Don’t Know Much ‘Bout Economics

Ezra Klein is a nice, smart, young guy who’s made a name for himself by posting about healthcare reform. I believe that for the best of reasons he’d prefer that the U. S. healthcare system were like that of France, Germany, or even the United Kingdom. There are however, limits to his expertise viz.:

But health-care coverage is not a benefit. It’s a wage deduction. When premium costs go up, wages go down. When premium costs go down, wages go up. Yet workers don’t know that.

Uh, no. There’s a good reason that “workers don’t know that&#148. Because it ain’t true.

Like a lot of people Ezra appears to confused about wages and compensation. Total compensation = wages + benefits. Since benefits are untaxed, $1.00 worth of benefits is worth something like $1.28 worth of wages.

Historically, that’s the reason we have employer-provided healthcare insurance at all. When wage and price controls were imposed during World War II, employers needed some non-wage method of attracting and holding employees so they offered healthcare insurance.

For the last thirty or so years an enormous proportion of the increase in workers’ total compensation has come in the form of benefits, particularly healthcare insurane benefits.

And workers know this. Or, at least their unions do. It’s the reason that unions have been fighting the taxation of healthcare insurance tooth and nail. A large part of their workers’ compensation is in the form of healthcare insurance, strategically so since it’s a way of getting more money than they could get through wages alone. If UAW workers were compensatd in the form of wages alone, it would amount to about a 10% pay cut.

It must be remarkable living in a world in which everyone acts against their own best interests. Certainly not the world I live in where I see lots of prudent, even ruthless self-interest.

12 comments… add one
  • Yep, Klein really doesn’t know much about economics, and Drum too. Been saying that for years. They know enough to sound knowledgable, but can really confuse the issue in the end…like with this example.

    Total compensation = wages + benefits. Since benefits are untaxed, $1.00 worth of benefits is worth something like $1.28 worth of wages.

    That is it entire and it is really damned simply. One sentence shows why Klein’s writings should be taken with a cannister of salt.

  • BTW, this relationship of $1 benefits = $1.28 in wages is likely one of the factors leading to the high growth of costs. Would you rather have the wages or the benefits? What if you have kids? A sick spouse? Suddenly that $1 of extra benefits looks a lot more attractive than $1 of wages. Keep in mind that health benefits employers provide also include things people are highly likely to need (relative to what health insurance is ideal designed for: rare and expensive events) like glasses, braces, child birth, routine visits, etc.

    Que up Our Paul’s entrance with some stupid post that is really just a straw man….

  • Andy Link

    I don’t think he’s completely wrong. To begin with, most workers today aren’t unionized and they probably have no idea how much the benefit portion of their compensation is costing their employers.

    Secondly, we do know that compensation has increased over the past decade, but wages have stagnated because of benefit cost growth. Some employees may understand this, but I suspect the majority do not.

  • Drew Link

    Andy –

    I hope you are wrong in your assertion, because it makes the employees look a bit dim.

    The cost to the employer is the after tax cost of total comp, wages or benefits. Not a hard concept.

    Perhaps slightly nuanced, the employee should understand that if their bennies are not taxable to them, the employer might prefer providing bennies. More bang for the buck.

    The real problem with Mr. Klein’s position is its (incorrect) zero sum mentality.

  • Drew is also correct. If the premiums go up, then everything else held constant yes, then wages would go down…with a labor market that is competitive. Those two assertions however are problematic, so it isn’t clear Klein’s reasoning has to hold true, or at least he should provide the caveats.

  • malthus Link

    The $1 healthcare benefit is worth much less than $1.28 cash wages to a young man and somewhat less to a young woman. It is worth much more than $1.28 to an old geezer, both because needs the benefit more than cash and because his marginal tax bracket is more like 39 – 42%.

    Young workers would do well to leave the country for work in promising lands like Brazil which, even though they have socialized medicine of their own, the costs to the worker are lower because the benefits are not US-gold-plated.

  • steve Link

    Hmmm, the equation is:

    Total compensation = Wages + benefits.

    If we hold total compensation as a constant, then if benefits (premiums) go up wages must go down. Conversely, if benefits (premiums) go down, then wages should go up. Sounds like he understands the principle even if did not define it the way you like. Certainly not the first writer to twist words a bit for effect.

    More broadly, do you have employees? All of mine have at least a Master’s degree. At least once a year I have to remind them that we pay them based upon a total package concept. Our competitor hospital pays better wages, but few benefits. My staff want those wages too. I have to explain over and over that we can rearrange for that, but they will lose the better benefits.

    Money people, like Drew, and people who have to run things, like me, or people interested enough to blog, like you understand all of this. IMHO, the great, unwashed masses grasp this only intermittently. They want it all and they want it now (Queen).

    BTW, Gawande has another great piece out. He says what I wanted to say about the CBPP report.

    http://www.newyorker.com/reporting/2009/12/14/091214fa_fact_gawande?currentPage=all

    This from the Annals of Internal Medicine is good also.

    http://www.annals.org/content/early/2009/10/05/0003-4819-151-11-200912010-00149.full

    Steve

  • PD Shaw Link

    Good point malthus. Because health care insurance is more difficult in this country to obtain outside of employment, the true value of the coverage is not merely it’s tax-adjusted cost. I’ve had employees that I might even say work for health care insurance (though it’s a mild exaggeration). They’re generally older, have assets to protect, and aren’t in a point in their lives where they are spending as much. They might value every dollar an employer pays for health care insurance at four dollars.

  • It’s not just “the way I like”. There are fundamental problems with his formulation. Basically, he’s discounting the effects of taxation. He’s implying that workers will be happier if they take a cut in total compensation by converting benefits to wages which I don’t believe is correct.

    And he’s also ignoring that, if employers are paying the government for healthcare on behalf of their employees, that’s part of total compensation, too. Particularly in industries in which the marginal utility of labor is low (many these days) if employers stop buying private healthcare insurance entirely I wouldn’t be surprised if wages don’t rise at all.

  • Total compensation = Wages + benefits.

    If we hold total compensation as a constant, then if benefits (premiums) go up wages must go down. Conversely, if benefits (premiums) go down, then wages should go up. Sounds like he understands the principle even if did not define it the way you like. Certainly not the first writer to twist words a bit for effect.

    steve,

    There is an implicit ceteris paribus assumption in Klein’s writing. When economists do this and make the assumption explicit (either saying ceteris paribus, or “all other things equal/constant”) the response is usually howls of derision.

    Klein does it and you argue in his favor. Its at this point that I say, “Make up your mind ffs!”

    More broadly, do you have employees? All of mine have at least a Master’s degree. At least once a year I have to remind them that we pay them based upon a total package concept. Our competitor hospital pays better wages, but few benefits. My staff want those wages too. I have to explain over and over that we can rearrange for that, but they will lose the better benefits.

    However, once pointed out they “get it”. If your total compenstation is the same between the two employers the one with the higher benefits might acutally convey greater value.

    Quick example, suppose total compenstation is $20,000 in both companies. One has benefits of $10,000 the other $5,000 meaning wagesa are $10,000 and $5,000 respectively. With a tax rate of 25% then Total compensation taking into taxes is, $20,833.33 and $17,916.67. Of course different employees will want different things. A young/healthy employee might be fine with the reduced benefits and the higher wage (more discretionary income). And older/less-than-healthy worker might favor the package with higher benefits. The whole problem is a result of how we’ve set up our taxes in this country.

    Fixing the mess is going to be really really difficult. Using the simple example above both employees lose out if we change the system to total comp = wages. There is no tax/subsidy structure that gets them back to where they were prior to such a change. In reality, changing our current system will create losers and winners when looked at more broadly. Which is why I don’t think the problem will be fixed. Obama, et. al. legislative push will simply make a bad situation worse. Then the party will end as unsustainable trends cannot be sustained. The only question is will it end badly or not so badly. My thinking is that you haven’t seen anything with the current financial/economic crisis.

    BTW, Dave’s point I think can be seen here from the Klein article,

    Of course they hated it. They didn’t see its benefits, only its costs. They knew they were suddenly trapped in networks and being hassled by their insurers. As for their raises, those were nice, but why are you changing the subject?

    What raises are we talking about? Eleven percent from 1995 to 2000. But earlier in the article we see that a 10% increase in benefits leads to 2.3% decrease in wages. So what does an 11% increase in wages, attributable to the managed health care experiment imply? How about a nearly 48% cut in benefits costs…which means fewer benefits. Longer lines, outright denial of access to specialists, sub-standard care, etc. and so on an so forth. Granted maybe part of that 11% is due to other factors such as productivity, but Klein is saying the entire 11% is due to health care.

    He notes that HMOs/managed care was a success from a cost stand point but yet people hated it. They hated it because the care they got sucked shit. Even if you didn’t get care it still sucked shit.

    When Americans rejected managed care, in other words, they didn’t know they were ending wage increases, too.

    How does he know? Did he ask them?

    But since 1990, wages have tracked changes in premiums more closely than they’ve tracked the growth of GDP. Maybe if more workers knew that, they would be more interested in efforts to control health-care costs.

    Or not. See my example above. I bet we have alot more people working in their 40’s, 50’s and 60’s than we do in their teens, 20’s and 30’s. We hear lots about our aging work force. As people get older they are more likely to have health issues and assets to protect. So having insurance benefits is good. Having good insurance benefits is even better. Maybe the problem Klein is seeing, and not recognizing, is the same problem for Social Security and Medicare…an aging population faced with increasing longevity.

  • Drew Link

    steve –
    Love the Queen reference. Anyway…….

    I understand your employees may all be well educated. But that doesn’t mean they are well educated in financial, managerial or economic matters. And that’s when trouble starts.

    I feel a lecture coming on, but please humor me. This is something that vexes me on sites like this. I’ve spent all my career in the commercial/business arena: plant productivity, management, finance, investment blah, blah.. I think I have training and experience that give me a decent sense. I’ve made a boat load doing it.

    Now, we have people on these blogsites, like M Reynolds, who come on and pontificate about business, finance and economics but have almost no real knowledge or experience – certainly not comprehensive knowledge or experience. They make me belly laugh at times. But they feel free to comment at will.

    Conversely, I have a much different view: I would be embarrassed to even think of advising Mr. Reynolds (who says he is a talented and successful writer: and I can’t imagine a reason not to take him at his word) on writing. It would be absurd for me to do so.

    But for some reason non-business people feel free to be particularly vocal.

    As they say, “everyone has a right to an opinion.” But it does not follow that all opinions are equal.

  • steve Link

    Drew-A lot of people who arent Doctors try to tell me how to practice medicine also. Shrug. Anyway, speaking for myself, I credit your arguments about business a bit more because of your background. That does not mean I may not challenge and expect you to defend them. I also think that business, like medicine, has some echo chamber problems.

    Steve- I think your analysis is mostly good. It is what we figured when we ran our numbers. We decided to emphasize benefits over wages to attract employees in a tight job market at the time. it also seems better at stopping turnover.

    Steve

Leave a Comment