Government By Voucher?

Rethinking the Welfare State: The Prospects for Government by Voucher
By Ronald J. Daniels and Michael J. Trebilcock. (New York: Routledge, 2005).

{The following piece appears in vol.33 no. 3 of Canadian Public Policy (September 2007). I felt that it was desirable to publish a review of Daniels' & Trebilcock's important book in CPP, where economists and members of the social policy community ought to feel equally at home. In addition, the current issue of The Economist contains an article touting new research from Colombia, Sweden, and several American states showing that education voucher schemes work in raising academic standards---"Free to choose and learn", May 5th pp. 73-74. But, as the following review makes clear, I remain skeptical about vouchers as a panacea that will work wonders without doing harm, at least in B.C. or Canada---MC}

Remaking the Welfare State: The Prospects for Government by Voucher will sit comfortably beside Milton Friedman’s Capitalism and Freedom; Arthur Okun’s Equality and Efficiency: The Great Trade-Off; and Osbourne & Gaebler’s Reinventing Government. It rests less comfortably with Janice Stein’s Cult of Efficiency, Joseph Heath’s The Efficient Society; or the critiques by Christopher Pollitt and Donald Savoie of New Public Management. Many students of social policy and the welfare state who think that they already know all of the pros and cons of this subject, or who are prone to dismiss vouchers out of hand, will benefit from a careful reading of this book, if only because it will force them to re-examine their assumptions and sharpen their arguments.

Daniels and Trebilcock begin by pointing out that vouchers (defined as “tied demand-side subsidies”) are simply a policy instrument. As such, they are compatible with any legitimate goal of the welfare state, such as regulation of public morality; building social solidarity; insuring individual risk; promoting economic stability, and providing an equitable distribution of resources. The authors provocatively assert that “a decision to invoke the voucher instrument does not in itself reveal much about the underlying character of the policies being pursued by the sponsoring government” (p.2), and that opponents who think otherwise routinely make an “illogical connection between means and ends” (p.12). Their primary claim is that choice by individual consumers of public services on the demand-side, coupled with competition on the supply-side, with explicit, targeted subsidies following consumers rather than suppliers, ensures that decisions regarding the consumption and production of public services will be made efficiently, and that citizen beneficiaries will be empowered. Their secondary claim is that, where their primary claim does not appear to be borne out by the evidence, “this is often because of design failures” (p.13).

Sharp-eyed skeptics may already see what they consider to be potential cracks in the argument. The authors admit “that is not to say that reliance on vouchers is bereft of any normative content whatsoever” since enabling citizen choice in the consumption of publicly funded goods and services increases “the scope for individual autonomy” (p.2). Could the autonomous citizen-consumers thus enabled (or their suppliers) make choices that are subversive of certain policy goals? While some critics of vouchers may confuse or elide means and ends, advocates of vouchers may too sharply distinguish them, over-simplifying what is an evolving and complex reciprocal relationship between citizens and between citizens and the state. Not all political “voice” is calculated to advance the entrenched interests of public-sector suppliers. And “design failures” could serve as a convenient carpet under which to sweep all kinds of problems—many relating to social inequities and asymmetries of information among putatively equal “consumers”, posing difficulties for regulators of voucher markets at least as daunting as those faced by bureaucrats under current arrangements.

Nevertheless, this book makes the interesting point that many of our existing policies already display degrees of “voucherness”. For example, Canada’s medicare system is in effect a tied demand-side subsidy paid by a single government payer directly to physician and hospital-suppliers on behalf of patients, making it a limited form of voucher which nonetheless restricts consumer choice and supplier competition. Targeted subsidies to students coupled with deregulation of fees could be one answer to perennial debates about how to maintain both quality and quantity of post-secondary education (which can be jeopardized if fees are frozen) and affordability and access to that service (which can be jeopardized if fees are not frozen). The authors tout the opportunity afforded by the “North American void in childcare provision [which] offers policy-makers a clean slate on which to work…comparatively free from the political impediments that often characterize the reform of established government services” (p.144). In these and five other policy fields (food stamps, low-income housing, legal aid, primary and secondary education, and labour market training), they do a thorough and creditable job of showing that “design challenges” can, in principle, be met.

For Daniels and Trebilcock, the identification of basic health care as essentially a Rawlsian primary good only strengthens the argument for vouchers, since “removing the provision of such services from the discipline of the market …introduces a number of perverse incentives for both providers and purchasers” , although they admit that these incentives “are not easily addressed” and that “striking the right balance between efficiency and equity is an extremely difficult enterprise” (p.102) . In general they prefer “managed competition” (i.e. the Clinton plan, or the Dutch system) to either the Canadian “fee for service” or the UK “purchaser /provider split” models, on the grounds that private health plan providers or insurers competing directly for the dollars of end-users, while still being obligated to provide a state-defined minimum level of services, are likely to be both more cost-conscious and better providers of consumer choice than either Canadian doctors and hospitals billing the government or British health care providers relying on historical relationships with District Health Authorities (p.114). They make a good case on the demand side for a universal health card with contributions paid on a sliding scale based on both usage and income, and on the supply side for capitation (lump sums for patient management, with improved incentives for preventative treatment) as the method of payment to physicians.

Yet they also state that “[w]e see no reason why for-profit entities should be prevented from participating in [hospitals] or indeed any other segment of the health care sector” [p.119, emphasis added]. This is a sweeping statement to make in the absence of any discussion of how a voucher-based welfare state might be more exposed to international trade rules (an ironic omission in view of Trebilcock’s recognized expertise in international trade law). My best guess is that the WTO General Agreement on Trade in Services (GATS) Article I:3 exemption for services “supplied in the exercise of governmental authority” would be much less likely to extend to Canadian public services under voucher-based policy regimes because of the way that that GATS provision is defined in Article I:3 (c) in terms of the conditions of supply, i.e. “supplied neither on a commercial basis, nor in competition with one or more service suppliers”. Would Canadian public health and education measures still be exempted from NAFTA national treatment provisions under Annex I of NAFTA after they have been “revolutionized” in the way that Daniels and Trebilcock advocate? A single payer voucher scheme serving clearly defined public ends might meet the Annex II definition of a “social service established or maintained for a public purpose”, although the U.S. Office of the Trade Representative has already made statements which indicate that it would likely have an opposing view. In addition, the NAFTA Chapter Eleven expropriation clause enables U.S. or Mexican companies to bring compensation claims for any “indirect expropriation” of their investments in violation of Canada’s national treatment obligations.

These concerns illustrate the larger point that foreign corporate for-profit suppliers of public services would not just become efficient “instruments” of competitive delivery. They would also become powerful rights-bearing political actors , who would use legal and political channels to advance their own ends, making attempts by government to reverse competitive and private provision or extend public provision more expensive and difficult to do.

In sum , the analysis and evidence presented in Reinventing the Welfare State is sufficiently persuasive to warrant a second look at voucher experiments in post-secondary student aid, labour market training, legal aid, and perhaps daycare. Nevertheless, the case for the over-all superiority of a pure voucher system in the more complex and multivalent areas of K-12 education and healthcare remains unconvincing. Daniels and Trebilcock give an honest accounting of the challenges of avoiding socially negative “tipping points” in program design, calibrating voucher schemes to minimize cream-skimming, extra-billing, opting out, various moral hazards and so on; but perfecting the welfare state may require something more than economic or regulatory acumen. It may take a sense of common destiny and purpose, and an ability to enforce and revise collective will in the public interest. These are democratic qualities, not just political ones, and they could be even harder to come by in a voucher world.

Mark Crawford
Assistant Professor, Centre for State and Legal Studies
Athabasca University

markc@athabascau.ca