To the amazement of millions David Brooks had an interesting observation in his column today. He picked up an article by my friend Steve Teles which outlines the story of kludgeocracy.
Steve's idea is that we often end up advancing policy goals in incredible indirect and inefficient ways because this is the only way to move forward. The Affordable Care Act could be the poster child for this point. We got an incredibly complicated and unnecessarily expensive system because the insurers, the drug companies, the medical equipment suppliers, and the doctors all pushed to ensure that they would get their cut of the pie on the way to getting closer to universal coverage.
Steve gives many other examples in this article. My personal favorite is flexible spending accounts, which allow people to squirrel away some amount of money on a pre-tax basis to pay for health care expenses, child care expenses, or work-related transportation expenses. The point is to have the federal government subsidize these activities.
The absurdity is that the payroll costs to employers for administering these accounts are often a substantial portion of the money being saved. A fee of $20 per employee would not be unusual. If that employee puts aside $1000 a year in an account and is in the 25 percent tax bracket, this implies the tax subsidy is a bit less than $400. (The money is also exempted from the payroll tax.) A $20 fee would imply that 5 percent of the savings are being eaten up in administrative costs.
In addition, the worker loses money not spent by the end of the year. This gives them an incentive to buy items not really needed (e.g. an extra pair of glasses) to avoid losing the money. Filling out the forms can also be very time-consuming for workers.
The shape of the subsidy is also awful from a distributional standpoint. Wealthier people stand to get the largest subsidies.
Of course the government could just subsidize health care directly, which would be far more efficient. But, all the people in the financial industry who make profits from managing flexible spending accounts would be very upset. Therefore we can expect these accounts to be around for some time. This is kludgeocracy.
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