Yet Another Bad Post Office Analogy

Last night, Rep. Jesse Jackson, Jr. (D-Ill.) suggested on CNN (video here) that the Post Office keeps DHL, UPS and FedEx honest, and so a public health care option would keep insurers honest:

"Look at it this way: There's Federal Express, there's UPS, and there's DHL," Jackson told CNN host Larry King. "The public option is a stamp; it's email. And because of the email system, because of the post office, it keeps DHL from charging $100 for an overnight letter, or UPS from charging $100 for an overnight letter."

This is a flawed analogy on several points:

First, this "honesty" comes with a price, which he fails to acknowledge. The Post Office is projected to lose $7 billion dollars this year, in spite of raising the prices of stamps several times recently. Where is that $7 billion going to come from? It will be subsidized with tax dollars. Where do tax dollars come from? The profits of corporations and the wages of individuals.

However, it is a good analogy in the sense that Medicare is bleeding money, just like the Post Office. While many claim Medicare is "working" because it has (so far) been able to provide a reasonable level of care, the Trustees of the Medicare trust funds say Medicare payroll taxes would have to more than double ($3.88 more will be taken out of everyone's paycheck for each $100 earned), or services would have be immediately cut in half to cover Medicare's budget shortfall. Until either of these happen, the Medicare deficit is paid out of general funds, which is the money collected through income tax.

By suggesting that whenever a private business is making too much money, the solution is to create a massive, money-losing, taxpayer-funded competitor to keep everyone "honest", Jackson seems to think there is no limit to government revenue and what people are willing to pay for and tolerate. Should the Post Office, or a public health insurance option, exist merely as a mechanism for transferring money from successful businesses to failed ones, with the goal of keeping everyone "honest"? If we keep subsidizing money-losing government "businesses" for this purpose, we might end up running out of profitable businesses.

Second, the example shows a misunderstanding of microeconomics. Suppose UPS raised its rate to $100, far above current rates. They would lose all their business to others who charge less, assuming the service quality is similar. Therefore, UPS would have to reduce their rate to a level that allows them to provide the service without losing money.

So, the Post Office isn't keeping UPS from charging $100 - DHL, FedEx, and the Post Office together are competing. Also - $100 is just a ridiculous price for an overnight letter! If a business charges more than people are willing to pay for something, customers will keep you honest by finding another way, and with no government subsidy!

Third, Health care in America isn't expensive because everyone is charging consumers $100 for something that should cost $10. It's expensive because there has been an explosion in technological innovation that enables us to treat things that were recently untreatable. Waste, fraud, profits, and other factors have contributed, but according to the Congressional Budget Office, technological change accounts for 40 to 65% of the increase in health care costs from 1940 to 1990 based on their analysis of several studies (see table 2 on page 8, here).

On his blog "Happiness in this World", Dr. Alex Lickerman says:

Heart attacks used to be treated with aspirin and prayer. Now they’re treated with drugs to control shock, pulmonary edema, and arrhythmias as well as thrombolytic therapy, cardiac catheterization with angioplasty or stenting, and coronary artery bypass grafting. You don’t have to be an economist to figure out which scenario ends up being more expensive.