Wages at Wal-Mart

by Russ Roberts on July 7, 2009

in Health, Wal-Mart

Shopping at Wal-Mart yesterday, I asked the cashier if she liked her job. Yes, she said, smiling. How long had she been at Wal-Mart? Three months. Where had she worked before? Safeway, the grocery store. Why did she come to Wal-Mart? The pay was better. Really, I asked? How, yes. How were the benefits at Wal-Mart compared to Safeway? Not as good. But she needed the money, she told me. She had a young daughter.

I didn't get to ask her if she had health care coverage at either job. But the conversation reminds me that people prefer different mixes of cash, retirement, health care and so on.

Which is why the political pressure and the threat of coercion that lead to this kind of result is so dangerous and harmful to human beings and other living things.

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{ 49 comments }

vikingvista July 7, 2009 at 4:15 pm

I like to think Sam Walton, economist that he was, is rolling in his grave. This is a clear example of a powerful force for good turning to the dark side.

megapolisomancy July 7, 2009 at 4:26 pm

This is a fine example of people on both sides of the issue having a valid perspective. Wal-Mart is not the evil employer as critics and unions portray it. On the other hand, such corporations do lobby for regulation that mainly benefits them at the expense of competitors.

See:
Undercover at Wal-Mart

Jeremy July 7, 2009 at 4:31 pm

I can't fault a company for acting in its own best interests. Wal-mart believes that backing a mandate is its dominant strategy, given the current climate. Who am I to say it's not?

To be sure, I don't believe that a health insurance mandate is the socially-optimal outcome, just as I don't believe that socialized medicine is the optimal outcome. But it's possible that private interests don't coincide with public interests. In fact, private interests are the only reason that anybody would suggest an insurance mandate or a socialized medicine scheme in the first place.

Dave July 7, 2009 at 4:34 pm

Political pressure and coercion may be the primary reasons for Wal-Mart's stance. Here's another possible explanation, although it begs the question of why Wal-Mart didn't back this policy before now (were they waiting for a Democrat to be in office?). Another point which may be relevant is that Wal-Mart has a pharmacy business, and more insured workers means more potential business.

Certainly an interesting change of heart.

Ike July 7, 2009 at 4:44 pm

Russ — know anyone who might care to tackle a longitudinal study to determine how much upward mobility those Walmart employees might enjoy within their own company?

James July 7, 2009 at 5:24 pm

It will be interesting to see how the lefties interpret this one. Rejoice at health care for the employees? Condemn Wal-Mart for acting in its own interest?

I'm certain that little ire will be directed at the government for enabling such action.

Billy July 7, 2009 at 5:28 pm

Dave,

A bit off topic, but 'begs the question' is not synonymous with 'raises the question.' It means to assume the conclusion of an argument in its premises.

John Dewey July 7, 2009 at 5:48 pm

megapolisomancy: "such corporations do lobby for regulation that mainly benefits them at the expense of competitors."

Of course they do! Walmart's CEO is required by contract and required by law to act in the best interests of shareholders.

Not in the best interests of employees.

Not in the best interests of the American public.

Not in the best interests of competitors.

In the best interests of shareholders.

As long as lobbying is legal under the laws of our land – Congress would never turn off that spigot – the CEO of Walmart must pursue lobbying which will maximize shareholders value.

vikingvista July 7, 2009 at 5:53 pm

Billy,

Its widespread misuse has effectively changed its meaning. I know it's a flammable topic, but you ain't going to win.

Dave July 7, 2009 at 6:08 pm

Ha, whatever… I'll just concede! Thanks for pointing it out, Billy.

John Dewey July 7, 2009 at 6:28 pm

Russell Roberts: "I didn't get to ask her if she had health care coverage at either job."

According to Walmart, 92% of all its workers have some form of health insurance. About 50% are covered by Walmart's group plans. The rest are covered by other sources, such as spouse's group plans or Medicare.

In 2007 Walmart's full time employees were not eligible for its group plans until after 6 months of work. Parttime employees had to wait 12 months.

If my information is not out-of-date, then the cashier you spoke with would not yet be in a Walmart group plan.

Over 80% of Safeway's employees belong to a union which represents them. As I understand it, benefits are negotiated by the local unions. In Southern California, UFCW Local 324 has negotiated a 6 month waiting period for new employees' health insurance coverage.

John Dewey July 7, 2009 at 6:48 pm

Not sure if anyone cares, but I was curious:

UFCW Locals 400 and 27 cover Safeway employees in the DC and Maryland area. Like Walmart non-union employees, those Safeway union employees also face a waiting period for health insurance benefits. I don't know the details.

Peter Muldoon July 7, 2009 at 6:57 pm

Of course people prefer different mixes of insurance. In fact, some of them choose not to have any at all, even though they have absolutely no savings at all in case something happens.

And guess what? Something always happens!

And when it does, we have two choices as a society. We can tell this person "Tough luck-hope you don't die!", or we can do what we are currently doing, and that is to allow her to visit an emergency room even though she can't afford it. In which case society just pays her bills anyway. This, of course, is a terribly inefficient way of treating people.

There is no free market in health care. No one I know, including the most hard-core libertarians around, are comfortable with what this entails. Nor should they be.

We currently have a socialized system. It's extremely inefficient, partly because we pretend it's a free-market system.

I agree that there is no earthly reason for employers to be providing health care. But that's only because having employers involved just makes it less efficient. An efficient public option is what's needed.

And before you guys all start calling me a liberal, I've been reading Reason Magazine since I was about 8 years old.

LowcountryJoe July 7, 2009 at 7:16 pm

@ Peter

I'm not opposed to a public option either as long as two conditions are met: 1) one can truly opt out 2) the funding can NEVER use general taxpayer funding, money confiscated from opt outers, or EVER have any sort of implicite or explicite backing/subsidization of the taxpayer; in other words, this pig will only be funded by those who voluntarily particpate in such an insurance scheme. PERIOD.

Ray Gardner July 7, 2009 at 9:34 pm

Ike:
See Russ' podcast on the subject from a few weeks ago. It wasn't a huge study, but it's interesting, and sheds a good deal of light.

I have an aunt that worked for them for decades, and from what she says, it's a great place to work, and they tend to promote from within overwhelmingly.

As for health care, I'm upper management at a large manufacturing firm, and I'm one of the unwashed masses without health insurance. But I opted out of it.

I'm in my thirties, my wife and kids are in perfect health, and we have no family history of health problems. And since we don't have any bad habits or dangerous hobbies, I did the math, and it's cheaper to pay out of pocket for the few things we do need from time to time.

Salary and vacation time are the only things that really get my attention in an offer.

James July 7, 2009 at 11:16 pm

@Ray

But see, you're exactly the person who should have insurance. The whole concept of insurance is to insure against something horrific happening (ie a car crash). You get a bunch of similarly healthy people, you all pitch in a little bit, and the one or two of you that gets nailed by a drunk driver doesn't have to worry about paying an astronomical hospital bill.

I don't understand why people who are old, fat, and diseased are angry that their insurance is so expensive. The only reason they have insurance at all is because the insurance companies have been forced to provide them coverage, which means the entire scheme is no longer insurance, in the true sense of the word, but theft.

vidyohs July 7, 2009 at 11:17 pm

Peter M.,

"Of course people prefer different mixes of insurance. In fact, some of them choose not to have any at all, even though they have absolutely no savings at all in case something happens." //Isn't this called personal choice? And, isn't personal choice connected foot, knee, thigh, hip, shoulder, and head to personal responsibility?//

"And guess what? Something always happens!"//Yep, and this is nature's way of culling the gene pool. Foolish animals die sooner than wise animals.//

"And when it does, we have two choices as a society."//What is the mechanism that converts an individual choice into a burden for society? You say "society" has two choices, why. Why does society override the choice of the individual, which was to expose himself to death if certain things happened? When they happened he or those with whom he has personal relationships with can take care of him, why should "society" be burdened with his health care. Pine box and potters field is sufficient to address this concern.

"We can tell this person "Tough luck-hope you don't die!"//exactly..

"or we can do what we are currently doing, and that is to allow her to visit an emergency room even though she can't afford it." //Emergency rooms and health care facitlities in general are not staffed with volunteers, they are fee for service, they will remain fee for service even under a socialist plan, only with the socialist plan those who want to train and work for the fee will dwindle and soon there won't be quality health care that can be bought at any price. You'll have to be an insider to get access to that kind of health care.//

"In which case society just pays her bills anyway. This, of course, is a terribly inefficient way of treating people."//Arrgh, see above comments.//

"There is no free market in health care. No one I know, including the most hard-core libertarians around, are comfortable with what this entails. Nor should they be."//What do you propose as a solution, Peter?//

We currently have a socialized system. It's extremely inefficient, partly because we pretend it's a free-market system.//The efficient system is cash for treatment, payable upon service. No insurance, no government interference, only total cash exchanges. We don't walk into a grocery store, select items, and then fill out food insurance forms, why should we walk into a healthcare facitlity and not expect to pay as we did when we bought groceries?//

"I agree that there is no earthly reason for employers to be providing health care. But that's only because having employers involved just makes it less efficient."//Really, this is the only reason? Personal responsibility doesn't figure into your thinking at all? Why should an employer be forced to pay for your health care?//

"An efficient public option is what's needed."//See my comments about cash. It is the best public option going. You got cash, you can pay for treatment. You no gotta da cash, you no getta da treatment. People die, foolish people die sooner; it is no different than the Wildebeast on the Serengeti plains, foolish animal do foolish things, end up dead and gone; natures scheme of things, ya know.//

"And before you guys all start calling me a liberal, I've been reading Reason Magazine since I was about 8 years old."//Good on ya. But, I read Karl Marx at age 8, does that make me a communist? BTW, how long ago was your age 8?//

But, hey Peter, I am no libertarian so I can't speak to that. I am also a subscriber to Reason and have been for 18 years. Can't say I always agree with them, sometimes they lean to much towards believing that government has a legitimacy that I just can not accept.

But, my health care plan works real simple. You take care of you and yours, I'll take care of me and mine; and, neither of us will burden the other with any cost, not even for the pine box and the plot in potter's field. Any heartache and sadness that comes with that stark reality will be absorbed and overcome; or it won't, in which case the one who can't handlie it will also get a pine box and a plot in potter's field. Nature really did know what she was doing.

Ray Gardner July 8, 2009 at 12:23 am

James:
You state the very reason why I don't have health care in your second paragraph.

On a company plan, I'm lumped in with the fat, lazy, sedentary people, and so I subsidize their poor choices with a good chunk of my salary.

When I said I did the math I wasn't kidding. The eye opener was when I taught for a couple of years at a small, private high school. They didn't offer insurance, and so I paid for routine visits to the pediatrician, the normal stuff for my wife, and I had one sports related injury (7 xrays and some vicodin). I could step back at the end of that time period and see that I was saving money as compared to the average price I paid at most employers.

Look up what the chances are on a normal, healthy person with no crazy habits or hobbies having an astronomical health care need. If I was into playing those kinds of odds, I'd be buying lotto tickets every week. (Which I don't – the simple man's 401K, the Lottery ticket.)

Peter Muldoon July 8, 2009 at 1:47 am

Lowcountry Joe

You will never be able to opt out of the system. You are in a system now. When push comes to shove, you will get medical treatment in this country. I pay for that. And i'm ok with that.

But don't kid yourself into thinking that you can opt out.

Incidentally, if you are one the people with employer provided care, then I'm am already subsidizing that because it's tax deductible.

Peter Muldoon July 8, 2009 at 2:00 am

Vidyohs,

I'll try to summarize your argument. Please correct me if i'm wrong.

If you can't pay for health care, you should die.

According to you diagram, personal choice is connected foot, knee, thigh, hip, shoulder, and head to personal responsibility.

People who get life-threatening illnesses get them because they are foolish.

Personal choice and responsibility are the most important thing, even if you're dead.

Grocery stores are analogous to health care systems.

Foolish people are like Wildebeast on the Serengheti, and they should just die.

If people are sick and don't want to die, they should rely on their friends and family to pay for them. If they are foolish enough not to have friends and family, they should die.

You can only pay for health care with cash. If you only have a credit card, you should refrain from using it and just go ahead and die.

Reason Magazine is too pro-government for you.

People who needlessly lose their friends and family because they don't have enough cash for treatment will either get over it, or they should just die too.

The proper method of burial for foolish people and their foolishly grieving friends is a pine box in a potters field.

Did I miss anything?

Peter Muldoon July 8, 2009 at 2:07 am

Ray,

I have to take issue with your math, because your math has a fatal flaw. It requires you to be able to predict the future. And the truth is, you have absolutely no idea what might happen to you tomorrow.

Your perfect health and lack of family medical history may make it a little less likely that something catastrophic will happen. But you still have no idea what those odds actually are, and so you really can't say you've computed them.

Gil July 8, 2009 at 2:22 am

"Walmart's CEO is required by contract and required by law to act in the best interests of shareholders."

No kidding, J. Dewey! Why do you write that in a way that makes it sound as though you're offended by the concept?

"On a company plan, I'm lumped in with the fat, lazy, sedentary people, and so I subsidize their poor choices with a good chunk of my salary.

No kidding, R. Gardner! All insurance companies use the money provided by safe customers to pay out the unsafe customers. If everyone was sufficiently incompetent and inept then insurance companies wouldn't exist. By the way, how do you feel about your car insurance?

Peter Muldoon July 8, 2009 at 3:45 am

Gil

That is not, in fact, the way insurance companies work.

Insurance companies do not lump everyone together and then charge them the same rates. They underwrite people, which is the process of determining how likely it is that people with certain attributes will make a claim, and how much that claim will be for. They then charge you a rate which is determined by your riskiness, and your riskiness alone, and charge you a premium above that expected rate of claim. They then take this money and invest it somewhere else. in fact they often use it to hedge against things that would cause claim rates to increase.

In this sense, health insurance companies aren't really insurers at all. They are generally not in the business of insuring you against catastrophic events, but are, instead, using their market share to negotiate better deals with providers.

The simple and plain truth is that if you have an existing health problem that costs more than you can afford, you cannot be insured in a free-market system.

The insurance company will underwrite you, calculate how much it will cost them to insure you, and then charge you the amount that you were going to pay anyway, plus a premium to cover their costs.

insurance is for things that rarely happen; they are for things that you can reasonably expect won't happen.

Needing health care is not something that we can reasonable expect won't happen."Health insurance" companies cannot operate using normal underwriting. The benefit gained is from having them negotiate with providers on behalf of large pools of customers.

If that is the case, then why do we need 100 different health insurance companies? The redundancies in the administration and overhead of providing this is wasteful and costly. The only reason is for competition.

So why not have a public plan compete with the private ones? The current competitive environment in health care is pathetic; in many states there are only a couple companies, and few options. Why not add another? Why are private companies so scared of what they claim will be an inefficient bureaucracy , that will be further saddled with the competitive disadvantage of not being able to deny coverage to people with pre-existing conditions?

Please don't say that it's not the role of government. The way the general welfare clause has been interpreted makes this constitutional. And if you disagree with the way it has been interpreted, as I do, then you must realize that, if the Court ever started invalidating some of the laws that Congress has passed under this clause, the public would simply amend the Constitution to clarify it. And then you'd be left with the argument of whether it made sense to do this or not. And it does.

And for everyone who is worried that they will have to subsidize health care for people who are less healthy then them, I can only urge them to step outside their theories and visit the real world for a moment, because in the real world, today, they are already doing that.

And for those who are concerned that a public health care option will somehow turn our health care system into a bloated, unresponsive, system in which you do not have a choice of doctors and you have to deal with insane amounts of paperwork, then I can only say that that is what what we have now. Welcome to the world of PPO's and HMO's.

Incidentally, Medicare is far easier to deal with than BCBS.

John Dewey July 8, 2009 at 5:13 am

Gil: "Why do you write that in a way that makes it sound as though you're offended by the concept?"

I think you misunderstand me, sir. I am in no way offended by the fact that CEO's act in the interests of the shareholders who employ them. It was megapolisomancy who implied something insidious when he wrote:

"on the other hand, such corporations do lobby for regulation that mainly benefits them at the expense of competitors."

John Dewey July 8, 2009 at 5:30 am

peter muldoon: "if you are one the people with employer provided care, then I'm am already subsidizing that because it's tax deductible."

I agree the tax codes are wretched, and distort the economic decisions we make. That was the intent of Congress in making those laws.

I do not think we should call it a subsidy when someone is allowed to keep more of the income they earned. One who is not insured through his employer may rightfully call it unfair that he is not allowed to keep more of his income.

A subsidy implies that someone has wealth transferred to them. That's not the case with tax shields. Tax shields allow someone to escape having more of their wealth confiscated.

Babinich July 8, 2009 at 5:49 am

Posted by Peter Muldoon on 07/08/09 @ 3:45:03 AM

"So why not have a public plan compete with the private ones? The current competitive environment in health care is pathetic"

So a insurance based GSE WOULD be competitive with a private sector option?

This is a canard put forth by the "best and the brightest".

Babinich July 8, 2009 at 5:58 am

Posted by Peter Muldoon on 07/08/09 @ 3:45:03 AM

"Incidentally, Medicare is far easier to deal with than BCBS."

Maybe you can be lumped in with Teddy Kennedy & Paul Krugman who believe in "Medicare for all"?

There is no evidence that the elderly receive better care, more cost-effective care, or more egalitarian care than people under sixty-five.

I find it interesting that the U.S. spends about forty percent more per capita on health care for the elderly, just as we spend about forty percent more per capita on health care for those under sixty-five.

Where is the proof that Medicare is efficient?

John July 8, 2009 at 7:29 am

The only legitimate argument that the government should pay for health care is the fact that the government mandates that health care professionals offer their services without regards to ability to pay.

If the government is going to use threat of force to coerce people into serving others, the least it could do is pay them for it.

Then again two wrongs do not make a right.

Speedmaster July 8, 2009 at 8:31 am

But Dr. Roberts, surely the liberal do-gooders know what's better for this woman than she does?! ;-)

erp July 8, 2009 at 8:37 am

Your conversation with the Wal-Mart cashier reinforces the fact that most people think they know better how to spend their money than the government. Also since Safeway is a union shop, part of employees' salaries go to keep union officials living the good life and also to support left wing candidates they may or may not want to support.

Medicare easier to deal with than BCBS? In what way? They take their cue from Medicare for decisions on what payments they make.

Eric Hammer July 8, 2009 at 9:08 am

I gotta say Peter, people like you scare me in the sense that horror films are supposed to be scary.
You very clearly say that you think you are being taken advantage of and having your money stolen from you to take care of people who make what you believe to be very irresponsible and irrational decisions, then say that you are ok with that, and that everyone else should be too. You don't even bother to tart it up as a mandatory charitable donation or anything. You just go right ahead and say that you love the lash, and suggest that everyone else is bad for not loving it so.

Your entire argument boils down to "The system is bad now, and if you don't want it to become even more terrible, you are a bad person who is divorced from reality.I love the government forcing me to be a better person as they see fit, and you should to."

Vidyohs makes all the relevant points, but I think it is worth stating that at a moral level, you are a frightening thing.

Chris July 8, 2009 at 9:25 am

James:

That is, of course, your choice. However, if something does happen to you or to your family which costs more than you have access to, please have the decency to die at home instead of sticking the hospital (and, indirectly, its paying customers) with the bill.

LowcountryJoe July 8, 2009 at 10:33 am

>>You will never be able to opt out of the system. You are in a system now. When push comes to shove, you will get medical treatment in this country. I pay for that. And i'm ok with that.

But don't kid yourself into thinking that you can opt out.

Incidentally, if you are one the people with employer provided care, then I'm am already subsidizing that because it's tax deductible.<<

So, then, why kid ourselves and call it a public option? Be okay with it. Incidentally, if there are people drawing a paycheck from an employer then, according to your faulty reasoning, their pay, too, is being subsidized because the cost of labor services are being deducted from revenue. You do know that only earnings are taxed, right? You also knew that individual taxpayers who itemize deductions [that is: if their qualified expenses exceede their standard deductions] are also being 'subsidized', don't you?

Now, if you really want an interesting discussion, Peter, we could discuss using the income tax forms to rebate (up to a determined limit) healthcare costs spent on healthcare insurance; having it a below-the-line deduction/rebate gainst the tax owed to the federal government. That would be a near full-coverage scenario and would be just like a 'middle class tax cut'.

If they [federal government] could do this while cutting spending somewhere else to offset the tax revenue 'lost', this would be great.

Daniel Kuehn July 8, 2009 at 12:47 pm

Although presumably, they would make many options available for an "employer mandate" so employees still can choose between higher and lower benefits. But I agree with the basic point. I'm not terrified of a mandate, but I do think it's a ham-fisted and inefficient way of addressing a side-show problem.

The other point that this raises is that we shouldn't tax benefits and wages differently – because those tax differentials distort the market for health insurance. This was a McCain proposal in the campaign, and last I heard it's still very much on the table for the health reform bill – which is very good.

vikingvista July 8, 2009 at 1:03 pm

"And guess what? Something always happens!"

An obviously false statement, if you are referring to any given individual. A great many of uninsured Americans are young adults in school or between jobs. These people uncommonly have any need for health care beyond what they can get out of their own medicine cabinet or readily pay out of pocket.

The right of these people to NOT buy insurance is useful to them as their finances typically rightfully have much higher priorities.

That being said, catastrophic health insurance, particular for young adults, is highly affordable. The low premiums are a reflection of the statistical observation by insurance companies of the low risk for this group.

For example, a quick search on HealthInsurance.com reveals that a nonsmoking 25 year old man in TX can get a BCBS HSA plan for $56/mo = $672/yr. If his income puts him into a 25% tax bracket, then if he could save the maximum tax-deductible $2900/yr his tax deduction would more than pay for his premium, and his $5000 deductible would be fully funded in 2 years. In other words, by saving enough for future health care needs, his insurance is essentially free to him. However, he probably will have a job within 2 years.

Employer-based HSAs are substantially cheaper. I know a 34 year old woman whose employer HSA premium is $6/mo AND the employer contributes to the HSA. Since the HSA is her personal asset, when she is between jobs, she carries the fund with her.

There are solutions to America's health care problems, but the President has never given any indication about having a clue about any of them. The only solutions he puts forth will ONLY make the system worse for the vast majority of Americans. His fixation on government financing blinds him to both the problems and the solutions.

vikingvista July 8, 2009 at 1:16 pm

"have the decency to die at home instead of sticking the hospital (and, indirectly, its paying customers)"

It raises costs to the paying customers, but it is not the reason US health care costs grow faster than inflation and demographic factors.

Hospitals and physicians have always engaged in such cost shifting to allow them to provide services to a wider community. And it is their choice and their right to do so. Typically the cost shifting to you was not enough to cause you to go elsewhere for services, but that would be your choice.

That this cost shifting has become a significant concern of yours is a consequence, not the cause, of the general increase in health care prices.

It would therefore serve you better do direct your concern at the real cause.

vikingvista July 8, 2009 at 1:26 pm

"and last I heard it's still very much on the table for the health reform bill – which is very good"

It's only on the table as a government revenue generating measure.

Neither the President nor the fools running Congress recognize the benefit deduction as contributer to health costs. If they did, they would put forth the politically palatable solution which is to eliminate the tax deduction on benefits while simultaneously reducing the tax on income, so as to be revenue neutral.

There's been no epiphany. It's just another greedy money grab by our elected thugs.

Daniel Kuehn July 8, 2009 at 1:50 pm

vikingvista -
RE: "It's only on the table as a government revenue generating measure."

Ummmm… not really. The tax treatment's contribution to costs has been central to every discussion I've heard about it. And not just the contribution to cost, but the contribution to inequities in the system (tax savings is higher for higher salary employees – so the distortion is even greater).

Of course they don't mind the revenue especially if they're talking about a new system. But if you listen to a discussion or debate about this going on in Washington for just fifteen minutes you'll realize they're concerned about the market distortion and the effect on cost.

Put it this way – my employer (private employer, btw – some people have thought in the past I work for the government) is considered "liberal" or at least center-left and it supported this measure during the campaign It's published reason was the cost/equity concerns. They didn't even mention the revenue issue.

Caricatures of "elected thugs" are fun to write about, but they don't really exist vikingvista.

vikingvista July 8, 2009 at 2:52 pm

"Ummmm… not really. The tax treatment's contribution to costs has been central to every discussion I've heard about it."

Ummmm…are really that naive? You know how you tell when a Congressman is lying?

The problem of the benefit deduction is that it increases health care prices by its direct stimulation of health care demand, and its indirect stimulation through encouraging third-party financing. If you are right, and Congressman are concerned about this issue, then

(1) they are directly opposing the President who since his campaign has endorsed MORE employer-based coverage,

(2) they wouldn't be trying to create a $trillion new government subsidy to further stimulate demand.

(3) They would also likely be looking at restructuring Medicare and Medicaid third-party schemes which are a major component of demand hyperstimulation.

If you think that tax revenue is just some side benefit rather than the primary focus of these insatiable beasts, then I have a Miami condo to sell you. Any mention of the effect of the deduction on demand, is only to justify the tax increase, not vice versa.

The real solution to this issue does not cost taxpayer dollars.

"Caricatures of "elected thugs" are fun to write about, but they don't really exist vikingvista."

In the form of Kali-worshiping ritualistic stranglers, no. In the form of highway robbers, yes. No, I take that back. My entire lifetime losses to common robbers doesn't equal what Congressional creeps confiscate from me in just one month. Common robbers aren't nearly as bad. My apologies to thugs.

Daniel Kuehn July 8, 2009 at 4:18 pm

vikingvista -
You're confusing the effect of a third party payer with the distortion introduced by the tax.

The argument about third party payers is that if employees don't have "skin in the game" – ie, pay the full premium – they're going to demand too much. Perhaps this is true to some extent, but I'm cautiously skeptical. As Russ points out in this very post, health benefits are just another form of compensation, like salaries. There's no reason why we shouldn't trust employees to know their optimal mix of salary and benefits – ergo no inherent problem with a third payer system. Now – I'll grant that there are some psychological inconsistencies with this explanation. I think third-party payers might contribute marginally to the problem.

But that issue – the issue you're introducing – is completely unrelated to the tax treatment of health benefits. The problem with benefit deduction isn't that it increases third-party payment. The problem is that it increases demand for health insurance REALTIVE TO salary. So there's nothing inconsistent between wanting employer based (or other third party) coverage and wanting to end the differential tax treatment. You only see an inconsistency because you're identifying the problem as third-party payment itself.

Daniel Kuehn July 8, 2009 at 4:21 pm

vikingvista -
In other words: we are talking about two different distortions -

1. the tax that distorts the price of insurance, and

2. the third-party effect that would exist no matter what the tax scheme is

The GOP plan is a way of dealing with the first distortion. You seem concerned with the second distortion, which I think is probably minimal, and which Russ's post seems to suggest is minimal (although other posts on this blog have emphasized it more).

John Dewey July 8, 2009 at 4:51 pm

Daniel Kuehn,

Here's more information that may be later than the last you've heard:

"But Sen. Conrad suggested Tuesday that the benefits-tax proposal is losing favor. He noted that recent polls show the idea is unpopular and "very hard to explain" to voters. Such concerns dominated a morning meeting Tuesday of Senate Democratic leaders and were passed along later to Mr. Baucus. He said Senate tax writers are broadening the search for revenue beyond the health area."

Daniel Kuehn July 8, 2009 at 5:09 pm

John Dewey -
That's a shame. I think they should still try. There's a reason why we have a representative republic, rather than referenda every time something needs to get done. Thanks for the link.

vikingvista July 8, 2009 at 6:12 pm

DK–

Wrong. But your misunderstanding of the economics is no worse than the average Ways and Means Committee Chairman.

The central US health care problem, from which all of its other problems follow, is that health care prices are growing more and more beyond consumers' valuation of those services. The reason prices are rising thus is because demand is being hyperstimulated relative to supply.

Demand is hyperstimulated because:

1. People are made to pre-pay for future health care consumption;

2. Tax code encourages health care consumption relative to other consumption;

On #1, people are not primarily buying health care & insurance, but rather are consuming health care that they have already been required to purchase (or in some cases did not have to purchase).

People are required to purchase health care via the payroll tax, and premiums from employer-based health insurance. The latter acts as a required tax because people shop for jobs, they do not shop for health care. The EXISTENCE of income takes precedence over health insurance or any other benefit.

The prepayment system, WHICH IS THIRD PARTY FINANCING, acts as a combination of income loss (for those who pay) and health care subsidy. The former can decrease consumption and prices overall, but that loss is then concentrated into shifting the health care demand curve to the right. If people could choose how to spend their money, they likely would shift some spending from health care to other things according to their individual values, and would search for ways to maximize their utility (shopping).

On #2, the direct effect of stimulating health care consumption relative to other consumption is obvious because of the relative tax benefit.

But likely at least as important is that it creates the employer third-party financing problem in #1.

Why is third-party financing such a major problem?:

1. Pre-payment encourages people to consume without limit regardless of the cost, as that is what maximizes their utility. The only way to control this is to deny people what they want and what they feel they have paid for (rationing).

2. Cost-control is a function of third party payment denial and provider selection. In other words, the third-party does the shopping for everyone in its group. But those third-party decisions create a one-size fits all selection toward the covered. It cannot possibly optimize choices to the individual values of the patients as individual patient purchase choices can. This is a major inefficiency which may not be matched by its economies of scale, especially once the middle-man fees are accounted for.

Such groups can be beneficial, but that can only be determined by individual choice–i.e. a free market. Currently those decisions are decoupled from those who define the value of health care services.

John Dewey July 9, 2009 at 3:27 am

vikingvista: "The latter acts as a required tax because people shop for jobs, they do not shop for health care."

I don't know, vikingvista. If health insurance benefits weren't so important to job seekers, employers wouldn't be spending so much time touting their benefit packages.

I was a small business owner for 15 years. Potential employees certainly let me know that group health insurance was a critical requirement for their families.

Have you read much about union negotiations the past decade or so? It seems to me that health insurance packages have become a key factor in the bargaining process. Health benefits seem to be extremely important to union employees. Why would they be any less important to any other employee groups?

Daniel Kuehn July 9, 2009 at 9:01 am

vikingvista -

OK – well we seem to agree that there are two SEPARATE issues – third party payment and the differential tax treatment (clearly the third contributing to the second).

But why do you think third party payment is any different from salary or life insurance or tuition assistance, or donuts on Friday mornings, or free coffee, or any other form of compensation? As Russ points out in this post – it's ALL some form of compensation, and different people have different preferences regarding the mix of salary and benefits. If we assume the labor market is efficient (which I think is a reasonable enough assumption in this case), then there shouldn't be any problem with third party payment because employees know what compensation mix they want.

The only outstanding problem is the differential tax treatment – which does stimulate demand and drive up prices.

Explain to me – what makes employer benefits any different from salary, Christmas bonuses, or free Friday donuts. From the perspective of the market for labor and individual preferences I see absolutely no difference.

RE: "Cost-control is a function of third party payment denial and provider selection. In other words, the third-party does the shopping for everyone in its group."

Yes… which is more efficient and smooths catastrophic costs across participants – which is EXACTLY why people are willing to pay a premium to have an HMO cover their bills and manage (ie – deny coverage and select providers) their care and the care of everyone else in the pool. And since we know people are willing to pay for this service, it should come as no surprise to us that people are also willing to accept a promise to pay a portion of the premium from their employers as another form of compensation.

All that having been said – I agree there may be a psychological effect whereby low deductible type plans might encourage overconsumption. I don't necessarily think people are always rational at the extremes. So I wouldn't presume there is NO third part effect, but I doubt it's large unless you can tell me why third party provision of health care is different from third party provision of donuts :)

Daniel Kuehn July 9, 2009 at 9:10 am

vikingvista -
Contrary to your assertion, the debate is over the impact of the tax, not the revenue it generates. Case in point – an article in today's Washington Post by Len Burman, one of the nations foremost tax policy experts. The only time he even mentions the revenue is in the last sentence.

This is a solid policy regardless of what you want to do with the revenue (give it back elsewhere or use it on something else).

John Dewey July 9, 2009 at 9:51 am

daniel kuehn: "what makes employer benefits any different from salary, Christmas bonuses, or free Friday donuts."

Here's one rationale for treating health insurance the same as any of the other employer expenses for which employees are not taxed:

For the employer, providing health insurance which includes monitoring and preventative care decreases the chances that valuable employees will face prolonged illness. If employers did not provide health insurance, some employees would forego coverage. It is in the best interests of the employer to ensure that does not happen.

Employee benefits can be much more broadly defined to include attractive work environments, cafeterias, company nurses, covered parking, employee exercise rooms, and much more. Each of these, like health insurance benefits, is part of the overall competitive package offerred by employers in attracting talent. None of these other broadly defined employee benefits are taxed, so why tax health insurance?

Of course, arguments about the fairness of taxing health benefits do not matter. The reasons Congress will not tax employer-provided health benefits are very clear:

1. the tax would impact too many voters;
2. the tax is too visible.

Politicians need protection from the visibility of whatever tax is used to fund health insurance for the freeloaders.

Daniel Kuehn July 9, 2009 at 10:37 am

John Dewey -
That makes complete sense to me. The whole point of this post, I think, was that compensation comes in many forms and all are negotiated with job applicants.

I think health benefits stand out above things like "a nice work environment" because they are more explicitly tied to the employment contract. They are also something that an employee would conceivably by on his own if he were only compensated with salary (unlike a cafeteria or a nice work environment). In that sense there is a market tradeoff between salary and insurance in a way that there isn't a market tradeoff between salary and a "nice work environment" (although clearly the trade off between the two will be considered in the market for labor itself). So in that sense – since there is a trade off between salary and insurance OUTSIDE of the labor market, the question of a tax distortion is more relevant.

But obviously it's a messy complicated world and other good examples of compensation will retain a tax distortion… but there's no good reason why this has to.

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