According to President Obama, government health insurance will create competition in the health insurance industry. It simply would provide another alternative to existing plans offered by private companies, the argument goes. Like many Americans, we simply don't believe it. Whenever the government enters into a market, it will try to expand its share and take over the sector. During a town hall meeting last week at Portsmouth, N.H., Mr. Obama pointed to the U.S. Postal Service as evidence that private companies don't need to worry about competition from the government. "If you think about it, UPS and FedEx are doing just fine, right? No, they are. It's the post office that's always having problems."
If the president considers the Postal Service as an example, we should all be scared. The Postal Service is a classic example of both inefficiency and extreme monopoly power.
The Postal Service has staunchly resisted competition from UPS and FedEx since their infancy. Even though the Postal Service loses money in the overnight delivery business, it resisted infringement on its turf. The Postal Service has often increased its first-class mail rate to be well above cost, then used those profits to subsidize its overnight delivery service. For example, it raised first-class stamps to 33 cents in January 1999 and simultaneously reduced the price of domestic overnight express mail from $15 to $13.70, even though it was already losing money at the $15 rate.
Despite numerous advantages that FedEx and UPS could only dream of having, the Postal Service loses money. In addition to direct subsidies, the Postal Service is exempt from paying state sales, property and income taxes. It uses some of the most expensive real estate in the country rent-free. Perhaps Mr. Obama has not noticed, but nobody else but the Postal Service is allowed to deliver regular first-class mail, and only the Postal Service has access to Americans' mailboxes.
The Postal Service has not managed to kill off UPS and FedEx because these private companies have better on-time delivery and much lower costs. But that is not because the government postal business did not try to squeeze out the competition. When a government agency gets into an industry, it tries to get bigger, even when it is not profitable.
The competition that Mr. Obama envisions between government and private insurance companies won't be fair. Many proposed regulations, such as eliminating caps on what insurance companies will pay out or preventing insurance companies from discriminating against those with pre-existing conditions, will eliminate private insurance. But even if the government only tilts the playing field partially in favor of a government insurance plan, making it artificially cheaper, a lot of Americans will give up their private insurance to save money. Government insurance gradually will take over, and service will deteriorate.