Tuesday, September 4, 2007

Employer Paid Health Insurance: Child of the Liberal Mind

(Crossposted)

Many jobs these days--especially those filled by college graduates--offer health insurance and other benefits as part of a routine compensation package. I would argue that this is not good, and it certainly was not always so.

While the concept of health insurance dates back a few hundred years, employer-paid health insurance is decidedly a 20th century concept. Even then, most Americans did not have health insurance, and the ones that did had insurance only for emergency problems that would result in a permanenent disability.

So, what caused the 'benefits revolution'? A liberal midset!!! In its omnipotence, the government decided to freeze wages during World War II as an inflation fighting measure. Any time the government interferes with a free market, a black market develops. Look no farther than the illicit drug market in the United States to see that the government cannot change the laws of supply and demand--at least not without a sever restriction of freedom.

So what happened when the goverment tried to control the labor market during WW II? A black market for labor developed. Employers, struggling to attract workers, HAD to offer benefits in lieu of pay to find employees, since the benefits were not subject to the wage freezes. And, since wages are subject to employment taxes whereas benefits are paid pre-tax, there is further financial incentive for employers to pay in the form of benefits.

Once the war ended, union collusion ensured that such benefits would remain a permanent part of American business life. It is reasonably fair to say that the philosphies of big government and imperfect markets have paved the way for the health care system as we know it today.

So why are benefits inferior to straight monetary payemt? The answer is restriction of choice. For each employee hired, an employer determines the total compensation (salary and benefits) that the particular employee will receive. Let's say that you are worth $100,000 per year to your employer. Let's further stipulate that your compensation consists of $80,000 in salary, and $20,000 in the form of health insurance that the company pays for you.

As Nobel Laureate Milton Friedman points out, economic freedom is essential to political freedom. In your case, you do not have the choice as to how to spend your $100,000. You get health insurance and $80,000. What if you are a healthy person? You don't smoke, you don't drink, you don't listen to talk radio, etc. Since you are healthier than the average person, you could get health insurance for less than $20,000--let's say $15,000. So, if you received your $100,000 all in the form of cash, you could get health insurance and have $85,000 to spend, not $80,000. As you can see, this process distorts the market result and in some (perhaps most) cases results in an unfavorable outcome.

Time and time again, government policies to control markets result in unintended consequences that affect our lives negatively for years to come.