Heads I win, tails you lose

What big banks, big pharma and the Big 10 have in common

Proud self-sufficiency has always been a part of the American myth. It was often overstated, in the way myths are; but enough existed to distinguish American society from the societies of many other countries. America was slow to adopt business regulation and social-welfare programs common elsewhere.

Even today, the bashing of government is a reliable vote-getter among large sections of the American public. But the bashing is far more rhetorical than real, and the capture of government to serve private interests has become a predictable feature of American politics.

In an ideal world, a blending of individualism with collective action would combine the best aspects of each. The strength of individualism is its focus on personal accountability; when people are held responsible for their behavior, they tend to perform better than when they’re not. The strength of collective action is its capacity for comprehensiveness. Governments can provide goods and services more broadly and equitably across societies than individualistic methods can. The perfect blend would be a system that holds individuals accountable while guaranteeing no one is left out.

Alas, the system that has evolved in America often does the opposite. Rather than enjoying the best of individualism and collectivism, we suffer the worst. We get the inequities of the former and the clumsiness of the latter.

Consider three examples. First, the banking system. Until the 1930s, banks were allowed to fail like other businesses. But the banking crisis of 1932-33 caused the federal government to devise schemes to rescue the banking industry, lest its utter demise make the Great Depression worse. The Banking Act of 1933 merged weaker banks with stronger ones and underwrote the arrangement with federal money. The industry was rescued; the bankers were spared the consequences of their bad decisions during the previous decade. They lived to lend another day.

The arrangement was made permanent with the creation of the Federal Deposit Insurance Corporation, which put the faith and credit of the government behind each member bank. Yet another bailout was required in 2008, after the giddiness of the 1990s prompted a relaxation of government oversight of the financial industry. Once more the government bailed out the banks, again saving the bankers from the consequences of their folly. 

Through all of this, the banking system remained securely in private hands. Briefly in early 1933, critics of bankers called for the nationalization of banks. But Franklin Roosevelt resisted, and the mood passed. The result has been an alternating system of capitalism in good times and socialism in bad. When the banks turn a profit, they get to keep the money, but when they make a loss, the government absorbs it.

Something similar occurs in the pharmaceutical industry. Big pharma is regulated for consumer safety but not for unseemly profits. In fact, a substantial part of the industry’s profits is guaranteed by government policy. Since the 1960s the federal government has been the largest purchaser of medications in America, chiefly for the Medicare program. In the private sector, a large purchaser typically has negotiating power with its suppliers. But under law, Medicare has very limited authority to negotiate prices with pharmaceutical companies. It has to pay whatever they charge. (The recent Inflation Reduction Act changes this only a little.)

Higher education is the most recent industry to capture government in the name of individualism. Until a generation ago, most undergraduates didn’t borrow much or at all to finance their studies. But as states reduced their funding for public colleges and universities, the federal government ramped up lending, lest young people with brains and ambition but not money lose access to a college education. Today the average student departs college owing around thirty thousand dollars.

President Biden recently forgave a sizable part of that debt. The beneficiaries will be the student debtors, relieved of full accountability for their borrowing decisions, and the colleges and universities, which otherwise might have had to roll back the tuition increases made possible by the government loan program.

Conceivably future students will be chastened by the close call of their older siblings and cousins. More likely the lesson taken will be that the government can be counted on to rescue student borrowers. After all, the government has been rescuing banks for almost century and underwriting pharmaceutical companies for decades.

We Americans remain rugged individualists—in our dreams. The dreams grow ever more detached from reality.