Russ Roberts

Mark Warshawsky on Compensation, Health Care Costs, and Inequality

EconTalk Episode with Mark Warshawsky
Hosted by Russ Roberts
PRINT
Beats the Alternative... It's in the Perks...

insurance%20inequality.jpg Economist and author Mark Warshawsky of George Mason University's Mercatus Center talks with EconTalk host Russ Roberts about his work on the role health care benefits play in measuring inequality. Using data from the Bureau of Labor Statistics, Warshawsky shows that because health care benefits are a larger share of compensation for lower-paid than higher-paid workers, measures of inequality and even measures of economic progress can be misleading or distorted. The conversation covers a wide range of topics related to how the labor market treats workers and the role of benefits in setting overall compensation.

Size:30.8 MB
Right-click or Option-click, and select "Save Link/Target As MP3.

Readings and Links related to this podcast episode

Related Readings
HIDE READINGS
This week's guest: This week's focus: Additional ideas and people mentioned in this podcast episode: A few more readings and background resources: A few more EconTalk podcast episodes:

Highlights

Time
Podcast Episode Highlights
HIDE HIGHLIGHTS
0:33

Intro. [Recording date: December 8, 2016.]

Russ Roberts: Before introducing today's guest, I want to encourage listeners to go to EconTalk.org. You'll find a link there to vote for your favorite episodes of last year, of 2016. And give us some additional feedback about your listening habits. Really appreciate that.

0:53

Russ Roberts: Now on to today's guest, author and economist Mark Warshawsky.... Our topic for today is a recent working paper he's written, "Earnings Inequality: The Implications of the Rapidly Rising Cost of Employer-Provided Health Insurance." Mark, welcome to EconTalk.

Mark Warshawsky: Thank you. I really appreciate the opportunity to chat about his.

Russ Roberts: Well, it's incredibly important. And--this is an area of general interest to me, and in particular the focus on inequality, but also the standard of living. Which, whenever we try to measure compensation, income, these kind of issues that you raised in your paper come up. And I thought you had some insights and some facts that were rather startling and illuminating. So I'm very excited to talk about it. I want to start with some basic economic logic. What's the difference between, say, compensation and take-home pay for a worker?

Mark Warshawsky: Well, there are many, many differences between the two. For most workers, they get a whole package of both pay and benefits when they work for an employer. They may get a pension or they may get a contribution to a 401k plan. And what's particularly relevant here is they very frequently will get health insurance whose costs will be shared between the employer and the employee. But it's very important to remember that for most workers, most of the cost is paid for by the employer. And as we'll discuss, health insurance is very expensive. So this is a major cost for an employer and a major part of the compensation package. There are [?] other benefits that an employer will give to workers: certainly, vacation time and other types of leave, perhaps other types of benefits. And then, of course, added to the pay that a worker actually takes home. So, there are a lot of components to compensation, and part of the issue that is included here in this research and also in the politics of this matter is: take-home pay is pretty noticeable. And it's pretty easy to measure. It's in official records and tax records and earnings and so on. But the other parts of compensation, the benefits that workers get, are harder to measure and aren't as [?] measured, and so they are sometimes not noticed as much in terms of their cost, it's not noticed as much to the worker and it's not noticed as much to the researchers who look at these matters. But I can assure the employer knows very much what all this costs. And it's very much part of the employer's consideration in terms of how to design the compensation package and what they can afford to pay given the profits in their business--what they can afford to pay in terms of, you know, [?] earnings. The employer really pays attention to these costs very carefully.

Russ Roberts: So, there's a gap to start with between what the employer pays and what the employee receives--physically, literally there's a gap. Meaning, the employer has to pay for it; the employee takes home the cash part of it; and it's possible that the benefits that the employer has to pay for are worth the same amount to the employee, so the compensation that the employee receives is equal to the compensation that the employer pays. But it's also possible that the value of the benefits provided by the employer, which the employer has to pay for, may not be valued for all employees equally; and by some, not at all. So, if the employer provides, say, daycare on site for employees and I don't have any children, then that's a form of compensation--that's a cost to the employer--that I get no benefit from. Whereas, somebody who has multiple children might find that to be a wonderful value. So, first, talk about that and how the labor market works in dealing with these issues about compensation versus income for employees.

Mark Warshawsky: Yeah. So, there's a very complex mix of considerations to an employer in designing a benefits package. Sometimes it has to be done in a one-size-fits-all manner, and if they feel that some employees would appreciate, let's say as you indicate, you know, childcare, obviously it costs the employer quite a bit. But they give it to everybody; and they don't necessarily make an adjustment on a worker-by-worker basis to the rest of their pay as to whether they are using the child care or not. So, sometimes these things are done in true[?] approximations and averages. But there is another consideration--and this is very important to our topic--is that there also are a lot of government rules that pertain to these benefits. And in particular there's something called non-discrimination requirements in the tax code that particularly apply to retirement[?] benefits and to health benefits. And they state--they are very complex and so I'm not going to go through all the nooks and crannies of them. But in very broad terms they say that, regardless of whether the worker is high paid or low paid, everyone gets the same benefits. In retirement benefits this usually is a percent of pay; but for health benefits it means the same benefits, in dollar terms, so that the lower-paid worker gets the same health insurance benefits in terms of the cost to the employer as the high-paid worker. And that is a government requirement. Now, there are many other government requirements coming from different parts of federal and state law, and they have a big influence on how these packages are designed. You know, we could discuss whether they are good policy or bad policy, but at least for our purposes we have to recognize that they exist and that they have an important influence on how benefits are provided.

7:59

Russ Roberts: So, let's talk about the role of taxes. Most--almost all, maybe; you tell me--most benefits are not taxable in the same way that income is taxable. So, you could think about, if you gave me, let's say that you as the employer cover $5000 worth of health care insurance for me, one alternative would be you could raise my salary by $5000 and let me pick my own health care plans, not approved by the company, etc. And that's not as attractive to me in many cases because if you give me $5000 in income, I have to pay taxes on it. If you provide $5000 of health care coverage, or all kinds of other things that might be provided on the job, I tend generally not to pay taxes on that. Which seems like a good thing. But that has problems. So, talk about that just as a general aspect of benefits.

Mark Warshawsky: Yeah. You're 100% correct. Most, not necessarily all, but most benefits provided by employers are not taxed for the employee as income. The motivation for that--and this goes back, way, way back to the beginning of income tax--the motivation was that there [?] was a type of incentive or a type of encouragement to the employer to, and to the employee to demand these type of benefits. I think the notion is because it was thought that to have retirement benefits and to have health benefits is a good thing, and that employers and workers should be encouraged to have it. And so therefore they are not taxed. Again, in retirement benefits, the rules are very complex. It's not a totally open tax treatment, so there are limits. Some people may recall that, for example in their contributions to the 401k account, there are dollar limits that apply to restrict the amount of money that can be contributed tax-free to 401k accounts. Again, the important point here with our discussion of health insurance: there are no such limits for health insurance. So, even very, very generous plans--no deductibles, no copays, no employee contribution for the insurance premium. You know, and there are such plans out there. Totally tax free. So, that obviously is a contributing factor to, you know, having these plans and sometimes I think many people argue for them to just grow seemingly without limit.

Russ Roberts: So the last point, at least I think is the last point before we turn to health care in particular, that I think is so important and so unintuitive for most people is the idea that mandating benefits for workers is not a free lunch. I think a lot of people--certainly on Twitter, and pundits in the op-ed pages of our newspapers and publications, have a tendency to say, 'Well, if the government forces employers to provide Benefit X, then that's good for workers because that makes sure they have that benefit.' And what people neglect is that, that almost inevitably--I suppose we could cook up some scenarios where this is not true, but it's not easy to do--that almost inevitably means lower take-home pay: lower salaries in terms of cash for that worker. And it's imaginable, and often the case in my belief that workers would prefer the cash to the benefit. It's true that the benefit is tax free. But sometimes the benefit isn't a value. So, one example I always think of--and this is subtler, relative to the standard benefit discussion we've been having--one example would be safety regulation. So, we all--everybody likes the idea of a safe workplace. The question is: If you mandate certain expenditures by employers to make the workplace safe, that is a--may be--a way to help workers that is not as productive as paying them more money and letting them take their own steps to stay safe on the job. That is, it may be cheaper for workers to reduce the risk of injury than for employers. That's not always the case, of course. And employers have a natural incentive to make their workplace safe because they want to attract workers to a safe workplace. It's easier than to attract them to an unsafe one. But if you wanted a "unsafe one"--and it's not black and white, it's not 0-1, it's actually continuous--if you wanted a relatively less safe workplace, you might be able to attract workers there with higher pay who would then take their own steps to make sure that they are not hurt on the job. And that, that might be better for the workers--especially who are poor, who have low skills. And so when we mandate benefits for low-skilled workers in the name of helping them, we've taken away some freedom from them and some wellbeing, because they cannot use their money as they might choose. You can get into a debate about whether they can choose wisely. And I, of course, as listeners know, tend to be sympathetic to the idea that they can choose more wisely than the employer or the government. But that's the debate. The important thing is to recognize, I think, the unavoidable truth: That benefits aren't free. They come out of the salaries of workers. And that that is a cost that has to be taken into account.

Mark Warshawsky: Yeah. I mean, as you indicate, it really is Economics 101. There may be a very few economic circumstances where the employer, they are mandated to provide benefits can pass that cost along, you know, if they are a regulate monopoly or, you know, sell their products in, you know, in monopoly situations and they don't have much competition. But let's face it: When you are doing business in a global economy, there aren't many of those type of organizations around. So most employers, the vast majority of employers, you know, pay their workers; and it's pay--it's compensation. It's not take-home pay. They look at the cost of the employee as the cost of pay, as benefits as well as the mandated benefits that they have to provide. And if there's more mandated benefits, and--you know, and the going rate for workers is, you know, x, and you know, the profits that they make and you know, what economists call the marginal product, is you know, is y, and, you know, it's part of if x goes up because of mandated benefits, well that means that the take-home pay is going to have to go down. And that's--you can almost call it a law of economics. In other words, it's something that you just, you can't get around. You know, again, except in very special circumstances.

15:31

Russ Roberts: And it's not--I want to make the point--it's not just mandated benefits. It could be that--there are many, many benefits on the job that we don't think about. We tend, when we say 'on the job benefits' or compensation, we tend to think of these dramatic, large categories like health care, vacations, a company car, a cell phone, dental care, health care, retirement, etc. But of course employers provide all kinds of things on the job that are not obvious and we don't think about, like a warm place--there's heat. There's light. Sometimes there's a uniform. Sometimes there's training and explanations of things; and there's camaraderie and corporate culture. And all these things are part of the job. And if culture--or more importantly, competition--encourages employers to provide something for employees--and that thing gets more expensive, even if it's not mandated but it's just part of the competitive environment, employers are going to respond to that. And how we then observe--since we don't easily observe compensation but rather easily observe take-home pay--we may underestimate the wellbeing of workers or their relative situation to, say, 10, 20 years ago, simply because we are not really measuring the right thing. And although we're going to focus on inequality, I also want to think about how these kind of issues affect our perception of changes in the standard of living over time: not just the inequality issue. It is, of course, both, how they interact. You want to say anything about that before we go on?

Mark Warshawsky: No; I'm very sympathetic to what you are saying. There certainly have been some attempts over the years to try and measure these things, but they are hard. And that's why, you know, getting a little bit into my contribution here, when you get some unique data sources, that in fact does measure the cost of some of these benefits, you know, that gives us a great insight that we didn't have before.

17:43

Russ Roberts: So, let's start with just the logic of your argument, not the particular measurement--the ways you are going to measure it. Your claim, which is quite clever, and appears to be a matter mainly of just logic rather than bias or ideology--your claim is that rising health care costs affect our measurement of inequality if we only look at earnings rather than compensation. So, it's a little bit complicated, but it's just pretty much just basic algebra and logic. We're not going to do the algebra on the air, but we'll do the intuition and the logic. What's the argument you are making?

Mark Warshawsky: Yeah. It is, I think, just basically arithmetic. But, you know, maybe it's sort of--put this in context a little bit even before I go into the logic: The important thing to keep in mind is how much--and again, I don't think people realize how much these costs have gone up. So, here I'm going to cite a statistic from the Kaiser Foundation, which collects information on costs of health insurance. Just from 1999 to 2014--so, 15 years--the cost to an employer, and this is on the average, of health insurance, so this is what the employer is paying, not what the employee is paying--what the employer is paying for health insurance tripled. That's just in 15 years. And so--incomes didn't triple. The economy didn't triple. But the cost of health insurance tripled in just 15 years. And so when you have that sort of, I would say, I don't know what you call it, dislocation or disequilibrium or just sort of a massive change of an important part of the pay package--of course, it's going to have impacts on things which are more easily measured. Which are earnings. So, anyways, getting to the logical argument here: And we'll simplify it a little bit; it's of course more complicated when you look at the data and when you consider a lot of institutional and market considerations. But let's think of it in pretty simple terms. The cost of insurance, the health insurance, to an employer is the same whether the worker is high paid or low paid. And that's true, as I indicated, by law, because of nondiscrimination requirements. But it's also simply because that's simply the way, you know, pay packages way--that sort of, I'll even call it custom, or just for peace within the labor force: that everyone gets the same health insurance benefit regardless of whether they are high paid or low paid. Now, obviously there are high paid and low paid workers: people with more education or more value to the employer are going to be paid more as opposed to people who are, you know, either younger or don't have as much experience or simply don't provide as much value and profit to the employer are obviously going to be paid less. So, you know, that's just natural. And what everyone would expect. The employer looks at the whole cost. He doesn't look just at the take-home pay. He looks at: What does the insurance cost me and what does the take-home pay cost me? And they combine that. And then they say, 'Is the total package going to make sense for this worker and for that worker?' Now, when, you know, when health insurance is going up so much over a short period of time, that's going to change relationships that heretofore were occurring in terms of take-home pay. So that, let's say that at the initial point of our analysis, let's say, health insurance cost $4000 per worker. But for the worker who was earning $40,000, that represented 10% of pay. But for the worker who was earning $100,000, it was only 4% of pay. So, then let's say that cost doubles. So, it's $8000. So, for the worker earning $40,000, now it's going to be a lot higher percentage than for the worker that's earning $100,000. And even if everyone gets a compensation pay increase because, let's say, the company is doing better or the economy is doing better or time productivity increases, and so on, the employer still has to pay the money for the health insurance. And that represents more of a percent of compensation for the low-paid worker than for the high-paid worker. And so, the employer will increase take-home pay for everybody; but they are going to have to increase it less for the low-paid worker than for the high-paid worker. Because the cost of having the worker has gone up, you know, because of the cost of health insurance; and that represents more of the total compensation for the low-paid worker than for the high-paid worker. And you are going to see, you know, at the end of the day, that the take-home pay for the high-paid workers will have increased more than for the low-paid workers.

23:57

Russ Roberts: So, I want to take a step back and take a slightly different way of thinking about the numbers here and see if I'm doing it right.

Mark Warshawsky: Okay.

Russ Roberts: Part of the challenge of all this is that there are three million things happening at the same time: The economy is growing; there's increases and decreases in the demand and profitability of a product of a particular company; there's increased scarcity of certain types of labor. So to make it simple, let's say all that's flat and static. That's the kind of thing that drives non-economists crazy; but it helps you see what's actually going on. That's the reason we do this, as a mental exercise. So, let's say nothing has changed in the economy except health care is getting more expensive. And let's say that health care insurance doubles in the example you gave. So, I'm the low-paid worker: I was making $40,000 in take-home pay and I had this nice compensation for my health care insurance which was worth $4000. And you're the high-paid worker: You're making $100,000 in take-home pay, but your compensation is actually $104,000. So, the ratio of our compensation is actually 104/44. But we don't see that. We just see the 100/40.

Mark Warshawsky: Right.

Russ Roberts: Now let's say health insurance doubles: It goes to $8000 in the example you used. And I'm not any more productive, and neither are you. What's going to happen in the marketplace, approximately? And there's some wiggle room for this, but let's just take the extreme case. My take-home pay is going to go down. It's going to go down to $36,000 from $40,000, because my total compensation is going to stay at $44,000. I'm no more valuable to my employer than I was before, so their first impulse is going to--not their impulse--competition among employers is going to tend to drive the salary of people like me down to $36,000; and yours is going to go down to $96,000. And the ratio of 96/36 is not the same ratio as 100/40. And as a result--did I do that right?

Mark Warshawsky: You did it exactly right. And I'll just conclude your thought: Therefore, it will look like the lower-paid work is falling behind the higher-paid worker, proportionally. But that's not actually the case, because we know total compensation for both workers has not changed at all.

Russ Roberts: Right. So, my--the absolute gap between us is the same, but the ratio is what we tend to look at in these stories has changed. And now, let's move forward: let's have health care ratchet up steadily--right? Health care gets increasingly expensive. And if that's happening, the gap between you and me is just going to continually get bigger, if nothing else changes. Now, of course, something else is going to change: salaries are growing, in general, in an economy that's growing. But it's going to look like they are not growing very quickly because an increasingly large share of it is going toward health care. So there's two things going on that are deceptive when we only look at income rather than full compensation. The first is, it will look like--on average--forget the poor and the rich, forget the inequality issue. First thing that you're going to notice is that the growth in income is going to be relatively low compared to the growth in compensation. The second thing is that the inequality at any point in time is going to be growing because compensation--excuse me--benefits as a proportion of total compensation is increasing more rapidly than take-home pay is going to be. And that's always going to be true when, say, it's doubling or tripling, health care insurance costs, because productivity doesn't go up that fast. The other point to make is that I might--and this is just a reality; sometimes there's so much emotion around these issues I think it's really hard to think about them clearly--but the reality is, is that in that not-so-attractive scenario where my take-home pay falls by an additional $4000 to $36,000, I don't necessarily get $8000 worth of benefit just because health insurance is more costly. I do if I need it or really want it. If I really feel compelled to have health insurance, the fact that it's $8000 now and paid by the employer, that's worth it for me. It's true my take-home pay is down to $36,000 from $40,000, but I value it. And the more complicated case will be, in terms of measuring standard of living and inequality, is when I don't value it: if it's gone up in ways that are not productive for me but through either mandates or competition I'm forced to pay that for it. I mean, I think, if nothing else, listeners should realize that I'm paying for those increases in health care insurance, not the employer. Just because it's covered by the employer masks what's really going on underneath.

Mark Warshawsky: Yeah. That, leads into a related topic which I think is very relevant for politics and also the policy and the economics of the issue, is health care costs are exploding. They are rising very rapidly. And the question comes both at the individual level and at the company level and at the level of government and society, as to whether those benefits are worth it. In other words, whether they are on the margin providing us with a lot of increased health and increased longevity and so on. There's a strong debate about this, and there's some reason to think that they are not providing that marginal benefit, again, particularly when you consider the very rapid increase in cost. So, I think that becomes relevant when we think about this at a higher level. But you are certainly right: even at the individual level, people have different preferences for these type of benefits, compared to young, compared to old--all sorts of individual situations. And just general attitudes toward risk and attitudes towards even getting health care--some people are more interventionist in their situation and others don't necessarily go to the doctor at every sniffle. So, even at the individual level, not even considering broad societal considerations, people have different preferences for these things; and one size fits all is probably not the best solution.

31:02

Russ Roberts: So, just to clarify the two issues I think are easily confused--that I probably jumbled up in the last comment I made and while saying that we shouldn't confuse them. Let me make it clear. Philosophically, people may differ, and do differ, on whether government should mandate certain kinds of benefits. They can--I happen to be a person who is very opposed to that; but I understand the argument. It's not open and shut. You can be a fine human being and think that government can mandate health care, that government should make health care insurance deductible, etc., etc. For all kinds of reasons--political economy, philosophical, ideological reasons. At the same time, there's a separate issue that we're talking about here, which is: Once you do that, the measurement of wellbeing of workers and the inequality across workers is going to be much more difficult to observe because we don't regularly generate government reports on compensation in dollar terms. We instead generate reports on worker pay in dollar terms. We are missing a large part of compensation. And that affects our understanding of inequality. And it affects our understanding of wellbeing over time--changes in the standard of living, progress for low- and middle-income and high-income workers. And that has nothing to do with whether you think it's a good idea to have mandated health care or government benefits of this kind or another or the nondiscriminatory kinds of regulations that we face. We're simply talking here about the numerical part. And to me, the only thing controversial about that part of this is, "Who pays for it?" That is, the story I just told where salaries fell from $40,000 to $36,000--it is possible, under different models of the labor market, that the employer might have to eat some of those costs. They won't all be imposed on the employee. So, when we said earlier, when you said earlier, that between 1999 and 2014, health care costs to employers tripled, my first thought is: 'Well, that means that employees had to pay triple, because it comes out of their compensation.' Now, you can debate that. That is debatable. You can argue that it doesn't all come out of compensation. And economists--this has to do, we're not going to get into it, with the elasticity of supply and demand for labor of certain types. But that there is an effect on employees when costs go up to employers--you can't argue with that. You can argue about the size of it. You can argue how important it is. You can argue about whether employers have to bear some of those costs: they don't all fall on the employees; that markets aren't fully competitive, etc., etc.

Mark Warshawsky: At one time when these measurement systems and tax systems were designed, back in the 1940s and 1950s, you know, when these benefits were not very costly--health insurance was cheap. So maybe it didn't matter as much, because it was almost a rounding error. Or it wasn't that significant in terms of whether--perhaps we didn't tax it or didn't measure it in our income measurement systems. It didn't matter as much. But when you have these costs increasing as rapidly as they have, those systems of measurement become increasingly outmoded as ways of looking at ways of people's wellbeing and just in terms of what they are earning. What they are really earning. So, you know, that is also a reality that, when these costs have increased so much we just have fallen behind in our ability to both understand and measure these things.

35:17

Russ Roberts: Okay. So now let's come to the magnitudes. So, as you say, in the old days, a small proportion. So, this distinction between compensation and income was relatively unimportant. And then the other question is: Well, how important is it? And I think, when I argue with people about the importance of focusing on compensation rather than just income, one of the things you hear is, 'Well, okay, it's true, but low-income workers, middle-income workers, they don't really get many benefits. Most of the benefits are accruing to--it used to be the case that everybody would, say, get a pension. Now that's mostly gone. And only the higher-end workers are getting benefits.' So, let's, first just talk about the rough, crude magnitudes for who are--the magnitude of benefits for workers across different income levels in the economy today. What do we know about that?

Mark Warshawsky: Yes, and I'm just going to--yeah. I'll cite some statistics from my paper. So, I'm just taking two years: 1992 and 2010. So, looking at the lower-paid workers, those who were in the 30th percentile--so these are people basically earning, they are full-time workers but they are basically earning minimum wage--their health insurance as a share of compensation--and this is data from the Bureau of Labor Statistics (BLA), so this is based on a government survey; it's a very well-established survey, very carefully-designed--and it's a survey of employers. So, it doesn't require the [?] of workers--

Russ Roberts: [?] Yeah.

Mark Warshawsky: as to what they think they are getting or maybe they are getting. It's directly to the employer that knows what these things cost. So, anyway, so in 1992, the, at the low-income worker, their health insurance as a share of compensation was about 7-and-a-half percent of compensation. For the very highest-paid worker, in the 99th percentile--we are talking about the 1% that people talk about--their health insurance as a share of compensation was only 4-and-a-half percent. So, because, again, it's sort of, to a first degree approximation, it costs the employer the same thing to provide health insurance, whether it's a very high-paid worker or a low-paid worker. In reality there are distinctions. And there are differences by geography, by type of employer, and so on. But again, these are actually statistics from the survey of employers. Low-paid workers had a higher share of health insurance paid by their employer as a part of compensation compared to the high-paid worker.

Russ Roberts: And repeat the ratio again? This is 1992, it was 7-point something--to 4-point something.

Mark Warshawsky: Yeah. So, basically 7.5% to 4.5%.

Russ Roberts: Okay. Fast forward.

Mark Warshawsky: So health insurance benefits were more costly as a share of compensation, total compensation, for the low-paid worker than for the higher-paid worker. And these are, you know, incontrovertible statistics, again, based on the Survey. So it's not a matter of ideology or some claim that well-paid workers don't get health insurance. They do--

Russ Roberts: Or your attempt to try to measure what the health care is worth to a low-paid worker or a high-paid worker. These are just what the government gathered from employers that they paid out of pocket.

Mark Warshawsky: Yeah. What it cost them to have those workers working for them. Exactly.

Russ Roberts: It's just important to add--we've said many times that it's hard to measure these benefits. That's only because the way the government tends to report them. Right? So, we have surveys of workers where we ask people what we earn. We have surveys of employers; we ask them what they pay. The things that typically get reported and talked about in the media are income. These compensation numbers you are quoting--they are black and white. They are checks written by employers there--it's not like, 'I wonder what it is, how important it is, I'm going to guess.' These are costs to employers that are measured in this survey. Right?

Mark Warshawsky: Yeah. And it is indeed based on a survey of employers. Most of the time that people talk about pay, they talk about their income. And a lot of times that comes from income tax returns. And a lot of scholars that look at income inequality basically focus on income tax data. But again, that's take-home pay. It does not include these non-taxed sources of compensation. They are essentially not on the tax return.

Russ Roberts: Okay. Carry on.

Mark Warshawsky: So, yeah.

Russ Roberts: So, 1992, 7.5, to 4-something.

Mark Warshawsky: So we can--

Russ Roberts: Go forward to 2000.

Mark Warshawsky: Sorry?

Russ Roberts: You were saying. I interrupted you. In 1992, the ratio of the 30th percentile worker to the 1st percentile worker was 7.5-to-4.something. Go forward--

Mark Warshawsky: 4.5. Exactly. So, now we move to 2010. Pay has gone up but benefits have, costs of health insurance have gone up even more. So, in 2010, looking at the low-paid worker, their cost of health insurance paid by employer as a share of compensation for the low-paid worker has increased from 7.5% to 11.6%. So, that's a--what--3 percentage point increase. 3.1 percentage point increase.

Russ Roberts: 4.1.

Mark Warshawsky: Uh. 4.1. Yeah.

Russ Roberts: It's over 50%.

Mark Warshawsky: 4.1. Thank you for that correction. So, 4.1 percentage point increase in the share of compensation that is required to pay for the employer to pay for health insurance for the low-paid worker. From the very highest paid worker, the 99th percentile, that share of compensation that goes to pay for health insurance did increase but it only increased to 5.7%. So, that was an increase from 4.5 to 5.7--I think I'll do the math right now: 1.2 percentage points. So, the percentage-point increase as a share of compensation was almost 4 times the increase for low-paid workers as for high-paid workers. And so, and for low paid workers, we said 4.1% [percentage points--Econlib Ed.]; for high-paid workers it was 1.2% [percentage points--Econlib Ed.]. And those are the facts--and I don't think people can argue either with the logic or with the data in terms of that the consequences of rapid increases in health insurance are felt more by the low-paid workers than by the high-paid workers.

42:46

Russ Roberts: Well, they could argue--they could say it's not a good study; they could argue it wasn't representative; they could argue it left out this or that. But what I find important about what you've done is that at least you have some measurement of this. Let people argue about it if they want. Here's a paragraph in the paper I'm going to read that I found so striking--a much shorter time period but it really makes clear how these effects are important. I'm going to read it selectively, so that, again, we're bombarding listeners with a lot of numbers and I hope you guys out there are doing okay; but it's so important. We're talking about 1999 to 2006. This is a 7-year period. And you are quoting, again, data from the Bureau of Labor Statistics (BLS). So, the employer cost of health care for a low-wage worker went from 6.2% to 12.2% of compensation over that time period. That's just a huge increase. While total compensation for the group rose by 41% over that 7-year period--this is not corrected for inflation; that's not the point--41%; wages grew by only 28%. So if you looked at wages you'd say, 'Well, over 7 years, up 28%. It's pretty good. It's not great but it's okay.' And you'd have to correct for inflation to see how much better off they actually were. But their compensation went up 41%. That's a huge difference, 41 versus 28, trying to assess their wellbeing over that period. To go up to the high end, for a high-end worker, the top 1% over this period--smaller window than we just talked about--health care costs grew from 4% to 4.3%--a tiny increase in percentage terms. The more important point is: Earnings grew 35%; compensation grew 36%, for high end workers, because it's such a small portion--there's not that big a difference between compensation and earnings. However, if you just looked at earnings, the low-wage workers, their earnings only went up 28% compared to 35% for the high-end workers. So you'd say, 'Well, inequality is growing.' But if you looked at compensation, compensation went up 41% for low-wage workers and only 36% for high-end. So, actually, the true inequality is getting smaller. And that's really the point of your paper. A lot of numbers there; but again, the basic intuition is pretty clear, that if we looked at compensation rather than earnings we'd see a different picture. We are actually seeing the lowest wage workers in the data, the 30th percentile full-time workers, actually doing better: their standard of living is growing faster than people at the high end. But if you only look at earnings, you are misled. What about over the longer time period that you look at, 1992-2010?

Mark Warshawsky: Well, when you look over a longer period of time, of course there are many other factors that are coming into play. Although the advantage of looking at 1992-2010 is, they are similar points in the business cycles. So, they are both at the, just immediately following the low point in the economic cycle. But still, there is a lot--while over a longer period of time, the results aren't quite as striking, they are still there. So that about half the increase in inequality is explained by the increase in health care costs. But it's not a 1-for-1. So, to be more specific, looking at this 1992-2010 period, in the 30th percentile, earnings growth was 60%; but if you look at compensation which includes the growth of health care costs, a very rapid growth of health care costs, the growth is 70%. Whereas if you look at the 99th percentile, earnings growth was 78% and compensation growth for the 99th percentile was 82%. So you do have both earnings growth and compensation growth higher for the upper earners than for the lower earners. But--and this is the point of the analysis and the main finding here--is that compensation growth grows more for the lower-paid workers than looking at earnings growth alone. And it's relatively more for the lower-paid workers than for the higher-paid workers. So, we still have the result that a big part of the increase--not all--in earnings inequality is explained for by the increase in the, the rapid increase in the growth of health care. And I want to even move a little bit further in terms of thinking about it, in terms of what role the government or government policy would have. And that is: If you just think that there's something nefarious going on in terms of, I don't know, power relationships or just plain unfairness in the labor market between high-paid and low-paid workers, well, that, you know obviously indicates one set of policy prescriptions--increasing taxes on the high paid and so on. But if a large part of the explanation is the increase in the cost of health care, well, if that's the cause, then you presumably should address the cause and not the symptoms. And that clearly leads to an entirely different set of policy prescriptions and thoughts, in terms of how to deal with this issue.

Russ Roberts: And you are suggesting that, in fact, compensation inequality may be falling, while earnings inequality is rising. Is that a fair summary?

Mark Warshawsky: Yeah. Either it is falling or it has not increased, or it has not increased certainly as much as what just the earnings and income data show. It depends on the data source and the time periods. But the broader point, which is consistent across different time periods and different ways of looking at the data is that the increase in inequality is highly exaggerated when we look at just earnings or income as opposed to total compensation.

49:48

Russ Roberts: So, I want to raise one more issue related to this issue of who is going to pay for this and how it gets paid for. If my--going back to the example you used at the very beginning of the conversation--if I'm making $40,000 in salary and $4000 is in health care insurance that my employer is paying for me, and it doubles. Or let's make it really dramatic: it quadruples or quintuples and it's now $20,000 instead of $4000. So, it goes up to $60,000 is my compensation. If I just got a free ride in health care, my employer is not going to be able to afford that. So my employer is going to be tempted to take that whole $20,000 out of my income. And so, I've got $44,000 in compensation, and my employer says, 'Well, I'm sorry but my health care costs are really expensive. You're no more productive. I'm going to give you a salary of, now, $24,000 instead of $40,000.' I am going to respond by saying, 'I quit. I need to find a job that doesn't cover health care insurance. I'm going to go work for a firm that is homogeneous--only has low-wage workers.' So it isn't a discriminatory problem; and none of us are going to get health care. Or, if my employer already has low-wage workers mostly, they might just decide: 'Folks, you are not going to get health care any more. It's just too expensive. I can't afford it.' And they might even conceivably have to give me a raise in my income. So, react to that and how that might contaminate some of your results. Because it's kind of amazing that workers in the 30th percentile are still--11%, over 11% of their compensation is health care? You'd think a lot of them would want to work somewhere else, maybe, and have more income.

Mark Warshawsky: Yeah. It is an interesting and almost surprising result. But it is in the data. It's actually almost 12% of compensation as for the low-paid workers is the cost of health care. I would say there are a few things regarding [?]. One is, health care is--because it's so expensive, it is a risk to workers; and they do want insurance. They may not want to spend as much as it costs. But it's still nonetheless something that is of value to them, even if only as covering a risk, like they have car insurance or homeowner's insurance. So, there's number one. Number two is that it is still likely to be cheaper to be covered by the employer than it is to go out in the marketplace and buy insurance on your own, health insurance on your own, which could be expensive. You have to pass underwriting. Absent talking about the ACA (Affordable Care Act), which is a whole other subject. But here we're talking about historical data through 2014. So, the ACA was not a factor. So it still may be that it's better to be insured by your employer than to try to insure on your own. And it's also the case that you probably don't have an alternative in terms of Medicaid. You might try to fund your health care costs on your own, but you, you know, and maybe you can try to get charity care from the hospital. But that's not--all these are sort of second bests and not the most desirable outcomes. And so even though it's really a lot of money--it didn't happen overnight, also, we have to remember. This is a phenomenon that is long-standing and precisely because it didn't happen--one day it was $4000, the next day it was $20,000--where I think you would get your very strong reaction. But this has happened over time. So therefore it's more muted. The other consideration is, it is a tax advantage to get it through your employer as opposed to paying for it on your own. And that is a big advantage. And finally, I would say that it has happened, somewhat, you know, around the edges, and as you sort of note, particularly low-wage firms, some employers have indeed dropped health care coverage. It hasn't been dramatic, but there has been some of that as well. So, all of that taken in total I think explains the data. I mean, the bottom line as we still see it in the data that a very rapid increase in focus in percentage terms on the lower-paid for the cost of health care.

54:52

Russ Roberts: Now, one of the problems with the paper or the claim--I don't know how to say it--is that most of the people who have tried, maybe all of the people who have tried except for you, to measure these kind of effects have to bend themselves into pretzels to impute some kind of guess about health care costs to a certain class of workers or some measure of compensation. This data set that we're talking about that you've drawn these conclusions from--again, the conclusions, there's a theoretical set of claims here that I think is almost impossible to argue with; then there's an empirical question: How important is it? Your measure of importance comes from a data set that only you have, it appears. So, talk about where those data come from and why do you have access to it and other folks don't? It is the Bureau of Labor Statistics--that's good; it's not your uncle. But why aren't other people using these data to answer these questions?

Mark Warshawsky: Well, it [?] vindicated--the logic is so obvious that, obviously I'm not the only one to have thought of this. So, for example, the Congressional Budget Office (CBO) has looked at this question; some scholars at the Brookings Institution have looked at this question. And they come up with a similar conclusion but not as empirically strong as what I have. And the reason why, I believe, that they don't come with as strong, and careful, result is that they are using data sources which are, I guess you could characterize them as indirect. They have to do some imputations; they have to do some smoothing; they have to get data from different data sources which are not always consistent, consistently measured, sometimes they are measured with error because they rely on the recall of workers or households. So, those data sources are inferior to what I have, which is the same data source that the Bureau of Labor Statistics uses to report on very widely quoted statistics on what's going on with wages and what's going on with costs of hiring workers. These are very widely used and very widely respected statistics. I did have to ask for this data, in terms of, to get the detailed data on the numbers by compensation level. That is not something that the Bureau heretofore has reported. And I can't honestly say that I [?] others haven't asked for it. It wasn't a slam dunk, in terms of me getting it. It required a little bit of effort and a little bit of persistence on my part to convince them that this is a worthy study. But ultimately they did provide me with these statistics. And I have to be very grateful to them for doing so. But I can't fully explain why others haven't tried to get these statistics, which I think are, as I indicated, are very high quality and, you know, the same statistics are used for widely, widely recognized and widely cited. The unique thing here was to get some of the detail on these, on earnings and compensation by earnings level. That's what's unique here and what has not been heretofore published.

Russ Roberts: And can other scholars get access to those data now?

Mark Warshawsky: I assume so, if they ask.

Russ Roberts: Can you make those public?

Mark Warshawsky: Yeah--it wasn't sort of mine to give. So I'm a little reluctant to offer them on behalf of the Bureau of Labor Statistics, statistics that they--it required a negotiation to get. So, but, I think the question could be posted to the Bureau of Labor Statistics as to sharing it with others.

Russ Roberts: But the point is, is that: The BLS puts out a ton of data. I assume a lot of government agencies. And they put that out in various ways. So, just to take an example: When Piketty and Saez look at inequality over time using IRS (Internal Revenue Service) data, or they've done a similar kind of negotiation, I think--they get access to data from the IRS--they make public their data that they've created from the IRS. They don't make public the IRS data. They, in the course of--the very generously post all kinds of spreadsheets that an economist or interested person can play with themselves and check. And many people have. And that's great. But of course there's a lot of stuff going on under the surface. There's a lot of imputed and implicit assumptions that are made to get the certain numbers in those spreadsheets. And that part is much more opaque. What I'm wondering is, is that when you present the numbers in your paper, in what sense are those just a straightforward arithmetic, you know, ratio of things that the BLS [?] versus crunching and assumptions behind them that you had to do to get to the conclusions that you drew?

Mark Warshawsky: There's very little crunching and no imputations and no smoothing and no inferences. It is--the spreadsheets were provided to me entirely based on the raw data. So, there's very little of that. You know, I think the issue--certainly with IRS statistics, and I think also with the Bureau of Labor Statistics as well, is, these are surveys or actual data that come from actual companies and actual individuals; and we have to be mindful of their confidentiality. So, that's why there needs to be a negotiation. When you get to more refined levels of this data to do this analysis, you do have to be more concerned about the ability to identify, 'Oh! IBM (International Business Machines, Corp.) has these data.' You know, that's a commercial secret to IBM. And they share this information with the BLS on the promise that their data will not be shared, their specific data. And similarly with tax data. Obviously we have to be concerned about confidentiality. So, it's a balance, in terms of, you know, sharing all the data as opposed to being concerned about confidentiality. I think in my regard, the data, there was no--very little crunching. Almost no crunching. It's basically the raw data.

Russ Roberts: It's unfortunate, though, that we have to take your word for it, for now. I mean: I know you; you are a nice guy. You could have made a mistake, though, right? Even the nicest person makes spreadsheet errors. It would be useful if the BLS would make this more widely available so people could confirm your numbers and their reliability.

Mark Warshawsky: I think that's a balance which, you know, is a broader issue; and an argument certainly could be made for the BLS to do so. I think also, there's also a practical issue in terms of the BLS provides a lot of data. They have limited staff. And so I think there's that element as well. But I think mainly it's a question of, when you cut the data more finely--as you need to, in this exercise, to look at levels of compensation--you have a little bit more risk of revealing the confidential information. But that's a judgment and a balance.

1:03:37

Russ Roberts: Having said that, I just want to conclude, and then I'll give you the last word: It's always going to be a question of magnitudes. There's always a question of how important things are that you want to notice or observe. And inevitably there's imperfection in trying to measure those magnitudes. I spend a lot of time in this program talking about complex, sophisticated econometric analysis. That's not what this is. These are just some facts. Even facts can be tricky. You chose the 30th percentile on the grounds that that was basically the full-time worker cut-off. As we said before, it could be the survey is not that representative, for reasons that we don't understand. It could be it leaves out certain categories of workers that are important. There's always issues that are, even interpreting just basic "facts." But I think the fundamental thing that I learned from your paper and that I'd like listeners to consider is this idea that compensation and earnings are not the same; that our inevitable focus on earnings doesn't tell the whole story when we look at inequality.

Mark Warhsawsky: Well, I appreciate the opportunity to talk about this. And let me just conclude with a little bit, moving a little bit into the policy realm. As we talked about inequality, and also as we talk about the repeal and replacement of the Affordable Care Act, I think the contribution that I'm making is that the two are tied. That, particularly as health care has grown as a share of income, just as a share of our economy--now it's almost $1 out of every $5 dollars in our economy. When we talk about inequality, when we talk about the role of health insurance and the cost of health insurance, who should pay for it, you know, how those programs should be set up: The two are so intertwined and so importantly connected to one another that we really have to think about them in the same breath, almost. We talk about them in the same breath. And as we go forward in design or replacement for the Affordable Care Act, I think we really need to address the root cause of the problem--how the income inequality, which is the rising cost of health care cost--and I think we need to deal with that more directly than we have been. And we've been very indirect and very tentative about it. And I think we need to be more aggressive and more direct in addressing that problem.

Comments and Sharing



TWITTER: Follow Russ Roberts @EconTalker


COMMENTS (37 to date)
David Gossett writes:

Currently listening to today’s podcast, but wanted to do a shout-out to Russ for an outstanding 2016. Listened to every 2016 episode (have been listening for years) and the podcast has never been stronger. I often think guests say wow after hanging up with Russ. This has to be one of their top 2-3 interviews on their book or paper. Russ not only reads their books (very rare for interviewers), but can turn a single sentence/paragraph into a thought-provoking conversation.

Here is my favorite thing about EconTalk. Listeners know Russ will comment (high level) on a guest’s book, etc. at the beginning of many podcasts. In past years, this would be an indication of the upcoming conversation. Russ really enjoying the book was a predictor of a great podcast coming…

But in 2016, I could not see a single difference between books/papers that impressed Russ and those that did not merit an upfront compliment. Regardless of the subject/book/paper quality, Russ has this great ability to make it come alive and be interesting. This is an amazing skill. Topic no longer matters… Russ can make anything into a great podcast. Well done! Very well done!

Greg G writes:

I thought this was an excellent podcast in the best tradition of EconTalk. You tackled a difficult, controversial, and under appreciated problem and did it in a fair and informative way.

Employer paid healthcare benefits SHOULD be valued (by the majority of employees who need them) as MORE valuable than the same compensation dollars put into a salary increase due to their tax advantages.

But that is NOT the way human psychology works. If employees have had their health care costs paid by the employer in the past, they tend to view that as status quo going forward no matter how much premium costs go up. I spent three years as a local School Board member and one of the great frustrations of that job was that, no matter how much more we paid in increasing health care premiums for health care that really was increasing in quality and quantity, employees did not feel that was an increase in their compensation.

One of the easiest things to get economists to agree on is that allowing employer paid tax deductible health insurance is bad policy. But getting the public to agree with that is a complete political non-starter and not just on the left.

The problem of higher insurance costs for small groups due to the very real risks of adverse selection is often the biggest obstacle for talented young people seeking to start their own businesses.

In my opinion, this is why some form of mandatory health insurance covering basic care and catastrophic coverage would be good public policy. It is the only way to avoid the adverse selection and free riding problems.

I have two adult children who wanted to start their own businesses. One has already done so successfully and the other expects to do it in about two years. Both tell me that leaving their previous good jobs with larger pools of good employer paid healthcare is the biggest obstacle to starting a new business. Mandatory health insurance for everyone could level the playing field in healthcare costs for new businesses and result in a burst of new entrepreneurship.

Yes, it would require taxpayer funded premium support for the poorest Americans. We already have that now in the much more costly and inefficient form of emergency room care for all regardless of ability to pay.

Harvey Cody writes:

Excellent concept for a study and well presented.

I worry, however, about the comparison of the $40K/yr employee to the top one percenters when it comes to the fraction of total employee cost which is healthcare. The calculation of the cost of $40/yr. employees health care as a percentage of the total cost of employing such employees is fairly straightforward. The pay is easily quantifiable and the healthcare benefits are reasonably standard and quantifiable. Such is not the case with respect to the one percent.

At least as described in the podcast, Mark Warshawsky looked only to "take home pay" when comparing compensations. Take home pay for some of the one percenters is as little as $1/yr, i.e., insignificant. In any event, take home pay is only one, perhaps relatively small, factor in total compensation to the one percenters. Stock options and other equity participation can be a very large percentage of total compensation. Such compensation [Black-Scholes notwithstanding] is essentially non-quantifiable until after the fact. [After the fact quantifications grossly misstates the value and cost of the option when granted.] Especially in the 1990s, percs like company cars, club memberships, business lunches and dinners, office amenities, first class transportation and accommodations, annual comprehensive physicals, etc. were a large part of total cost to the company for these employees.

Additionally, the one percenters were much more likely to have Cadillac healthcare plans. Not only were these extra costs incurred for top employees which are not included in take home pay, if those extra costs were included in the company's total cost of healthcare, they could have resulted in an overstatement of the costs of providing healthcare to the $40K/yr. employees.

Hopefully, these were details which Mark Warshawsky factored into his study but could not be addressed due to the constraints of a one hour podcast. If so, unless non-take home pay is immaterial (something which would be surprising), and no massaging of the numbers were employed to quantify the perks and options, the study could be materially flawed.

In any event, Mark Warshawsky did a great service in getting this ball rolling. Thank you for the great podcast.

Gandydancer writes:

Greg G: "In my opinion, this is why some form of mandatory health insurance covering basic care and catastrophic coverage would be good public policy. It is the only way to avoid the adverse selection and free riding problems."

What is "basic care" doing in that sentence?

Alan McCrindle writes:

For someone who lives outside of the USA, American healthcare has looked like an ideological blindspot to many Americans.

I have heard people crowing that growing healthcare costs are a massive benefit to the economy. Its as if you put the word growth in front of something it is always good.

And it seems that in todays discussion the numbers from the analysis created a bunch of wood which prevented the trees from being seen.

The comment from Greg G sums it up - "one of the great frustrations of that job was that, no matter how much more we paid in increasing health care premiums for health care that really was increasing in quality and quantity, employees did not feel that was an increase in their compensation."

What do you do when confronted by something that doesn't fit the preconceived model? What do dumb workers know anyway - we have analysis and numbers to prove them wrong.

Maybe I can put it another way - imagine you are my slave and the costs I have to pay to keep you healthy double. How would you react if I said to you - Slave, you must be really grateful to me for the increase in the quality of your life you just experienced. You would think I was deluded.

In the same way as the slave experienced no increase in the quality of life from the increase in healthcare costs, so the American workers experienced no increase either. What they experienced was a decline in take home pay, a decline in their standard of living and a decline in their quality of life.

One of the reasons that Trump won the election is that the elites have lost touch with the workers. The elites have deluded themselves with their own analysis and used it to confirm their own biases.

D writes:

Seems to be just an academic exercise....that is compensation for low paid workers has increased at a faster rate than higher paid workers, but high paid workers have a greater cash flow so they don't care, it doesn't have the same day to day impact.

The bigger question is why has health care tripled in cost?
Too many middle men between point of care and patient?
Disease treatment guidelines lowered each year to increase drug sales and more freq. office visits for monitoring?
Doctors who don't want to treat must treat due to lawsuits, always error on side of I don't want to be sued?
Those who aren't sedentary pay the same as sedentary?
Some folks see the doctor 4x month for simple scratch?
Power in numbers to negotiate good pricing is variable?

I suggest you have Nassim Taleb to comment on some of his new findings on medicine.
P

Greg G writes:

Gandydancer,

>-----"What is "basic care" doing in that sentence?"

For one thing, if you neglect basic care, catastrophic care will often cost a lot more. To cite just one example of many, we had a man with diabetes in our local community a few years ago who was employed at a very low paying job but did not have enough money to buy insulin and get proper preventative health care.

For years, he would show up at the the local emergency room, sometimes conscious, sometimes unconscious. Then he would normally stay for a week or two of very expensive care, which he couldn't pay for, until they nursed him back to health. Then in a few months this would happen again. Simply paying for his preventative care would have been much, much cheaper. This is one of the reasons so many other countries get health outcomes that are statistically similar, or even better, than the U.S. at much lower cost.

Ask yourself why basic military defense, basic police protection, basic judicial services and basic provision of public roads and basic urban water and sewer are supported by taxpayers in all modern industrialized countries. The logic is similar and has everything to do with which public policies you believe will provide the best results.

There are private actors who would love to provide mercenary services for military defense, private security, arbitration services, toll roads and urban water and sewer and resent having to compete with government in these areas. Some people think that anarcho-capitalism would be a better system. I am not among them.

I think that when a country gets to a certain level of wealth there is a moral responsibility for all its citizens to have access to a certain level of essential services. And I think that, despite its many faults, constitutional democracy is the best way to decide these difficult and controversial issues.

D writes:

Greg G writes.....I think that when a country gets to a certain level of wealth there is a moral responsibility for all its citizens to have access to a certain level of essential services. And I think that, despite its many faults, constitutional democracy is the best way to decide these difficult and controversial issues.

I believe a coresponding responsibility also is required of all citizens to behave in a way that benefits their health over time not negates it. As a pharmacist I have seen many people on state Medicaid plans getting 9 bottles of insulin per month while holding a bag of Big Macs, fries, coke, and ice cream.
I would like to know why some people choose not participate in their own health care even at the basic level and as a whole we need to be responsible for those who aren't. My car insurance gives me a rebate at the end of the year if I was a good driver, why doesn't that occur in health care?

Greg G writes:

D,

Those are good points and I don't doubt that a more optimal system would have better incentives built in.

But excessive risk taking that imposes costs on others is far from something we only see in health and nutrition. We see it in almost the full range of human activities from food choices to environmental pollution to financial choices and beyond. Different citizens also impose very different costs on the judicial system for example.

It's difficult to design a system that accurately assigns blame and imposes costs for irresponsible behavior. But we probably could do a lot better at that than we have done.

Greg G writes:

Alan,

I'm not sure I understood your comment.

Slaves don't make a good analogy at all for the school employees I was talking about. We had many qualified applicants eager to take any job openings we had which paid well both compared to the pay of the median American worker and compared to comparable jobs offered by other employers in the education field. No one was forced to work there.

The very expensive healthcare that is available today really is much better in many ways than the healthcare that was older and cheaper. I got a hip replacement five years ago. It took me from being a disabled person in intense pain every day to being a healthy guy who now skis 40 to 50 days a year. The easier to recover from version of the surgery I had improved my life enormously. (Even if I was a slave, I wouldn't want to be in that kind of pain)

What is it exactly you think "the elites" should do? You say you live outside the USA. One of the weird things about American politics is that a lot of the opposition to more government guaranteed healthcare comes from some of the demographics that need it most.

Edwin McAuley writes:

As one who lived in the UK until I was 30, then 2 years in Australia followed by 39 years in Hong Kong, I find the discussion to be from a narrow US standpoint not likely to be found in other countries.
Even in Hong Kong, this bastion of low govenment intervention, we have almost free (c.USD12/day) at point of consumption basic health care including excellent clinical care. Of course this comes out of taxes but it is super-efficient and provides a necessary glue for social adhesion in a place where income discrepancy is monstorous even when compared with the USA.

In my, admittedly uninformed, view the US health system has two major weaknesses in economic terms: 1. It relies too much on employer-funded insurance which makes hiring a complicated and expensive operation especially for start-ups who want to attract the best talent. 2. It relies on an insurance model which provides a superb example of the problem with "third party payer" systems - the inherent disincentive for either medical providers or the consumers of medical care to control health costs. Thus apparently far too many tests are performed,unnecessary proceedures carried out, and drugs prescibed without concern for price because the doctor has no incentive to control the cost but a big incentive to maximize his/her income whilst the patient is mostly interested in getting "fixed" NOW whatever the cost. If doctor #1 won't prescribe the drugs or tests then doctor #2 will.

It would make a good Econtalk for some expert on health economics to discuss and debate the pros and cons of alternative systems such as the "single provider" and other free at point of consumption models paid for by taxes.

Another apparent anommally in the USA is the way that drug prices can be maintained at very high levels which is surely a failure of the not-so-free market as much as anything else? It might interest American listeners to hear of the experience of other systems in achieving much lower drug costs even without draconian price controls.

Finally, it is not clear that the US system actually leads to better outcomes overall, even after recognizing that it is very dificult to isolate the causes of variances in life expectancy and quality of life, let alone place an economic value on them.

jw writes:

Frankly, I am embarrassed.

I spend a lot of time trying to, as diplomatically as possible, explain to people that the math and definitions behind the fraudulent GINI index are flawed and therefore most, if not all, of the "inequality" meme is nonsense. Yet I completely missed this additional factor of health benefits. (BTW, GINI is fraudulent because it was DESIGNED to maximize redistribution.)

GINI already ignores the benefits of redistribution on the low side and the tax impact on the high side of the curve, so adding the relative costs of health insurance obviously makes the index even more fraudulent. This is so obvious that I was surprised that Russ spent so much time on the BLS data transparency issue, as once it was clear that it was a BLS imposed constraint, replication (which should be done) will only result in minor adjustments. The math is intuitively obvious.

So if GINI were calculated post-redistribution programs, post-imputed health insurance and post tax payments, it would be at least a little more accurate.

This effect would also affect the "zero median income growth since 2000" meme that is floating around.

Also, what effect did the ACA have on these calculations when low income earners without employer insurance had almost 100% of their ACA premiums refunded?

Besides health insurance, what impact does employer paid SSA taxes have on inequality as well? Granted, health care is supposed to be a constant benefit and SSA benefits have a cap, but SSA was sold as "insurance" so it is only fair that it has a corresponding income cap as well.

For example, a median $50K household's employer would pay 6.2% into SSA as a benefit to the employee, or $3.1K. The minimum 1%-er makes $430K, but due to the $118K SSA limit would get a max benefit from the employer of $7.3K, or only a 1.7% additional benefit.

Greg G, There are many free market alternatives to your government supplied health care solution. I agree that health insurance regs drastically impede small business creation, but that doesn't mean more will be better. Making individual health insurance payments deductible to compete with corporate plans, allowing interstate competition, transparent health service pricing, and on and on.

Mort Dubois writes:

I'm an employer, and have been one for 30 years. I buy health insurance for the 19 workers in my factory, and their dependents. This account of the employer/health insurance/employee relationship may be statistically elegant, but it doesn't align with my experience. A few points:

1) Referring to health insurance as part of "compensation" is an error. That word implies the existence of two parties, one performing an effort, and other rewarding same. Both parties understand the scope of the effort and the reward. In my factory, at the commencement of employment, I negotiate a satisfactory compensation package with my employees. The portions of it that the workers pay attention to are, in order of importance: first, cash payments, in for the form of hourly wage or salary; second, paid time off; third, flex time. The fact that we offer health insurance is merely noted, since it's not a given in my industry. (We're paying, on average, about 60k a year.) I've never had an employee ask for any details about the program prior to accepting or rejecting the job offer. They don't see it as part of their compensation. It's just a thing. And that's rational, because the actual insurance itself far too complex for easy comprehension. So, as far as I can tell, my workers simply set it aside in their mind as a different thing than compensation. Consequently, they don't place value on it the same way they would a dollar-an-hour wage increase, and have no comprehension whatsoever of how cost increases might affect them. It's invisible to them, and so you can hardly call it part of compensation. My health insurance costs have been rising 10 percent or more annually for the last 15 years, and my workers have never expressed the slightest interest in this at all. It's just something that happens, something that's my problem, as employer to deal with. They don't care much about the fluctuations in our electric costs, or the oil to heat our shop, or the coffee in the break room, either. (All of which provide a more direct benefit to them.)

2) In reality, insurance is just a cost to an employer like me. And the money to pay for it doesn't come from their wages. Like all of the money involved in my business, it comes from the customers. So do the wages. So does my own compensation. The only possible response to increases in health care costs is an increase in prices charged to the customers.

3) So everyone in the economy raises their prices to cover their increasing health insurance bills, net result is zero? Possibly, except that our borders are open and I have to compete with imported goods produced in factories with lower wages and healthcare costs. I can't raise my prices as much as I wish to cover my increased expense. So the net effect for me has been a drop in profits. In non-tradeable sectors (like healthcare and government) prices have simply gone up. Which sucks more money out of manufacturers like me. Which makes automation, offshoring, or simply going out of business more attractive.

I'm close to dropping health coverage entirely. I made a decision 25 years ago to offer it, because back then an individual buyer not only paid for their coverage with post-tax dollars, but would have premium rates triple or more than I could get as part of a group. It was the morally correct thing to do. Everything about my interactions with health insurers subsequently has been painful and expensive. The ACA was a game changer, as it allowed the individual buyer ( in my state, at least) access to plans at about the same premium cost as I could offer. It would still be a post tax purchase for my employees, most of whom make too much for a subsidy. So I'm continuing to offer it so that they can get the tax benefit. I've had to shift a larger and larger portion of the expense to them as the premiums relentlessly rise, though. They don't complain about this, as it's subtracted from their paychecks just like taxes, and they don't seem to see this as part of their compensation, as I noted earlier.

I'm just one employer, working in one industry, buying in one health insurance market. I sympathize with anyone who is trying to aggregate millions of stories like mine into a coherent analysis - in my opinion, this is impossible, and the powers that be like it that way. Which brings me to my last question: what's the point of framing this episode in terms of inequality? Is the guest suggesting that workers are mistaken when they feel pressed by low wages? That they should just be grateful that they have insurance at all? If I was looking at aggregate numbers, I'd be trying to figure out where all the extra money is going and what can be done about it.

SaveyourSelf writes:

Greg G wrote, "It's difficult to design a system that accurately assigns blame and imposes costs for irresponsible behavior."

Isn't that the easiest system of all to design? Simply let the costs of irresponsible behavior fall on the person(s) who chose that behavior. I concede that may be difficult to imagine, but here's a taste of what it would look like:

Person A voluntarily overdoses on heroin and stops breathing. Person A is allowed to die.

Person B smokes for decades. Their lungs turn to a giant scar that cannot exhange oxygen or carbon dioxide any more. Unable to breath, they are unable to work. Unable to work, they are not able to afford antibiotics for the inevitable pneumonia. Person B is allowed to die.

Person C does not use heroin or smoke. He is able to work long hours for decades. Person C is allowed to get rich.

It's simple and it is moral. No one is forced to do anything. Everything is voluntary. If someone wants to save person A or B of their own volition, let them. If someone wants to take huge risks with their own lives, let them take those risks and, for god’s sake, let them reap the rewards or pay the costs of those decisions. It's such an easy system to design--> Don't force anything on anybody.

I know you realize this. But, when you acknowledge it at all, you dismiss it as, "anarcho-capitalist." I have always thought anarcho-capitalist an inaccurate and misleading characterization. It would be more accurate to call it, "pacifist."

Harvey Cody writes:

Greg G.

“I think that when a country gets to a certain level of wealth there is a moral responsibility for all its citizens to have access to a certain level of essential services.”

As beautiful and self-satisfying as one might think that thinking is, it is packed full of unconsidered assumptions, and is the result of focusing almost exclusively on some of the first order consequences of the policy you favor, and ignoring or undervaluing all of the negative consequences.

Among your assumptions is that the US is at the “certain level of wealth” which triggers moral responsibilities and that it can forever remain above that certain level of wealth if it provides a “certain level” of “essential services” to its citizens. What if it were the case that given its $20 T of debt, its lackluster growth – due in no small part to too much taxation, its need to defend itself and all its allies from invasions and its need to provide many other, more fundamental services, providing “essential medical services” to its citizens would cause the US to suffer economic collapse soon or be unable to fund a defense against an attack – resulting in the government not being able to help anyone with healthcare or other “essential” services? [Note: The conclusion should change little if rather than cause such event, it would vastly increase the chances of such an event.] One should not come to the conclusion you did before seriously studying this and all other possible negative consequences of your policy prescriptions. Ignoring or dismissing out of hand the “unseen” is not a sign of good thinking.

Citing what goes on in other countries which have different cultures, and rely on others to defend them against invasion, and provide to them emergency relief funds and services, most of the technological and other innovations (including research and development of better and cheaper medicines and medical procedures) is not compelling. Citing them is also not persuasive because their role and responsibilities in the world are entirely different from that of the US. The fact that those countries are so less self-supportive and contribute relatively little to innovation, wealth creation (which enables other countries to have a vast market into which to sell their goods) and charity is very likely in no small measure attributable to their more collectivist attitudes and cultures.

“There are private actors who would love to provide mercenary services for military defense, private security, arbitration services, toll roads and urban water and sewer and resent having to compete with government in these areas.”

This observation is not an argument in support of your position. In fact, it is not an argument at all. There are a great many instances in which the government does things which could be more efficiently and effectively done by private actors. So government, which is astoundingly inefficient at getting things done, should not be doing many of the things it does. Such is true whether or not private actors are resentful or whether their resentment is justified.

“Some people think that anarcho-capitalism would be a better system. I am not among them.”

This is a false dichotomy. Government is terribly inefficient in essentially everything it does. So it is best for society to assign to government as little as possible, thereby allowing more efficient actors to fill the needs. There are certain functions, however, for which government is the best alternative. [With respect to the federal government, the powers enumerated in the Constitution are among the best list of such things ever drafted. Providing healthcare and many, probably most, of the other things government does did not make the list.] Believing in less government is not support for anarcho anything.

Why is the preceding paragraph true? Because there is a strong correlation between wealth creation and improving the well-being of human beings. Humans in the “bottom half,” however defined, have the opportunity to live, and most do live, vastly better lives (including access to healthcare which actually heals) than they did 10, 100 or 1000 years ago because of the attitudes and cultures (and resulting policies) of more free, less collectivist countries which better facilitated the activities which incentivized such wealth creation. In general, redistribution slows wealth creation.

Yes, well conceived and well executed wealth redistribution can alleviate some suffering in the here and now, but at the cost of less alleviation of even more suffering in the future. Moreover, with few exceptions humans have yet to figure out how to redistribute in a way which actually helps people live flourishing lives. On the contrary, most redistribution schemes result in people living in poor and dangerous conditions with bad attitudes and much unhappiness. The tradeoffs are not nearly as easy as your thinking leads you to believe.

You say, “there is a moral responsibility.” Whose responsibility? The cat’s? Or are you saying that it is a moral responsibility for “the poor” and their advocates to vote for policies which forces third parties to pay the vast majority of the cost of providing things to the poor which the poor wants?

Greg G writes:

SaveyourSelf,

I respect and share your objections to being dismissed with a label. I wish I had a nickel for every time I was dismissed as a leftist or Progressive who hadn't considered the coerciveness and inefficiency of government and who failed to appreciate some other commenter's keen insights into the one and only proper understanding of the Constitution.

When I want to dismiss someone I usually do it by not engaging them in the first place. But I have only ever known you to argue thoughtfully and in good faith so I am eager to address your complaint.

When I ask someone if they are an anarcho-capitalist I do so to engage with them and attempt to accurately locate their views. Libertarian comment forums are filled with people who like to use the arguments and rhetoric of an-caps but who aren't the real thing. In my experience real anarcho-capitalists tend to be better informed and more interesting to talk to than minarchists borrowing the rhetoric.

To me "anarcho-capitalist" is not an insult. I have more respect for some of the an-caps I have encountered than I do for the run of the mill self identified libertarian. Because their position is unusual and hard to defend, they are usually well prepared.

I would be happy to have your help in coming up with a better term than anarcho-capitalist but "pacifist" won't do it. That may describe your views but most an-caps I talk to are very keen on active self-defense not pacifistic non-violence in the face of aggression.

Not all anarchists are capitalists but most are. Few capitalists are anarchists but some are.

To me, an anarchist is anyone who denies that there is any legitimate purpose that the coercive powers of the state can be put to. An anarchist thinks the state should not exist and that individuals would be better off without it.

An anarcho-capitalist is someone who thinks that a capitalist economy could and would and should do a better job of fulfilling all the necessary functions now done by government.

I don't believe that well functioning private markets and a thriving economy are what you would get in the absence of government but some people do. I think you would get a rapid breakdown in the rule of law and that would cause economic disaster. I think that's why we never see capitalism develop without first having governments that establish and maintain the rule of law.

Are there any legitimate functions that you see for the coercive powers of government? If not, how do you propose to solve the problems now addressed by a government providing military defense, policing and a judicial system for starters? If so, how do you justify them in a way someone else can't use to justify some other government action you don't want?

Your examples of Persons A B and C are way too convenient. In real life, Person C can do everything right, fail to get rich and suffer from some devastating disease.

I have been a Hospice volunteer for the last 20 years. I have seen countless people who worked hard, did everything right and still were bankrupted by devastating diseases, often after nursing several other family members through fatal diseases themselves. My idea of morality does not involve telling them that a proper moral system would leave them on their own or to take their chances with whatever charity might be available.

Reducing violence and coercion as much as possible is a very important moral goal. It is not the only moral goal.

Sanne writes:

I found this a very thought-provoking discussion. I just have one comment which is to do with the suggestion that by not taking into account employer-provided health insurance conventional estimates of the increase in earnings inequality may be overstated. I take the point that conventional measurements of earnings inequality leave out a consideration of health insurance benefits which actually constitute a very substantial part of the compensation awarded to employees by employers. However, when most people talk about inequality and how it has increased, what they are concerned about are the implications of this for the relative standard of living of workers (this is why earnings are usually adjusted for inflation in these types of measurements). And although the rising cost of health insurance has meant that the overall compensation received by low-wage workers from their employers (in monetary terms) may have increased by more than is implied by conventionally reported inequality measures, I do not believe that this has necessarily meant that their standard of living has correspondingly increased. Just because insurance premiums have gone up a lot over the last decade or so does not mean that workers now necessarily get a corresponding increase in coverage - at least as far as I'm aware - than in the past. So if you want to measure inequality in terms of what really matters, living standards, you would have to have some way of measuring how the actual value of health insurance to workers has changed over time.

I do agree though that the effect of increasing employer health insurance contributions on earnings inequality needs thinking about much more carefully. Because in a way you could argue that low-wage workers are more disadvantaged by increasing health insurance costs than high-wage workers. If insurance premiums paid by employers go up over time, meaning that take-home-pay goes down, low-wage workers - for whom health insurance benefits constitute a greater share of overall compensation - feel the effect of this more strongly than high-wage workers. And if it is true (which I think it probably is) that increases in the cost of health insurance have not been matched by corresponding increases in the value of health insurance (either in the generosity of coverage or the quality of healthcare), then low-wage workers may be receiving a rather large penalty in the form of lost take-home-pay that is not made-up for by a corresponding boost to the value they receive from employer-provided health insurance.

Anyway, really enjoyed the show as always.

SaveyourSelf writes:

Greg G, you comment Posted January 5, 2017 8:53 PM is an excellent and well thought out position statement. After rereading it several times, I am hungry to know more about your morals and their logical consequences.

You wrote, “reducing violence and coercion as much as possible is a very important moral goal. It is not the only moral goal.” Your statement is, without question, true. There are an infinite number of moral rules. But, then again, you didn’t say moral rules. You said moral goals. Perhaps we are not talking about the same thing. When I talk about Justice—the prohibition against positive harm and the expectation of remedy when harm is done—, I hear in my head: “Do no harm and make no threat of harm except in self-defense.” It’s a rule designed, hopefully, to maximize the odds of survival. Survival is the goal. Survival is the only moral goal. So far as I know there are no other moral goals. Do you disagree?

You also said, “my idea of morality does not involve telling them [hospice patients] that a proper moral system would leave them on their own or to take their chances with whatever charity might be available.” What do you tell them is proper? Do you feel your hospice patients have a moral position lofty enough to justify committing violence or theft against my person and property? Does their illness or the righteousness of the actions and decisions they made in their life entitle them to the produce of others not earned or voluntarily given?


There’s much more I would like to know and you asked some questions of me that I will answer later, but I think the other matters pale in importance next to this question of our moral-foundation and its consequences. I look forward to your reply.

Greg G writes:

SaveyourSelf,

We might as well cut to the chase. We both want to see violence and coercion reduced as much as possible. We disagree on the best way to do that and the best way to reason about ethical issues. Our most fundamental difference is that I am advocating a consequentialist ethics and you are advocating a deontological rule based ethics.

Ask yourself why you care so much about rules in the first place? I doubt it's because you care about rules for their own sake. Isn't it because you believe that following the best rules will lead to the best outcomes?

Lots of important moral rules can apply to the same situation. They can, and do, often conflict with each other. I don't think that one rule always trumps all others. Often choices aren't between good and bad. Often they are between bad and worse, or good and better. Philosophers of ethics develop Trolley Problems to highlight this fact, not to address actual runaway trolleys in real life. And they do it to show how futile it is to expect simple rules to solve complex ethical problems.

If I understand you correctly, you are advocating the view that only negative rights are legitimate and that there are no positive rights. The first and foremost negative right being the right not to have anyone initiate the use of force against you if you are not threatening anyone.

Do you think people should have the right to a fair trial before they are judged guilty and punished for a crime? If not, that's a moral problem because a lot of innocent people will be punished in error. If so, you have just advocated for a positive right that will require mandatory taxation. Trials are expensive and fair trials are even more expensive. The accused won't always have the resources to pay for a trial. Somebody will have to pay mandatory taxes if we are to have a judicial system that is as fair as possible and accessible to all.

History has shown over and over that violence and coercion are much higher when there is not a relatively impartial judicial system in place and available to all. Not just many, but MOST, disputes with the potential to lead to violence involve cases where BOTH parties think the other is the aggressor.

I think The Non-Aggression Principle is as good a general rule as you can find. I just don't think it gets you very far in settling complex real world disputes. For THAT, process is every bit as important as principle because we know that disputes about who is the aggressor will be utterly commonplace.

I agree that the burden of proof should be on those claiming an exception to the NAP (like taxes being legitimate in a democracy) but I think that burden is met in some cases where you don't. We have all of human history to demonstrate that the best results (in terms of minimizing coercion) happen in constitutional democracies.

So then, how do I justify mandatory taxes to fund palliative care at the end of life?

I start by pointing put that we are all members of a social species who have no hope of surviving without a lot of help from our community. We are all born entirely helpless (and usually die that way) and you couldn't possibly survive to become an adult human without a lot of help from a lot of other people who you couldn't possibly repay directly. This creates very complex webs of rights and responsibilities that simply can't be all captured in one simple rule that always trumps all others.

Sometimes a little bit of coercion can prevent a lot more coercion down the line. Sometimes a little bit of coercive taxation can prevent a vast amount of suffering. There is no way to escape judgement calls and yes, sometimes both individual and group judgments will be wrong.

Whether they know it or not, everyone will need palliative care at the end of life either for themselves or for someone they love. Mandatory taxes that fund such care are the only way to guarantee that care is available to those who need it.

George Gantz writes:

I was very disappointed in this episode - perhaps the worst EconTalk I have ever heard. Why did it take 60 minutes to make a five-minute point - that you have to take total compensation (including benefits) into account when you do inequality comparisons.

The worst part was the excruciating attention afforded to the comparison of health benefits as a % of total compensation for the bottom 30% to the top 1% for 1992 to 2010, and the conclusion that since that percentage increase was 4X higher for the poor that this somehow confirms an implication that total compensation increases were equal for low and high income workers. This is totally bogus! In truth, since the increase in health benefits is nominally equal for all groups, the result implies that total compensation growth for the wealthy far outstripped total compensation for the poor. The subsequent discussion of income did nothing to clarify the mud that was left on the ground.

Russ - normally your skepticism is right on point, but in this case I think your bias against the inequality conversation misled you.

I was also disappointed that the conversation failed to mention the most profound impact of the dramatic increases in health benefits costs, an impact that I observed directly as a business executive. Many companies in the US, in the face of increasing benefit costs and an uncertain business environment, found it prudent NOT to hire new employees, choosing instead to increase workload for existing employees, outsource non-essential functions (sometimes to 1099 workers with no benefits) and take other measures to avoid new hires. Hence the "jobless recovery" and consequent deterioration in productivity.

SaveyourSelf writes:

@Greg G

Eureka! I think we’ve gotten to the root of our differences! You wrote, “Our most fundamental difference is that I am advocating a consequentialist ethics and you are advocating a deontological rule based ethics.”

I had to look that up.

Consequentialism is the class of normative ethical theories holding that the consequences of one's conduct are the ultimate basis for any judgment about the rightness or wrongness of that conduct.”

“Deontological ethics or deontology (from Greek δέον, deon, "obligation, duty") is the normative ethical position that judges the morality of an action based on rules.” https://en.wikipedia.org/wiki/Deontological_ethics

It’s so simple! All that conflict and confusion—for YEARS—and it really does come down to a difference in the direction in time from which we each assess causality.

Greg G wrote, “Ask yourself why you care so much about rules in the first place? Isn't it because you believe that following the best rules will lead to the best outcomes?”

Yes! Outcomes matter in both systems, but they’re not equivalent. In consequentialism, a “good” action is defined looking backwards. An action has been performed—perhaps many—and an outcome was found acceptable. Thus some—or all—of the actions that preceded that outcome are judged moral. Deontology, on the other hand, defines an action as “good” before the final outcome is known for certain.

These systems for identifying and categorizing causality have a perfect similarity to two concepts in statistics. In statistics, there is a method called “regressive analysis” that is consequentialist and a different method called “progressive analysis” that is deontological. In regressive analysis, the outcome is known and historical data is searched for potential relationships to that outcome of interest. In progressive analysis, the outcome is only hypothesized to follow from one or more causes, and an experiment is conducted to determine if, in fact, the hypothesis is true. This is where the “rules” come from in deontology. Rules are the behaviors hypothesized to produce a specific outcome.

Given that description, it might sound as if regressive analysis is superior because it is made in full knowledge—“hindsight is 20/20”—whereas progressive analysis is planning made in ignorance of what is going to happen. But “full knowledge” is an impossibility. Hindsight is not perfect; it cannot be perfect. Thus the comfort provided by assuming a consequentialist position is an illusion. Competent consequentialist/regressive statisticians know this and make allowances for what they know, called “dummies,” and also for what they cannot know, called omitted variable bias. Importantly, “…circumstancial evidence for modest OVB [omitted variable bias] doesn’t guarantee that the regression results…have the same causal force as results from a randomized [prospective] trial—we’d still rather have a real experiment.” (Angrist & Jorn, Mastering Metrics page 78). This is because, “most sources of error due to confounding and bias are more common in retrospective studies than in prospective studies.” http://www.statsdirect.com/help/basics/prospective.htm

The take home is that information obtained through progressive analysis is, as a general rule, more robust and reliable. Put another way, a humble consequentialist is more biased than a supremely confident deontologist. Thus, if you ever have an option between evidence produced through prospective or retrospective studies, always favor the prospective. For the same reason, if you ever have a choice between consequentialism or deontology, choose deontology.

Now, given that background, let us examine your proposed funding of hospice services through taxes: You are a hospice volunteer. You know, intimately, the benefits of hospice and the difficulties associated with funding it through a voluntary-market. What you don’t know is the opportunity costs to all of society generated by mandated universal taxes for hospice services. You don’t know the amount of injury the police and military will have to cause when some people refuse to pay those taxes. You don’t know the value of the lost work hours due to incarceration for tax dodging. You don’t know what opportunity costs tax-paying citizens must give up in order to satisfy the additional tax burden. You don’t know the additional transaction costs heaped on every single market transactions due to the additional, systematic violation of property rights by government coercion. You don’t know how much more time the additional line of tax code will add to the complexity of filing taxes. You don’t know how well the government will behave as a steward of the money they take through taxes in the name of hospice services. You don’t know the costs of shortages or surpluses that will inevitably occur when hospice services are not rationed by price and instead are rationed by bureaucrats. In short, you know almost nothing about the cost benefit ratio of the exchange you propose when you state that we would all be better off if hospice services were funded through government taxes. Given such astounding and unavoidable ignorance, what can a thoughtful man do? If you are human, you can just ignore what is not-known; pretend it does not exist; as in, “what you see is all there is.” (Thinking, Fast and Slow, Daniel Kahneman) But what if you can’t ignore it? The next easiest thing to do is assume—ie. guess—that all of the costs you can imagine plus the ones you cannot are, in total, equal too or less than the additional benefits hospice companies can provide, if only they were government funded. If that still doesn’t cut it, Daniel Kahneman states the brain has another trick of substituting difficult questions for simple ones without acknowledging the switch. The substitution can take any form, really, but might look something like, “I may not know all the costs associated with nationwide, government funded hospice services but I do know that hospice costs, in general, are tiny compared to usual end of life care. Thus, government funding of hospice generates cost savings.” [Which is, if you read carefully, not an answer to the question about total costs added by universal government funding of hospice services. It’s an answer to a different question, which is really no answer at all.]

Regardless of how you end up dealing with what you do not know or cannot know as a consequentialist, the actions of your brain, which may be entirely unconscious, become assumptions in the model you use to justify a position. They systematically distort the data to fit your desires, which is BIAS.

I have heard it said that the “fear of god is the beginning of wisdom.” To me, it an equally true that “acknowledgement of the unavoidability of bias is the beginning of wisdom.”

You and I are biased. Biased towards what we know. Biased away from what we do not know. We are even biased by our bodies, our cultures, our brief history, the history of those who came before, random luck, our environment, our education, our hopes and desires just to name a few. In short, we are unavoidably biased in a big way. Reducing bias is like cleaning grime off your glasses. Because bias is reduced better by a deontology framework, deontology is often the cleaner lens. But that does not mean regression and consequentialism are bad. Regressive analysis is often cheaper, faster, and easier than progressive analysis. Additionally, there are times when progressive analysis is impossible due to cost or ethical considerations, so that progressive analysis is not even an option. In truth, regressive analysis is frequently a great place to begin preparation for prospective studies. So I’m not trying to vilify consequentialism, merely demonstrate that the consequentialist methodology is systematically inferior because it cannot address our ignorance as well as deontology. Insisting on deontology over consequentialism, therefore, is an exercise in humility. Restraining hubris is perhaps the most noble of all academic undertakings, and possibly the most difficult.

Which brings us to the moral rules of Justice—categorical rules against violence and coercion—which I assert stand above all others. You made no objection to my statement that the ultimate goal of all moral rules is increased survival, so I will proceed as if that is a given.

Violence is the easier of the two to consider. Anything that causes positive injury decreases survival, by definition, excepting only violence done to prevent other violence. Thus, by definition, rules against violence increase survival. Coercion is similar in that coercion is a threat meant to produce action in others. In order for coercion to work, some violence must occur. Humans are always testing boundaries. A threat without teeth is no threat at all. Thus coercion is a guarantee of violence to some degree. Again, violence is, by definition, a reduction in survival. So a general rule against coercion will, in general, increase survival for those who practice restraint except in self-defense.

Occasionally, though, situations arise where the amount of violence produced by coercion, whatever it may turn out to be, is likely lower than the harm that occurs without the coercive rules in place. Seatbelt laws in cars come to mind as a likely winner of that bet. But even with seatbelts it is a bet; a gamble; a hope that the lives saved and the injuries prevented by seatbelt use outweigh the costs born by everyone who makes or uses a car. Seat belts satisfy that hurdle like perhaps nothing else I know. Low cost. Large, quantifiable reduction in death. Perhaps vaccines meet that lofty standard too. But they are exceptions to the rule that coercion decreases survival and must be avoided. Hospice, on the other hand—like most good ideas— does not pass that test.

Hospice is great. I love hospice. Hospice is a humble and dignified way to approach death. Death is a situation we must all face. But just because hospice deals with death and just because everyone dies says nothing to the question of maximizing survival. It is an argument of appeal to sentiment. Those statements are true but they are substitutions. The violence accompanying government coercion reduces survival. Universal hospice funding through government taxation does nothing to improve survival. Thus, from the perspective of overall survival, that proposal is immoral, and should be avoided.

Greg G, this line of argument is new for me, so I know it cannot be perfect. I hope none of it gives offense. As always, I thank you for your time and your thoughts. Your competition makes me better and I value you for it.

Scott Fry writes:

I loved the discussion of reproducible research (though that wasn't the term used). The focus on making data and the complete set of analyses performed available to other researchers is important in avoiding errors and allowing readers to completely understand the data analysis and the choices made in data cleaning and model-fitting.

Robert Swan writes:

Like George Gantz, I thought this talk made heavy weather of a pretty straightforward bit of arithmetic. The complaint that "the rich get richer and the poor get poorer" is so silly it's better taken on by frontal assault than by this sort of subtlety.

It might be more fruitful to work out why health insurance costs have been going up by more than 7% pa. for the last 15 years. Does it reflect true value, or are there bootleggers ripe for eviction?

The discussion between Greg G and SaveyourSelf might have something in it, but I'm not sure I understand SaveyourSelf's last posting. I'm somewhat familiar with statistics, but have never heard of "regressive" or "progressive" analysis. No question that, in statistics, a priori is powerful and a posteriori is weak (I truly despise "data dredges"), but statistics is not ethics. You might as well have argued that guessing next week's lotto numbers is more valuable than knowing last week's. It's true enough, but says nothing about making ethical decisions.

In any case, I doubt that SaveyourSelf and Greg G's different outlooks are so black and white. Greg G's world of consequences surely has some rules, and SaveyourSelf's world of rules surely adjusts in light of consequences.

Greg G, I hope you're wrong about all of us needing hospice care eventually (equating hospice care to what is called palliative care in Australia). As practised here it frequently achieves nothing more than prolonging suffering. My parents both managed to make it to the grave in their own good time without it. Will see how it goes for me -- no rush.

I find the need to support people born disabled to be a compelling argument for a tax on the rest of us; far more compelling than end of life care.

SaveyourSelf writes:
Robert Swan wrote, "I'm somewhat familiar with statistics, but have never heard of "regressive" or "progressive" analysis."
You are correct. I was mistaken. The correct terms are "retrospective" and "prospective."

http://www.statsdirect.com/help/basics/prospective.htm

Thanks for reading our posts.

Kevin writes:

Thanks for a great podcast and thanks to the commenters for their high level contributions.

I think this podcast makes an excellent case for removing employer insurance and allowing for pre-tax health savings accounts (that last forever). Allow people to put in 20K pre-tax from age 18 to death and buy whatever insurance they want (catastrophic/comprehensive/none). I expect health care costs will fall like a brick as we eliminate the distance between payer and payees. There would need to be some medicare reforms so it did not inhibit the changes, but currently we live in a swamp of health insurance, not health coverage, that we created. Getting out would allow some amazing innovation.

SaveyourSelf writes:
Robert Swan wrote, "but statistics is not ethics. You might as well have argued that guessing next week's lotto numbers is more valuable than knowing last week's. It's true enough, but says nothing about making ethical decisions."

Morals derive their value and meaning from their relationship to survival. Winning the lottery has no direct consequence on survival. Thus, you are correct, your example is not an ethics question. Tie a lottery to something like the Hunger Games, and now you've got an ethical issue.

Greg G writes:

SaveyourSelf,

First of all, no worries about there being anything offensive in your comments. You are one of the most polite and likable people I have ever encountered in an internet comments section. Because of that, I wanted to like your comment of Jan. 9 a lot more than I actually did. The truth is I thought that comment was a train wreck for a lot of reasons.

For one thing, whether or not you favor consequentialist reasoning or not does not determine whether you will arrive at a libertarian ethics. In my opinion, the two most influential advocates for more libertarian ethics and public policies were Milton Friedman and F.A. Hayek. Both used consequentialist reasoning.

And Kahneman's personal politics were left leaning so you really can't argue that a proper understanding of his work supports your views. He probably understood the implications of his own views a lot better than either of us.

Ethical principles are chosen as value judgments, not discovered as objective facts in nature. They are the assumptions you reason from, not the conclusions you arrive at from logical proofs. You say we should be humble. I don't doubt that is true and I claim no special achievements in humility. But I would have to get a whole lot less humble to claim any ability to justify my moral biases and intuitions from statistical analysis or some analogy to it.

I am happy to admit my biases. I am strongly biased in favor of being more influenced by the results of human history than any theories about how much better than our best results we could get if people would only try some revolutionary new arrangements.

I am also strongly biased in favor of thinking that one moral principle does NOT trump all others in every case. I realize you disagree with that but that doesn't explain why you read my comments as having "no objection " to you making "survival" the supreme moral goal. I do object to that and have been objecting to that. "Minimize human suffering" seems every bit as powerful a moral imperative as "maximize survival" to me.

We don't just disagree on how best to describe the most important moral principles. We disagree on whether they are assumptions, intuitions, and values to be chosen or whether they are objective facts in nature to be discovered by proper methodology.

And somehow, despite all that, I expect if we were neighbors, we would get along just fine. I do think that the best way to advance this discussion is to tell me how your views vary from my description of anarcho-capitalism and how you think the critical government functions I asked about should be handled.

SaveyourSelf writes:

@Greg G

Greg G wrote, “In my opinion, the two most influential advocates for more libertarian ethics and public policies were Milton Friedman and F.A. Hayek. Both used consequentialist reasoning.”

Perhaps. As I said, consequentialism is not evil, just inferior. On reflection, though, both men you named would probably describe themselves differently. In The Fatal Conceit chapter five, FA Hayek wrote, “"No longer the end pursued but the rules observed make the action good or bad,” which is the most deontological position I have ever read. Milton Friedman is similar. Friedman wrote in 1953 in Essays in Positive Economics, “the only relevant test of the validity of a hypothesis is comparison of its predictions with experience.” The wording is a little different, but he uses the terms “positive” and “normative” when discussing the same methods you described as “deontology” and “consequentialism” and I described as “prospective” and “retrospective.” Apparently our differences are not new.
“I do think that the best way to advance this discussion is to tell me how your views vary from my description of anarcho-capitalism and how you think the critical government functions I asked about should be handled.”
You have asked me twice about the proper role of government. I put it off because I’ve written about it in the past and because I sensed that we might not agree on the purpose of government much less on the best method for evaluating alternatives to meet that end. Now I am certain. I will answer your question, but I fear I am simply painting a target.
“An anarcho-capitalist is someone who thinks that a capitalist economy could and would and should do a better job of fulfilling all the necessary functions now done by government.”
Key to that statement is the term, “necessary functions.” I suspect, based on that sentence, that you might endorse all functions “…now done by the government,” as “…necessary functions.” If so, you would not be alone. President Obama made that very same argument when he heard that republican’s meant to undo Obamacare. I can’t find the quote. It’s buried under a mountain of political headlines at the moment, but he essentially said that now that Americans were used to Obamacare, they wouldn’t tolerate losing it. The Supreme Court took the same position each time they considered and eventually overlooked the non-Constitutionality of Social Security, Medicare, and Obamacare. An article on January 6, 2017 in The Nation, phrased it best when they wrote, “What this shows is that Obamacare really did alter the social contract in America.”
The social contract, my friend, is the key. It is the Citizenship-Contract. You have seen my writings and know my thoughts. There are very, very few things that every living human can agree on. The social contract contains those few, near unanimously agreed on items. The fact that I disagree with government run Obamacare, Medicare, and Social Security is, to me, evidence that they are not part of the social contract. I would never agree to any contract that contained them. I resent being forced to pay for services I never agreed to purchase. Robbery is the old name for that circumstance. I guess it’s redistribution now.
The major problem is not the intentions of these programs or their design. Charity for the poor, particularly the sick poor, is something I value. I donate to local programs that help the poor. In this area, it is called, “Hope Clinic.” I would donate more if the government left me more money to do so. The elephant-in-the-room problem is the use of government—ie specialists with bombs and guns—to run a program that, in theory, could not possibly benefit from expertise with bombs and guns. It’s rather like asking your plumber to clean your teeth or your doctor to teach you finance. Using the government to perform activities that do not explicitly benefit from the surgical application of violence demonstrates either a lack of understanding of specialization and its importance to health and wealth, or a flat rejection of that understanding. And that’s before we’ve even touched on the undesirable and unnecessary costs of government leveraging its violent potential to increase monopoly in the economy or force ever expanding holes through individual property rights.
The real social contract is a non-aggression pact, as you put it, AND a unified response pact. It is an agreement without equal in its simplicity, near universal acceptance, and record of success in reaching its stated goals. It produces relative safety, which allows specialization and trade, which leads to increased productivity. Important to our discussion is the fact that it is even possible to specialize in fulfillment of the duties required by the social contract on behalf of other, paying, Citizen-customers. This specialization in protecting neighbors leads to, initially, individual security guards/police who trade their skills for the produce of other types of specialists. Gangs and simple coverage convenience make forming larger groups of security personnel advantageous. Concern for the security of people who cannot afford the specialized security services, threat of outside invasion, or a desire to limit entry in the security field [to raise their wages] continues to push up the size of the security forces. Eventually a single security force dominates all others and, predictably, demands tribute, also called taxes. Thus government and taxes are born out of specialization and trade made possible by the Citizenship-Agreement. But, regardless of their size or monopoly power, the essential core of this specialty remains unchanged. The proper role of government is SECURITY. Security as it is defined in the citizenship agreement and agreed on by ALL CITIZENS.
I don’t believe Anarchy, as you have defined it, is an improvement over no “government” at all. To say such would be a denial of the importance of specialization. But I do believe that requiring the monopoly that now calls itself my government to limit itself to those activities that I would willingly pay for if I remained free to choose is an excellent starting place for discussing the optimal role of the government. Your opinion is welcome, so long as we can agree to exclude from government activity any activities on which we cannot agree. I propose: protect and defend. That is a position that I think nearly everyone can agree on, which is why it is about the only thing that can exist in a social contract between millions of unique and disparate people. The charity programs, the schools, the health insurance, the retirement insurance, the disability subsidies—are all special interests seeking the power of a violent-monopoly in their fight for advantage in an otherwise freely competitive world. I give them no sympathy. They are wolves in sheep’s clothing.
“I am also strongly biased in favor of thinking that one moral principle does NOT trump all others in every case. I realize you disagree with that but that doesn't explain why you read my comments as having "no objection " to you making "survival" the supreme moral goal.”
If we cannot agree on a goal, then we cannot possibly agree on the means to best achieve it. In the absence of a stated goal, economics assumes you will place your own self-interest above any and all competing concerns, particularly the concerns of others. It is a neat trick to try and define your own interests as if they were the interests of others, in spite of the fact that others--me for example--say you are hurting them.

"Minimize human suffering" seems every bit as powerful a moral imperative as "maximize survival" to me.”
There is a rare condition where some children are born without the ability to feel pain. Those unlucky wretches, who lack the ability to suffer, die very young. They get infections or bleed to death from injuries they don’t even know exist. They close their limbs in doors and don’t notice except when they can no longer move. They do not learn from their painful mistakes because they feel no pain. Even putting these kids in bubbles to try and protect them from the world rarely gets them to their teenage years.
This is why, I think, God allows suffering. Because a world without it is worse than the world with it. Much worse in fact. You think that trying to reducing suffering is a path for improving the world. I say you are wrong.
Most humans have, built in, the drive to minimize their own suffering. You, who are not where they are, have less of the information necessary to minimize their suffering than they have. If you truly wanted to minimize their suffering, you would leave them free to make their own decisions without your interference. If you are a philanthropist, you might also fight against the many others who would impose themselves on those poor people.
“We disagree on whether they are assumptions, intuitions, and values to be chosen or whether they are objective facts in nature to be discovered by proper methodology.”
I’m not sure what you mean here. Perhaps you mean we don’t agree on the ends or the means.
“And somehow, despite all that, I expect if we were neighbors, we would get along just fine.”
Like brothers.


Greg G writes:

SaveyourSelf,

It's been a while since I read "The Fatal Conceit" but I think Hayek was arguing that government should operate by rule in order to avoid prejudicing outcomes unfairly in favor of particular individuals and to promote emergent order not as a defense of deontology in general.

He argued in Chapter 1 of "The Fatal Conceit" that the size of the populations that various governments could support was a reasonably good measure of how good those governments were (which has reminds me of your emphasis on survival). I thought that was very strange because it would have meant that the governments of India and China were outstanding which they clearly weren't, especially at the time he was writing.

He makes a distinction between rules that promote, and rules that hinder, evolution (by which he means what later libertarians would call emergent order). This distinction seems dubious to me. It all looks like evolution (or emergence) from here.

In Chapter 1 he says "Moreover, if civilisation has resulted from unwanted gradual changes in morality, then, reluctant as we may be to accept this, no universally valid system of ethics can ever be known to us."

In Chapter 5 he quotes approvingly quotes Hume as pointing out that "the rules of morality are not the conclusions of our reason."

Hayek was very interested in rules but not as ends in themselves. He was interested in their consequences.

Here is an excerpt from Wikipedia on Consequentialist Libertarianism:

"Unlike deontological libertarians, consequentialist libertarians advocate actions they believe bring about favorable consequences regardless of whether these constitute initiation of force.[6][7] For example, unlike deontological libertarians, in addition to support for involuntary taxes, some consequentialists libertarians support eminent domain[8] Particular views vary among consequentialist libertarians, with political theorist David D. Friedman supporting a consequentialist form of anarcho-capitalism where the content of law is bought and sold rather there being an established legal code forbidding initiation of force.[9]
Notable consequentialist libertarians[edit]
Milton Friedman,[10] David D. Friedman, Peter Leeson, Ludwig von Mises,[11] and Friedrich Hayek[12][13][14] are consequentalist libertarians."

Those children you mentioned born with that condition that does not allow them to feel physical pain do not find that it results in less suffering. It leads to serious injury, disability and more suffering. Physical pain is not the only or even usually the worst form of suffering.

You say you are not an anarchist but you think government should only require of citizens what they are voluntarily willing to do. After all this writing I still don't see how you reconcile those two things. Do you really think we can and should run our military, police, and judicial systems on voluntary donations?

SaveyourSelf writes:

Greg G wrote, “I think Hayek was arguing that government should operate by rule in order to avoid prejudicing outcomes unfairly in favor of particular individuals…“

I think you are correct. Note that “prejudicing outcomes unfairly in favor of particular individuals” is bias. He was arguing that government should operate by rule in order to reduce bias, not as a defense of deontology in general. Deontology is an approach to problems, not a goal in and of itself.
Greg G wrote, “He argued in Chapter 1 of "The Fatal Conceit" that the size of the populations that various governments could support was a reasonably good measure of how good those governments were (which has reminds me of your emphasis on survival). I thought that was very strange because it would have meant that the governments of India and China were outstanding which they clearly weren't, especially at the time he was writing.”
Yes, but you've forgotten part of his statement. He said we could determine which extended order was superior by the population AND wealth of the different societies in competition with each other. Neither criteria alone—wealth or population—is adequate.

Greg G wrote, “He makes a distinction between rules that promote, and rules that hinder, evolution (by which he means what later libertarians would call emergent order). This distinction seems dubious to me. It all looks like evolution (or emergence) from here.”
Yeah. He said most moral rules were prohibitions against behavior. I often wonder which moral rules which require certain behaviors he found acceptable. Regardless, I think he would agree with you that it is all evolution or emergence.

Greg G wrote, “Hayek was very interested in rules but not as ends in themselves. He was interested in their consequences.”
I agree.

Greg G quoted “’ "Unlike deontological libertarians, consequentialist libertarians advocate actions they believe bring about favorable consequences regardless of whether these constitute initiation of force.’”
I’ve never heard of a consequentialist libertarian before, but Fox News immediately popped in my head on reading this definition. That made me laugh…darkly.

That final bit about Mises, Hayek, and Milton Friedman being “consequentialist libertarians” is garbage. David Friedman I might believe, but I don’t know his work well.

Greg G wrote, “Physical pain is not the only or even usually the worst form of suffering.”
Please define them all, since you have placed reduction of suffering equal to or above survival in your moral pantheon.

Greg G wrote, “Do you really think we can and should run our military, police, and judicial systems on voluntary donations?”
Yes. No question that is the best way, especially if the military, police, and judicial systems are legion and in competition with one another. The trouble with even that best case design is there are some people born in this world who would not survive in said “perfect” system. I estimate between 3 and 10%. To accept this ideal system you have to accept that death is a natural consequence of nature sometimes, and allow it to happen, perhaps even help it to happen in some cases per the choice of the parents or the individual. But that caveat is not unique to a free, competitive society. People die regardless of the structure of society. The fact is, fewer people suffer or die in the free, competitive, voluntary society than in any other. The aim of capitalism is not to minimize death or suffering, but it spontaneously does that because the people that make up the society are free to act and they have, built in to them, a desire to minimize death and suffering. Thus the expression of the free society will satisfy your goals even though the free society is not explicitly designed to satisfy those goals per se.

Greg G writes:

SaveyourSelf,

>----"Deontology is an approach to problems, not a goal in and of itself."

I agree and I didn't think I suggested otherwise. It is a method, not a goal. But is it the right method? That is something we disagree about.

Of course both methods share a lot of common ground. Consequentialists have to care about rules because rules have enormous consequences. And a rule based ethics still has to care about outcomes because they remain the only good reason to care about rules in the first place.

>----"That final bit about Mises, Hayek, and Milton Friedman being “consequentialist libertarians” is garbage."

You are surprisingly confident you've understood this all for a guy who had to look up what these terms even meant three comments back. And for a guy who invokes Kahneman, Friedman, Hayek and the founders for getting to a conclusion about government that all of them rejected. Those guys all thought that a taxpayer supported government was not just ethically possible but necessary.

All I am seeing is unsupported assertions and handwaving. Look at the Wikipedia entry for "Consequentialist" and you will see Milton on the short list of the most famous consequentialists of all time in any field.

What you have described is an anarcho-capitalist system and I don't mean that as an insult. If you think I am wrong about that then I want to know what differences I am missing.

And I want to know a lot more about how military defense will work in the nuclear age with it being just another product on the free market. Now that's taking the Second Amendment seriously. There was some detail missing there about how all that would work.

SaveyourSelf writes:

Greg G wrote, "There was some detail missing there about how all that would work."

Sorry about that. I misread your question. I read right over the word "donation." No. I don't think you can fund the military and judiciary by donation. The idea I am building on is specialization and trade. By that I mean, the government is a specialty, like any other. For it to exist, the security specialists that operate the government must trade with the rest of the society.

So here [drumroll please] is the outline of my voluntary market solution to my concerns about government, freedom, property rights, competition, AND care for the poor. I take all credit for this idea. I created it from scratch from the models I share freely on Econtalk, though I am beholden to legions of people for teaching me economics, yourself included. If the idea is bad, well, it's all on me.

Libertarian Government and "Charity":

Different "shadow" governments--parties--compete for the contract to actually run the government for some fixed, stated amount of time. They compete on price and product features. The price each potential government offers is divided by the number of possible voters and that is the proposed annual tax. For the present government with expenditures of 3.85 trillion and 200 million eligible voters, that comes out to $19,500 per voter, per year in tax.

Governments are chosen and later run by votes--one vote per eligible voter. The party with the most votes wins the election, runs the government, and assesses their quoted tax to all eligible voters to pay for the services they advertised during the election campaign.

Each Citizen has a vote. That won't change. A big change, however, is vote selling is permitted. Allow votes to be sold, just like a stock or bond, on an exchange. The way I envision this working is poor people or disinterested voters, if they wanted, could check the voting-right market and, if the price offered was higher than what they value their right to vote, they could exchange their right for money.

Wealthy people, interested in the outcome of the election, could purchase voting rights to strengthen their influence on the outcome. The sale of voting rights would operate, functionally, as a universal redistribution program, except that it wouldn't be redistribution, it would be a sale of a right. Redistribution is theft of property. Sale of a right is everyday, vanilla trade. Anyway, whoever owned a voting right at the time a government was chosen would have to pay the annual tax on that right--$19,500 in the case of the current government. The person who pays that tax would then retain that voting right for the remainder of the year, for use whenever a public vote is taken for any reason--which should be often in this modern age.

At the end of the fixed term of the government, the voting rights automatically return to the original Citizen so that each Citizen has one vote again.

To avoid too much power consolidation, there would have to be a limit on the number of voting rights a single person could hold and only Citizens could hold votes--no corporations, though holding partial voting rights should be acceptable.

In its mature form, assuming it works out as I have described, this system satisfies all criteria of an ideal market. There is competition to push prices down and the requirements for ideal markets are preserved including stable property rights and rationing by prices. Voting would fall on the shoulders of people who are invested in the outcomes which means they are also likely to stay interested on the votes taken.

The sale of votes would operate as a system like redistribution in that the wealthy would pay money to the poor and also pick up the entire tab for all taxes, but the poor are not getting a handout and the wealthy are not getting robbed. Thus there is no master-dependent relationship created between the wealthy and the poor or the party and the poor.

The public-good problem present in our present system created by coercion induced redistribution of property is eliminated. The monopoly problem of a two party political system is reduced.


What do you think?

Greg G writes:

SaveyourSelf,

I think that compensates with originality for what it obviously lacks in practicality.

I DO now see how this is very different from anarcho-capitalism. What I don't really see is how this system would be enforced. It certainly won't be through popular support and social norms since I have never heard another person propose anything remotely similar.

>----" The price each potential government offers is divided by the number of possible voters and that is the proposed annual tax. "

There isn't really any reason to think that "potential government offers" would be accurate assessments of real world budgets. That kind of budget is extraordinarily difficult to get right when there is no conflict of interest in making it and there would be a huge incentive to "offer" unrealistic numbers.

And what you are proposing for the sale of voting rights sounds like price fixing for those voting rights, not market pricing of them. Let's remember that the price that approximately half of all eligible voters now put on giving up their vote is exactly zero in any given election. That's an awfully long way from $19,500. I don't see any reason to think that the amount voters are willing to buy and sell votes for will really equal the government budget other than that you are stipulating that in a fantasy scenario.

A small coalition of the most wealthy could easily gain power in this scenario. If you believe that power corrupts, that is a problem. I understand that you think this is a system for actually limiting power. I think it would have the opposite effect.

SaveyourSelf writes:

On Jan 19th Greg G wrote, “I think that compensates with originality for what it obviously lacks in practicality.”

Coming from you, for an early draft of a new idea, that’s a healthy critique. Practical problems I can overcome.
To frame this, there are three separate initiatives here which I mashed into one last night. Importantly, none are contingent on the others, but I think they synergize if I can get more than one through at a time.
  • The first initiative is to create a market for voting-rights. This requires no changes to the Constitution, which makes no prohibition of trade of voting rights. I glanced over it again to make sure, and saw nothing that would make it unconstitutional. And, anyway, votes are already bought and sold. It’s just indirect and the government has a monopoly as middle man in the exchange.

  • The second initiative is to use the market for voting-rights as a complete substitute for all wealth transfers, which means ending Social Security, Medicare, Medicaid, and Obamacare. The easiest way to end them is on Constitutional grounds. None of them are constitutional. Since that approach was tried and failed, the second easiest approach is to buy them out. As in, pay back the contributions people made over time and let them use their money to invest privately, if they so desire. That will likely involve immense borrowing since, well, the money’s spent, [shocker]. But even said “immense borrowing” is cheaper than the alternative—failure of those systems. The third approach is to simply wait the programs out. They will all fail. They are not sustainable. Even if they were, the government is as bad a steward of saved money as is possible to have. To remove them, we need only survive the catastrophe of their demise.

  • The third initiative is to create greater competition in the creation and adherence to a budget. This one is made possible by making the budget item a national contest, probably on a 4 year cycle. One way to do it is have each presidential candidate run on his(her) party’s platform budget. The winner of the election will become the president and his party’s budget proposal will become the official budget of the US government during his or her term. That budget will define the annual tax per eligible voter each year. The Constitution will require an amendment to remove the power to determine taxes from the legislative branch—since it will be handled by the nation in the whole—but the legislature will remain free to tweek the details of the budget, though not the total. The president can protect the budget if necessary through his veto power and his power not-to-spend money allocated by congress. If budget overruns occur, they will be assessed at the end of the president’s term to all the individuals who held voting-rights during the election of that president, which should keep the politicians honest. Emergency expenditures and non-budgeted wartime expenses behave like the budget overruns, but can be expensed over time as a separate tax item independent from the peacetime budget item.

“What I don't really see is how this system would be enforced.”
The IRS. The justice department.
“There isn't really any reason to think that "potential government offers" would be accurate assessments of real world budgets.”
That’s a good point, so I added the clause that budget overruns would be assessed to those who held the voting-rights at the time that particular budget was accepted. That should keep the politicians honest. Nothing will lower a politician’s satisfaction rating faster than unexpected tax increases.

“And what you are proposing for the sale of voting rights sounds like price fixing for those voting rights, not market pricing of them.”
There are two different markets here: One is the market for purchase and sale of voting-rights. In that market, prices fluctuate in the normal, unrestricted manner typical of equity markets. The prices in the voting-rights market are unrelated to actual taxes. On voting day, however, the market for exchange between citizens and the government comes online. At that time, the taxes become the responsibility of the people holding the voting rights--which is where the $19,500 dollars per voting-right came from if we elected this present government as a formal budget.

“A small coalition of the most wealthy could easily gain power in this scenario.”
A limit can be set on the number of voting rights and individual can control, limiting the concentration of power. Additionally, the sale of voting-rights could occur all at one time, rather than over a period of time, maximizing competition, which would maximize the price for the voting-rights, making excessive concentration of voting rights unlikely due to both cost and competition. Finally, concentrations of power are less meaningful given that the people with the power are also the one’s paying the entire cost of the government. The people who sold their voting-right still get to enjoy all the services the government provides free of charge and without investing any time or effort. Still, it might be reasonable to add a buy-back clause to the voting-rights sale, so that if a person who sold his voting-right later thought the person exercising it was corrupt, he could buy back the right for what he was paid plus interest as well as the remaining taxes for that cycle plus interest.

Greg G writes:

SaveyourSelf,

>---"What I don't really see is how this system would be enforced.”

>---"The IRS. The justice department. "

And now we have come full circle. The whole purpose of this project was trying to avoid the problem of anyone being coerced by government. Remember?

And now you propose to use the IRS and the Justice Department to enforce a system that literally no one but you is supporting. Surely you can see the irony here.


>---" ...which means ending Social Security, Medicare, Medicaid, and Obamacare. The easiest way to end them is on Constitutional grounds. None of them are constitutional. Since that approach was tried and failed, the second easiest approach is to buy them out."

Only if by "easiest" you mean method with vanishing little support and no prospect of success.

As for the constitutionality issue, the founders understood very well there would be disagreements about what the Constitution meant. They disagreed among themselves about what it meant.

Not despite this, but because of this, the most important parts of the Constitution had to due with the method by which such disputes would be peacefully decided more than the particular decisions reached. The fact that you don't like those decisions, which have huge popular support, does not make them unconstitutional.

SaveyourSelf writes:

Greg G wrote, “the most important parts of the Constitution had to deal with the method by which such disputes would be peacefully decided more than the particular decisions reached. The fact that you don't like those decisions, which have huge popular support, does not make them unconstitutional.”

Correct. The fact that they are not in the Constitution is what makes them Unconstitutional. Items not in the Constitution are explicitly delegated to the states. The interstate commerce clause and the “general welfare” clause in the Constitution were never meant as alternatives to the amendment process. But we’ve argued that before.
Also, "huge popular support" is not proof of efficacy. But we’ve argued that thoroughly before too.

Greg G wrote, “And now you propose to use the IRS and the Justice Department to enforce a system that literally no one but you is supporting. Surely you can see the irony here.”

I have great respect for the Constitution. One of my goals throughout this exercise is to change as little about the US Constitution as possible. Thus, I have not considered changing the present system of enforcement. Even so, your comment is a strong one. At a minimum, you get enormous style points for cleverness and execution.
Let’s end on that note. Thanks for pushing me.
Emma writes:

I found this podcast interesting.

Perhaps I missed it but it sounded like the podcasters spoke about the increase in compensation to the workers in terms of the cost of the health insurance plan to the employer. (ie. a $4k plan for a worker earning $40k vs. $100k)

Is this cost not less than the actual value of the plan to the employee, since if they bought it on their own they would have to purchase it with after-tax dollars?

If that's right then the same plan to the higher paid worker would be valued more as they would be paying a higher marginal rate of tax and would have to earn more dollars in absolute terms in order to purchase the same plan on their own as compared to a lower paid worker in a lower tax bracket. So, in some ways, the higher paid worker gets a greater benefit.

Maybe it would not make a huge difference in terms of the numbers, but it may add some nuance to the discussion.

(I'm Canadian and I'm not sure if you could deduct the whole cost of your health insurance plan in the USA... so this whole point may be moot)

Comments for this podcast episode have been closed
Return to top