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The Genealogy of Obamacare

Harking back to the worst of the New Deal.

Jan 13, 2014, Vol. 19, No. 17 • By JAY COST
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Despite its clunky rollout, Obamacare continues to move forward. Many of the problems with the website have been fixed, at least on the “front end” that the consumer sees. The government, meanwhile, has reported nearly 2 million enrollments between the federal and state exchanges. This number is well below the 3.3 million expected—and it is almost surely an overestimation, considering the potentially high levels of nonpayment by enrollees and the remaining problems on the “back end,” where the insurance companies interact with the government. Still, it suggests that the program is here to stay for the time being.

Healthcare.gov

Supporters of the law are breathing a huge sigh of relief, but their respite may be short-lived. Already there are hints of bigger problems with the law—bad ratios of healthy to sick enrollees, limited networks of doctors and hospitals, paltry drug formularies, and more. And there are more problems to come, symptoms of a deeper malady inherent in the law: It is ill-suited to our Madisonian system. Obamacare seeks to micromanage a vast sector of the American economy, when our government was designed purposely to prevent that sort of control. When central planners during the New Deal ignored the limitations placed on our pluralistic government, the results were disappointing and often perverse. The flaws already evident in the Obamacare system suggest that history may be repeating itself.

The progressives of the early 20th century were a diverse group of activists, but one thing they had in common was a taste for telling people what to do. Early progressive thinkers like Herbert Croly were enthusiastic about grand, government-directed endeavors to make America a better place. And that was the subtext of Theodore Roosevelt’s famed Osa-watomie speech: He wanted to co-opt Lincoln’s wartime coercion for peaceful social engineering.

The problem the progressives encountered is that our Madisonian system is incompatible with their grand ambitions. If the progressive left was bent on telling people what to do for their own good, just that sort of curb on individual freedom was one of the Framers’ biggest fears. For a decade, the Founding generation had been bossed around by a distant and unsympathetic British government, and then—after throwing off the shackles of colonialism—they found themselves, under the Articles of Confederation, at the mercy of ignorant, capricious, yet effectively omni-potent state legislatures. The subtext of Federalist 51 is a promise from Madison to the people: Nobody is going to tyrannize you under this new government. In Madison’s scheme, the government would empower a broad spectrum of interests to check one another, thus breaking and controlling what he called in Federalist 10 “the violence of faction.” 

Of course, this has not stopped the government from finding novel ways to boss people around. Even so, the Madisonian system has often thwarted central planners who think the world would be a better place if only the country would follow their dictates. 

This was a lesson the progressives had to learn the hard way during the New Deal. Today when people think of the New Deal, they are wont to recall Social Security or the minimum wage. But those were actually part of the second New Deal, which focused on granting new rights or powers to different groups. The first New Deal had more to do with controlling almost every aspect of American economic life, and it was an epic disaster that even the staunchest FDR cheerleaders are hard-pressed to defend. 

The Agricultural Adjustment Act (AAA) of 1933 was the first major program of the New Deal, and it was straightforward: The government would pay farmers not to farm in the hope that this would cut down the glut of agricultural products, raise farm prices and wages, and thus promote prosperity. Yet in practice it failed in surprising and far-reaching ways. It was in Dixie that the AAA wrought the most harm, decimating the economic standing of poor farmers, many of them black. Wealthy landowners manipulated the payment program so as to stiff tenants, purchase farm equipment, and send unskilled laborers crowding into the big cities looking for work. When reformers in the Agriculture Department tried to do something about this, they were unceremoniously sacked to keep congressional bigwigs like Senate majority leader Joseph Robinson of Arkansas happy. 

The National Industrial Recovery Act (NIRA) of 1933 sought a grand bargain among all the major industrial players including big and small businesses, organized labor, and consumer groups. It suspended the antitrust laws in exchange for cooperation from businesses in writing codes of “responsible” industrial conduct that protected unions and consumers. Yet big businesses mostly wrote the codes and took charge of their enforcement, using the NIRA as a vehicle for cartelization. Consumer prices went up, organized labor gained nothing at all, and small businesses took it on the chin. Jacob Maged, a dry cleaner from Jersey City, spent 30 days in jail for charging an extra nickel to press a suit, while General Motors was free to squash incipient unionism.

The disastrous experience of the NIRA pushed FDR into the second New Deal. Instead of grand bargains, he would supply targeted groups (read: prospective FDR voters) with benefit streams from Uncle Sam. Organized labor received explicit guarantees, senior citizens received Social Security, laborers won a new minimum wage, and so on.

This became liberalism’s template for generations to follow, in no small part because it was electoral dynamite. It was so irresistible that the Republican party came to mimic it, expanding programs like Social Security and Medicare. From 1935 until 2009, “clientele liberalism” was triumphant and “programmatic liberalism” was largely abandoned. 

To a surprising extent, Obamacare stands apart from the string of social welfare programs that stretches from Social Security, enacted in 1935, to the Medicare prescription drug program of 2003. Instead, it harks back to the first New Deal. To be sure, it provides a new benefit—subsidized health insurance—to a certain group, and thus is similar to classic liberal efforts. But unlike Medicare and Social Security—programs created out of whole cloth, with income streams in the form of withholding taxes dedicated to funding specific benefits—Obamacare accomplishes a clientelistic goal by programmatic means. It rearranges and cobbles together a wide swath of “stakeholders” (a favorite Obama administration buzzword) in a grand bargain reminiscent of the NIRA and AAA: In exchange for cooperation in administering subsidies and providing the uninsured with government-approved health insurance, Obamacare essentially guarantees the stakeholders a permanent place in the nation’s health care architecture. To bring this promise to fruition, Obamacare must then regulate the minutest details of health care provision.  

And so it seems that the “central planning” wing of the American left, dormant for generations, has sprung back to life. It is hard to account for this. Perhaps contemporary liberals do not understand their own history, in particular what has worked and what has not. Or perhaps they do, but believed a straightforward benefit program akin to Medicare simply could not pass. Or perhaps they were itching all along to give the NIRA/AAA approach another shot, but simply lacked the votes until 2009. 

Whatever the explanation, the odds are high that history will deem Obamacare to have been based on false assumptions. Our system’s pluralistic nature does not lend itself to top-down programmatic efforts like the first New Deal and Obamacare. The Constitution exacerbates what F.A. Hayek called “the fatal conceit,” the illusion that central authorities are equipped to control the details of complex human affairs. Again and again, the same story plays itself out: The planners, unable to coerce behavior outright, try to woo disparate interests through governmental incentives; they are convinced they have set up the incentive structures correctly but have miscalculated just a bit somewhere along the line; affected interests whose assent is required for the program to work respond to these miscalculations by pursuing goals that undermine the program’s stated purposes, producing effects that cause other assumptions to become false; and the ensuing vicious cycle produces perverse results. That is how the AAA came to support the established powers of the segregationist South and the NIRA reinforced the wealthiest industrialists even as unemployment topped 25 percent. 

We are already seeing signs of this with Obamacare. The paltry provider networks, insufficient drug formularies, high deductibles, and outrageous out-of-pocket limits offered by the insurance exchanges are all a consequence of insurers’ pursuing their bottom lines in the context of the government’s extensive regulations. Will young and healthy consumers, another vital moving part in this massive system, actually purchase policies such as these? If they do not, then insurers, stuck with predominantly older, sicker, and therefore more-expensive-to-cover enrollees, will be forced to jack up premiums or deductibles even more, making their policies less attractive still to healthy customers. 

These are not the only interests from which Obamacare requires cooperation. Will hospitals behave the way the planners expect? Will drug makers? Will small employers? Will large businesses? The list goes on and on. Importantly, every assumption that proves mistaken has the potential to blow up another assumption, then another, then another, creating a cascade of failure. 

Unfortunately, even when they fail, such grandiose plans do not necessarily disappear from the national landscape. The NIRA did, as the Supreme Court struck it down in its famed Schechter Poultry decision, but the AAA largely survived. Indeed, after the Court struck down the original law, Congress quickly passed a new version that addressed the constitutional issues the justices had flagged. Congress did so not because the policy had succeeded; in the South, at least, the AAA destroyed the fragile farm economy, replaced it with nothing, and contributed directly to the urban crises of the postwar era. Rather, the program was reinstituted because key groups found it profitable and used their position in our pluralistic system to retain a favorable status quo. Eighty years later, Congress’s annual ritual of passing the pork-laden farm bill is a reminder that the AAA has survived in a form that the New Dealers would surely deem perverse.

That is the great danger of Obamacare—not merely that it will fail, but that it will fail and cannot be undone. The best chances conservatives had to do away with Obamacare altogether have come and gone. Now, Obamacare is not merely a policy problem, it is a political problem as well, and the two are inextricably linked: The program damages health care as a whole while favoring key groups who can be expected to fight to protect their new benefits. It is not enough that conservatives develop good policy alternatives to solve the problems Obamacare creates; they must also adopt innovative political strategies. 

 

Success is far from guaranteed, as history indicates. Generations from now, Americans might still be stuck with the ill effects of Obamacare, just as we are still saddled with the corrupting remnants of the AAA. 

Jay Cost is a staff writer at The Weekly Standard.

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