION .

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per limits of the destruction, creative and otherwise, it will accept in the name of entrepreneurship and when possible damage to the confidence of consumers and business poses serious risks. Since deregulation, for instance, airlines are profit-making (or, more precisely, profit-seeking) firms with broad discretion over where and when they fly. Carriers find it profitable to fly full planes at peak times. When all carriers follow market signals, congestion ensues and the resulting service becomes undependable. This “crowding-in problem” is “one of the ugly anomalies of a freemarket system” and results “when there is no direct owner of a given resource—the air-transportation infrastructure in this case” (Ketcham 2007, p. a13). The market alone cannot staunch the decline in consumer confidence in air travel. Solutions—adding runways and new airports, easing antitrust rules, imposing a stronger regulatory hand in determining routes and times, and more—all involve more government. Health care also illustrates the consequences of inadequate government rules for market competition. Expansion of health maintenance organizations and other forms of managed care, which was first promoted by Richard Nixon in the 1970s to incorporate competition into the organization of medical care, initially failed to win the confidence of consumers. Assuming (not unreasonably) that managing care meant delivering less of it, prospective subscribers worried that the health plans would achieve savings and compete by o∏ering financial incentives to providers to use fewer resources, by denying requests to see specialists, and by taking other suspect steps to contain costs. In time, the plans decided to ease earlier limits on the subscriber’s free choice of providers in order to gain market share and prominence in the health care system. Consumers and providers alike, however, doubted that the competitive dynamics of the thriving MCO industry gave suΩcient weight to the quality of care, and a backlash against managed care set in. Some promoters of markets called on government to monitor access to and quality of medical care, define a set of standard benefits to level the playing field, require open enrollment of all applicants, and forbid plans to tailor premiums according to health status—to manage

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competition, in short (e.g., Enthoven 1988). Proposals to rationalize the health care system by market means foundered, however, because the prescribed dose of procompetitive regulation that would set the rules of the game proved politically unpalatable to virtually all stakeholders. In the absence of sound regulatory infrastructure for managed care, Republicans joined Democrats to establish a list of reforms designed not to be procompetitive but rather to curb MCOs run amok. As noted in chapter 4, these measures require plans to make direct referrals to specialists, mandate specific medical services, set procedures for resolving disputes between plans and their enrollees, secure timely payment of providers’ bills, and monitor and regulate plans’ financial practices. This agenda advanced politically because insuΩcient attention to regulatory infrastructure as managed care became mainstream helped to fuel a political backlash that altered (some say arrested) this market experiment in midcourse. In education too, e∏orts to expand competition cannot succeed without “a regulated market, heavily dependent on governmental protection and support.” Individual schools might gain autonomy, and central administration might shrink, but “a governing agency will still be needed to establish and monitor minimal standards; regulate rates; bar discrimination; restrain arbitrary discipline and expulsion; provide for special educational needs; . . . study and report on success and failure; and see to it that the right to enroll in the school of one’s choice is recognized in practice.” (Selznick 1992, p. 517). A system that brims with competitive incentives but lacks strict oversight invites strategic gaming—for instance, a school that seeks to attract only bright students with active and skilled parents in order to boost its scores and look like a winner. The price hikes and breakdown of markets in electrical power in California and other states that experimented with market reforms led one study to conclude that institutional structures and rules make a “tremendous di∏erence” to the prospects for successful competition in this sector. Restructuring, Kira Fabrizio (2005) observes, should not mean “complete reliance on the market” but

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rather “replacement of the old regulation with a new regulatory framework” (p. 43). Kenneth Arrow argued years ago that the market cannot produce enough “fundamental new knowledge” and that government would “regularly have to take a hand” in its generation (Warsh 2006, p. 153). The rise of a service economy based on information technology and scientific innovation has triggered new roles for government in supporting and protecting innovation as well as setting rules and providing oversight. The innovations in intellectual property on which pharmaceutical, recording, and software firms depend cannot be secured by free market orthodoxy. Because their costs are heavily concentrated on the front end and the marginal costs of the products themselves are often at or close to zero, these industries craft creative strategies to protect their investments. Microsoft, for instance, tried by “making copying more complicated and . . . squeezing out, or buying out, its competitors.” Pharmaceutical firms worked at “segmenting their customers, and devising clever ways to extend their patent protections.” But market logic inevitably guides such firms to “the doorstep of government” as they seek to protect their intellectual property rights. Alan Murray predicts that as businesses dependent on intellectual property loom larger in the U.S. economy, their determination to lobby for greater government protection (i.e., intervention) will grow (Murray 2003b, p. a4). New technologies have repeatedly driven enthusiasts of small government and free choice to reject the market’s invisible hand in order to safeguard their moral and ethical values. When pediatric surgeons developed new procedures to extend the lives of severely disabled newborns, the federal government was soon monitoring and regulating parental decisions on whether to accept these heroic interventions (Journal of Health Politics, Policy and Law 1986). Policy makers of neither political party are willing to toss breakthroughs in cloning and genetic engineering into the marketplace and then let sovereign consumers and utility-maximizing businesses decide whether and how to use them. Congressional intervention in 2005 STEERING INNOVATION .

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to pressure the courts to keep Terry Schiavo alive may foreshadow more government activism in regulating the decisions of guardians, patients, health care providers, and the firms that develop medical devices and equipment. In the wake of technological progress come bioethics commissions, executive orders, practice guidelines, and legislative interventions. The extension of the Internet into a vast public system has triggered new government interventions, for instance, to regulate pornography, subordinating free markets to social norms. Similarly, the di∏usion of wireless phone service “creates debate over whether to regulate” and “the possibility of rewriting 70 years of rules” governing the telephone industry (New York Times 2004, p. c3). Less than ten years after the national Telecommunications Act of 1996 was expected to “get government out of the telecom business,” the law had “already become outdated by new technology and industry trends,” and pressure was mounting for new government intervention (Murray 2003b, p. a4; Labator 2004, p. c13). SU PPLYI N G I N FO RMATI O N . Choice is indispensable to consumer empowerment and information is indispensable to choice. Consumers may benefit handsomely from choice if they are suΩciently informed, but establishing institutions and procedures to gather accurate information and then disseminating it in ways that consumers can find, use, and trust is diΩcult and costly, especially when users lack training in technical or otherwise complicated issues. The aviation industry is an instructive case in point. The good news is that travelers can generally buy cheap seats on flights in many (though not all) venues since deregulation enabled lower-cost carriers to enter and compete in many local markets. The bad news is the diminished quality of airline performance—canceled flights, delays, marathon sojourns on the tarmac, lost baggage, and overbookings that result in denied boarding, uncomfortable seating in coach class, and more. There is little di∏erence, and therefore little to choose, among carriers. Consumers so inclined can exhaust themselves on the Internet learning the likelihood that flight x or y may arrive late, but the “triumph” of market forces in this arena derives

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mainly from competition (in many markets, customers who once could a∏ord only to travel by bus can now, in principle, get their discomfort over with much faster) and very little from information or choice. In these circumstances, it is not surprising that consumers turn to government for more reliable information on the misadventures their travel plans may encounter. Education and health care are markets very di∏erent from transportation. Their desired outcomes are diverse (achievement and socialization, curing and caring, for example). Much of what their providers do cannot be successfully standardized. (How much can be is of course in hot dispute.) And their production functions contain considerable mystery. Information (“data”) is abundant. But schools and health providers are slow to make it public without a government mandate to do so, the accuracy and comparability of what gets reported are sometimes suspect, and uncertainty as to whether statistical di∏erences in outcomes reliably reflect substantive di∏erences eternally looms. Consumers who are determined to use objective data to choose among schools, MCOs, and hospitals have serious work cut out for them. Analytical data mavens may enjoy the intellectual thrill of the chase (not to mention the financial thrill of selling their wares to or winning grants from government reformers), but “average” consumers may be enervated by navigating cascades of information in hopes of sorting out proliferating choices in multiple markets (Schwartz 2004). Below-average consumers (those, for instance, with limited literacy, leisure, and / or Internet skills) may be unable to get in the game at all. Moreover, data do not speak for themselves. Heated debates abound over what to control for. Do ratings of hospitals take due account of the mix of cases and their varying degree of severity? Do school ratings adequately factor in the socioeconomic, cultural, and family backgrounds of pupils? Beyond these methodological disputes lurks a vexing immediate issue: How well do the ratings speak to the conditions of “someone like me” (or my family)? Answers may not come easily. Diligent consumers may choose to rely on such “satisfycing” expedients as word of mouth within the community, anecdotes of friends and neighbors, referrals by trusted

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family physicians, and a prima facie preference for schools and hospitals close to home. When all the evidence-based enlightenment has been sifted, buying good health care or a good education for one’s children does not much resemble purchasing a refrigerator or, for that matter, an airline ticket. A little knowledge is, to be sure, a dangerous thing, but if a surfeit of knowledge is not to become an overwhelming and frustrating thing, government must labor not only to ensure the availability and accuracy of information but also to explain its practical limits and to protect “emptors” who for whatever reason cannot or will not honor the relevant caveats. Market promoters’ high hopes for consumer choice rest increasingly on government’s capacity to design and monitor sophisticated reporting requirements for providers, analyze the results, and ensure that consumers get the information they need and want. Policy analysts attuned to institutional realities should not be surprised that information is not consistently easy to collect and use (Barr 1987). As noted in chapter 2, consumers can eΩciently and accurately inform themselves in relatively simple markets such as those for food and consumer goods; government intervention would be ineΩcient and fail to satisfy their demands. But decision making in complex and technical spheres such as health care imposes more stringent information requirements and costs on individuals. “Rationalizing” Policies

Government also grows because time and trial and error show that policies need repair. E∏orts to rely on market methods may be more or less successful but they generally leave government bigger, not smaller (Brown 1983b). President Bush promised as he signed No Child Left Behind into law on January 8, 2002, that “in the face of failure. . . . [parents] will have these options—a better public school, a tutor, or a charter school.” All of this would be achieved, the president predicted, in a new system in which the “federal government will not micromanage how schools are run.” Implementation soon led to questions and then steps to “rationalize” (i.e., correct past policies) on several

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fronts including the definition of “failure,” what types of “options” were available, and how students would be transported to them. These corrective endeavors turned up the volume of complaints about both federal government interference and the lack of “real” options. In December 2003, President Bush and a Republican Congress enacted the Medicare Prescription Drug, Improvement, and Modernization Act, which asked seniors to choose prescription drug coverage from among competing private health plans and insurers. Even before the new benefits were implemented, the Act’s ten-year estimated cost jumped from $350 billion to $724 billion, and the race was on to identify economizing improvisations. Alan Murray, for example, recommended that Congress “create an e∏ective marketplace for prescription drugs,” which would be aided by a new federally funded independent agency to finance and analyze research on the cost-e∏ectiveness of new drugs (Murray 2003a, p. a4). Even as new government interventions were proposed to foster more robust and durable markets in Medicare’s drug program, the president of the American Enterprise Institute predicted that the new Medicare benefit would “almost certainly lead to price controls on pharmaceuticals, just as the existing program led inexorably to price controls on hospitals and physician services” (DeMuth 2004, p. a16). This turn to government “fixes” for Medicare’s rising costs has a counterintuitive (bi)partisan history. Democratic presidents John Kennedy and Lyndon Johnson rejected the recommendation of civil servants for “direct federal administration” of costs and chose instead to interpose private intermediaries between providers and the government (Jacobs 1993, chap. 7). Republicans Reagan and Bush addressed Medicare costs head on by establishing a government-directed Prospective Payment System for hospitals in 1983 and a Resource Based Relative Value Scale fee schedule for physicians in 1989, as well as new commissions to run these systems. Market enthusiasts sought to introduce choice and competition into the Medicaid program for the indigent and other covered groups by encouraging or requiring enrollment in managed care.

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Implementation of market theory soon revealed risks that led to government tinkering. States augmented their capacities to monitor the new managed care arrangements, as did federal oΩcials who stepped in to review and negotiate over state waiver requests and then keep tabs on those they approved. Government programs—whether of Republican or Democratic origin—are not self-implementing and self-repairing. Beyond the promise of new legislation, policy makers invested in a lengthening list of rationalizing measures to adjust to realities on the ground and to keep (or make) programs fit and functional. The technical, incremental, and amendatory character and mind-numbing administrative detail of these government “fixes” may elude public notice or defy philosophical pigeonholing, but that does not diminish their importance in keeping market forces in decent working order. The progression of government refinements of market-friendly policies leads, ironically, to more government, not less. As we have shown in earlier chapters, these “reforms” display a consistent life cycle: advocates proclaim the virtues of market forces and smaller government; they succeed in establishing new policies; complications develop as markets falter and fail; voters, providers, and interest groups demand redress; government steps in with new rules and standards that are far from minimal. The paradox is plain: strategies designed to unleash free markets by downsizing and containing governments end up seeking rescue from governments whose capacities have been denigrated and damaged. Repairing Market Damage

In theory, the engine of market transactions is voluntary exchange, but in practice those transactions sometimes have consequences that violate the volitions of participants, bystanders, or both. Then injured, threatened, or aggrieved parties turn to government for protection or redress. Few dispute that the federal Food and Drug Administration (FDA) should be vigilant in determining that drugs are safe and e∏ective; the fights are mainly SAFEGUARDING CONSUMER PRODUCTS.

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about how, and how fast, it ought to do so. As Americans exhibit a seemingly inexhaustible tendency to medicalize every conceivable health issue and as health care costs continue to rise faster than the general rate of inflation, government’s role steadily grows. Even when Republicans controlled the federal government, lawmakers insisted that government weigh the safety and eΩcacy of a burgeoning supply of new drugs, devices, vaccines, and surgical procedures. Policy makers, businesses, and consumers also look to government to collect and analyze evidence on the merits of medical practices, leading the federal Agency for Healthcare Research and Quality to develop “state of the art information” for the National Guidelines Clearinghouse (Landro 2005, p. d4). Rising rates of obesity thrust government at all levels into debates about regulating and informing the public about the caloric and fat content of food. The safety of consumer products has now reached the elevated status of a “right” that both political parties compete to secure by adding new government protections product by product. Revelations in the summer of 2000 that unsafe Firestone tires may have caused many fatal accidents led policy makers of diverse ideological persuasion to suspend “traditional antistatist sentiments” and demand new regulations and liability provisions (Moss 2002, pp. 319–320). Evidence that indoor tanning may cause skin cancer prompted at least twenty-nine states to craft laws and rules that limit or ban it for young teens (Saranow 2005, p. d1). When the diet drug ephedra appeared to be dangerous and the death of a professional athlete drew critical media attention, the Bush administration’s FDA moved quickly to ban it. When consumers chose to spend many billions of dollars on complementary and alternative medicine, Washington created a new unit within the National Institutes of Health to scrutinize its safety and merits (Ruggie 2004). Even as commercial transportation is deregulated, the reach of government intervention in automobile manufacturing grows in order to improve the safety of consumers. Washington now dictates to automakers that their products contain seat belts, driver and passenger air bags, side air bags, crash-resistant bumpers, systems that prevent SUVs from rolling over, and more. In health care, transpor-

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tation, and other arenas, government bolsters consumer confidence in the products and services private markets o∏er. Market reforms may implicate uninvolved third parties. For example, since deregulation, lower trucking costs have reaped savings for buyers and sellers, but other vehicles on America’s highways face greater risk from exhausted truckers and unsafe machinery. Improperly maintained railroad crossings increase the threats of moving trains to vehicular traΩc. As policy makers watched scathing media reports and weathered angry constituencies, talk of reregulating trucking and railroads revived. Research and news reports on the health dangers of mercury emissions from coal-burning power plants set o∏ bipartisan alarms. The Bush administration’s Environmental Protection Agency and members of both parties contemplated expanding government’s role by developing a tighter regulatory structure or establishing a “trading scheme” that would use market incentives (Lee 2003, p. a4). Neither political party lacked compassion for families who lost children to su∏ocation inside appliances and vehicles. In 1956, the federal government enacted the Refrigerator Safety Act, which required all units to open in response to fifteen pounds of pressure from within. In short order magnetic door seals largely solved that problem. Then the deaths of eleven children in car trunks in 1998 prompted calls for investigations and safety rules (Adams 2005, p. 69). Negative externalities are many and various, as are the ways and means by which government seeks to protect the third parties they threaten. Although government activism is readily apparent in the big developments that rivet public attention—No Child Left Behind and Medicare’s expansion to cover prescription drugs, for example—much of it escapes wider public debate because it emerges from the piecemeal accretion of discrete responses to concrete breakdowns or shortfalls in private markets. Philosophy and partisanship typically takes a backseat in such cases. Government expands but without a public philosophy or clear set of principles as

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debates over individual self-reliance and government intervention yield to nuts-and-bolts pragmatism. Compensating “Losers”

One way in which private interests advance those of the public, wrote Charles Schultze (1977), is by avoiding the need to indemnify individuals and groups that lose public resources or other advantages in fair market competition. EΩcient suppliers do what they must to stay afloat; ineΩcient ones can expect to go out of business. The decisions of many MCOs in Medicare’s Advantage option to drop hundred of thousands of seniors during the late 199 , which generated disruption and anger, ensued when managed care firms evaluated profitability and investors weighed alternative options and decided that insuring the aged no longer looked like good business. Likewise, after deregulation, airlines and carriers chose to curtail or end services to some cities and towns. Consumers and businessmen in these unhappy sites were inconvenienced and occasionally driven out of business, but markets “worked” as they balanced the costs and returns of goods and services. Society does not have infinite tolerance for remorseless market dynamics, however. The unfolding of promarket reforms often spurs e∏orts to insulate well-organized interests and groups from the costs of loss in the marketplace. When better (or shrewder or luckier) performers put competitors on the ropes, indignant journalists (insuΩciently schooled in market logic) warn of disruptions and risks to the innocent when government falls down on the job. Governments then respond to irate voters who lose “their” school or health provider and need help to find alternatives. Republicans and Democrats alike hear the pleas of average citizens and wellorganized supporters who paint themselves as aggrieved buyers and sellers, creditors and investors. Government regularly steps in to negotiate with providers on behalf of consumers, adjudicate among creditors, assess the fiscal (and other) health of the remaining competitors, and encode lessons learned in rules promulgated for the benefit of other health plans, schools, or carriers. Erosion in the quality of air travel fuelled a chorus of outrage

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and demands for government intervention. Consumer groups lobbied congressional representatives and protested in Washington, the media broadcast horror stories of lost luggage and passengers “trapped” for long hours on planes sitting on runways, and corrective legislation climbed the policy agenda. George W. Bush deplored the industry’s “egregious” abuses and summoned federal transportation oΩcials to work with airline executives to craft solutions. The workings of this deregulated market have put the protection and indemnification of passengers on the policy agenda for the foreseeable future and have sharply challenged the premise that markets can be left to their own devices. Health insurers in the individual and small group markets are adept at identifying “losers” who were, are, or might become sick, hence costly, enrollees. In hot pursuit of profits, insurers may deny coverage to consumers with preexisting medical conditions or other misfortunes that signal likely high use of care in the future. Political indignation led to the 1996 Health Insurance Portability and Accountability Act, which proscribes some o∏ensive practices and creates a limited legal and regulatory framework for monitoring and correction. Managed care creates losers of its own. Sometimes these are left to sink or swim. Teaching hospitals that MCOs think too expensive to include in their networks may fold or merge in order to command a market share large enough to let them bargain from strength. Beneficiaries dropped by MCOs that left the Medicare Plus Choice market because costs within it proved higher than expected may think twice before signing on with MCOs in today’s Medicare Advantage option. Some aggrieved parties turn to the policy process for insulation. For instance, consumers—perhaps spurred or joined by providers— seek laws that regulate the practices of managed care plans. Government often acquiesces, not because providers dominate and capture the policy process (though they are far from powerless within it), but rather because anxieties about access and quality span a wide swath of constituents who do not think that the public interest is well served by their individual and collective losses. The halting introduction and spread of market forces sets the ed-

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ucation arena apart from transportation and health care. The advent of markets in education is often disquieting not only because teachers and other providers of schooling fear displacement or replacement but also (indeed mainly) because a fairly broad and di∏use range of potential losers insist on pondering possible side e∏ects of the “panacea.” The aΔicted may include parents and children who cannot a∏ord the best, do not get into schools dubbed most desirable, or are at sea as to how and what to choose; and community groups worried that poorly managed choice may aggravate separation by class, race, and ethnicity. Visiting the full force of these risks on ambivalent communities might jeopardize choice severely. Contrary to the conventional wisdom of market advocates, government may be doing choice a favor by introducing it incrementally, cautiously, and with solicitous regard for the insulation of potential losers. The incremental and cautious expansion of choice may have prevented the backlash that beset MCOs. In sum, responding to both normal operations and breakdowns in markets expands the responsibilities of government and deepens the complexity of its tasks. The issue is not how to reduce government’s role but rather how to build the sophisticated capacities these expanding tasks demand. Honoring Exceptions Promoters of markets and individual autonomy often insist that government interventions, when absolutely necessary, should and can be kept to a minimum. Calls for exceptions to this rule and for improvements in government performance often render this counsel vacuous, however. Small government devotees stand squarely on principle—except when they happen to dislike the outcomes free markets produce and feel duty-bound to recruit government into repairing these “breakdowns.” These supposedly rare departures from orthodoxy in fact constitute a long parade of “exceptional” cases. Self-styled moral reformers have opened a large and growing breach in free market and antigovernment orthodoxy. Under the banner of civic virtue, these activists push for government controls

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on pornography, contraception, prostitution, consumption of alcohol and drugs, abortion, and other o∏ending practices (Morone 2003, 1990). Today’s moralists often ally politically with market utopians to press government to limit or outlaw alleged moral transgressions such as euthanasia and stem cell research. Some conservatives who denigrate government and laud individual liberty in other contexts find it expedient to make an exception for a key coalition partner. Social conservatives and their Republican allies practice a kind of philosophical exceptionalism. For instance, politically mobilized evangelicals fight to implant their favorite scriptural imperatives in public policy while dismissing the case for tighter public regulation of big business. Philosophical exceptionalism ranges far beyond this buzzing moral sphere. Business believes in marketplace competition, of course, but seldom objects to grabbing advantages through tari∏s, selective tax breaks, and the not so occasional public bailout when the weak ones fade. Physicians insist that government keep its paws o∏ the private practice of medicine once it has finished raising fees in Medicare and Medicaid and regulating MCOs into impotence. Consumers tremble at the prospect that government might ration their medical care, but seek government protection against alleged rationing by MCOs. Conservative legislators deplore government intrusions except when they entail job-creating and constituency-pleasing benefits such as loans for college, tax breaks for health insurance premiums and mortgage payments, and an array of initiatives that create jobs and stimulate local business—from opening military bases to highway improvements. Conservative politicians rarely reconcile the contradiction between the small government theorizing they espouse and the big government realism they practice. “As a fiscal conservative,” says Republican Senator James Inhofe (Okla.), “I believe in spending more in certain areas,” such as national defense and “infrastructure.” “Are these roads magically going to fix themselves?” wondered former Republican Senator Jim Talent (Mo.) (Hulse 2004, p. a16). The right deplores big government and the growth of Medicaid but calls for

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commissions and other delaying tactics to avoid cutting budgets that bring their states seventy-plus cents of federal funds on each Medicaid dollar. Former Congressman Henry Hyde (Republican from Illinois) was a bona fide conservative who supported the expansion of Medicaid eligibility because better care for poor pregnant women seemingly strengthened the case against Medicaid-funded abortions, which he abhorred. Utah Senate Republican Orrin Hatch staunchly supports tax cuts and smaller government but also considers children exceptionally deserving of government largesse. He therefore joined such unlikely allies as Edward Kennedy, the Clintons, and the Children’s Defense Fund to promote the State Children’s Health Insurance Program. In the 2000 election, George W. Bush promised to cut back government intervention, but, according to a conservative analyst, he has “gladly signed legislation to restrict telemarketing and email spam, and boasts at fund-raisers that he will lock up executives who abuse the public trust in their companies.” A researcher at the conservative Heritage Foundation grumbled that Bush had “not uttered the word ‘deregulation’ since 2001” and dismissed “this stu∏ about the deregulation president” as “a Howard Dean myth” (Sanger 2003, p. a15).

6 Pragmatic Policy in the Marketplace of Ideas

The collision of appeals to expand markets and shrink government with disjointed, issue-by-issue decisions to expand government’s roles and functions has rendered conservative public philosophy incoherent. Conservative political leaders, pundits, interest groups, and contributors denounce big government but promote government activism on behalf of worthy exceptions to their “principle.” This Jekyll and Hyde performance may yield short-term political gains: small government promoters boast of their political virtue, identify with worthy cases, and express outrage at “big government” for misserving the public. This political pattern might be called (with apologies to Mancur Olson) the illogic of disconnected action. An endless caravan of liberal rules and conservative exceptions fuels a steady growth of government, while those fueling it reassure the public that the era of big government is over. A cynical spin might attribute to this illogic a calculated logic all its own: insofar as talking up small government discredits and discourages (other) claimants and reduces competition for scarce resources, conservatives can better brandish their philosophical bona fides while seeking benefits for their prized exceptions. The result is a democratic disconnect between a national narrative trumpeting small government and steadily increasing expectations of government. Government expands pragmatically under pressure from constituents and political interests, but the public sector lacks the workers, money, and information to fulfill its enlarging duties. All too often government disappoints expectations, which encourages 121

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the rhetorical attack of the state bashers and deepens the democratic disconnect. A New Pragmatism In American policy debates of the last three decades, influential analysts and practitioners of policy have elevated markets from one social mechanism among others for making collective decisions to a “simple truth” somehow naturally endowed with awesome problem-solving properties and powers. One such highly touted virtue is the power of private interest (incentives, choice, and competition) to serve public ends, and to do so more e∏ectively and eΩciently than the blunt instruments of government authority to tax, spend, and regulate. This book demonstrates that this marketist project has powerfully shaped discussions of public policy through its critique (government is “the” problem) and its solution (markets are “the” answer). The promarket project has by no means conquered policy making (as our preceding chapters have shown), but its simplistic critique (government as “the” problem) and solution (markets as “the” answer) has in several policy spheres served more to confuse than to enlighten democratic deliberations. The big ideas of market-led transformations have given way to pragmatic reconsideration of the conditions (both practical and theoretical, but more the former than the latter) under which collaboration between state and market stands some reasonable chance of enhancing the quality of public policy (Barber 2002). The success of policy analysts in persuading policy makers to embrace market forces as the solution to the faltering of the public sector in such arenas as health care, education, and transportation has obscured several important propositions. The performance of markets depends crucially on the institutional framework that surrounds and shapes them. Institutional design is inevitably a political project. Pursuing that project entails a larger role for government in policy design. Even—perhaps especially—when markets are expected to do a better job than does government in delivering the benefits and reducing the costs of policy, the strategic question is

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not “either . . . or” (how to get more market forces and fewer government rules in the policy equation) but rather “both . . . and” (how to craft a public framework that will elicit the benefits of markets without permitting them to run amok). Although education, health, and transportation are highly distinct policy arenas, these spheres show striking parallels across the five stages of the policy reform cycle we explored in preceding chapters. In all three, value for money was suspect, market enthusiasts insisted that provider dominance was the problem, proposals proliferated for igniting the magic of market forces, policy makers warmed to these prescriptions and wrote them into law, unanticipated problems arose as competitive theory collided with institutional reality, critics accused market forces of harming both public and special interests, and political leaders responded by expanding government regulation of the private initiatives that had been advertised as alternatives to public commands and controls. Paradoxically, then, the roles and duties of government have grown precisely in the course, and as a consequence, of the unexpectedly complex quest to use markets to make public policies more e∏ective and eΩcient. As Steven Vogel (1996, p. 3) observes, deregulation becomes reregulation—“the reformulation of old rules and the creation of new ones.” The brute fact behind marketist visions is that the introduction of market forces into public policies will achieve desirable social outcomes only if they are managed by governments with capacity suΩcient to perform a widening range of complex tasks. Creating, canvassing, and correcting market “solutions” in health, education, and other arenas presupposes that government regulators have extensive data, management information systems to make sense of them, personnel adept at data analysis and timely intervention, budgets adequate to support these resources, and, therefore, recognition among political leaders that decently functioning market forces in public services require a formidable array of government tools. Such realism seems to be in short supply: the managerial means noted here (for instance, heavy investment in management information systems that enable state oΩcials to monitor the per-

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formance of health plans and schools) have few powerful supporters and little if any constituency among the public. Indeed the idea of investing in government to keep market reforms on track defies the vision that policy makers embraced precisely in hopes of shrinking government and reducing its costs, complexities, and rules. New public management geared to the objectives of market forces yields to something newer, namely, “management by objection”: market forces unfurl, crises and scandals ensue, competitors collapse, headlines scream, heads roll, band-aids adhere, and the cycle resumes, implicitly tolerated as a price worth paying for the best and only alternative to leadership by a discredited and distrusted state. The policy cycle thus degenerates into a vicious circle of crossed messages. To market enthusiasts, the steady enlargement of governmental roles as corrector and rationalizer of market reforms gone wrong proves only that the right (government-free) stratagem has not been tested (doubtless because power-grabbing public oΩcials and provider monopolies refuse to run the risk) and that they therefore ought to redouble their e∏orts. We have shown, however, that policy makers (including conservatives) selectively retained certain government roles or reintroduced them in pragmatic response to promarket reforms that persistently failed to meet expectations and disappointed citizens. The real challenge, notes Donald Kettl (1993, p. 38) is not to choose between market and government but rather “how to strike the best balance between them” and then to manage the ensuing tensions. Adam Smith understood that markets valiantly serve important public purposes but that they are means, not ends in themselves, and are best deployed by a public philosophy that is curious and candid about the connections between public purposes and institutional capacities. Markets both empower citizens and subject them to risk. Markets sometimes nudge public policies toward the common good and sometimes add new frustrations to troubled policies. In good American pragmatic fashion, government should aim to discern the right balance for the policy arenas in question, a balance between protecting citizens and encouraging market forces, achievable only by enfolding market mechanisms within cogent public rules and serviceable managerial structures.

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The Mixed Legacy of Market Reforms Market reforms have delivered good results when government had ill advisedly raised barriers to entry and the basic good or service o∏ered to consumers is relatively easy to evaluate in terms of price. Perhaps the most dramatic achievement of promarket reforms is the sharp decline in airline ticket prices following deregulation. In routine and simple cases such as laundry and food services, the government has used competitive contracts to vendors who run large operations and has generated savings. The public ends and means that markets have been asked to serve are seldom so routine and simple, however. In arena after arena— education, health care, transportation, energy, and more—market reforms have fallen short of the improved performance and eΩciency initially promised. This disappointing legacy suggests that the key reform challenge is not how to bifurcate government from market but rather how to commingle and manage them. Our investigation of promarket reforms leaves us with three overarching conclusions and several more narrowly focused lessons, which we elaborate below. The first broad conclusion is that a return to the realism of Adam Smith and of other economic and social pragmatists is long overdue. Such pragmatism is a venerable U.S. policy tradition. Because market failures suggest that “Adam Smith’s invisible hand is missing a finger or two,” policymakers have enacted a long list of “public risk management” programs—deposit insurance, federally insured mortgages, federal disaster relief, and many more. Political leaders thereby demonstrate “a remarkable willingness to suspend their free-market principles . . . as if certain risks simply fell outside the boundaries of laissez-faire philosophy” (Moss 2002, pp. 10, 298, 319). In practice, pragmatism has emerged de facto as policy makers learn that launching and steering market forces is harder than supposed and that e∏ective public policy means viewing government and markets as complementary, not exclusive sectors. Market reforms have often sent political leaders and civil servants in obscure agencies scrambling to forestall market failures, repair the breakdown of services that the public expects, and respond to the complaints of concerned constituents. Institutional realism should be

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introduced earlier and more prominently in discussions of policy reforms. Our second general conclusion is that pressure from voters and stakeholders is an unavoidable ingredient in sustainable and e∏ective policy, not an extraneous distraction that should be pushed beyond the pale of sound policy logic. The development of policy in health care, education, and transportation discloses the central importance of negotiation and compromise among competing values and interests. Market proposals that triggered backlashes among voters and stakeholders—for instance, the reactions against managed care in health care and choice in education—sent policy makers fleeing to safer political ground. In an open society with democratic institutions, elected oΩceholders and government oΩcials do and should respond to strong and sustained messages from voters and strategically important supporters. Because politics and markets are intimately connected (Lindblom 1977), the disengagement of market reforms from institutional dynamics, public sentiment, and political responsiveness has produced a public philosophy that lacks coherence. Third, the uncritical promotion of markets as vehicles of e∏ectiveness and eΩciency served the conservative agenda well, but also carried a considerable cost: a growing disconnect between public rhetoric and political practice that blocked a balanced assessment of market forces in public policy. As we and others have shown (e.g., Hacker and Pierson 2005), conservative groups regularly championed political messages that aΩrmed the virtue of smaller government but also routinely claimed exceptions to the general rule in order to use government resources and authority to win elections and reward contributors, lobbyists, and loyal party activists. Farm groups tout their conservative convictions while clinging to public subsidies. Business associations insist that small government is hardwired into the national creed but lobby hard for public “incentives” (such as the generous payments extended to managed care organizations [MCOs] and suppliers of pharmaceuticals in Medicare’s new Part D). Commercial insurers denounce big government but expect government to help them cover the costs they incurred from terror-

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ist attacks. Nor do organizations defending disfavored groups pause to ponder government’s larger roles and purposes when they can hit specific targets, win a program or appropriation, and move on. More groups cite more exceptions, win more public commitments, and fuel more growth of government, leaving oΩcial ideology undisturbed all the while. When politics is premised on a principled denial of the obvious, government grows without vision, purpose, or a due concern for its capacities to serve the public. OΩcials manage crises on the fly and tackle new, tricky tasks for which they are often unprepared and ill equipped. Managerial capital in such boilerplate categories as personnel, not to mention the development of specialized, welltrained managers and oΩcials equipped with thoughtfully articulated operating procures and advanced information technologies, lags behind policy needs because ideology forbids their e∏ective translation into political demand. As government thus loses ground, the public’s trust in government ebbs farther, and the era’s reigning non sequiter—if government is so bad, markets must be better— begins to look axiomatic. Our investigations of education, health care, and transportation confirm that the performance of markets depends crucially on the institutional framework that surrounds and shapes them. As Robert Lane (1991) remarked, an economic system cannot be understood apart from “the social system of which it is a part”—including cultural forces and complex formal organizations within which market players and government oΩcials pursue their projects (p. 599). Analysts as di∏erent as economist Alain Enthoven (1988) and political scientist James Morone (1993) have long argued that the larger the role of market forces in public policies, the larger and more sophisticated the role of government must be. Pragmatism Regained Promarket reforms have provoked a pragmatic reaction that expanded government roles in generating public goods, sustaining market allocations of resources, and o∏setting damages and risks to individuals. A lingering question is whether this pragmatism stands

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at odds with basic American values of individualism and antistatism. After all, America’s unique history has long been associated with a culture that embraces minimal government and maximal individual liberty (Hartz 1955). In the early twenty-first century, American political culture continues to constitute a complex amalgam of philosophical conservatism and pragmatic liberalism (Free and Cantril 1967; Jacobs and Shapiro 1999; Page and Jacobs 2008). Generations of public opinion research have shown that Americans consistently oppose government measures to limit business profits, confiscate wealth, and implement extensive redistribution. Abstract questions about raising taxes and expanding government regularly produce majorities of opponents. Even as Americans remain uneasy about government in the abstract, however, polls reveal that they favor specific government programs to protect individuals from threats. Public opinion surveys show, for example, that most Americans welcome government programs that o∏er minimum protections against low income and illness in old age, safeguard the environment, and ensure the safety of consumer products (Page and Shapiro 1992). Bennett and Bennett (1990, chap. 1) find “a history of ambivalence” in America’s quest to come to terms with big government. Antagonism over the state’s tendency to thrust itself into too many issues coexists with “growing expectations of what government should be doing.” Indeed the citizenry’s attachment to public programs is “so elemental” that in the Reagan years (a hard test case) “even an immensely popular president [who] pledged to trim the size of the national establishment was forced to concede to a nation that had come to terms with big government” (Bennett and Bennett 1990, chap. 1, pp. 108, 134; also see Page and Shapiro 1992; Page and Jacobs 2008). Surveys of public sentiment that probe beneath the surface, asking not merely how government and its activities are broadly perceived, but also what respondents want it to do concretely, find substantial ambiguity. Majorities favor cuts in government spending in the abstract but want government to spend more in, and continue

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to take responsibility for, a long list of policy sectors (for instance, the environment, health care, and housing) (Page and Shapiro 1992; Jacobs and Shapiro 1999; Suleiman 2002, pp. 67–71). Although nowadays big government “may make all Americans queasy some of the time, it . . . makes only a tiny fragment nervous all of the time” (Bennett and Bennett 1990, p. 144). As the years of the Bush presidency show, however, this is not the whole story. A tiny nervous fragment that exploits highly intense preferences, big bankrolls, avidly mobilized and well-organized supporters, and astute media strategies can draw American politics sharply o∏ center (Hacker and Pierson 2005; Fiorina 2005). The discombobulation persists until the antistatist agenda bears fruit sour enough to disappoint the electorate’s expectations and trigger a shift back toward pragmatic middle ground. Reagan, for example, sought to deregulate environmental policy but ceased when the push generated “a strong, highly visible backlash brought about by clashes with organized environmental groups and may even have precipitated the resurgence of support for the environment among the public” (Prasad 2006, p. 80). This of course is pretty much the pattern we have sketched in this book in the health, education and transportation arenas. The evolution of American culture is inseparable from the growing connection of individuals to government (Campbell 2003). Just over half of all Americans—52.6 percent—now receive significant income from government programs, a sharp increase from 28.3 percent in 1950 (Trumbull 2007). Storms over whether the federal government should be involved in health care, education, retirement, housing, employment assistance, protection for consumers, and many other policy arenas have abated. Scope-of-government disputes now generally center more on methods than on principles. Even as Richard Nixon introduced HMOs into health care, he locked in recurrent increases in Social Security to o∏set the rising cost of living, created the Environmental Protection Agency, and proposed both national health insurance and a negative income tax. Successor Republican presidents followed in his expansionary footsteps. Ronald Reagan imposed central governmental cost

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controls on hospital payments for Medicare, and George H. W. Bush revised and tightened federal controls on Medicare payments to physicians. George W. Bush proposed and won enactment of a long-sought addition of prescription drug coverage to Medicare and gave the federal government new powers to set and enforce performance standards in K–12 education in the No Child Left Behind law, and doubled the federal government’s financial support. When faced with concrete threats (Hacker 2004), most Americans—as demonstrated in countless polls—expect government to intervene even if they remain uneasy in the abstract about the e∏ectiveness and trustworthiness of government. When MCOs limit the powers of subscribers to choose their providers (and thus perhaps their treatment), the public rallies for patient bills of rights that have found favor in red and blue states alike. As the proportion of Americans covered by employer-based health insurance declines and many seniors are increasingly hard pressed to meet the rising cost of the (many) prescription drugs they take, both political parties see the case for insuring more children by means of the State Children’s Health Insurance Program (SCHIP), expanding Medicaid coverage, and adding drug benefits to Medicare. When airlines suddenly go out of business, face strikes, or otherwise inconvenience travelers, citizens expect government to look into the matter, not simply defer to a self-regulating competitive marketplace. When acts of nature such as hurricanes ravage coastal regions, the public wants government to respond quickly and well and is outraged if it dithers. Across an array of arenas, Americans expect government to sustain and (if necessary) restore “normalcy.” The philosophical tradition of minimal government endures, but it has become a subordinate chord in the realities of American public life. The public may support in principle the general goals of promarket reformers, but it expects policy makers to take corrective action if valued services are disrupted and its expectations are not satisfied. Under the spell of the magic of the marketplace, reformers too often forgot that in public a∏airs “the most sublime speculation of

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the contemplative philosopher can scarce compensate the neglect of the smallest active duty” (Adam Smith quoted in Buchan 2006, pp. 39–40). By substituting invisible hands for hearts and heads— the more-vital organs of sound public policy—marketists temporarily assuaged one species of public malaise by replacing it with another. Had these reforms been less bent on deifying markets and vilifying government, thus rendering democratic deliberations more befuddled and disconnected than before (Jacobs and Skocpol 2005), they might have charted creative collaborations and partnerships between state and market. But American policy is forever a maddening mix of continuity and change. One can look at the fruits of these experiments, learn from them, and try again as events conspire to clear new space for pragmatism in public policy.

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Warsh, David. 2006. Knowledge and the Wealth of Nations: A Story of Economic Discovery. New York: W. W. Norton. Wells, Amy Stuart, ed. 2002. Where Charter School Policy Fails: The Problems of Accountability and Equity. New York: Teachers College Press. Wilson, James Q., ed. 1980. The Politics of Regulation. New York: Basic Books. Winerip, Michael. 2003. “What a Voucher Study Truly Showed, and Why.” New York Times, May 7, p. a27. Winston, Cli∏ord, and Chad Shirley. 1998. Alternate Route: Toward EΩcient Urban Transportation. Washington, D.C.: Brookings Institution Press. Witte, John. 1996. “Who Benefits from the Milwaukee Choice Program?” In Who Choses? Who Loses? Culture, Institutions, and the Unequal E∏ects of School Choice, ed. Bruce Fuller and Richard Elmore, pp. 118–137. New York: Teachers College Press. Zimmerman, Peter. 1999. “Not So Big.” Government Executive, March 1, p. 6. www.govexec.com / features / 0399 / 0399s2.htm (accessed June 13, 2005).

Index

Page numbers for definitions are in italics. adverse selection, 36, 40 African Americans: NCLB disparities in achievement, 88; school choice, 41, 53, 59 Agency for Healthcare Research and Quality, 114 Airline Deregulation Act of 1978, 54 airlines: anti-competitive behavior, 35, 47, 68, 70, 71, 85; Civil Aeronautics Board (CAB), 45, 47, 54; consumer access, 1, 34, 38, 68, 109–10, 125; defining demand, 46; distributive politics, 41–42; environmental impact, 69; poor performance, 85, 106, 109, 130; regulation, 54–55, 85, 106, 116–17, 130; safety, 68–69; travelers’ bill of rights, 70; wage decline, 69–70, 85 allocation function, 35–36; deterring fraud, 104–5; in education, 86–90; government growth, 98–99, 101–3, 128–31; in health care, 39–40, 41, 90–95; in transportation, 68, 85–86 Alum Rock Voucher, 60–61 American Airlines, 70 American Association for Labor Legislation, 18

American Enterprise Institute, 112 American Medical Association, 61–62. See also Medicare; managed care organizations (MCOs) / health maintenance organizations (HMOs) anti-competitive behavior, 34, 47, 68, 70, 71, 85 antistatists, 5–8, 21, 128–29 Armey, Richard K., 1 Arrow’s impossibility theorem, 22–23 Barr, Nicholas, 36 Bentham, Jeremy, 15 Blue Cross, 52 Bogdanich, Walt, 69 Boulding, Kenneth, 18 Boyer, Kenneth, 72 Breyer, Stephen, 47 Buchanan, James, 21, 29 Bush, George H. W.: government regulation, 32, 130; Medicare, 130 Bush, George W.: airline regulation, 71, 117; consumer safety, 3, 6, 114, 115, 117; corporate oversight, 6, 120; environment, 115; government spending, 4, 130; health care, 5, 32, 112, 130; industry reg-

145

146 Bush, George W. (continued) ulations, 3–5, 71, 115, 120; Medicare Modernization Act, 112, 130; No Child Left Behind (NCLB), 5, 57, 73–74, 80–81, 88, 111–12, 130; school choice, 5, 57, 73–74, 75, 80–81, 88, 111–12; swelling of government, 4, 129 Business Week, 7 California: charter schools, 60–61, 82, 87; emissions limits, 6; energy market, 7, 104–5, 107–8 Cannon, Howard, 55 capture theory, 23, 24, 25–26, 28, 30 carbon dioxide, 6 Carter, Jimmy, 47, 54, 55, 63 Catholics: school choice, 41, 47, 49, 59, 77, 79; schools, 47, 59, 77, 79 Cato Institute, 98 Chamber of Commerce, Michigan, 41 charter schools: and achievement, 74–75, 89; bankruptcy, 38, 82; government role, 61, 87, 111; growth, 46, 56, 57–58; as niche market, 43, 58–59; racial disparities, 80 Children’s Defense Fund, 120 Chubb, John, 48 Civil Aeronautics Board (CAB), 45, 47, 54 civil servants, 51, 99–100, 112, 125 Cleveland Public School District, 42, 43, 55–58, 87; Scholarship and Tutoring Program, 55–58, 87; Zelman v. Simmons-Harris, 57, 87 Clinton, Bill: cost of regulation, 47, 64, 97; federal spending, 4, 32, 64, 95, 97, 98, 120; health care reform, 32, 64, 95, 120; managed care, 32, 64, 95; State Children’s Health Insurance Program (SCHIP), 120

INDEX

Cold War, 26, 99, 100, 101–2 Coleman Report, 74 collectivist, 16, 20, 25 Commons, John R., 18 communism, 26 Congressional Research Service, 88 conservatives: European, 26 conservatives, U.S.: government growth under, 4–9, 96–100, 100–118, 118–20, 121; market dogma, 1–2, 21, 29–30, 95, 124, 126–27; philosophical exceptionalism, 118–20, 121; regulation, 46–47, 65–66, 96–97, 121; school choice, 48, 49, 73–74, 81–82; and Adam Smith, 10, 14, 16 corn laws, 12, 22 Council of Economic Advisors (CEA), 20, 54 Council on Wage and Price Stability, 54 Coverdell Education Savings Accounts, 56 Dean, Howard, 120 defense spending, 8, 11–12, 13–14, 35, 98–100, 101–2, 119 Delta Air Lines, 85 Detroit, 80 Dickman, Anneliese M., 78 distribution function, 21, 29–30, 35, 36 dogmatic utopianism, 10–11, 17, 21–34, 119 Downs, Anthony, 21, 22, 24 economists: academic, 17–18; classical political, 10, 11–16, 35; Keynesian, 18, 20; market utopian (free market school), 10–11, 21–34, 119 (see also dogmatic utopianism); neoclassical, 19; New Economists, 20; pragmatic realist, 11, 16–17, 19, 21 Educational Testing Service, 75

147

INDEX

electric utilities: impact of regulatory commissions, 27; rate hikes, 2, 3, 7, 38, 105, 107 Ellwood, Paul, 51–52 Elmore, Richard, 81, 82 Employment Act of 1946, 20 Engler, John, 41 Enron, 7, 38, 83, 104–5 Enthoven, Alain, 127 Environmental Protection Agency (EPA), 115, 129 ephedra, 6, 114 euthanasia, 119 evangelicals, 49, 119 Executive OΩce of the President, 20 Federal Aviation Administration (FAA), 54, 71, 86 Federal Drug Administration (FDA), 113–14 Federal Highway Administration, 54 Federal Railroad Administration, 6, 86 Federal Register, 96–97 Federal Reserve, 4, 5 Federal Trade Commission, 54 Ford, Gerald, 54, 55 France, 98 free market school, five pathologies, 22–24. See also under economists Friedman, Milton: failure of government, 21, 22; government role in setting rules of the game, 104, 105; on ICC, 23; regulation, 21–24; vouchers, 48 Fuller, Bruce, 82 General Services Administration (GSA), 100 Gingrich, Newt, 4, 5, 7 Gordon, Kermit, 20 government growth, 4–9, 96–100, 100–118, 118–20, 121

Great Britain, 12, 16, 79 Great Society, 53, 95 Greenspan, Alan: smaller government, 4; market devotee, 7 Harvard-Pilgrim Health Plan, 84, 91 Hatch, Orrin, 120 Hayek, Friedrich von, 20 health: as basic right, 40; as common property resource, 35–36, 40, 102; precondition for individual in market society, 41, 102 Health Insurance Plan of New Jersey, 84 Health Insurance Portability and Accountability Act (HIPAA), 117 health maintenance organizations. See managed care organizations (MCOs) / health maintenance organizations (HMOs) Heckman, James, 103 Heller, Walter, 20 Henig, Je∏, 49–50, 89 Heritage Foundation, 58, 120 Hess, Fredrick, 43, 60, 80 Hickok, Eugene, 87 HMOs. See managed care organizations (MCOs) / health maintenance organizations (HMOs) Holmes, Stephen, 105 Hoover, Herbert, 18 Hume, David, 8, 14–15 Hurricane Katrina, 38, 130 Hyde, Henry, 120 Inhofe, James, 119 Individual Retirement Accounts (IRAs), 99 Interstate Commerce Commission (ICC), 23, 45, 47, 71–72, 86 Jencks, Christopher, 48 Jet Blue, 70 Johnson, Lyndon, 29, 51, 95, 112

148 Kahn, Alfred, 54 Kaiser Permanente Health Plan, 52, 59 Kaufman, Herbert, 28 Kennedy, Edward: airline deregulation, 53, 55; HMOs, 62; State Children’s Health Insurance Program, 120 Keynes, John Maynard, 18 Keynesianism, 18, 20, 21, 29, 31, 36 Koopmans, Tjalling, 19 Krueger, Alan, 74 Kuznets, Simon, 19 Lane, Robert, 127 law of exceptions, 118–20 Light, Paul, 99, 100 Lowi, Theodore: distributive politics, 28, 41 Maine, 6 managed care organizations (MCOs) / health maintenance organizations (HMOs): and American Medical Association (AMA), 61–62; financial solvency, 83–84, 91–92; growth, 51–53, 61–66; independent practice associations (IPA), 59, 62; and Medicaid, 51–52, 61–62, 63–64, 112, 119; and Medicare, 5, 33, 51–52, 61–62, 63, 64–65, 112, 115, 126; preferred provider organization (PPO), 62; professional autonomy, 41, 84; regulation, 2, 4, 40, 41, 43–44, 90–94, 96–97; under serving subscribers, 61, 63, 83 March, James, 28 markets: generation of private wealth, 8, 10, 11–14, 17, 19; social organization, 8, 10–37 market utopianism, 10–11, 21–34, 119. See also dogmatic utopianism

INDEX

Marxism, 26 Mathematica, 74 MCOs. See managed care organizations (MCOs) / health maintenance organizations (HMOs) Medicaid: filling market gaps, 33, 40, 51, 130; and MCOs, 52, 61–62, 63–64, 112, 119; philosophical exceptionalism, 119–20; rising prices, 51–53, 63–64 Medicare: Advantage Option, 116, 117; American Medical Association, 61–62; filling market gaps, 33, 40, 51, 130; and MCOs, 5, 33, 52–53, 61–62, 63, 64–65, 112, 115, 126; philosophical exceptionalism, 119; prescription drug benefit, 5, 33, 65, 112, 115, 130; prospective payment system (PPS), 112 Medicare Modernization Act, 65, 112. See also Medicare: prescription drug benefit Medicare Part D, 126 Medicare Plus Choice, 64–65, 117 Merton, Robert, 77 Meyers, David, 74 Michigan: charter schools, 42, 86–87; school choice, 41–42, 86–87 Microsoft, 6, 108 Mill, John Stuart, 15 Milwaukee Parental Choice Program: achievement, 75; coalitions, 41–42, 43; market malfunction, 58, 76; racial tensions, 59; religious schools, 55–56, 58, 60 Minnesota, 56, 61, 82, 87 Missouri, 6 Moe, Terry, 48 Montana, 7, 105 Moore, Stephen, 100 moral hazard, 35–36, 40, 45, 52

149

INDEX

Morone, James, 127 Motor Carrier Act, 54 Moynihan, Daniel Patrick, 29 Murray, Alan, 108, 112 Murray, Charles, 73, 82 Musgrave, Richard, 35 Nader, Ralph, 47 Nathan, Robert, 19 National Conference of State Legislatures, 98 National Guidelines Clearinghouse, 114 National Institutes of Health (NIH), 114 National Taxpayers Union, 5 neoclassical theory, 19 New Deal, 14, 18 New Democrats, 65 New England, 7, 84, 105 New Jersey, 84, 91 new public management, 31, 124 New York Times, 4, 69, 74, 85, 86, 109 New Zealand, 79 Nixon, Richard: conservative realism, 21, 95; HMOs, 51–53, 61–62, 106, 129; public policy shift, 21, 30–31; War on Poverty, 95 No Child Left Behind (NCLB): adequate yearly progress (AYP), 57; class size, 88; desegregation, 74, 81, 88; federalism, 73, 81–82, 88, 111–12, 130; implementation challenges, 5, 73–74, 76; tutorial services, 57, 87 OΩce of Management and Budget (OMB), 97 Oklahoma, 104 Olson, Mancur, 121 Organization for Economic Cooperation and Development (OECD), 98

partnerships: state and market, 10–15, 19–20, 27–28, 33, 40, 94, 125, 131 patient bill of rights, 90 Penn Central, 45 Peterson, Paul, 74 philosophical exceptionalism, 118–120 Pigou, Arthur, 35 Polanyi, Karl, 16 pornography, 109, 119 Portugal, 13 pragmatic realism: dissenting minority opinion, 11, 21, 34–37, 86, 123–24, 125–26; public-private partnership, 17–19, 35–36; Adam Smith, 11–13, 16 prospective payment system (PPS): resource based relative value scale (RBRVS), 112 public choice theory, 27 Public Company Accounting Oversight Board, 104 public goods: allocation, 9, 10, 19, 31, 35, 127; education, 86, 102, 103; government growth, 101–3, 121–22; health, 40, 102; national defense, 35, 101–2; political economists, 10–12, 13–14, 31; transportation, 35, 68, 101, 102 Reagan, Ronald, 98; deregulation, 55, 97, 129; government as problem, 32, 95, 96, 128; HMOs, 64; markets, 32, 95; Medicare, 112, 130; vouchers, 61 Refrigerator Safety Act, 115 Rosenberg, Nathan, 13 Safire, William, 74 Samuelson, Paul, 19 San Antonio, 80 San Jose, 60 Sarbanes-Oxley Act, 104

150 Schiavo, Terry, 109 school choice: African Americans, 41, 53, 59, 88; Alum Rock Voucher, 60–61; coalitions, 58–61; Hawthorn e∏ects, 50; limited availability, 42–43, 58; overselling impact, 43, 49–51, 58; racial disparities in achievement, 88; racial tensions, 41, 47–48, 59; religion, 42, 47–48, 55–56, 57, 59–60; Supreme Court (Zelman v. Simmons-Harris), 57, 87 school choice, charter schools: achievement, 74–75, 89; bankruptcy, 38, 82; government role, 61, 87, 111; growth, 46, 56, 57–58; as niche market, 43, 58–59; racial disparities, 80 school choice, vouchers: capped enrollment, 42–43, 58; Milton Friedman, 48; as panacea, 48–49; political battles, 59–61; religious schools, 55–56, 57, 87; Zelman v. Simmons-Harris, 57, 87 Schultze, Charles: indemnify losers, 116; public use of private interest, 31 Scott, W. Richard, 28 Securities and Exchange Commission (SEC), 104 Selznick, Phillip, 28 Simon, Herbert, 27 Smith, Adam: conservatism, 10, 14, 16; laissez faire principles, 12; pragmatism, 11–13, 16; public goods, 11–12, 13–14, 35; rules of the game, 10, 12–13. See also Wealth of Nations Social Security, 18, 31, 99, 129 South Wales, 79 Southwest Airlines, 70 Spain, 13 Spellings, Margaret, 88

INDEX

Spitzer, Eliot, 6, 104 stabilization function, 20, 35, 36 Staggers Rail Act, 54, 71 State Children’s Health Insurance Program (SCHIP), 33, 120, 130 stem cell research, 119 Stigler, George, 21, 22, 23, 25, 27, 49 Sunstein, Cass R., 105 Supreme Court: CAB, 47; segregated schools, 47; vouchers, 57, 87; Zelman v Simmons-Harris, 57, 87 Surface Transportation Board, 54, 71, 86 Talent, James, 119 Teamsters, 55 Telecommunications Act of 1996, 109 Tennessee Valley Authority, 28 Thompson, Tommy, 59 Tobin, James, 20 totalitarianism, 24, 25, 26 Transportation Quarterly, 71 travelers’ bill of rights, 70. See also airlines Tullock, Gordon, 21, 26 Tuohy, Carolyn, 39 Tyco International, 104 UnitedHealth, 84 U.S. Catholic Conference, 77 U.S. Department of Defense, 99 U.S. Department of Education, 42, 75, 81, 87 U.S. Department of Justice, 54, 70, 86, 99 U.S. Department of Labor, 99, 100 U.S. Department of Transportation, 54, 99; enforcement of safety rules, 6 U.S. Department of Treasury, 64, 99 U.S. Forest Service, 28

151

INDEX

U.S. Health and Human Services (HHS), 100 U.S. Justice Department, Microsoft settlement, 6 Utah, 82, 88, 120 Van Dunk, Emily, 78 vouchers: capped enrollment, 42–43, 58; Milton Friedman, 48; as panacea, 48–49; political battles, 59–61; religious

schools, 55–56, 57, 87; Zelman v. Simmons-Harris, 57, 87 Wall Street Journal, 73, 98 War on Poverty, 29, 95 Wealth of Nations, 12–14 West Germany, 21 Williams, Polly, 59 Wilson, James Q., 28, 29 Wisconsin, 42, 58, 59, 76 Worldcom, 104