Begging to Differ

David Brooks is one of the few remaining conservative columnists whose commentary is always rational. I may agree or disagree with the substance of any given column, but Brooks is a remnant of the days when liberals and conservatives disagreed about aspects of a shared reality–unlike today, when they appear to inhabit different solar systems.

It is in that vein that I want to take issue with a column Brooks wrote earlier this week, in which he suggested that the health reform debate is really a debate over competing values, which he defined as additional security on the one hand versus social “vitality” on the other. He seemed to be echoing (albeit in a far more reasonable fashion) cultural arguments over the  “Europeanization” of America–the argument that our entreprenuerial energy will slowly give way to a wave of genteel European social welfarism, and in the process will somehow destroy our “special” American character.

I get the argument, but I think Brooks’ central assumption is faulty.

As any economist will tell you, the largest single drag on job creation and entreprenuerial activity in the US today is the cost of providing health care. We are currently the only advanced country where health insurance continues to be provided primarily through employers–an aspect of the current landscape that current healthcare reform proposals will not change, unfortunately.

The business sector currently spends an amount in excess of its net profits to provide  health insurance for employees. The difference between what it costs an employer to create a new position and the amount that employee actually receives is sometimes called the employment “wedge.” As health costs and insurance premiums escalate, the wedge grows larger, and inhibits hiring additional workers. In good economic times, that is troubling; in times like these, it can be catastrophic.

For the shrinking number of companies that can afford to offer health insurance, negotiating and administering medical benefits, and complying with the government regulations attendant to them, consumes untold hours of HR time. This is a drag on productivity—a generator of overhead costs that reduce profits and divert effort away from the core business operations. Single-payer would remove those costs and that burden, but even the inadequate proposals contained in the Senate bill would significantly ameliorate them.

Then there is competitiveness. If you don’t think that healthcare reform would be economically significant, let me share an example. In the case of our struggling auto industry, amounts paid for employee health add somewhere between 1800 and 2000 of the price of each new car. No wonder American automakers have found it difficult to remain competitive! (In the single payer systems with which we compete, not only are those product costs eliminated, but  doctors’ expenses are reduced as well: currently, medical offices spend considerable sums on personnel whose only job is dealing with insurers—confirming coverage, complying with insurer regulations, submitting claims on multiple different forms and collecting amounts due.) Doctors and employers alike could save millions of dollars each year just by standardizing insurance forms!

Smaller companies—the real engines of economic growth and job creation, the “entreprenuers” about whom Brooks is so worried—are increasingly unable to offer benefits, and that puts them at a competitive disadvantage when they try to hire good employees. If health coverage were de-coupled from employment, the United States would become a much more attractive location for new businesses, and incentives to outsource production to overseas workers would be reduced. (Not too long ago, Toyota was looking for a site for a new factory in North America. Several southern states were offering tax abatements, infrastructure improvements and other incentives worth millions. Toyota decided to go to Canada, which was not offering anything. When asked why, the company explained that in Canada, they didn’t need to provide healthcare.) We aren’t going to solve that problem any time soon, but almost everyone I know has a story about someone who wanted to start a business, but couldn’t due to an inability to get reasonably-priced health insurance, or any at all.

Contrary to Brooks’ assumption, rationalizing American healthcare, and removing the burden of providing insurance from employers, would unleash a new era of productivity and usher in an entreprenuerial renewal.

2 thoughts on “Begging to Differ

  1. Two questions:
    What is the effect of that “wedge” on wages? While we have recorded economic growth and improved worker efficiency over the past decade, worker pay has been relatively flat (adjusted for inflation). Are the proceeds of growth and efficiency simply being re-directed to the health sector, and does that suppress economic growth that would otherwise result from elective consumer spending?
    Does the exemption of health benefits from the individual’s income tax serve a purpose? i.e. Would insured people’s coverage preferences change if they faced consumer decisions more similar to those of uninsured workers?

  2. Robert–I don’t know the answer to your second question, but the answer to the first is YES. If we control health costs–and especially if we remove the onus of providing health insurance from employers–wages would undoubtedly rise.

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