Ezra Klein graciously responds to my post on the public option. No doubt an inquisitive tweet from Ryan Avent helped. The meat of that post came from Adam Ozimek, but I am happy to try to push the conversation.

Specifically Ezra says

Karl Smith has a theory explaining how the public option could drive the government deeper into debt. The argument, essentially, rests on an analogy to Medicare and Medicaid. The problem here is that Medicare and Medicaid are entitlements. The public option is not.

Klein is still arguing that the plan as it currently stands, will not raise the deficit. However, isn’t there a scenario under which the plan transforms into something more akin to an entitlement. Furthermore, this is scenario that Klein would seem to support. Yet, it is one were the public option becomes the vehicle for higher deficits. Specially I have the following in mind.

First, supporters of the public option win the ability to piggyback on Medicare rates. This combined with some hypothesized administrative efficiencies make the public plan cheaper than private alternatives and just as effective. Public plan recipients are very happy with what they have. That is, the plan is successful. But here is where it gets costly.

American’s outside of the exchange will be fully aware that those inside are getting to buy a government service and are getting a better deal because of it. It will hardly seem fair that this cheaper alternative is available and ordinary tax payer can’t even buy into, just because they have employer provided care.

Advocates will argue that most Americans could save money by buying into the plan and enjoying the pricing advantage that the plan has. The plan will steadily be opened up to more and more Americans the majority of Americans are on some version of the public plan.

Now, the government has a serious public choice problem. It will always be politically advantageous to make the public plan more generous. The plan will already be getting some subsidies and it will be difficult for people to understand the difference between subsidies and simply lower prices. After all, its a government run program – can’t they just choose the prices?

However, it will be politically difficult to raise taxes to pay for cheaper prices (or if you prefer larger subsidies.) Like Medicare and Medicaid before it the public plan will face pressure for unfunded expansion. It should cover more and cost less.

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