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Wednesday, June 24, 2009

Last Friday, Peter Robinson wrote in Forbes on Milton Friedman's view on health care reform. You can read Friedman's original article here. The best part of Friedman's article is the history lesson he provides:

During World War II, the government financed much wartime spending by printing money while, at the same time, imposing wage and price controls. The resulting repressed inflation produced shortages of many goods and services, including labor. Firms competing to acquire labor at government-controlled wages started to offer medical care as a fringe benefit. That benefit proved particularly attractive to workers and spread rapidly.

Initially, employers did not report the value of the fringe benefit to the Internal Revenue Service as part of their workers’ wages. It took some time before the IRS realized what was going on. When it did, it issued regulations requiring employers to include the value of medical care as part of reported employees’ wages. By this time, workers had become accustomed to the tax exemption of that particular fringe benefit and made a big fuss. Congress responded by legislating that medical care provided by employers should be tax-exempt.
It all began with the government's misguided wage controls. As always, the private sector responded to government intervention with new means of bypassing it. It's difficult to blame them for that.

Also, it's important to note that the government originally tried to prevent this tax exemption for employer-provided health "insurance" (I will cover why insurance is in quotations in a later post). Therefore, the argument that the exemption was intended to encourage the behavior of employer-provided medical care is false.

Posted by Eleutherian

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3 comments

  1. Ashley Says:
  2. Interesting blog, Chris. First, your title is a bit off. The extended quotation from the Friedman article, as he himself says, illustrates how "how one bad government policy leads to another." That's a side note, but there is a difference between economics and political economy, as you should know from your econ studies.

    Second, it's inflammatory. Part of every debate on healthcare needs to thoroughly examine the biases from which the recommended policies arise. Merely saying "bad economic policy begets bad healthcare policy" is vacuous. What do you mean by "bad"? In that the government has a greater role in healthcare? Why is that bad? And when are there exceptions to that rule? (And believe me, there are exceptions).

    What frustrates me is that these academics have no humility in their pursuit of enlightenment. They are blind-sided to the fact, for example, that logic and reason aren't the gold-standards if you start off from a theoretical basis that doesn't match with how the world really works. People use "logic" and "reason" to say that homosexuals will go to hell, that women should stay at home and raise children, that we should have invaded Iraq.

    I mean really, your blog says "through logic and reason". There are actually limits to logic and reason when applying them to human actions, especially aggregate human actions. Not everything can be solved through theory carefully reasoned bc a) no matter where you start in your reasoning, you start on some BASIS principle/foundation that already shapes your belief in the world. Even the simplistic Cartesian statement, "Cogito, ergo sum" is based on an even more fundamental idea that the body is separate from the mind. But is it? If that were a definitive yes, then we wouldn't have the field called psychoneurimmunology. Sometimes you just have to listen to data and what people actually do, rather than just

    When you take higher-level maths, you learn that even to define the natural numbers (which we thought to be fundamental), you have to still define 3 basic operations (addition, multiplication closed under vector spaces, the idea of zero, etc) before you can even "prove" that counting numbers exist. Doesn't that blow your mind?

    When would we want employer-provided medical care? What is the use of opening dialogue on a societal problem when the ensuing talk is only to defend this or that ideological belief (libertarian versus socialist, free market versus regulation, Dem vs GOP etc)? We blow hot air on Social Security, but what has been done to address it?

    What was the healthcare system like before employer-provided medical care was available? How was health-insurance run? What was the coverage rate? What is the link between healthcare expenditures and health outcome?

    Rather than throwing out the baby with the bathwater in the name of some ideological championing, let's see where government-provided medical care or employer-provided medical care could be reasonable. When I said about premiums is that employer-provided medical care, under the present system of health insurance premiums, allow people to buy policies as a larger pool of people and thus benefit from the risk reduction, rather than pricing out the people who are higher risk. A simple mathematical exercise we did in my health economics class can be provided to show you how this works.

    Whether the employer-provided medical care created our current health system of insurance premiums or was a response to the health system of insurance premiums, did Milton Friedman answer that in his historical overview? I don't know the answer, but knowing this might change our attitude towards the current system.

     
  3. Ashley Says:
  4. oops, sorry for posting a blog post entry almost in my comments haha. it's longer than your entry....eep

     
  5. The purpose of this post was to show how the current employer-provided system developed. Too many people believe that Congress granted a tax exemption to encourage the behavior. However, they were merely responding to political pressure from businesses and individuals who wanted to preserve the behavior. The government originally wanted to end the behavior.

    I don't believe that any one ideology is perfect. However, you can still use logic to compare multiple takes on the same concept. Yes, I more often than not take the free market perspective on economic issues, but I use logic and reason to keep myself from being blinded by ideology. Logic and reason are tools. More importantly libertarians (NOT necessarily Libertarians) do not have one set of beliefs on most issues.

    By looking at the historical circumstances, we see that the government's arguements that they encouraged this behavior is false. This isn't an ideological belief.

    I actually agree with the government's first reaction (before they were influenced by political interests) to remove the tax exemption for employer-provided medical care plans. There is no need in the absence of wage controls. I will write a post on this subject in the future.

     

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