Can Government Compete Fairly?

I think it is possible for government to compete fairly with private enterprise, although I cannot think of an instance where it has happened. When the question is posed, what first comes to mind are subsidies by taxpayers to the government operation. That’s true, but there are also issues of access to and the cost of capital, costs of building market share, equatable rules of competition, and the risk of failure. All of these factors must be taken into account when considering if there is level playing field. I’m here to help.

If an ordinary citizen has identified a market and wants to start a business to serve it, one of the first concerns is securing the capital to buy facilities and hire employees. Few business start making money on day one, so financing is needed. If it’s very small business, the capital might come out of your saving or from a loan from Uncle Harry. The government isn’t going to do anything small, and, lord knows, it doesn’t have any savings. The avenue is then to write a business plan showing how much money is needed and how it will be repaid. Investors will then consider the risks and potential rewards, and decide if they will put up the capital.

That is usually a non-starter for government. Private markets would never risk the capital needed to legitimately fund a gigantic government operation like a health insurance venture, at least not without guarantees of the full backing of taxpayers. Backing by the taxpayers, however, would be unfair competition. Nonetheless, we don’t want to kill the idea of government ventures at the starting gate. Instead, we will charge the venture at the interest rates prevailing to commercial ventures comparable in size to the new government venture.

Taxpayers should receive not just the rate on government bonds, but rather the rates appropriate to risky commercial ventures. For a health insurance venture, we can use the rates at which large health insurance companies are borrowing money. That’s not quite fair, because the existing companies have a track record. But charging the rates at which, say, the government lent money to AIG will be close enough.

Usually, a new competitor starts small and builds market share slowly by establishing a record of positive performance. A new insurance company would have to start in one state, then expand later if and only if they were successful. It would be a good idea for a government venture to follow that route, and fair competition dictates that they must. Of course, that’s not how government works. So again we are forced to make allowances if they are to have a chance. We can put an additional charge on their books that taxpayers will get back for building market share. Ventures like FedEx, CNN, and USA Today lost money for years before they reached the scale needed to break even. We’ll just estimate the cumulative debt and put it on the books of the government venture.

Now we get to the rules of equitable competition. It would be grossly unfair for a government insurer to offer policies across state lines without private insurers being given an equal opportunity to do so. In that vain, if private insurers are subject to onerous state regulations and reporting requirements, then the Feds must operate under an equal burden. The is no need to make allowances, the Feds get the same regulations.

In the interests of equity, the government venture should conform to all the Securities and Exchange Commission regulations, Sarbanes-Oxley requirements and so forth that are imposed upon large corporation. the venture should fill out all of the tax forms and be subject to audit by all the government agencies whose job it is to audit them. The taxpayers ought to get all of this information anyway, since they are in effect the stockholders.

Ordinarily, the Feds get special treatment for lawsuits. They cannot be sued without their permission. That would have to be waived in the interests of fair competition.

Government ventures do not ordinarily pay local real estate taxes, sales taxes, or income taxes.Fair competition dictates that any government venture pay real estate and sales taxes or equivalent fees in lieu of taxes. While ventures like the Postal Service commonly exempt themselves from local taxes, there is precedent with some military installations paying equivalent fees. It can be done.

Private insurance companies do not to keep all of their profits. They pay state and federal income taxes, at the rate of forty to fifty percent of profits. thus private health insurance includes payments to states and the federal government into general revenues. If those taxes are not paid it would be unfair to taxpayers who would have to pick up the slack. Consequently, for fairness, a government venture ought to make payments in lieu of income taxes. Those payments could be keyed to the taxes paid by the private sector as a percentage of their revenues. If the private sector has a bad year and pays little income tax, then the government venture would be spared as well.

Private corporation cannot require customers to use their services, not can they impose price controls on their suppliers, so there will be none of that in the new era of fair competition by government. Hospitals, physicians, and nursing homes will be allowed to decline accepting patients at government rates, and customers can decline coverage at government rates.

Under present Medicare rules, investigations of gross fraud are charged to the Justice Department. Such investigations would only be charged to the Justice Department if similar fraud investigations are so chrged by private insurers. Otherwise, they are charged to the government insurance venture directly.

Ordinary ventures fail if they do not turn a profit or at least break even. Consequently, the length of time required for government failure will be established at the outset, and the government venture will close down or be sold off if the criteria are not met. Five years would be reasonable, since the operation starts at full scale. This avoids the trap of the Postal Service and public transit agencies that lose money virtually every year forever, but never go into bankruptcy. Fair competition requires that they be allowed to fail, and their assets taken over or liquidated on the open markets if they cannot compete.

So there you are. There are ways for government to compete fairly with the private enterprise. The question is whether proponents of fair competition from the government step up to the challenge.

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