Thursday, January 10, 2013

Government Intervention...What Could go Wrong?

So what can happen when the government interferes with the economy?  Let's take a peek at what happened in the case of health insurance, specifically employer provided insurance.

In 1942, in an effort to control costs and prevent disruptions in the labor market, the government passed the Stabilization Act which essentially froze prices, wages and salaries at the level they were at in September, 1942.  Exempted from this was insurance and pension benefits.  So to attract workers, companies began offering health insurance as a fringe benefits as they could not offer higher wages.  The next year, the IRS ruled that employer provided health care was tax exempt, further encouraging the practice.

Towards the end of the war, the War Labor Board ruled that companies could not discontinue these benefits during the life of a contract.  A few years later, in 1949, the National Labor Relations Board ruled, later upheld by the Supreme Court, that insurance and pensions could be considered wages and thus subject to collective bargaining.  During the 1950's when there was little competition for US manufacturing, companies and governments were eager to provide these tax free benefits.  This greatly expanded the number of employees covered by employer provided insurance.  In 1951 100,000 employees were covered by major medical insurance, by 1986 this had reached 156,000,000.

All of this helped increase the rate at which health care costs rose.  As a report from the Wisconsin Policy Research Institute shows:
The regulatory changes that propelled the rapid expansion of employer-provided health insurance during and after World War II helped fuel the hospital cost spiral by completely removing consumers from any contact with health care costs.
This trend was likely exacerbated by the introduction of Medicare and Medicaid in 1965 which further removed the individual from the real costs of their health care.

All of this has led to recent decades where the only real growth in employee compensation is from the increase in health care costs rather than in an increase in wages.  So the cost to the employer has gone up but the employee has received little direct benefit from it as the services he gets for his insurance likely have not improved, just had their costs increase.  For example, a USA Today report shows that from 2007 to 2011, real wages increased only 1.4% ($777) while benefits increased by nearly twice that amount, $1302.  The article does not mention how much of the $777 growth in real wages went to paying the increased employee contribution to health care.

Enter Obamacare, which was in part intended to help control the spiraling costs which were in part caused by previous government interventions.  With the Obamacare employer mandate, many employers will be compelled to provide health insurance for their employees or face fines.  While some employers already do provide insurance, many will see their costs go up due to the requirements of the new law.  This will likely further erode real wage growth for many employees.  Assuming they keep their full time jobs, which is by no means guaranteed.

Which brings me to the latest step in long chain of cause and effect.  Last week, Investor's Business Daily had an interesting editorial.  In it, Betsy Mccaughey describes a coming change we will be seeing on our W-2 forms this year, namely a box for your health care benefits.  According to the administration this is simply for information purposes so you can appreciate the value of your health care plan. The fear is that this is actually a prelude to employer provided health care benefits being taxed.

The federal government, since it is apparently incapable of actually controlling spending, is always on the look out for new sources of additional tax revenue.  It likely did not take them long to come to the conclusion that the exemption for employer provided health insurance is the single largest "tax expenditure" in the tax code.  (Interesting how a feature of the tax code that allows people to keep more of their money is considered by analysts to be an expenditure to the government.)  In 2012-2013, the CBO estimates this single item has a total "expenditure" of 1.8% of GDP or something approaching $300 billion, making it a likely target for tax reform, especially for the "rich."

If you feel that this is unlikely, I found an article detailing such a proposal in President Obama's 2009 jobs bill.  In this bill the proposal was to exclude employer-provided health benefits from itemized deductions for those making more than $200,000 while at the same time capping the remaining deductions for the same group.  It is not difficult to imagine this notion seeping down to lower brackets.  As I pointed out in "First the "Rich" and the YOU!", it simply isn't possible to fund current government spending by just taxing the "rich."

So thanks to a history of government intervention in the economy, you could end up paying taxes on benefits that government policy helped inflate the price of out of a paycheck that is likely smaller because of those same government policies.

Government intervention, what could go wrong?


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