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Wheeling Out the Latest Contrivance

Tuesday, March 31, 2009

The fight for survival by automakers has made them unlikely proponents of government-controlled healthcare. But nationalizing healthcare would do little to improve their competitiveness.

The fight for survival by the not-so-big three Detroit automakers, now effectively owned and managed by Washington, has made them unlikely proponents of government-controlled healthcare. Healthcare costs add more than $1,500 to the cost of each vehicle made by Detroit, it is said, putting them at a significant disadvantage relative to competitors in other nations where healthcare is provided by the government. If healthcare were provided by the federal government, some argue, automakers’ costs would decline, their cars would become more competitive, and their business fortunes would improve.

It is an attractive argument. Unfortunately, it goes against how most economists think about how healthcare costs are truly paid. The question regards the “incidence” of healthcare costs, meaning that the person who actually bears the cost of healthcare is often not the one that formally pays for it. Whether health costs are financed by employers or by the government, the true cost is actually born by workers. Nationalizing healthcare, which is effectively what most liberals wish to do, would do little to improve automakers’ competitiveness.

Yet the United Autoworkers (UAW) joined the clamor for universal healthcare, saying the current system places the automakers at a “competitive disadvantage…. It’s not just the U.S. auto industry that suffers from this competitive disadvantage. It’s every U.S. industry, every U.S. company, and every working person,” UAW President Ron Gettelfinger told the Automotive World Congress earlier this year. Gettelfinger estimated that switching to nationalized healthcare could save the Big Three billions of dollars.

Likewise, the Center for American Progress, an influential liberal think tank, declares, “as American automakers are grappling with soaring healthcare costs, their foreign competitors aren’t burdened with the responsibility of providing healthcare. For instance, Toyota, which benefits from Japan’s universal health system and cost-sharing and containment mechanisms, paid $1,400 less per vehicle on healthcare and makes $2,400 more per car than American manufacturers. In Japan, the government, employers, and individuals all share in the responsibility of providing healthcare, while American companies are left at a competitive disadvantage.”

Healthcare costs do not come out of the automakers’ profits, they come out of their workers’ take-home pay.

But here’s the problem. Almost all health economists (91 percent of those surveyed in 2005) agree that “workers pay for employer-sponsored health insurance in the form of lower wages or reduced benefits.” MIT professor Jonathan Gruber, an advisor to the Obama administration, concluded after reviewing the economics literature that “increases in health insurance costs appear to be fully reflected in worker wages.” In other words, healthcare costs do not come out of the automakers’ profits, they come out of their workers’ take-home pay. The reason is straightforward: employers ultimately care only about the total compensation paid to employees, not whether compensation takes the form of wages, benefits, or taxes paid on their behalf.

Consider a simplified example: imagine you are an automaker and you have an employee who, over the course of a year, builds around $50,000 worth of cars. How much do you pay him? Well, the best guess is that you will pay him right around $50,000. You will not pay him $51,000—that would put you out of business. And if you pay him much less than $50,000, your competitors could profit by hiring him away. So $50,000 it is.

But what if he wants health coverage or other fringe benefits that cost, say, $10,000? Well, that has to come out of the $50,000, since otherwise he would receive total compensation higher than what he produces and you would lose money. So even if you formally pay for the employee’s healthcare, he is the one who really bears the burden since it reduces his take-home pay to $40,000.

Now imagine that the government decides to nationalize healthcare. How does that affect things? Well, the market would push your worker’s take-home pay up from $40,000 to $50,000, since as the employer you would no longer be paying for his health coverage. Good news for him? Not really. Assuming the government provides him the same health package he previously received, it would require $10,000 in taxes to finance it. So, after taxes, his take-home pay remains $40,000.

Beyond failing to help automakers, Obama’s plan does not address the root causes of overspending on healthcare.

Most on the left would acknowledge the logic behind this argument, even if they do not go out of their way to advertise it.

However, they would argue that government-run healthcare could provide large cost savings without affecting the quality of service. These savings could reduce costs and thereby make automakers and other American businesses more competitive. President Obama’s campaign touted that health information technology, disease management, and cost-benefit analysis could save families $2,500 a year. However, the Congressional Budget Office projects little positive cost impact unless we first change incentives to reduce over-treatment, and one health consulting group estimated savings only one-fifth as large as the administration’s.

But let’s assume that government-run healthcare could cut costs without hurting quality or innovation. If workers can buy more healthcare with their earnings than before, that’s great, but it is no different than if their earnings allowed them to buy a better television set than before. Unless the UAW negotiates those savings back to their employers in the form of reduced wages, the savings do not benefit the Big Three’s finances.

Beyond failing to help automakers, Obama’s healthcare plans do not address the root causes of overspending on healthcare. Namely, Obama’s plan retains the tax advantages for employer-sponsored insurance that give consumers little incentive to watch their spending. Tax policy changes that alter these incentives could reduce health costs and at least cushion the effects on automaker employees of necessary cost-cutting. But a common misunderstanding of who really bears the costs of healthcare, and why, have led to deceptive arguments regarding the source of Detroit’s problems and the degree to which health reform can help.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute.

FURTHER READING: Philip I. Levy and Michael O. Moore wrote about the trade implications of the auto bailout. Martin Feldstein, Kevin Hassett, Ken Green, and others weigh in on the auto industry’s future here.

Image by Darren Wamboldt/The Bergman Group.

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