Given the tremendous amount of focus on income inequality these days and the common knee-jerk reaction to push harmful and counterproductive wealth redistribution policies as a palliative, it is timely and important that Mark Warshawsky of the Mercatus Center at George Mason University recently published a working paper exploring the largely heretofore ignored impact to earnings inequality of employer-based healthcare coverage as a component of total compensation.
The punchline is this: healthcare coverage costs have consistently risen faster than wages for most Americans over the past four decades. Given that healthcare coverage is relatively equal across the income ranges (it is roughly the same cost to an employer to cover a family of four in the lower 30th decile of earners as that of a family of four in the highest 10th decile of earners), rising healthcare costs will harm and encroach more grievously on the employer’s ability to increase take home earnings for lower income earners. In other words, increasing healthcare costs, even if growing at the same rate for lower income workers as higher income workers, will eat up more of a percentage of total compensation and restrain actual take-home earnings for lower income workers. Furthermore, most studies, including the high- visibility and high impact to public policy book by Thomas Piketty, Capital in the Twenty-first Century, have used after-tax earnings data to compare wealthy and poor, resulting in loud alarm bells on inequality. The impact? Politicians across the globe, including President Obama, declared income inequality the defining issue of our time, but based upon partially constructed data! Warshawky’s research more appropriately focuses on total compensation, which provides a more comprehensive assessment of what is going on, and in this picture is revealed a more tightly coupled growth between the income poles. This is not to say that inequality in earnings is not a problem we should address, it is more to say that policies to address it should focus on the actual cause – which is not the perceived ability of the wealthy to extract wealth at the expense of the poor, but a direct result of the pernicious impact of rising healthcare coverage costs that crowd out earnings growth for those in lower income categories.
Warshawsky uniquely pulls directly from the Bureau of Labor Statistics, which provides a full assessment of the total compensation aspects of American workers. Contrast that with most studies’ data sources from the IRS and Social Security that only include cash earnings, and one develops an understanding that Warshawsky has the superior data set. In previous research using BLS data from 1999-2006, Warshawsky was able to demonstrate that if it had not been for increases in healthcare coverage costs, earnings growth between income levels would have been roughly the same. In order to understand and present the data more clearly and in layman’s terms, I have taken Warshawsky’s data and plugged in and extrapolated where I could while backing into implicit assumption numbers on baseline earnings, healthcare coverage costs, and fringe benefits for middle decile income and comparing them to top 1% incomes from 1999-2006. The patterns revealed are that while overall total compensation increased in the same percentage range over the course of seven years (34% for middle income earners and 36% for high income earners), the differences were more substantial and divergent within the earnings and healthcare coverage components of total compensation. Whereas for middle income earners wages increased only 3.5% per year, wages increased by 4.4% per year for high-income earners. This may not seem like much for any given year, but over time the differences become pronounced – over the course of seven years, the compounded gain for high income earners was 35% growth in take home earnings compared to only 27% for lower income earners. The key constraint in earnings growth for middle income earners is the fact that healthcare coverage costs rose much faster as a percentage of total compensation – rising at an annual rate of 9.9% compared to a more modest 6% for higher income levels. As Warshawsky indicates, this meant a rise in healthcare coverage as a percentage of total compensation for middle income earners from 7.2% in 1999 to 10.4% by 2006. In comparison, higher wage earners saw a modest increase of 4.0% to 4.3%.Graphs 1 and 2 visually show the impacts. While the slopes of the topline are similar between the two income groups (both rising at annual rates just over 4%), the relative mix of earnings, healthcare coverage, and fringe benefits is dissimilar; healthcare coverage costs are constraining earnings increases for middle income earners. Graphs 3 and 4 represent the percentage of total compensation aspects of the different components of total compensation, further visual evidence of the forces at play here – healthcare coverage increases for middle income earners takes up a larger percentage of total income and constrains earnings growth.
For anyone interested in a more fulsome review of the examples and scenarios I have created on top of Warshawsky’s values, I have attached the spreadsheet at health-care-costs-inequality. The detailed numbers simply provide another view in support of what Warshawsky states in the working paper, “Though rising healthcare costs eat away at wage growth for everyone, the effects will be largest for the working and middle classes because their healthcare costs are so large relative to the rest of their compensation package.”
In the rest of the paper, Warshawsky provides empirical evidence updates dating through 2014 using the same BLS approach as well as discussing supporting and conflicting studies. The conclusion is the same as the data above that cuts off in 2006, so I won’t drone on at length on it here. The policy implications are much the same as well – relief from healthcare coverage costs and decoupling health insurance from employer-based coverage, allowing American citizens to demand and receive higher wages with which they can then decide how to spend will do more for the lower and middle classes than any economically distorting wealth redistribution program.
Since I think that most news is overblown fluff, I have little sympathy for the endless pieces about “What we’ve learned about the world in 2016.” Against the background of all of human history, 2016 taught us next to nothing. If you just discovered that horrible people often gain vast political power with widespread popular support, you’re in dire need of remedial history. If you’ve just discovered that politicians’ personalities matter at least as much as their policy views, you’re in dire need of remedial political science. If you’ve just discovered that demagogic appeals to national identity work, you’re in dire need of remedial psychology. I am only a messenger.
Still, if you compelled me to articulate what I learned in 2016, here is the most I’ll admit.
1. American voters are at the moment even more irrational than I thought they were in 2015.
2. Republicans are at the moment even more nationalist than I thought they were in 2015.
3. Democrats are at the moment even more socialist than I thought they were in 2015.
From Economist Bryan Caplan from George Mason University at his Econlog blog. I concur!
“There are three kinds of lies: lies, damned lies, and statistics.” – Benjamin Disraeli
The L.A. Times provides a nice set of cherry picked data to justify the Affordable Care Act. The author is also fond of the word fatuous to describe Republican plans to repeal and replace Obamacare, so I feel compelled to maintain usage of the word my thoughts on the matter.Ignoring the long descent that healthcare has been on for decades now, and then claiming that slowing the growth rate of healthcare spend, while it still moves above the general rate of inflation and much of the decrease in observed to expected growth is related to the recession, is analogous to giving a kid a blindfold and a bat and told to hit the piñata in the tree in your backyard, meantime you have tied the piñata to a forest in the park two miles away. When the kid swings and misses, you take the blindfold off and tell him to try again, and declare success when he at least swings level at the air. The point being, even if Obamacare impacted these selective statistics, it is still miles from being where it needs to be.
To wit, there is many citations of costs decreasing, but the author conveniently ignores that those costs are going back up and projected to once again hit their stride of 6% a year, double the rate of inflation, for the foreseeable future. The recession was a temporary halt in healthcare spend, so it is really convenient to leave that fact out. Consider that in 1946 the average inflation adjusted hospital stay was $30 per day whereas today it is an astounding $2,200, a 70-fold increase. Trumpeting a modest decrease in this awful record is quite a bit like missing the forest for the trees.
Plus, while there is a lot of current debate about the tactics of repeal and replace given the slim Senate majority and how to use arcane Senate rules on budget reconciliation, Paul Ryan and others have come up with plans on replacing Obamacare, all under the banner of the Better Way moniker, which I detail in further detail elsewhere. Apparently this journalist is too lazy to look that up. But yes, I do hope that Republicans don’t take the risk of getting repeal without replace and do both at once. I honestly am not holding my breath given Republican ineptitude in the past.
It’s nice that the uninsured rate is going down, but of course a federal mandate to buy health insurance upon pain of hefty tax penalties is going to increase insurance rates. Would you praise a parent who upon their child spilling a drink or dropping food forced them to do 40 push-ups before eating again and then declaring to Facebook, “my child can do 40 pushups!”? No, I think not. At any rate, the real question is whether this metric on its own is the most important one and decoupled from the irrefutable evidence that healthcare costs and insurance premiums continue to skyrocket at a double-digit pace. Plus, recent research from economist Mark Warshawsky indicates that skyrocketing health insurance premiums have held down take home wages, as health insurance coverage has gone up for the lower and middle classes as a percentage of their total compensation from 4% to 12% in just a couple of decades – meaning they are not getting raises in take home pay because it is getting swallowed up in health insurance. Since inequality is a focus these days, look at the failures in our government run healthcare system as a main culprit.
If we are concerned with people not seeing the doctor, providing a stipend for catastrophic insurance and flexible Health savings accounts would have done the same thing without the enormous bureaucratic bloat that has led to skyrocketing premiums. And uncompensated care is an important gap to close, but this is all a bunch of cost shifting. What used to be covered through disproportionate share payments at the county and state levels, where great board oversight could be applied with local knowledge, is now being soaked up by cross-subsidies through the federal tax code – out of sight, out of mind, no accountability, and requiring hospitals to create a new administrative burden to work through the ACA and all its complexity.
This also ignores the many blatant failures of Obamacare, which I helpfully capture here. https://wordpress.com/post/gymnasiumsite.wordpress.com/117
The American Enterprise Institute recently published a thought-provoking and helpfully brief primer on how Medicaid funding works, what it means to shift to state block grants, and why politically such a move will be tremendously challenging.
Alas, something much more radical would actually give the poor better access and would drive the competition in the marketplace that would start to incent health care delivery systems and insurers to compete for their dollars. To wit, why not simply focus on an individual income basis and fund catastrophic insurance for unexpected events (what insurance is designed to do in every other industry save healthcare) complemented with funding for a flexible with annual rollover features Health Savings Account? This seems to me to be the ultimate path out of Medicaid and all of its challenges, such as those raised in this post. It would provide purchasing power directly to individuals, get them out of narrow networks defined by states, and remove the massive costs of administering programs through federal and state bureaucracies.
Turning on the nightly news, whether it be local or global, is bound to be an exercise in depressing futility. Whether it is a twelve car pileup, the local restaurant who failed its health exam, a case of road rage, a corrupt politician caught with his hands in the proverbial pot, despair and protest over Trumps’ latest tweet, acts of terrorism, or perhaps even the more provincial annual outrage over the grinch who stole Christmas by taking the yard inflatable Santa and his reindeer out of someone’s yard. For sure, the element of the depravity of mankind is ever with us, but that should not stop us from celebrating and recognizing that the times we live in are better than ever on a tremendous amount of fronts.
Take for instance the “Notable and Quotable” section out of today’s Wall Street Journal, in which Johan Norberg points out that since 1990, actual poverty, defined as living on $1.9 per day or less and adjusted for inflation and local purchasing power parity, has fallen from 37 percent of the world population to less than 10 percent today. That’s a rate of 138,000 people escaping poverty every day.
In a more fulsome article on the subject within The Spectator back in August of 2016, Norberg elaborates on the points of the golden age we live in and the reasons for people’s doom and gloom pessimism.
If you think that there has never been a better time to be alive — that humanity has never been safer, healthier, more prosperous or less unequal — then you’re in the minority. But that is what the evidence incontrovertibly shows. Poverty, malnutrition, illiteracy, child labour and infant mortality are falling faster than at any other time in human history. The risk of being caught up in a war, subjected to a dictatorship or of dying in a natural disaster is smaller than ever. The golden age is now…
…Look at 1828, when The Spectator was first published. Most people in Britain then lived in what is now regarded as extreme poverty. Life was nasty (people still threw their waste out of the window), brutish (corpses were still displayed on gibbets) and short (30 years on average). But even then things had been improving. The first iteration of The Spectator, in 1711, was published in a Britain whose people subsisted on average on fewer calories than the average child gets today in sub-Saharan Africa.
Karl Marx thought that capitalism inevitably made the rich richer and the poor poorer. By the time Marx died, however, the average Englishman was three times richer than at the time of his birth 65 years earlier — never before had the population experienced anything like it.
Fast forward to 1981. Then, almost nine in ten Chinese lived in extreme poverty; now just one in ten do. Then, just half of the world’s population had access to safe water. Now, 91 per cent do. On average, that means that 285,000 more people have gained access to safe water every day for the past 25 years.
But what about the plights facing the world of today? Norberg’s advice is sound:
Times have been rough since the financial crisis, yet for all the talk of Americans ‘left behind by globalisation’, median income for low- and middle-income US households has increased by more than 30 per cent since 1970. And this excludes all the things you can’t put a price on, such as advances in medicine, an extra ten years of life expectancy, the internet, mass entertainment, and cleaner air and water…
…Parts of the world are falling to pieces but fewer parts than before. Conflicts always make the headlines, so we assume that our age is plagued by violence. We obsess over new or ongoing fights, such as the horrifying civil war in Syria — but we forget the conflicts that have ended in countries such as Colombia, Sri Lanka, Angola and Chad. We remember recent wars in Afghanistan and Iraq, which have killed around 650,000. But we struggle to recall that two million died in conflicts in those countries in the 1980s. The jihadi terrorist threat is new and frightening — but Islamists kill comparatively few. Europeans run a 30 times bigger risk of being killed by a ‘normal’ murderer — and the European murder rate has halved in just two decades.
But inequality is growing faster than ever, you might retort. I am going to refute much of notions of how many studies focus on inequality and why they are flawed in a post later on this week, but for now I will point back to an earlier post as to why this is the wrong focus. Also, just as a gentle reminder – the politics of envy and the urge to give government power to address it is beset with problems. Namely, envy of a neighbor who has a mansion is just that, a base and unvirtuous feeling. He can do nothing further to me than invoke feelings and emotions. In contrast, the government leveler with the monopoly of violence can do far more harm.