Brother, Can You Spare a Cup of Joe?

Health Insurance Reform, Part 2

In the first post, we discussed the so-called "death panels" and how the government would have to get involved in individual health-care decisions that are now made by patients, their doctors, and their insurers. We also talked about the potential demise of the best care available in the world when government mandates and cost-controls are imposed on doctors' salaries.

In this part, we will examine what happens when additional mandates like mandatory health insurance are added to the burden on business.


Government mandates on business are not new. But for every additional mandate, it becomes tougher and tougher for businesses to grow and prosper, and business growth and prosperity is what pays for our society's spending.

Government service workers, as valuable and important as they are, do not create society's wealth. Teachers, firefighters, police officers, the military, highway workers, toll collectors, welfare counselors, prison guards, food inspectors, and the like are all important jobs, but we must never lose sight of the fact that it is private enterprise which ultimately funds all of these endeavors--and more--in a capitalistic society.

As government spending continues to grow, and it looks like a government take-over of our health-care system is a likely possibility, the percent of our GDP generated by private business shrinks and the potential harmful consequences loom ever larger. When will the "tipping point" occur, or has it already occurred and we just don't know it yet?

Can You Smell the Coffee?

Let me give one example of how the increase in taxes (and mandates, which also increase costs just like taxes) can affect the development of business.

I'd like to use a local coffee shop as an example. In Acton, we have several fine, independent coffee shops and at least five locations of a national coffee franchise (which may be locally owned as well.)

Some people are addicted to coffee and to the ritual of buying a cup. I go about four times per week to get coffee and drink it every morning at home.

Getting coffee in a shop is a luxury. The coffee is roughly the same quality as what I get at home, but the price is several times more expensive. A large coffee costs about $2.50, in round numbers. It is about one-tenth the price when I brew it at home. I can also drink coffee at work or have a soda, which also costs about 25 cents per serving.

As government starts to require that everyone must have health insurance, and companies will face mandates or fines if they don't insure their employees, there will be two reactions. First, coffee shop owners will look to reduce their staffing. Of course, this could hurt their business in the long run if customers come and the lines are too long so they just leave. But keeping people on staff while paying for their health insurance will greatly increase the cost of labor.

(And for those businesses who already provide health insurance for their full-time workers, their costs will also increase to help pay for the uninsured elsewhere.)

If workers aren't fired outright, many may be moved from "full time" to "part time," which may mean that their health insurance is not covered by their employer, but must be picked up by taxpayers.

Second, these shops will have to raise their prices. I can't imagine that these places make that much money just by selling coffee--my guess is that they rely on those extra purchases (muffins, donuts, cookies, sandwiches) for their profit. But coffee is what brings people in, so they need to keep that foot traffic as high as possible, and keep coffee prices down.

But when workers go from no health insurance to full coverage, at roughly $10,000 per year each, those costs must be covered somewhere. Coffee shops can't increase the prices of their add-ons since these are often impulse buys and they are already expensive. So they will be forced to charge more for their coffee.

In general, when prices go up, we call that inflation. But price increases because of inflation is really different than price increases because of taxes. That is because the general population is not getting the same wage increases that inflation often accompanies.

So if one's wages go up 5% and one's expenses go up 5%, that is about even. But if wages are flat and expenses go up, then that is a problem. Most people look to cut expenses when that happens.

So when the price of a cup of coffee goes up from $2.50 to $3.00, there could very well be a consumer reaction. Speaking personally, I really do think about that $2.50 I currently spend. I may cut back to twice a week or even wean myself off of this luxury if coffee prices go up.

If foot traffic at cafes, delis, and sandwich shops declines 10%, profit may decline 20% or 30%, or these local businesses may even close. As shops close, the remaining shops may survive (there is a subset of coffee drinkers who will go to the local coffee shop whether the price is $2.50, $3.00, $4.00, or even $5.00 per cup), but employment and economic activity will be lower and the overall economy suffers. And we will have a lot of people out of work, collecting unemployment, and being provided with health insurance by the government.

For the laid-off workers, how many of the other service businesses in town will be looking to hire when they have to provide a $10,000 health insurance policy to employees? Businesses will be very cautious about increasing employment.

Even now, if a business hires someone and they work for a couple of months, the business must pay their unemployment benefits if they get laid off. There are already many incentives to be cautious in hiring workers. This will be an unwelcome addition that will affect all businesses in our economy, directly or indirectly. According to published reports, health care represents about one-seventh (or about 15%) of our GDP.

When government increases taxes to businesses, the ramifications may take months or years to be felt, but they could be significant. And they are certainly more significant than our representatives in Congress have conceived, if you just consider that they passed the health insurance bill before reading it.


Learning from Europe

Here are two worthwhile articles:

Study shows Austria has the best health care system in Europe in 2007
(the comments are particularly interesting)


Europe's Socialism

I read both of your links. Maybe I should move to Austria! Would you buy me a ticket?

As we all know, statistics can be extremely misleading. It is quite easy to research various "facts" and to selectively present them. The facts that don't jibe with one's conclusion (or view of the world) are forgotten or belittled.

The author praises Europe's socialistic system and concludes that it is working just fine, thank you, even as he acknowledges Europe's very high and persistent unemployment rate. That makes conservatives' point right there. In America, we want people to work and wouldn't accept 20% unemployment as the norm. But that is what you get when you take away much of the incentive for entrepreneurs.

The author admits that American workers are more productive than all of Europe's workers but says a couple of countries are close. That is a neat trick. If we broke up America's 50 states and could selectively pick and choose which top states in any category to highlight, we would lead the world in virtually every category, wouldn't we?

On the health article, the numbers look extremely misleading. It says that the per capita cost of health insurance in Austria was about 2500 euros, or around $3500. In other countries, it is higher, but in the same neighborhood. In the U.S., it costs individuals much more, so obviously we are comparing apples to oranges. Either European healthcare is heavily subsidized and the subsidies are not included in the calculation, or other cost-saving measures are being implemented.

For example, in a socialist system, they could limit doctor pay to control costs. That was one of the points of my article. Do we want to (and is it fair to) limit doctor pay?

In the private sector, this would be devastating, but in the public sector, it is something that always has to be considered. I simply don't want my doctor to be part of the public sector.

Look, there is no question that "socialism" is a valid political system. It does some good things. But on balance, it is not the best way to create wealth or provide incentives to entrepreneurs to create jobs or workers to put in long hours or excel. I would prefer to reward hard work and risk-taking through a capitalistic system than have more and more people working for the state, which puts more pressure on the private sector to fund it.

We can't all be working for the state, can we? This gives me a good idea. Let's let the state make us all millionaires! It can hire everyone, pay them all $1m per year, and then take back $950,000 in taxes.

I would make one more comment on this. In a snapshot, socialism can look attractive. But over time, the system will (and has to) tend to stagnate. Maybe the timeframe the author is reviewing isn't long enough. Maybe it takes 50 years for the system to collapse.

Let's say medicine in the U.S. continues down the path we are on and becomes socialized. All of those students who graduated from medical school are probably going to enter the profession anyway (too late form them to switch now) and stay for 20 or 30 years. (Some might drop out sooner than they would have.) But the real harm comes in recruitment, which may not be felt for 10 or 20 years. By then, it is too late for a quick fix. We could face a significant shortage of doctors and healthcare could deteriorate rapidly.

Allen Nitschelm has lived in Acton since 1998 and writes about fiscal issues at the
local and state level. He is a former member of the town's Finance Committee
and is an Associate Publisher of Acton Forum.


Of course you arent against providing some level of public service thru taxation. That was my point, Allen. As soon as you acknowledge that some activities are best provided thru public taxation, then your argument against doing so for a specific service such as health care must address the specific reasons why or why not health care should or should not be publically funded, rather than trying to make the case thru generic arguments that apply to any public service. Generic arguments such as those are intellectually lazy at best and deceptive and fear-mongering at worst, and IMO the wholesale reliance by the conservative movement on making just these kind of arguments are exactly why it cannot be taken seriously.

So, indeed, some services are best publicly funded. And sometimes the private sector is best positioned to provide it. On this you and I completely agree. The discussion, then, is whether a particular function in society is best managed thru public funding, the private sector, or some combination. I am willing to have that debate, and find it a legitimate one. I am not willing to accept as credible an argument the thrust of which is "taxes, bad."

(But how anyone can conclude that the private sector is the appropriate way to provide health care is totally beyond me. What else could one with such a position be thinking other than "taxes, bad"?)


Yes, Taxes = Bad

Hi Dr. Doug,

Taxes are not neutral or benign: taxes are bad. You might say they are a necessary evil. I'm sure most people would agree. If you "overtax" the private sector, then you inhibit job growth and entrepreneurship.

So the central question, again, is whether health care is a public right and responsibility, or should it be (mostly) a private enterprise? I think you have come to the same question based on your last statement.

I conclude that the private sector is the appropriate way to provide health care at this time by the following:

1. That is how the system developed. Change is not necessarily good. We shouldn't rush into this as Congress appears bent on doing (they vote on things they haven't even read);
2. To have the public fund it will be too expensive. The "net" cost is hundreds of billions of dollars (more, really, over time.)
3. To have the public fund it will lead to a decrease in the quality of care (discussed previously);
4. The government is about the least efficient way to manage things, so any and all projections about saving money are unrealistic;
5. This will not only lead to a worse health-care system for many patients, but it will also affect many other parts of our society. Healthcare spending is one-seventh of our economy, according to the papers.

Even if you disagree with all of the above, the public can't afford it. We are operating with record deficits and debt. The "cost" to society to take on this added burden is going to be the proverbial straw that broke the camel's back.

Would it be possible to come up with a universal healthcare system that preserved free-market principles, wasn't a major burden on society, and was affordable? I would say yes. But that's not what this bill will do. And that's my take on why 100% of the Republicans in Congress opposed it. There were (at least) several Republicans who were considering ways to compromise but the push to get this done as quickly as possible, even while bribing many Democratic members with individual "goodies" for their home states, made this into a purely partisan exercise and a very bad piece of legislation.

Allen Nitschelm has lived in Acton since 1998 and writes about fiscal issues at the
local and state level. He is a former member of the town's Finance Committee
and is an Associate Publisher of Acton Forum.

No, Im too sick and broke to buy a cup

In your first part you mentioned:

·Free education through high school.
·A "safety net" of welfare benefits so no one has to be homeless or go hungry.
·We offer forgiveness if someone overextends themselves and racks up debts they cannot pay (bankruptcy).

as three areas where our society has determined that the general welfare is important enougb to impose taxes to fund. You can add to this list manyfold:
- police and fire protection
- maintenance of roads
- maintenance and safety of water supply
- etc etc

Virtually all of your scenerio, your arguments and your reasoning can be directly applied to any of these services. Thus, I have to assume that you are also against providing these services, along with virtually any services at the federal, state or local level.

And if that is not true, than your entire argument goes down the drain, does it not? If it is not true, you must argue then for or against the merits of government support for health care specifically, rather than attempt to make hay thru the general conservative argument of "big" government and "high" taxes. So this part 2 has no credibility or cogency for me at all. Part 1 is where you make the arguments specifically against funding health care, and I can accept-- while 100% in disagreement -- the credibility - not the validity- of those arguments. It is when you genuflect to the kneejerk kind of example you use here that I stop bothering to believe that you have intelligently considered the issue.


Society's Services

Hi Dr. Doug,

Thanks for your post.

First, you are misreading my argument. I gave three examples (there may be more) of cases where society pays for something that normally an individual pays for. In many countries, children do not get a free education, you aren't entitled to the basic necessities, and there is no bankruptcy protection for bad business decisions.

Remember the English "debtor's prisons?"

I was certainly not trying to list all of society's expenses or duties.

Second, I did not argue against a society paying for police, fire, defense, or whatever. Nor would I. If society pays for nothing, then why organize humankind into societies in the first place?

What I did discuss was private enterprise versus public tax or mandate. If you have a capitalistic society that creates wealth (and jobs) through private enterprise, then it stands to reason that you want to empower such pursuits and things that inhibit these activities might be counter-productive.

For example, taxes will tend to lower economic output. Does that mean taxes can be zero? No. But it does mean that keeping taxes low provides benefits to society through increased economic output, more jobs, etc. And sometimes, that can lead to more tax revenue, counter-intuitively.

Dr. Doug, I run a small business and I see first-hand how government taxes influence decisions that small business owners have to make. The government is not always a benign entity that is trying to make life easier for you. In many cases, it is just the opposite.

So when government adds taxes or mandates, there are consequences. And, for a retailer, if these additional taxes or mandates result in higher retail prices, then some consumers will make different buying decisions which could have consequences beyond just an increase in a tax rate or a mandate that everyone has to have health insurance.

I'd much rather see our federal and state government trying to encourage increased economic activity and raise public funds that way rather than increasing the tax rate which increases revenue short-term until people find a way to get it cheaper, do without, or make it themselves. Just watch how many cars travel to NH or buy things over the Internet to avoid the state sales tax to see what I mean.

Allen Nitschelm has lived in Acton since 1998 and writes about fiscal issues at the
local and state level. He is a former member of the town's Finance Committee
and is an Associate Publisher of Acton Forum.