OTHER YOYO INITIATIVES:
KNOW THEM WHEN YOU SEE THEM

Social Security reform is the most visible example of where the hyper-individualists want to take us, but the promotion of Health Savings Accounts is an equally telling example of their thinking. As described in fascinating detail in an article by Malcolm Gladwell in The New Yorker, the idea of HSAs is to shift the risk of paying for illness from the largest pool to the smallest, from society at large to individuals.

HSAs are already on the books, although, like the idea of injecting private accounts into Social Security, they’re not very popular. They work by setting up an individual account—see the pattern?— where you can deposit money, tax free, to use for health care. If you’re young and healthy, or think you are, you can use the money to pay for that rare visit to the doctor while your account grows, since you can invest the account funds just like IRAs. The plan also requires that you own a low-premium, high-deductible insurance plan against “catastrophic illness.”

The way the YOYOs see it, the plan will save the system money by shifting more costs from the insurer to the “health care consumer,” or sick person, thus providing a new disincentive to go the doctor (as though you need another one). Essentially, the plan gives individuals an incentive to gamble: if they stay well, they can save tax free. But if they fall ill before they’ve had time to accumulate much in the account, they’re going to be worse off than if they’d stuck with a typical plan under the current system. Interestingly, the early research shows that this is precisely what’s happening: people in HSAs spend more on out-of-pocket expenses and premiums than people in traditional plans.25

Let’s look for a moment at what the Social Security and HSA plans share. In fact, a few core themes emerge that are useful markers for recognizing YOYO initiatives. Both deal with significant risks: in the case of Social Security, old age (and disability and the loss of a spouse); in the case of HSAs, illness. Both plans meet these risks by encouraging individuals to manage their own accounts, building up the reserves they need to finance their own retirement or health care needs.

The first thing to notice is that both plans rely heavily on the market. They work off the assumption that if individuals are given the right incentives, two things will happen: people will take the necessary steps to meet the risks in question, and the market will respond appropriately. In the case of Social Security, that response equals an investment portfolio that reliably beats the current system (which it doesn’t, as Shiller has shown).

With the health accounts, the idea is to make consumers better shoppers. In a speech touting this aspect of the policy, President Bush argued that there’s not enough “comparative shopping” in health care, noting that you wouldn’t shop for tile or insulation that way. “You don’t know whether the guy next is going to offer a better deal when it comes to some kind of medical procedure,” he said. Later we’ll discuss the huge inefficiencies triggered by this approach, but here, the point is to see the YOYOs’ fundamental belief that health care is just another commodity to be priced on the open market. They believe that what’s driving health costs is too much insurance held by too many people who are not conscious enough about cost savings. The idea behind HSAs is that the actions of account holders will create the competition needed to drive down prices and provide a better set of choices for consumers. 26

Never mind that trying to meld health care and markets got us deep into this mess in the first place, that health care ain’t tile, that every other advanced economy has solved this conundrum with universal coverage, that it doesn’t make sense to give people an incentive to put off going to the doctor, or that those with low incomes will be hard-pressed to build the account or meet the high deductible. And never mind that HSAs can’t really control costs anyway, because the big spending in health care is for the expensive procedures that will always be covered by insurance. No one’s going to pay for heart surgery out of pocket. For YOYOs, it’s all markets, all the time, and don’t let the facts get in the way.

Second, such initiatives aim to shrink the role of government. YOYOs don’t just rely on the market; they generally also view government with outright hostility. Some of this is only in theory: they spend a lot of federal dollars despite their rhetoric. But their rap clearly casts government as an impediment to be gotten around. Granted, that opinion is not exceptional these days, as most Americans are quite skeptical of the government’s ability to act efficiently, a skepticism boosted almost monthly (think Katrina).

And that’s exactly the way the YOYOs want it. It’s another important theme we’ll see popping up throughout: if you’re running the shop, it’s not that hard to prove to your constituency that government is ineffective. You staff it with incompetents, slash its income, decry it from the bully pulpit, and sit back and watch your self-fulfilling prophecy come true.

A related theme here, one that comes out in the brief history that follows, is that, in contrast to their mistrust of government solutions, YOYOs have a reverence for corporate solutions. They reflexively believe that private firms, acting in their own interest, will promote the wider interests of society as well.27

Third, YOYO initiatives avoid sharing resources and risks. To the contrary, they create individual silos. Clearly, a goal of their policies is to put the individual, not the group, at the center of the solution. This grows out of their faith in incentives. The hyper-individualist fears that pooling risks erodes a person’s incentive to meet risks. People provided with universal health care, for example, will have less reason to take better care of themselves and avoid frivolous uses of the system. (Jargon alert: economists call this proclivity “moral hazard,” which occurs when insurance allegedly leads you to engage in riskier or more expensive behavior than you otherwise would.)

Another YOYO account-based initiative, Personal Reemployment Accounts, floated by the Bush administration in 2003, also reflects this theme. Although Congress opposed the creation of PRAs at the time, they recently resurfaced as part of the administration’s plan to rebuild the Gulf Coast.

These accounts were designed with the belief, one supported by some evidence, that people receiving unemployment insurance aren’t always in a rush to find a new job. The PRA thus establishes an account for the job seeker that can be spent on employment-related activities, like job training or career counseling. An unemployed worker who finds a job before exhausting the account gets to keep the difference. Clearly, this approach is designed to counteract the moral hazard in the current unemployment insurance system.

Finally, there’s the personal anti-terrorism account… Just kidding, but the pattern is incredibly clear.

These initiatives sound pretty reasonable, no? The classically trained economists have probably all bailed out by now, but if any are still with us, they’re probably thinking these ideas make some sense. Yet, as the lack of acceptance of these ideas reveals, the people feel otherwise.

And the people have got it right. The three principles cited above—freer markets, less government, and more individualism— are fundamentally flawed when it comes to retirement, health care, and unemployment, not to mention the slew of other big-ticket challenges we face, like globalization and rising inequality.28

The YOYOs get it wrong because they mistakenly ascribe the source of both the problem and the solution to the individual. But these challenges are bigger than an individual’s ability to fix them, even for him- or herself. Take unemployment: while the traditional unemployment insurance program implicitly assumes the problem is on the demand side—there are too few jobs—the PRA embeds the notion that what stands between an individual and a new job is her reluctance to get off the dole and get to work. In the real world, where a weekly benefit check replaces about half an average worker’s earnings, most families can’t rely on unemployment insurance to make up for lost wages. What has held such job seekers back, especially in the absence of tight labor markets over the past thirty years (a tight labor market is one with very low unemployment), isn’t the enticement of a benefit check nearly as much as it is the scarcity of decent jobs. By obsessively focusing on the moral hazard, the YOYOs aim their policy fix at the individual and miss the real target: the lack of good job opportunities.

There is of course a place for tapping the immense and creative powers of the private market, for sending out accurate “price signals,” for worrying about moral hazards, and for getting the individual incentives right. But that place is not around health care, pensions, unemployment, and a slew of other risk-laden issues that loom large in today’s economy.

What is it about these particular aspects of our economic lives that makes them inadequate candidates for market solutions? For one, they are areas of the human experience that entail risks we all share, and even if we don’t experience them—if we never fall seriously ill or experience a spell of unemployment—our economic security is greatly enhanced if there’s a safety net in place. You might hope that the private market would respond to this need, but that turns out to be both impossible (because some people simply can’t afford to purchase a personal safety net) and highly inefficient (because the benefits of very large risk pools are lost).29

Second, markets fail, and they fail at many levels. There are big-time market failures like stock market or housing bubbles, massive layoffs, and recessions. Then there are the midlevel failures, ones that may not throw the economy off track but will certainly entail huge costs for their victims. I’m thinking here of firms that go bankrupt and renege on their pension promises, or industries hard-pressed to compete in global markets where the deck is stacked against them. (U.S. manufacturers face a huge disadvantage when Asian countries manipulate their currencies to make our exports more expensive, for example.) Then there are the everyday failures, like the lack of health care coverage for about 75 percent of the jobs in the low-wage labor market, or the steady pace of layoffs, now more numerous even in good economic times.

Third, these areas involve social goods, and you can’t count on the markets to price or provide them at a level that will work best for most of us. If you want to accurately price future options on pork bellies, the market is your best bet. If you want to set the right price for access to health care, look elsewhere.

As discussed next, history shows that these matters are best dealt with either outside the market, by pooling both risks and responsibilities, or inside the market, but with a dose of regulation to steer it in a direction that works best for the most people. History also shows that when we’ve tried to ignore this lesson, we generate astounding levels of inequality—of wealth, income, and opportunity.