Unbundle the Welfare State
From the December 20, 2010, issue of NR.


With such reforms under way, the next role for the government would be to provide information and truth in labeling, a classic market support. Suppose the federal government established a comprehensive national exam by grade level to be administered by all schools and universities that receive any federal money, and required each school to publish all results, along with detailed data about its budget, performance, and so forth, each year. Secondary, profit-driven information providers, analogous to equity analysts, would arise to inform decision-making. The federal role in education would be very much like that of the SEC in securities markets: to ensure that each school published accurate, timely, and detailed data.

The next logical extension would be to let schools make profits and thereby pay returns to investors. One reason the market scaled up Starbucks from a mere idea to thousands of stores within about one decade, while promising education innovations proceed glacially, is that a fire hose of capital could be aimed at Starbucks once it demonstrated its profitability. While ongoing, massive public expenditures on education can partially serve this purpose now and in the future, the free flow of investment would replace the existing capital stock of school buildings and equipment faster than would normal political processes. Such schools would become something like publicly regulated utility companies that can issue debt and equity instruments to raise capital while still having to meet defined regulatory objectives. 

We would, in the end, get something like a partially privatized school system, but we would have to go through the hard work of building market institutions rather than just waving a magic wand of vouchers at the problem. The trick is to be able to execute a sequence of steps each of which must both make progress toward the goal and demonstrate practical improvement in and of itself. The sequence I propose is: 1) allow parents to choose among public schools, with funding following students, and reform the chartering process so that it is far easier to establish new schools without collective-bargaining agreements; 2) institute consistent national annual testing for all schools that receive government funding, and publish the results along with other performance information; and 3) allow schools to operate at a profit in order to create incentives for private investment. More precisely, this is the vision that would animate the first steps of the journey. We could modify our plan of action as we proceeded and learned what worked and what did not. 

The same basic argument applies to each major welfare program. Conservatives often argue that we should privatize Social Security. But we would surely regulate what investment vehicles would be allowed — otherwise, I could “invest” in a retirement portfolio of Cheetos, beer, and big-screen TVs. As with government-funded schools, we would need a set of regulations and a means of enforcing them. If we wanted to replace Medicare with health-savings accounts, we would face a similar problem. 

Obviously, there will be challenges unique to each of these programs. For example, the degree of existing government entanglement varies widely. In the United States, the lack of an enormous government-operated physical-delivery infrastructure for health care and pensions (outside of specialized areas like the VA hospital system) means that such a transition should be logistically simpler with health care than it would be with education. But for each of the programs we would face the same need to create market institutions that produce the benefits of freedom, competition, and trial-and-error learning, while to some degree regulating conduct in a way that is consistent with our vision of the good life. 

Jim Manzi is a senior fellow at the Manhattan Institute and chairman of an applied-artificial-intelligence software company. This piece originally appeared in the December 20, 2010, issue of National Review.