Sunday, August 2, 2009

the sorry state of the US healthcare debate

After almost two decades of holding a subscription to TIME newsmagazine, I've decided not to renew. I don't have a problem with left leaning publications; indeed, I probably read more material from "left" sources than "right". But what is insidious about TIME is that its agenda is not apparent (aside from the fact that Joe Klein is unabashedly the biggest Obama partisan amongst MSM columnists, a remarkable feat given the intensity of the competition for this distinction). I could take a number of examples, but TIME's July 28 article "Taxing Pricey Insurance: No Health-Care Cure" will readily do. Despite the fact the whole focus of the article is the tax exclusion for employer provided health care, at no point is there any reference to the consensus of expert opinion on the subject. We instead just get
- the claim that "very few [nonelderly Americans] would look kindly on reforming the system" by removing the exclusion
- a few quotes from union lobbyists
- the argument that "Cadillac health plan" is somehow "misleading" terminology because these plans are more often enjoyed by union and public sector employees than CEOs:
many more of the most expensive employer-based health-insurance plans cover people like the families of New Hampshire state employees who, according to the Boston Globe, have policies worth $20,400 per year
- the title's conclusion that there is "no cure" to be found here

Contrast this with more openly leftist The New Republic, where their healthcare writers Jonathan Cohn ("most economists will tell you ... [t]he exclusion distorts the market") and Harold Pollack have both acknowledged where expert opinion lies. As Pollack writes
[re the] Taxation of health benefits... A large and influential group of policy experts--not least among them,Congressional Budget Office Director Doug Elmendorf--believe that this is the surest way to pay for reform and curb health spending in the future.

So why is Pollack not calling unequivocally for removal of the exclusion? He's frank: "For reasons of coalition politics, I don't go as far as ... many economists would." Pollack acknowledges that "Unions provided boots on the ground by the thousands in various canvassing efforts [for Obama]."

It's not like the economic argument is so abstruse mass market readers could not follow it. Of the measures that are uniquely tax exempt in America, the two most significant are income spent on servicing a residential mortgage and income spent on health care services. What is so special about these particular services that consumers should be able to pay for them with pre-tax income instead of after-tax income?

It should be obvious that when the taxman is not taking a cut from a particular sector of the economy that sector's share of the economy is going to grow, and we've already seen the consequences of retail overconsumption of mortgage origination. You accordingly don't have to be an expert CBO analyst to appreciate that raising taxes just on the non-healthcare economy in order to pay for broader health insurance coverage is more likely to "bend the curve" of spiraling healthcare costs up than down.

Although healthcare benefits are also not taxed in single payer systems like Canada, consumers here have to "bargain" with government and thus ultimately themselves as taxpayers for their level of healthcare service. In the US, employees bargain with their employers, and it is all too easy for them to agree to an inflated, inefficient level of service because, to get technically precise for a moment, the deadweight loss created by the externality is borne by third parties (the self-employed and the uninsured underclass).

To make the point with an example, suppose the employment compensation your household earns consists of $50 000 in wages and $10 000 in healthcare insurance. In negotiations for another $5000 in compensation, you could either get, on an aftertax basis, another $3500 in wages or another $5000 in healthcare value. The employer, of course, is indifferent between the two as both would create a $5000 tax deduction for the employer. What are you going to choose? Now, in practice, most individuals are not as familiar with the way the system works as professional union negotiators such that it is typically union members (as opposed to individual bargainers) who end up with "Cadillac" health plans. And so it is that the unions are quite happy with the status quo, such that if there is to be any expansion of healthcare insurance coverage, they want it paid for by taxing the non-unionized (a group which includes the ├╝ber-rich and the self-employed). Even if not taxed directly, the non-unionized working outside the healthcare sector pay an opportunity cost because unionized employees chose not to take their compensation increase as wages that could be spent in the non-healthcare economy.

On top of this is the fact that removing the exclusion would facilitate labour mobility and make costs more transparent to consumers.

I've been spending a fair amount of time on the US healthcare debate, and the prime reason why is because this is a critical test of whether the United States will get its fiscal house in order. With respect to soaking the rich, "You can only go to the same well so many times": if you can't tax the "middle class" here in order to rein in the deficits, when the policy argument for doing so is so clearcut (any absence of clarity being attributable to the sorry state of the current debate), the United States is highly unlikely to ever do so short of a California style fiscal crisis (or worse).

UPDATE August 4:

It appears that a couple of wonkier left wing pundits have finally broken from the herd. J. Lester Feder, a former "steward of the United Auto Workers" notes in a Salon piece that "[t]he employer exclusion is a backdoor health insurance subsidy that gives the most help to the wealthiest workers with the best benefits while fully taxing the income of uninsured low-wage workers" and defends the reforming efforts of Senate Finance Committee Chairman Max Baucus (D-Mont.) against Obama's union coddling policy. Today Jonathan Cohn at TNR joined Feder in calling for a partial rollback of the tax exclusion for group health insurance by supporting a cap regardless of what organized labour thinks.

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