What Is Seen…..

by Don Boudreaux on October 11, 2008

in Health, Myths and Fallacies, Work

Washington Post columnist E.J. Dionne, perhaps channeling Malcolm Gladwell, commits a truly bad economic mistake.  Like all such mistakes, it’s one that results when someone looks only at the surface, with no analytical penetration beyond what is most easily seen.

Here’s Dionne:

Few investments would help businesses more than offloading a share of
their health-care costs to the government. It’s social justice with an
economic kick.

Rather than explain in detail the flaws that saturate this idea, I content myself now only to ask: If Dionne is correct that the efficiency of American businesses would generally be improved if government paid for all workers’ health insurance – that is, if government paid part of firms’ costs of employing workers -  then is it also true that the efficiency of American businesses would be further improved if government paid firms’ full wages bill?

Put differently, if the U.S. economy would get "an economic kick" from government paying part of firms’ costs of employing workers, why would the economy not get an even bigger kick if government announces to all employers: ‘From now on, government will pay all of the expenses you incur in hiring and maintaining employees.  Government will pay not only one type of fringe benefit, as Mr. Dionne proposes, but all of your costs of employing workers.’

So no firm would any longer have to pay as much as a single cent to hire and maintain workers.  Wages, salaries, and fringe benefits – all benefits from health-insurance premiums to office holiday parties – would be fully covered by government.
…..
Who thinks that it would be a good idea for government to pay all expenses that firms now incur in hiring and maintaining workers?  Who supposes that the American economy would thereby become super-efficient?  I’m pretty sure that E.J. Dionne would oppose any proposal to have government pay all such expenses now paid by individual employers.  But if so, what is his logic for supposing that it would be good for the economy for government to pay only part of these expenses?

(I might post later on other problems with Dionne’s proposal?)

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{ 40 comments }

Stranger October 11, 2008 at 6:20 pm

Yes..please do! Such claims can have a real intuitive appeal; a proper response would be very insightful.

johnleemk October 11, 2008 at 6:20 pm

Socialized medicine is in abstract not a good idea. However, I think it would definitely make good sense to at least end government intervention in the healthcare market. The USA is probably the only country in the world where people expect their employers to pay for their healthcare. Almost anywhere else, people take their salaries and pay for their own medicine. The reason? The US government encouraged businesses to compensate employees in this way because of wage controls during WWII. There is no good economic reason for things to be this way; it's the exact opposite of a free market. Businesses should not be responsible for paying my medical insurance bills anymore than they should be responsible for my auto insurance or my groceries.

Sam Grove October 11, 2008 at 6:34 pm

The USA is probably the only country in the world where people expect their employers to pay for their healthcare

I'd like to restate that.

The USA is probably (is that true?) the only country in the world where people engage in the illusion that their employers pay for their health care. In many other countries, the people engage in the illusion that the government pays for their health care.

tarran October 11, 2008 at 6:38 pm

The thing is, there is a price bubble in U.S. medicine that is every bit as pernicious as the housing price bubble.

The problem is caused by government subsidies, particularly of Medicare as well as the employer sponsored insurance programs. These programs allow people to "purchase" medical services that are paid for not by the consumer, but by a third party with deep pockets.

Since providers will charge whatever the market will bear, the end result is that prices go up. And the more prices go up, the more the government tries to subsidize consumers in an attempt to make medical care more "accessible".

If we want medical care to become more affordable, we must lobby for the end to state subsidies paid with taxpayer dollars, and to alter the tax code so that the employer funded model no longer is made the cheapest method of procuring health care.

Initially, many consumers would find themselves unable to afford medical care at current prices. However, when people cannot afford their prices, doctors don't get paid. They have to reduce their prices to affordable levels again. And, for the first time in many years, doctors will engage in price competition.

Price competition is a major driver of innovation. It is particularly useful in providing incentives for entrepreneurs to invent new methods of doing things that cost less than the older methods they supplant. This process is precisely the one that, to cite on example, ensures that poor children today have what only rich children could afford 100 years ago: shoes that fit.

John V October 11, 2008 at 6:50 pm

While I agree with your sentiment, Dr. Boudreaux, I suppose the easy counter that Dionne or anyone advocating government-run insurance would give is that health insurance shouldn't be considered a cost of employing or maintaining employees.

He may say that such costs should not even be a business expense…much like paying car insurance or home owners insurance of employees should not be employer expenses for employing or maintaining employees.

In that sense, he would be right. Sadly, the conclusion he would draw from such a counter-statement would not follow the logic he would use for other types of insurance.

He would say that health insurance is a "public good"…like defense spending, public roads or the court system. From there, the argument changes entirely.

Then the argument saying that health insurance is a "public good" becomes a matter of asserting one's values and the debate becomes difficult to have.

kurt October 11, 2008 at 7:11 pm

John V, it's not a cost to business, as these costs (in a market economy) are fully passed on to the employees themselves. The only reason why employers should offer health care to their employees is because of economies of scale, and certain definite class risk benefits.

John B October 11, 2008 at 7:37 pm

Fear of physicians. Thats the real problem. No one has the guts to stand up to them.

Crusader October 11, 2008 at 8:04 pm

John V – then anything can become a "public good". I say leave "freedom" as the public good and let everyone hash the rest of it out.

LowcountryJoe October 11, 2008 at 8:21 pm

Why would EJ want to stop at healthcare? That's a good question, Don. But instead of using the argument: "then why not have government pay the wages of all U.S. business's employees", go completely socialist and ask "then why not pay for all the workers food, housing, and transportation costs ensuring that everyone gets equal amounts of each; complete equality of condition"?

swernga October 11, 2008 at 8:29 pm

If the government paid for all employee's health insurance, then we might expect prices (of goods and services) to decline commensurate with the reduction in expenses. But, wouldn't the government just raise taxes to cover the cost of insurance resulting in no change in prices? Where's the economic kick in that?

John V October 11, 2008 at 8:42 pm

Crusader,

You're preaching to the choir. I'm simply preempting the likely response.

T L Holaday October 11, 2008 at 8:56 pm

I am disappointed that an economist fails to point out that because employee health insurance is deductible as a business expense, the taxpayers are already paying for health insurance.

Don Boudreaux October 11, 2008 at 9:07 pm

TL Holaday,

Being tax deductible does not remotely mean that taxpayers pay for the tax-deductible expense.

If the firm's marginal tax rate is 40 percent, a tax-deductible expense of $1.00 means that that firm's tax obligation, as a result of incurring that expense, is lower by $0.40 – not lower by the full $1.00.

Crusader October 11, 2008 at 9:11 pm

TL – you seem to try to be contrary to every single post here.

GMU Phil Guy October 11, 2008 at 9:52 pm

In this line too:

Now, the government is obligated not only to prop up the economy but also to bring back long-term growth.

I cringe when I ponder what Dionne might mean by "prop up the economy" in an essay that praises Obama as the next FDR.

As for McCain, his campaign is trying to sow fear and panic about Obama. That's exactly what Herbert Hoover tried to do with Roosevelt. Days before the 1932 election, Hoover attacked Roosevelt's "inchoate New Deal." He predicted it would "crack the timbers of the Constitution" and warned voters to beware of the "glitter of promise."

To me, this sounds like the author is praising Hoover's spot-on assessment of the New Deal. But I know it's just an attempt make Hoover look foolishly wrong about FDR.

Sam Grove October 11, 2008 at 10:57 pm

I am disappointed that an economist fails to point out that because employee health insurance is deductible as a business expense, the taxpayers are already paying for health insurance.

Taxpayers don't pay for anything. Everything is paid for by producers. Taxes are the means by which government extracts value from producers.

Consider: government employees pay income taxes. But gov't employees incomes are derived from taxes, so when they pay taxes, they effectively pay it to themselves. Wouldn't it be cheaper to pay government employees less and exempt them from paying income taxes? It would reduce the accounting burden.

Crusader October 11, 2008 at 11:04 pm

GMU – but Hoover signed the Smoot-Hawley anti-trade act. He deserves as much blame for creating the Great Depression as FDR does for prolonging it.

T L Holaday October 12, 2008 at 1:00 am

Don,

Do you accept that what is nominally health insurance in the U.S. is actually prepaid health care? Do you accept that health insurance is not a deductible expense for the self employed? Do you accept that health care expenses are only deductible for individuals on Schedule A to the extent that they exceed 7.5% of income?

How, then, do you deny that taxpayers are essentially paying for nearly half the health care of employees already?

T L Holaday October 12, 2008 at 1:02 am

Crusader,

If Don and Russ wanted a cheering section, they'd go to a football game.

Gary October 12, 2008 at 1:20 am

I would argue that the government paying for health care for taxpayers WOULD in fact dramatically improve the business environment. Since we all know that while my money doesn't grow on trees, the government's does. By extension, that means that when the government takes money from their trees to spend on health care, its not as if anyone has to pay for it. Its FREE! And as such, provides more profit for the businesses!

Obviously the best way to boost a consumer driven economy is to take money from consumers and transfer it to government to be disbursed… poorly.

/sarcasm.

Babinich October 12, 2008 at 5:50 am

Don says:

"Washington Post columnist E.J. Dionne, perhaps channeling Malcolm Gladwell, commits a truly bad economic mistake. Like all such mistakes, it's one that results when someone looks only at the surface, with no analytical penetration beyond what is most easily seen."

I have a copy of Economics In One Lesson by Henry Hazlett on my desk as I write this. I'd suggest that EJ pick up a copy.

In the name of efficiency why stop at health care and having government pay wages?

Lets raise taxes (destroying production), fix prices (impacting supply and demand), & implement a minimum wage (impacting employment negatively).

Freddie & Fannie – GSEs.

Have we learned NOTHING about government intrusion into the free market over these last nine years?

Speedmaster October 12, 2008 at 6:58 am

And perhaps the worst part? Mr. Dionne's vote counts as much as yours or mine.

I_am_a_lead_pencil October 12, 2008 at 9:04 am

Crusader said:

"If Don and Russ wanted a cheering section, they'd go to a football game."

Don criticizes a Dionne article which says that "Few investments would help businesses more than offloading a share of their health-care costs to the government."

You argue (incorrectly) that these costs are paid for now by taxpayers: "…the taxpayers are already paying for health insurance."

You consistently argue parallel to the point raised…like cheering for a team that isn't even on the field.

LowcountryJoe October 12, 2008 at 9:10 am

>>Do you accept that what is nominally health insurance in the U.S. is actually prepaid health care? ~ TL<<

Only if the health care consumption is used by the health insurance premium payer. And couldn't the same thing be said of all insurance…that it's just prepaid amounts for certain coverage just in case one were to want to use it after a qualifying event?

>>How, then, do you deny that taxpayers are essentially paying for nearly half the health care of employees already?<<

TL, if you really wish to make some headway in your argument, take the arguement beyond just employees (those participating in the labor markets).

Line items 550 (Health) and line items 570 (Medicare) of just the federal budget total over $660 BILLION. This does not even include the $31 BILLION spent on veteran's health. Maybe we aready do have socialized medicine!

Source data from Excel spreadsheet from the Government Printing Office

Sam Grove October 12, 2008 at 1:14 pm

And I'll repeat, "taxpayers", those who have numbers transferred to and from bank accounts via the tax collection process, do not PAY for anything.

All values consumed via government are paid for by the labors of producers. That many producers are taxpayers is acknowledged, but misses the point. Taxes are a method of resource allocation by government.

If someone hasn't produced anything of value, it doesn't matter what they pay in taxes, they haven't produced any value that can be consumed by others. That it, they haven't produced anything that can be allocated to others via government spending.

Thus, government employees are NET tax beneficiaries. Their tax returns are just an accounting shell game.

Gary October 12, 2008 at 1:45 pm

Sam,

While I generally agree, your statement:

"Thus, government employees are NET tax beneficiaries. Their tax returns are just an accounting shell game."

May not be entirely true. Certainly there is added value in some government work. That's not to say similar work couldn't be accomplished by the market, but if you look at the investments many infrastructure funds are making (The Carlyle Group's infrastructure funds are bidding for airports and toll roads, among other projects built with government dollars) these expenditures have clearly added value… enough value that companies are willing to spend billions to take them over.

Sam Grove October 12, 2008 at 3:40 pm

IOW, things are muddied by government participation and clarification can be achieved by putting such operations in the market.

Let me qualify, if a marketable endeavor manned by government employees costs more than it would in the market, then the employees are net beneficiaries in the amount of the difference.

Methinks October 12, 2008 at 7:01 pm

The only reason why employers should offer health care to their employees is because of economies of scale, and certain definite class risk benefits.

Which exist largely because of government intervention in the first place.

vidyohs October 12, 2008 at 8:07 pm

Gary,
"in some government work…./…….. built with government dollars)?
Posted by: Gary | Oct 12, 2008 1:45:08 PM

Iiiiiiiiii…..dunno, Gary. Seems far fetched to me. But, maybe it's because I don't what defintion you thought when you wrote the words "government work". And, BTW where did those government dollars come from?

Rebecca October 13, 2008 at 8:55 am

Some of the posters here may find some interesting articles written by Dr. Harris or the Northern Institute of Urology in Traverse City, Michigan. (I don't know how to make links, so apologize) He has been running a cash and carry medical practice since 2001 and his first hand perspective in the comparison of government and insurance verses the way he operates today is worthwhile reading.

My sister and her husband are both in the medical field in the area, and when my brother in law had problems last year, that is who they used.

Sample of articles: Administrativectomy: The Cure For Toxic Bureaucratosis

Gary October 13, 2008 at 9:23 am

"Iiiiiiiiii…..dunno, Gary. Seems far fetched to me. But, maybe it's because I don't what defintion you thought when you wrote the words "government work". And, BTW where did those government dollars come from?"

So you would argue that while a private high school may add value by educating students, a public one does not add value?

If the government is engaging in an activity that private companies would engage in given the opportunity, they are adding value (at least, they are adding value in as much as a private company would). The government generally does so less efficiently, and in some cases is only able TO do so because they have the benefit of bad laws (eminent domain, etc.). They presumably add less value than the private company does, but they add value none the less.

Hammer October 13, 2008 at 9:48 am

"Do you accept that what is nominally health insurance in the U.S. is actually prepaid health care?"

I don't. If I get diagnosed with cancer tomorrow, go through a few million in medical bills, I haven't paid for all that already. Everyone else in that plan that didn't get sick paid for it. If I die after treatment, they still pay.

Further, if I stop working tomorrow, I don't get a credit for all the money I have paid towards insurance, or all the extra pay I have forgone in order that my employer will buy insurance for me. It is just lost. If it were "pre-paid" I would still be entitled to the money I put into the account.

vidyohs October 13, 2008 at 10:36 am

Gary,

"So you would argue that while a private high school may add value by educating students, a public one does not add value?"

If we both subscribe to the theory that "if just one life was saved" then there was value.

I am a cynic, so I don't subscribe to that.

This would bring us to the word value, and it is a word that in the context of our discussion must be applied to the whole of the exercise – educating a student body.

Is education the primary function of public schools? I have my doubts, I have come to believe that indoctrination is more of a concern than education. The kids are indoctrinated and any education they pick up in the process is a stoke of luck.

In Manvel we have a nice spanking new public High School that I estimate will have a average class size of maybe 600 to 800 hundred children. If we followed the sophomore class through its three years to graduation we would find that pretty close to half of those have dropped out after having incurred on behalf of the people a large expense to have taken them as far as they did go. How do we weigh cost Vs results to determine value there? If the kid is functional at the lowest employable level can we attribute that to the public school education? Is that value? I tend to think of value in slightly more elevated terms than just functionality.

True of the class that began its sophomore year there will be a very small percentage that wanted an education, sought an education, and got one sufficient to enter any college unimpaired with need for remedial work. There will be another small percentage that with remedial work may make it through a college and get a degree. The vast majority will graduate at the barely functional level and any employment they seek will almost always require industrial or professional training done by the prospective employer.

Is that value when it is weighed against the cost, is it value when it is weighed against the results?

Is there value in indoctrination? There is if one wants docile and compliant "voters" who fork over a staggering percentage of their value to the government each year through excise and income taxes, submit their bodies and the bodies of their children to the meatgrinder of foreign wars, and never even stop to question or ask, "Why am I doing this?" because the indoctrination renders them incapable of conceiving the question much less have the courage to stand up and ask it.

Private schools are not required to indoctrinate political and social philosphies and are able to concentrate on education. My God, they might even be able to teach kids to think. What a novel idea!

So what value do we get from "government work" done with "government dollars" that couldn't be far exceeded by private work with private dollars.

My answser is none.

mardam October 13, 2008 at 11:08 am

But, isn't one of the conservative mantras that large corporations (and small ones) can't compete in the global market because of health care costs for workers?

Are you trying to have it both ways here?

MichiganRefugee October 13, 2008 at 11:29 am

Why stop at healthcare? I want my car insurance paid for by the Federal Government. This would be an excellent investment too! That way, I can offload the risk of my poor driving record onto the public at large. That way, I can afford a more expensive vehicle, insured at my neighbor's expense. Of course, the government would someday have to mandate what kind of vehicle I could by, what features it would have, and which GSE would manufacture it. Kind of reminds me of Henry Ford's approach to the Model T: "You can have any color you want, as long as it's black".

Please government, give me fewer choices, so I don't have to think as much. It's hard to think at times like these!

John Smith October 13, 2008 at 11:49 am

Socialized medicine: everyone must pay

Some people pay as little as $300 a year and some may pay as much as $22,000 for the same quality insurance policy.

Can you think of any other product that you have to pay for according to your income? When you buy a car, does the dealer look at your tax return and say, “Well, this car is going to be ten times as much for you as it is for me”? It’s a great way to redistribute the wealth.

A is the customer, B is the service provider. B tells A what service he should buy. Then a third party pays for it from a common pool of funds.

This problem has no economic solution. We have simply disconnected supply from demand by taking the price to be paid directly by the customer out of the equation. Thus we have absolutely no control over the cost of this system. No wonder the cost keeps going up and up and up. Medicare is a perfect example.

Gary October 13, 2008 at 11:59 am

"So what value do we get from "government work" done with "government dollars" that couldn't be far exceeded by private work with private dollars."

This is not the issue at hand, in fact, I conceded this point. I take issue with saying that no value is added by the government. Indeeed, government in most cases (in fact, I can think of no cases in which this is not true) provides less value per dollar when compared to public work. That's not the same as providing NO value.

When NASA puts a satellite in the sky for DirectTV, DirectTV's network is improved. Could this be done by private businesses? Yes. But that doesn't change the fact that value has been added for DirectTV, and presumably its viewers by NASA putting the satellite into orbit. The fact that a private business isn't doing it does not mean no value was created.

vidyohs October 13, 2008 at 9:52 pm

Gary,

Okay, NASA puts a satellite in the sky for DIRECTTV and DIRECTTV has added value. Great.

What added value did I get out of it when it was my dollars that were used and I don't watch TV as I consider it to be an utter waste of time and infantile in content. Are there others like me, maybe. Are we a majority, probably no where near it.

I understand what you're saying, Gary, but value is an extremely subjective word and idea which is very difficult to state with assurance in regards to anyone but ourselves.

But by the by, Gary, when governement engages in business dealings it is doing something that it is never intended to do and therefore, in MHO, is decreasing its value as the government it is intended to be.

Wow! I am outa here!

Sam Grove October 13, 2008 at 11:58 pm

I propose that government education is destructive to value in net.

It deploys an age segregated system which cannot accommodate developmental variations within age groups.

It subjects children to socialization by other children rather than by adults who usually know how to behave with a modicum of sense.

It subjects them to indoctrination by government employees. The idea of government education is a 'progressive' one and will necessarily endeavor to indoctrinate children in 'progressive' ideals.

Capable children are often bored while the teacher must deal with problem students.

These factors, among others, can actually be destructive to the intellectual development of many children.
____________________

For some set of children, the format of standardized education may work just fine, but for others, the result can be very poor.

GMU Phil Guy October 14, 2008 at 5:03 pm

Crusader,

I hold Hoover accountable for the actions he took, but I don't think he deserves as much blame as FDR. However, it was the New Deal that Hoover was (rightfully) warning against and just because he made a bone-headed move by not vetoing Smoot-Hawley, doesn't mean he wasn't correct about FDR's plans.

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