national health care and american competitiveness
Greg Mankiw points toward a recent CBO report arguing that a national health care system would not improve American companies’ competitiveness. His case essentially rests on the following sentence in the report:
…cash wages and other forms of compensation would have to rise by roughly the amount of the reduction in health benefits for firms to be able to attract the same number and types of workers.
The upshot: national health care would turn out to be a zero sum game as far as competitiveness is concerned because employers would end up having to pay more to attract employees.
Mankiw focuses in on a very narrow definition of ‘competitiveness’: for him, it all seems to come down to labor costs. The thing is, competitiveness can be defined in a few ways. One is increasing the long term endogenous growth potential of the economy relative to other advanced economies. Another is increasing the productivity of American workers vis-à-vis others countries’ workers. Mankiw is likely right that health care reform would not improve competitiveness if you restrict it only to mean labor costs. But in either of the alternative senses, health care reform would plausibly contribute to American competitiveness.
As far as increasing the long term growth potential of the economy, one question is how a national health care system would affect different kinds of employers. Two dimensions seem relevant:
First, a fairly small number of employers compete in the labor market based on the quality of the health care benefits they offer. Those employers might have to make up for what would be essentially a cut in compensation with cash (though, more likely, they would do what “high end” employers in Canada and Britain do which is offer supplemental health insurance which gives their employee access to private clinics). As far as I can tell, these are the only kinds of employers who would be specifically subject to the effect Mankiw highlights in the quote above.
But the much bigger impact would be on the 15% of all employees who work for employers that offer no insurance at all as well as the sizable number of employees who work for employers that offer lower quality insurance than would be offered through a national system. As a recent GAO report makes clear, these employers are typically smaller and are concentrated in services:
While the share of large employers offering health benefits remained fairly constant between 2001 and 2006 at about 98 percent, the share of small employers (with 3-199 employees) offering them dropped from 68 percent to 60 percent.
So, a national system would likely impose a burden on many larger employers while improving the lot of smaller ones. To the extent that one sees America’s competitive advantage as having to do with the relative ease with which this country produces small, entrepreneurial companies that might grow to become tomorrow’s Google or Microsoft, a national health care system should be a net positive.
A second dimension: impact among large companies is not equal either. Older industries and older companies with older workers are currently our least ‘competitive’. Think: legacy airlines. Because the current system charges employers based on the risk pool of their employees, and also because the longer employees’ tenure, the better their benefits are likely to be, national health care would end up improving the competitiveness of some of our least competitive industries.
This is especially true of the auto industry. For reasons I detailed in a previous post, the auto industry took on retiree health care in the 1950s and, just based on demographics, the actuarial burden is getting worse with time. The most hard-nosed competitive markets advocates say that the shortsightedness of those contracts means the companies deserve to go down. But that’s a normative policy judgment. Empirically, there’s no question that relieving the auto companies (and now the union which technically owns retiree health care) would improve their competitiveness. If you buy into the idea that having a strong domestic auto industry is good for the economic prospects of the country (not to mention airlines and steel and myriad other older industries), then lightening their load would indeed improve competitiveness.
The second way of defining competitiveness has to do with the productivity of American workers generally. The report seems to somewhat dismissively mention “labor market effects”. But these effects are non-trivial. Part of America’s competitiveness stems from the mobility of its workforce. Yet, lack of health insurance and prohibitions against preexisting conditions keep workers tied to employers and to place longer than they would otherwise be. Moreover, the lack of health care diminishes the productivity of those workers who lack insurance and that is a drag on overall competitiveness. Yet, it’s not entirely clear that offering “Cadillac” benefits to workers at the top end of the market improves their productivity. This gets to a last point which is the extremely high costs associated with the American health care system. If we are paying more bucks than we are getting back in terms of bang, it certainly ain’t improving productivity or competitiveness. Why are costs so high? It has least partly do with the screwy system by which health care is paid for: employees spend employers’ money so employers have little market power over providers to affect costs.
In the end, the CBO logic—at least as its cited by Mankiw—is too simplistic an assessment. The narrow point about labor costs may (or may not) be true. But its not the only—or the best—way to think about the issue.