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When government does things better than private enterprise

The government's scale and ability to look beyond narrow self-interest make its involvement in many programs the smart choice. Medicare is a prime example.

Michael Hiltzik

The Economy Hub

8:39 PM EST, December 11, 2012

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Budget discussions in Washington these days always seem to deteriorate into arguments over what government is supposed to do for its citizens, and what should be left aside. Is the reach of government strictly defined in the Constitution? Or tradition? And, if so, whose "tradition"?

Here's a rule of thumb to consider for when government should take a role in providing a service: When it's cheaper.

That doesn't mean cheaper merely in a narrow sense, such as cheaper at the cash register, or for some people rather than others. Government can always achieve that end simply by subsidizing things by fiat. Congress could cut the cost of tablet computers simply by deciding to subsidize every household's purchase by, say, $50 or $100. The same thing goes for dishwashers, or fine crystal.

Rather, it means cheaper for the economy or society at large. And that points us to the idiocy of an unaccountably popular proposal aired in connection with Washington's "fiscal cliff" cabaret: raising the eligibility age for Medicare.

There seems to be a consensus developing that raising this age to 66 or 67, from today's 65, would be a fairly painless way of demonstrating our commitment to fiscal responsibility. You're all living longer, so what's the big deal? — you'll have plenty of time to enjoy the fruits of Medicare, if you're a little more patient.

Best of all, the change would save the federal budget $5.7 billion in 2014 alone.

Calculations such as these typically are made to look good by considering only one side of the ledger, the side showing the cost to government accounts (often only the short-term cost). This is a handy trick that can be applied to almost any situation, the way the ShamWow can mop up any spill.

Has the government spent too much on maintaining roads and bridges? Spend less! This does wonders for the federal budget. Of course, it does horrors for the budgets of everyone else.

What's on the other side of the Medicare-age ledger? Plenty. As the Kaiser Family Foundation calculated last year, health insurance for 5 million people would be affected for at least a year. Of that group, 42% would stay on their employers' insurance (including some as retirees), 38% would buy private insurance through the exchanges set up under the 2010 healthcare reform act, and 20% would land on Medicaid.

Two-thirds would pay more for insurance than they would have paid under Medicare, for an aggregate net increase in out-of-pocket costs of $3.7 billion. The shift of more-elderly members into the commercial insurance pool would drive up premiums for the non-elderly by an average of $141 per enrollee. Costs to employers of keeping these workers in their plans would rise by $4.5 billion a year, and Medicaid costs for states would rise by $700 million.

By the way, the higher costs would hit middle-class seniors especially hard.

Put it all together, as health economist Austin Frakt did, and you find that saving that $5.7 billion on the federal books would cost society as a whole $11.4 billion. To paraphrase Jerry Seinfeld, this is how you save money in the Bizarro world. It does nothing to improve Medicare. It does nothing to hold down healthcare costs. It does nothing to improve the health of the target population.

House Budget Committee Chairman Paul D. Ryan (R-Wis.), who recently ran and lost a race for a certain high government post, was a master of this bookkeeping with one eye squinted shut. Ryan's plan for Medicare involved simply shifting healthcare costs from the government program to private insurers and sticking seniors with more of the costs.

The bipartisan Congressional Budget Office forecast that these would be one-third higher by 2022 than they would be under Medicare. Net reduction in healthcare spending, economy-wide? Less than none.

Ryan is not the only politician playing with this stacked deck. In 2010, New Jersey Gov. Chris Christie killed a project to build two new train tunnels to carry passengers between his state and Manhattan, where hundreds of thousands of his constituents work. Christie's argument was that the cost was too much for New Jersey to bear. (Though the federal government would cover most of it.)

But Christie simply ignored the value of the benefits provided by the project — billions of dollars in new economic development, an increase in rail ridership and a gain in air quality thanks to reduced auto traffic, and reductions in travel delays for commuters.

About $13 billion would be pumped into the local economy via wages and increased business activity during the construction phase alone. Christie, whose blustery avoirdupois is supposedly so appealing it may float him to a presidential run, didn't care to do the arithmetic that showed the project was a bargain, not a burden. Such are the limitations of bluster.

The broad economic view has undergirded some of the most important government projects in our history.

Hoover Dam could not have been justified as a federal project based on the value of its hydroelectric generation alone; Southern California Edison was willing to erect a private dam on the Colorado River to produce power. It could not have been justified to control flooding of the Imperial Valley alone; the cost of a low dam for that purpose could have been borne by downstream growers.

But private enterprise would not have conceived of or funded a project that served those two goals together, even though together they cost less than they would separately. Only the government could manage the multipurpose structure we have today, which has helped fuel population growth in the seven states of the Colorado basin by more than 40 million people since 1930. In broad economic terms, the government seized the cheaper option.

Sometimes the "cheaper" option means one that wouldn't exist at all without government involvement. That's the case with the Internet, which grew out of a government project to allow the Babel of private, commercial networking technologies to communicate with one another.

Two leading companies in that space, AT&T and IBM, were offered opportunities to find the solution; both were so intent on preserving their narrow economic interests that they couldn't see the point of a project aimed at serving broader public interests. Where would either be today if the government's Advanced Research Projects Agency hadn't gone ahead on its own? Where would we be?

Health and welfare programs are prime candidates for government participation, simply because concerted action in those areas yields large dividends. That was one rationale for Social Security. As its chief draftsman, Edwin Witte of the University of Wisconsin, told Congress in 1935, seniors were destined to become a larger proportion of the population, with a growing need of support.

Whether society chose to manage it through pensions or some other way, he declared in speaking up for shared intergenerational responsibility, "there is no way of escaping that cost."

Any effort to do so without exploiting the government's immense economies of scale only takes money out of the pockets of beneficiaries. This stark truth was evident during President George W. Bush's ridiculous campaign to privatize Social Security, an idea that still shows a Rasputinesque ability to rise from the dead.

At that time, the CBO calculated how the administrative costs of individual private accounts would affect retirement assets. It found that administrative fees charged for private accounts would pare as much as 30% from benefits at retirement. Social Security's pooled administrative costs? Two percent.

Think of that when you hear that to save Medicare and Social Security we have to raise costs for everyone. It's the definition of being penny wise and pathetically foolish.

Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at mhiltzik@latimes.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.