Saturday, December 1, 2012

Obamacare: A Matter of Allocation--Or Regulating the Low Wage Job Creator Moocher Class

Approximately 61 percent of adults in the U.S. are covered by an employer sponsored health plan.  The percentage is higher for whites, lower for Hispanics and blacks, and lower overall in light of the recession.  Ezra Klein of the Washington Post provides a serviceable explanation of how this came about. 
 The hinge question in health care reform is "where do you get the money?" And the main … pot of money in health care reform comes from the employer tax exclusion. … [It] is a World War II-era tax quirk. The Roosevelt administration had instituted wage and price controls to prevent profiteering. Excess profits were taxed at (very) high rates. Wages were frozen so employers couldn't offer raises. But the government decided to exempt health benefits from these rules. So corporations took their wartime profits and plowed them into health care benefits. In 1953, with the war over, the IRS tried to overturn the rule. Congress overruled the IRS. 
And so here we are. If you walk out, on your own, and attempt to [purchase health insurance], you're taxed on that dollar. If your employer [purchases insurance] on your behalf, that dollar is not taxed. As a result, getting health insurance through your employer [is] a much better deal than purchasing it with your wages. This … made employer-based insurance the default. 
Obamacare won’t change this.  In fact, Obamacare is trying to increase the percentage of workers covered by employer sponsored health plans.  Effective in 2014, employers with more than 50 employees must offer health insurance and if they don’t, they will be taxed $2,000 per employee. This has led to some recent impolitic statements by angry CEO’s about lay-off’s and converting full time jobs to part-time jobs in light of Obamacare. 

Many on the right have been arguing for years that it’s bad policy to rely on employers to provide health care coverage, and we should stop it.  For example, the libertarian CATOInstitute argues that it would be better if workers controlled their own health care coverage, e.g.  through an expansion of HSA accounts (tax deductible accounts used to purchase health care).  CATO argues that a lack of employee control creates a disconnect between the consumer and the provider:  employees are apt to be more wasteful, less sensitive to cost implications of their health care choices; employer sponsored plans are regressive because higher compensated employees get better plans; it puts pre-paid plans like Kaiser, which tend to be more efficient, at a competitive disadvantage because efficiency is less valued by consumers who do not pay for their own health care; and it generally depresses competition because employers, in order to save administrative costs, tend to offer few plans.  But on a broader philosophical level, CATO objects that giving employer’s control over health care plans of workers means employers, with the encouragement of the government, control “28 percent of the $2.5 trillion sloshing around America’s health care sector.” 

At the root of this, of course, is a huge fallacy.  Says CATO:
 A survey by economists Michael Morrisey and John Cawley found that 91 percent of health economists agree that the money that employers use to purchase health insurance comes out of workers’ wages. In other words, if employers were not providing health benefits to workers, they would have to return that $9,000 to workers in the form of higher cash wages. That implies that, rather than encourage employers or shareholders to spend their own money on workers’ health benefits, this tax break instead gives employers control over a significant portion of their workers’ earnings.
 But that is just plain wrong.   As explained in this NYT article, the problem is that many businesses operate on profit margins and wages that are so low that neither the employer nor the employee can afford to pay $6,000/year for health insurance.  Hence the large pool of employed uninsured—a problem Obamacare is trying to fix.
 “Like many franchisees, Robert U. Mayfield, who owns five Dairy Queens in and around Austin, Tex., is always eager to expand and — no surprise — has had his eyes on opening a sixth DQ. But he said concerns about the new federal health care law had persuaded him to hold off. … “Any dollar that gets diverted, whether it’s through Obamacare or increased tax rates, puts franchisees one dollar further away from being able to expand their businesses,” said Don Fox, chief executive of Firehouse Subs, a fast-growing chain of 559 restaurants based in Jacksonville, Fla. At the 30 stores the corporation owns, only full-time managers are offered coverage. Mr. Fox is wrestling with whether to absorb the considerable cost of covering 100 more employees or pay the penalties — which would probably cost him less — but risk losing valued employees to competitors who choose to offer coverage.
 Employee health coverage now averages nearly $6,000 for an individual plan. That is considerable for businesses like restaurants in which the majority of workers make $24,000 a year or less, according to research by the Kaiser Family Foundation. The foundation found that only 28 percent of companies that employ large numbers of low-income workers offer health benefits. “This is where the biggest set of hurdles is,” said Gary Claxton, an executive with Kaiser.”
The problem faced by Papa John’s and the Dairy Queen franchisors is real.  Consumption of fast food is sensitive to price and if they have to raise prices on their product to cover the $6,000/employee for health care coverage, or the $2,000 in tax penalty for not providing coverage, this may make them hold back from expansion, or it may force them to cut back. 

But should we be encouraging “job creators” to create jobs that don’t pay enough for workers to eat and obtain basic health care?   If jobs don’t pay enough to live on, then society must subsidize those jobs through food stamps, Medicaid, and the like.  Job creators like that are moochers.    They pocket profits enabled because society subsidizes their workers. 

Ronald Coase won a Nobel prize in economics back in 1991 for his work on how many things that are regulated can in fact be better handled by private party negotiation, i.e. by the free market.  But Coase also recognized that when practical difficulties prevent private parties from negotiating an efficient contract with each other, then government must step in and make an approximation and enforce a rational cost benefit transaction.   In the United States today, we can afford to create jobs that pay enough to eat and obtain basic health care.    However, because there is an oversupply of unskilled labor the free market does not assure that employers will pay a living wage.  Therefore, government must step in to enforce rational wage structures that allow workers to eat and obtain health care. 

In part, that’s what Obamacare does.  It enforces rational wage structures that properly allocate the cost of providing health care for employees to the job. This regulation is necessary because, if the market is allowed to work without restriction, the low wage job creator class will mooch off the rest of society by having society subsidize their workforce.  

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