Thursday, October 28, 2004

A Scary Proposition

Reader Trent McBride reminded me to blog on Prop 72, one of the worst propositions Californians have had the chance to approve in years. Prop 72 would require large- and medium-sized employers to provide health insurance to their employees. Here is a post defending the proposition.

Here is the best-case scenario if Prop 72 gets passed: employers will provide health insurance, and then adjust wages and other benefits downward to compensate. They’ll be able to do this because any increase in size of the total benefits package will make more people willing to work, so an employer who already hires a given number of employees will be able to adjust wages downward and still attract the same number. The result will not, incidentally, just be a wash from the employees’ perspective. Why? Because if the employees’ most preferred benefits package (holding the overall cost fixed) included healthcare, employees could have already negotiated with their employers to provide it. They could have offered to accept lower wages in exchange for health insurance, for instance. The fact that they haven’t done so is strong evidence that they don’t prefer that option. (Of course, many employers already offer health insurance – they won’t be directly affected much by the law. For those who don’t, however, the argument above applies.)

But that’s a best-case scenario. It’s likely to be worse, for at least a couple of reasons. First, to the extent that employers are unable to alter the benefits package in the manner described above (say, because it’s mathematically impossible to lower wages enough to cover the cost of insurance), the mandate will act as a tax on employment. That’s true of any form of income tax, of course. But it’s true in an especially pernicious way with a mandate like this, which attaches to number of laborers instead of labor hours. That will induce employers to reduce their total number of employees while expanding the number of hours each employee is asked to work. In other words, the policy would tend to cause unemployment of some workers while shifting their hours to other workers.

Second, given the small-business exemption (one of the few saving graces of the proposition), there will be a tendency for employers to “bunch up” around arbitrary threshold defining the difference between “small” and “medium” businesses. If it’s defined at, say, 50 employees, expect to see lots of businesses with 49. Businesses may also find ways to start converting regular employees into “freelancers” or temps to get around the requirement.

Third, there’s a potential rent-seeking problem. The state legislature will have to define the set of benefits included in the standard benefits package (defined vaguely in the proposition as prescription drug, major medical, and preventive care). Lobbying groups representing the various medical fields will naturally press for the inclusion of their own specialties in the package. The package may start bare-bones, but eventually it will grow to include psychotherapy, chiropractic, dermatology, acupuncture, etc. As the package expands, the cost of insurance will grow, exacerbating the effects described above.

10 comments:

Anonymous said...

I was going to vote for Prop. 72 until you posted this. I'm still really confused about the pros & cons though. But, if I must rely on an MD to advise me on my health then why shouldn't I rely on a trusted economist to tell me how to vote here. It is so damn hard to think for myself! Per you, I'm going to vote against it and hold my nose the whole time I'm doing it. Damn you if you are leading me astray.

Sign me: I want my free pacifier.

Anonymous said...

When in doubt. . . VOTE NO!

Thanks for posting on prop 72! Although it hasn't received the attention it deserves, I would argue that it is potentially the single most harmful proposition on your ballot! It might just be a race to see which middle-market firms can leave California first.

Anand said...

The best case scenario - those employees who can, have already negotiated for health insurance. 72 won't change anything. For the rest:
1. For those who don't earn enough to be in the "best case" scenario - basically, minimum and very low wage earners - this is similar to a minimum wage hike... hasn't the "tax on employment" argument been discredited empirically for minimum wage hikes?
2. I agree - this pandering to small businesses has got to stop! But I don't think you meant that 72 would be better if it applied equally to small businesses...
3. I do think we (the people of CA) would be better off if mental health insurance was included in general health insurance packages. But come on... this isn't an argument - it's FUD.
So no, I don't see 72 as being all that bad...

Anonymous said...

I think a question every voter should ask when faced with a proposition is: If this is such a good idea, why aren't legislators trying to do it and collect the goodwill that results from having passed such a wise law?
Sometimes there are plausible reasons. Usually there aren't, and I vote no.

Anonymous said...

"employees could have already negotiated with their employers to provide it."

This sounds, prima facie, perfectly reasonable. It is certainly true when collective bargaining exists. It assumes, however that indiviidual employees would act in concerted fashion, which is empirically untrue.

"That will induce employers to reduce their total number of employees while expanding the number of hours each employee is asked to work. In other words, the policy would tend to cause unemployment of some workers while shifting their hours to other workers."

Do you not agree that productivity gains over the past 3 years are caused by the same phenominon? Given that employees are already working more hours for the same amount of pay, are you contending that mandated health insurance would worsen this trend?

"Second, given the small-business exemption (one of the few saving graces of the proposition), there will be a tendency for employers to “bunch up” around arbitrary threshold defining the difference between “small” and “medium” businesses. If it’s defined at, say, 50 employees, expect to see lots of businesses with 49. Businesses may also find ways to start converting regular employees into “freelancers” or temps to get around the requirement."

I have to agree with this. Considerable pressure will exist to remain below an arbitrary threshold of employees. However, this would leave a void in the economy that entreprenurs could fill, creating new jobs (albeit without insurance, as new companies will also attempt to remain below the threshold). While your point astutely notes that no additional insureds would be created, to claim that it will hold down employment is demonstrably false.

"Third, there’s a potential rent-seeking problem. The state legislature will have to define the set of benefits included in the standard benefits package (defined vaguely in the proposition as prescription drug, major medical, and preventive care). Lobbying groups representing the various medical fields will naturally press for the inclusion of their own specialties in the package. The package may start bare-bones, but eventually it will grow to include psychotherapy, chiropractic, dermatology, acupuncture, etc. As the package expands, the cost of insurance will grow, exacerbating the effects described above."

If you're using free market arguments to criticize the proposed system than you have to accept the elasticity inherent in market forces. The benefits will initially accrue to those who lobby most effectively, but this income will eventually accrue to those who provide new services in response to the privileged groups' increased disposable income. Or are you advocating socialism where the additional income would accrue to the state rather than the individual?

Glen Whitman said...

Anand:
"For those who don't earn enough to be in the 'best case' scenario - basically, minimum and very low wage earners - this is similar to a minimum wage hike... hasn't the 'tax on employment' argument been discredited empirically for minimum wage hikes?"

No. Recent research has cast some doubt on the minimum wage's disemployment effect, but it hasn't reversed the conventional wisdom. In any case, we're talking about distinct phenomena. Minimum wage hikes are generally *small* and attach to the number of labor *hours*. The cost of mandatory health insurance would be *large* and attach to the number of *laborers*. The high unemployment rate of many European countries is (in my opinion) directly attributable to the high per-worker costs of employment.

"I do think we (the people of CA) would be better off if mental health insurance was included in general health insurance packages. But come on... this isn't an argument - it's FUD."

I don't know what FUD means. In any case, the fact that mental health coverage sounds appealing is exactly the problem -- "free" benefits always sound good, and that will make expansions in the benefits package more politically viable. As the package expands, the undesirable effects of the law will grow as well.

Glen Whitman said...

Anon:
"This sounds, prima facie, perfectly reasonable. It is certainly true when collective bargaining exists. It assumes, however that indiviidual employees would act in concerted fashion, which is empirically untrue."

Collective bargaining might be needed to extract more benefits from employers who don't want to give them. But no collective bargaining is required if we're talking about a cost-neutral shift in the contents of the benefits package. Indeed, if a shift would actually improve the worker's position (from the worker's perspective), then the employer could actually offer him a more preferable package at *lower* cost. It is in the interest of both employer and employee to adopt such changes in the benefits package.

"Do you not agree that productivity gains over the past 3 years are caused by the same phenominon?"

I don't know what you're talking about. I have no particular reason to believe -- or disbelieve -- that productivity has increased as a result of fewer workers working longer hours. If such productivity gains do exist, then employers have every incentive to exploit them already; the law will therefore tend to push them *beyond* the productivity-improving range.

"Given that employees are already working more hours for the same amount of pay, are you contending that mandated health insurance would worsen this trend?"

Yes. As with most economic predictions, my claim is relative to a "ceteris paribus" condition -- I'm saying that the shift toward longer hours with the law would be greater than without the law.

"While your point astutely notes that no additional insureds would be created, to claim that it will hold down employment is demonstrably false."

Demonstrably false? I'd like to see the demonstration. If employers could *perfectly* shift from payroll workers to free-lancers or temps, there would not be a disemployment effect -- but in that case, the law would be completely ineffective. On the other hand, if employers cannot perfectly shift from payroll to free-lancers and temps (because there is some cost of doing so), then a disemployment effect will also occur. In short: the law will only have its intended positive effect insofar as it also creates the unintended negative effects.

"The benefits will initially accrue to those who lobby most effectively, but this income will eventually accrue to those who provide new services in response to the privileged groups' increased disposable income."

In other words, if lobbying makes group X richer, then markets will provide more of the goods that group X wants to buy. This is true, but in no way a defense of the inefficient laws created by rent-seeking activity. The privileged group still acquires its greater wealth only through an artificial, politically created demand.

Anonymous said...

Interesting. Combine Prop 72 with the California Supreme Court decision in the Catholic Charities case, and the effect will be that Catholics who adhere to the teachings of their Church will be forbidden to own businesses that grow above a certain number of employees, because if they do they'll be required to violate their consciences and pay for contraceptives. It sounds like the old penal laws in Ireland (where Catholics were forbidden to have more than two apprentices).

Anonymous said...

Due to a voting accident in Ontario in 1993, the socialist party got in and passed similar anti-employer legislation. It amounted to a tax on employees. The result was an explosion of 'sole proprieterships' in the design and construction industries.

If you wanted work, you had to register as your own entity, you could now right off all expenses incurred getting work, and you also wrote off the idea of sick leave and paid holidays.

Anonymous said...

I am a financial advisor and also sell health insurance to individuals and small businesses. You would think that I would vote for this proposition as it would increase my business, but I am voting no on Prop 72 for the very reasons that you state. If passed you will see more temporary workers and outsourcing of economic activities for small businesses to keep the number of employees under the threshold. Small business owners are under enough pressure with California's punitive regulations (workman's comp, environmental regulations, county regulations, fees, high taxes and on and on). Basically the proposition is a business buster.