Progressive Economics, Not Wal-Mart Bashing

I’ve heard a lot of Wal-Mart bashing from the left, and it generally comes couched in so much knee-jerk French-style* anti-globalization talk that I had taken to dismissing Wal-Mart bashers as, well, not quite getting the big picture. They know something’s wrong, but can’t quite put their finger on it.

Meet my new hero: Wal-Mart antagonist Andy Stern, the motivating force behind Maryland’s new law requiring employers with more than 10,000 workers, i.e. Wal-Mart, to spend at least 8% of its payroll on health care. This man gets the big picture, and oh, is he devious. In "The New War Over Wal-Mart" in the June 2006 issue of The Atlantic, Joshua Green quotes Stern, “My goal is to get Wal-Mart’s leadership out there in traffic and holler, ‘We can no longer compete in the global economy when health care is factored into the cost of our products.’ If Wal-Mart’s CEO, Lee Scott, were to come out and say, “We need a national health-care system that works for everyone,’ then it’s a whole new ball game.” In other words, he’s squeezing Wal-mart, in order to get Wal-Mart to use its size and influence to force national health care reform.

Pay attention, lefties; Stern has put his finger on the problem with employer-provided health-care coverage. Let me put it in Econ 101 language, so the next time one of your Republican friends throws at you, “What, do you want socialized medicine?” as if it’s an epithet, you can come right back at the only level they understand—freshman economics.

It is really quite perverse that Americans expect employers to provide group health insurance. (It is also an interesting bit of economic history. See this Economic History Net article for a discussion of the twists and turns in the development of health insurance in the United States.) We all learned in Econ 101 that firms are profit maximizers. So why would we expect them to provide group health insurance? They do so now mainly because of the favorable tax treatment: health care benefits aren’t taxed, so health insurance works as a payment to employees that is more valuable to the employees than it costs the employers. Unfortunately, tax incentives don’t help when the value of the labor isn’t high enough to cover the cost of the health insurance, thanks in part to spiraling costs resulting from a lot of factors we aren’t covering here today.

Sometimes it is profitable to be good to employees, to pay them well and ensure their good health so that they end up being more productive. But often it’s not. In the retail industry, where turnover is high and unskilled workers are plentiful, it’s cheaper to count on turnover and let employees deal with their health problems on their own dime. Having a social conscience when it is not profitable is only possible in an industry that is not very competitive, which in practice usually means a growing industry in which firms have not yet been subjected to the long-run competitive forces of the market. Americans like competition in markets, for pretty good reasons. Even the leaders of red-stated Americans claim to adore competition, despite undermining it wherever possible. (Possibly because they think the invisible hand will solve all problems, including the ones they create.)

There’s the rub: competitive forces means employers in competitive, low-wage industries can’t provide group health insurance and still remain profitable. So who is left to provide insurance? Not individuals, that’s for sure.

Employer-provided group health insurance is meant to solve an information problem: Namely, purchasers of health insurance know more about their potential health problems than the insurance company. As a result, at any price offered, the people who buy insurance will include more of those who are likely to submit high claims, because it is always a better deal for those who are more likely to fall ill. Insurance companies must be able to pay the claims, so they may have to charge a higher price to cover the claims – but then only a smaller group of people with a very high likelihood of high claims would buy the insurance. This problem, known as adverse selection in the economic jargon, results in such high insurance prices that people with ordinary risks rationally choose not to purchase insurance, even though they would like to be insured. Group insurance solves this problem, because the firm contracts to purchase insurance for all employees, a relatively random group with varying risks of falling ill, which means the insurers can provide insurance at the lower average price. And individuals cannot purchase insurance at this lower average price because of the adverse selection problem. [See Slate for a more detailed explanation of adverse selection. We’ll have to leave for another day the discussion of the many other problems in the health care market that lead to escalating costs.]

Employers in competitive markets have trouble providing health insurance. Individuals can't solve the adverse selection problem on their own. So again, who is left to solve the problem? The government. That’s what it’s good for, solving market failures. Careful government policy is required to solve the problem, whether or not the solution is “market-based.”


*French-style: When referring to meat, it means drowned in sauce. When referring to policy discussions, it means willing to debate without any understanding of basic economic principles. When referring to leisure time, it means languorous summer evenings on the terrace with a bottle of dry rosé, lively conversation, and no mosquitoes.