This article was published in the Washington Post and reprinted in "The Brookings Bulletin" (Vol. 9, No. 2, Spring 1972), in condensed form.
WHY IS THE RICHEST, best educated, most technically advanced nation in the world unable to eliminate poverty, keep babies from dying, teach its children to read, or get the traffic moving? This question is a cliche. It is also the most mystifying fact of our time.
John Gardner tells us that we are not trying hard enough; that Americans have lost confidence in themselves and their ability to work together; that men of goodwill must renew their faith and their values. They must put public ahead of private gain, dig deeper into their pockets, come together in a common effort to find solutions.
Edward Banfield, in contrast, tells us that we are trying too hard. In The Unheavenly City he reminds us that poverty, crime, and degradation are as old as human history. He believes they persist in an otherwise affluent world because of the inherent inability of the “lower classes” to plan ahead. He thinks that most public programs to educate and train “lower class” people to improve their neighborhoods are doomed to failure. In fact these efforts may be worse than nothing. “Faith in the perfectibility of man and confidence that good intentions together with strenuous exertions will hasten his progress onward and upward lead to bold programs that promise to do what no one knows how to do and … end in frustration, loss of mutual respect and trust, anger and even coercion.”
Far more widely held are a set of explanations of our national failures that might be called “villain theories” or “power theories.” They come in many varieties, but the common element is that some identifiable group is believed to have the power to solve social problems and to be deliberately refusing to do so.
A typical right-wing villain theory, eloquently expressed in the movie Joe, holds that too much power and freedom have been given to good-for-nothing blacks who do not want to work, to pot-smoking hippies and left-wing agitators who want to destroy a good way of life for their own purposes. The way to solve social problems is to put these people in their place—and their place is at work, in the army, or in jail.
A typical left-wing version of the villain theory holds that a different group called the “establishment” has the power to solve national problems, but simply does not want to. Establishment members benefit from the non-solutions. The persistence of poverty gives them cheap labor for their enterprises and domestic help for their wives. They maintain their power by legal or illegal suppression of those who look different or threatening. The last scene of Easy Rider, in which the rednecks shoot down the harmless, free-spirited motorcycle riders, expresses this view of the world. The solution, obviously, is to overthrow the establishment, put them behind bars, or at least get their hands off the decision levers.
While power theories are popular with extremists, moderates lean to the “powerlessness theory.” The powerlessness theory casts no particular people as villains. The villains are institutions or “the system.” Corporations, schools, bureaucracies are all institutions organized to thwart individual self-expression and creative solutions to problems. Everyone is caught in a big machine, going around on a treadmill he did not create but cannot get off. As Charles Reich describes the situation in The Greening of America, no one has power to act, not even congressmen or corporate executives. “From all of this there emerges the great revelation about the executive suite-the place from which the power hungry men seem to rule our society. The truth is far worse …. No one at all is in the executive suite. What looks like a man is only a representation of a man who does what the organization requires. He (or it) does not run the machine; he tends it.”
For those who hold this view the only hope is a new consciousness or a counterculture, but little is said about what happens after the flowers poke through the concrete. The proponents of the powerlessness theory may advocate a new lifestyle, but they do not tell us how this lifestyle would solve problems like poverty and medical care distribution and air pollution.
The power and powerlessness theories are convenient, not only because they are both partly right, but also because they relieve the individual of the unpleasant job of problem solving. A much less convenient theory is offered here. It might be called the “conflicting objectives theory.” It holds simply that we are failing to solve social problems because we do not know how to do it—the problems are genuinely hard. The difficulties do not primarily involve conflicts among different groups of people, although these exist. Rather, current social problems are difficult because they involve conflicts among objectives that almost everyone holds. These conflicts create technical or design difficulties that override the political ones.
The Case of Medical Care
Take the medical care crisis, for example. One would think that a nation with our technical competence—we do pretty well in telecommunications and rocket design, after all, not to mention open heart surgery—could solve the relatively simple problem of making sure that everyone gets medical care. Yet we are obviously not doing so.
Millions of poor families in cities have no access to regular medical care. They depend on the desperately understaffed emergency rooms of dismal city hospitals. Whole areas of the countryside are without any doctor at all. Moreover, one does not have to be poor to be dissatisfied with the medical care system. Long waits, impersonal treatment, high prices, and the bankrupting cost of major illness have left almost everyone with a strong sense that there must be a better way to run a medical care system.
The easiest explanation of this dismal state of affairs is a villain theory. If so basic a problem is not getting solved, maybe someone is preventing its solution. A typical villain theory casts the doctors as grasping insensitive clods who are not genuinely concerned about giving quality care to the poor or even the middle class. All they want is to make money and drive a Cadillac to the golf course on Wednesday afternoons. Subsidiary villains are the hospitals—how could they have the gall to charge $100 a day for that crummy room?—and the insurance companies with their pious advertisements and their high rates that never seem to cover one’s particular illness.
The medical establishment on the other hand has its own villains. It points the accusing finger at government bureaucrats with their endless forms and hypochondriac patients who just want attention and want someone else to pay for it.
An alternative explanation—the powerlessness theory—holds that there actually are few villains on the medical stage. Doctors, nurses, and other medical personnel are mostly dedicated, hard-working people doing the best they can to serve their patients. The basic trouble is that everyone-doctors, hospital administrators, insurance executives-are caught in a system which they are individually powerless to alter, and that system has a whole web of perverse incentives built into it. It offers doctors irresistible monetary rewards for practicing in the suburbs rather than in the ghetto and for entering rare specialties rather than dispensing family medicine. The fact that most people have hospital insurance rather than more comprehensive coverage encourages overuse of hospitals and emphasizes treatment rather than prevention of disease. The rules under which insurance companies and governments reimburse suppliers of medical services give the latter little or no incentive to hold costs down. The whole system is too badly designed to deliver good care efficiently to those who need it.
So why don’t we get busy and design a better system? The main reason seems to be that, although almost everyone is dissatisfied with the present setup, no one is sure what a better one would be like or how to get there.
Former Brookings Expert
The essential difficulty in designing a better medical care system is not so much reconciling the interests of different people, but reconciling objectives that are held by almost everyone. Most people would agree that the first objective is to ensure everyone care. The idea that medical care should be a basic right, not a luxury for the fortunate, is now widely accepted. The second objective-harder to define-is good quality care. No one wants second rate medicine. The third is reasonable efficiency. No one wants to pay the costs of wasting scarce medical resources. The real problem is that these objectives conflict, and it is hard to design a system that satisfies all three of them at the same time.
An obvious first thought is to make medical care freely available to everyone, either through a national health service or through a comprehensive national health insurance system. National health insurance would accomplish the first objective of ensuring everyone care, but it might endanger the efficiency objective by reducing both the doctor’s and the patient’s incentive to economize. If the government or some other third party is paying the bill, doctors tend to put in hospitals patients who do not absolutely need to be there and to order expensive medical tests or even surgery of less than clear necessity. Moreover, third parties have traditionally reimbursed suppliers of medical services for their actual costs or customary charges without exerting much pressure to keep costs down.
One approach to controlling costs is to have the patient pay part of the bill, perhaps through a health insurance policy with deductibles and coinsurance provisions. The theory is that if the patient pays an appreciable portion of the cost, both he and the doctor will be more cautious about embarking on unnecessary hospitalization, drugs, or surgery. Moreover, doctors and hospitals will try to hold their prices down because they know the patient is burdened with part of the bill. But such an approach penalizes the poor, denying care to those who need it but cannot come up with their share of the bill. Moreover, third party payment is already so widespread, and patients are at such a disadvantage in negotiating with doctors and hospitals—or even understanding what they are buying—that it hardly seems realistic to rely on the cost consciousness of patients to hold prices down.
A different approach to controlling costs is to change the way in which doctors, hospitals, and other suppliers are reimbursed for their services. Third party payment need not lead to waste if the third parties give the suppliers incentives to be efficient and to give only the services the patient actually needs. The most usual suggestion for change is to reimburse doctors or hospitals for the care of a given number of patients for a specified time, rather than for particular services rendered. One version of this idea, currently being touted as a solution to the efficiency problem, is the health maintenance organization (HMO), a group of doctors connected with a hospital that undertakes to provide each enrollee with needed care for a year for a single fee. Here the theory is that an organization that is paid a fixed sum for taking care of a patient for a year, regardless of the number and kind of services performed, will give the patient only what he needs and will emphasize preventive medicine lest the patient develop a more costly illness through lack of foresight.
But here one runs into the third objective: maintaining quality. Will doctors or groups of doctors give second-rate assembly-line medicine if they are being paid only on the basis of the number of patients they handle?
Enthusiasts of health maintenance organizations have two answers to the quality question: peer review and competition. They claim that quality can be ensured by regular reviews of the organization’s procedures by qualified professionals who do not work for the organization. Moreover, dissatisfied patients should be free, as they are now, to move to other competing health maintenance organizations or to other doctors-a threat that should encourage efforts to keep patients satisfied.
The point is not that no solutions can be found—indeed, some other countries seem to do better than we do—but that the problem is complex and no solutions are obvious. But uncertainty should not be an excuse for inaction. At the very least the government should act to reduce the uncertainty. If a vigorous program of experimentation with new forms of medical care and new types of reimbursement had been undertaken ten years ago, there would now be a body of experience to answer questions like: How do alternative systems work, what do they cost, how do patients like them, how do doctors like them, and do they produce better health? The surprising thing is that not much effort is going into answering these questions even now. Maybe it is not too late.
“Why Can’t We Cure Poverty?”
The debate over welfare reform, which has tied up the Congress for two sessions without resolution, provides another example of conflicting objectives. A better welfare system is certainly not the complete answer to poverty, but it would help. The paralysis of our legislators may reflect the unwillingness of their constituents to give aid to the poor, but it also reflects the sheer difficulty of constructing a workable welfare system that meets several objectives at once.
What are the objectives? First, there is pretty general agreement that we ought to have a welfare system that assures everyone at least a minimum adequate level of income. No one ought to be destitute, certainly not children. Second, there is general agreement that a welfare system ought to encourage people to work. Every one ought to have an incentive to better himself and be allowed to keep at least a substantial part of his earnings. Third, a good welfare system should be “fair.” Equally needy people should receive equal treatment, no matter where they live or who they are.
It is obvious that our present welfare system meets none of these objectives. It fails to ensure everyone an adequate income-millions are not covered at all. Those who are covered have little incentive to work, and unequal treatment abounds. Can’t we do better?
In the last several years a consensus has emerged about the general characteristics of a better welfare system. To satisfy the fairness criterion it should be a general system, not restricted to certain categories of people, as the present welfare system is, and it should be national, not subject to the whims of state legislatures . To satisfy the adequacy criterion it should guarantee every family a minimum income based on family size. To satisfy the incentives objective, families that increase their earnings should have their payment reduced by less than the amount they earn (the fruits of their labor should not be subject to a 100 percent tax).
The basic idea is appealing—indeed, it has appealed to persons as different as George Wiley, Milton Friedman, and Richard Nixon—but designing such a system is tricky, and moving to it from our present welfare mess is even harder. To satisfy the adequacy criterion and get everyone out of poverty , it would seem necessary to set the minimum guarantee at least at the official poverty level ($4,000 for a family of four, rather than the $2,400 of the administration’s Family Assistance Plan), although many spokesmen for the poor regard this as inadequate. Even the $4,000 level, however, may endanger incentives to work, especially in parts of the country where wages are low. A family of four would have a hard time living on $4,000 in Washington or Detroit , and it is not likely that many would quit jobs to live on the government minimum . In Mississippi, however, a large portion of the full-time labor force earns less than $4,000 a year, and one might expect substantial defections from the labor force if the guarantee were set so high . Maybe one should recognize this fact by setting a lower guarantee in Mississippi, but would this violate the fairness criterion, and how would one decide on the appropriate differential?
One would not have to worry so much about incentives if people were allowed to keep a large fraction of their earnings. Then they would still have plenty of reason to work. How about setting the guarantee at $4,000 a year for a family of four and reducing the payment by only 20 cents for each dollar a family earned? Then a family could keep 80 cents out of each dollar, which is about what lower-bracket income-tax payers get to keep. This solution sounds reasonable—why should the poor be subject to a higher tax rate than moderate-income people?—but it turns out to be prohibitively expensive . One cannot operate the system only for the benefit of poor persons who start working for the first time. Fairness dictates that people who are already working be treated in the same way. But if one sets up a general system with a $4,000 guarantee and reduces the payment by 20 cents for each dollar earned, one has to make payments to everyone who earns less than $20,000 a year, which is almost everybody in the whole country . A family earning $15,000 a year, for example, would have $3,000 (20 percent) deducted from its $4,000 guarantee and still receive a payment of $1,000. Apart from the obvious impossibility of financing such a system, one would surely question the fairness of giving public aid to families earning $15,000 while other families with no earnings were forced, perhaps through no fault of their own, to live on $4,000.
It is for this reason that even generous welfare reform plans reduce benefits fairly rapidly as earnings rise . Under the not-so-generous Nixon Family Assistance Plan, a family would have its benefits reduced by two dollars for each three dollars earned; it would be subject to a 66 2/3 percent tax rate. The effective tax rate would actually be higher—more like 80 percent—because it would have to pay the social security tax and might lose medical and other benefits as its income rose. Getting to keep 20 cents out of each dollar earned is hardly much of an incentive to take an unpleasant low-paid job .
Why not compromise and move the guarantee to $4,000 and the “tax” rate to 50 percent? This may well be a good solution, but it would cost at least $30 billion more than the present welfare system and would involve payments to people with incomes up to $8,000, or well into the middle income bracket. This may be worth it, but it should be recognized as a much more complex and expensive undertaking than appeared when we first asked, “Why can’t we cure poverty?”
The Issues Have Changed
Until quite recently historical accident—the accident of the constitutional reservation of almost all social concerns to the states—saved national political figures from having to face up to the difficulties of reconciling conflicting objectives in designing social programs. Until the 1930s, education, welfare, health, and social services were simply not national issues. Politicians built their campaigns around trust-busting, free silver, and keeping out of war. Then the necessity of coping with the great depression forced the federal government into social programs and provided liberal politicians with a simple set of issues good for thirty years of almost uninterrupted political success. The big question at the national level became: should federal resources be devoted to particular social objectives? Should there be a social security program, or a welfare program, or an unemployment insurance program? Should there be Medicare? Should there be federal aid to education? Should there be a “war on poverty”? The liberals said yes and the conservatives said no.
Once the federal programs were enacted the liberals were for spending more money on them. The problems were great; state and local resources were inadequate and unequally distributed; it seemed reasonable that spending federal money would help. It was not necessary to worry about exactly how the money would be spent.
Now we are running out of yes-or-no issues. National health insurance may be the last one available. Moreover, the liberals have lost their innocence. By the end of the 1960s it was evident that merely spending more federal money was not necessarily going to produce results. Money for education would not automatically teach children to read. It would be necessary to find out what was preventing children from learning, perhaps to redesign the whole education system; to attract different sorts of people to teaching and to give them different incentives, not just more pay and better buildings. More money for health might only escalate the price of health care, or put more people in hospitals who need not be there. To improve health care it would be necessary to redesign the whole health system, to introduce new incentives and new ways of reimbursing doctors and hospitals. More money for welfare would only perpetuate a badly constructed system. It would be necessary to set up a new system that did a better job of reconciling the objectives as to adequacy, incentives, and equal treatment.
All these design problems are hard to think about and even harder to explain to the public. They are unsuitable for campaign oratory, which almost of necessity must deal with simple questions of yes and no and more or less. Yet these are the issues that we must somehow bring into public focus.