December 5, 2023

Today’s Economist: The 300 Billionth Burger

Nancy Folbre, economist at the University of Massachusetts, Amherst.

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

In his autobiography, “Grinding It Out: The Making of McDonald’s,” Ray Kroc described the company he built as “my personal monument to capitalism.”

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The monument is a towering one. Only ballpark estimates are available, because McDonald’s stopped posting estimates of its cumulative burger sales when they reached 99 billion in 1994. But the company is on track to hit the 300 billion mark in the near future, if it hasn’t already.

With total revenue that exceeds the gross domestic product of Ecuador, McDonald’s is virtually a culinary country of its own. Not surprisingly, it has become a recurrent focus of political contention.

This year’s protests against the low pay of its employees reflect larger concerns about the decline of good jobs in the United States, and the company’s recently published personal budgeting advice reflects remarkably widespread disregard for people trying to get by on poverty-level wages.

A company that can sell 300 billion burgers clearly knows how to respond to consumer concerns. As Eric Schlosser explains in “Fast Food Nation,” McDonald’s moved relatively quickly to improve standards of humane treatment for the (nonhuman) animals in its supply chain. In the wake of bad publicity from Morgan Spurlock’s film “Supersize Me,” the company made significant efforts to improve the nutritional value of its menu. Last year, the company took the lead in a commitment to post calorie counts for every item.

Of course, the company’s nutritional impact is influenced by policies over which it has little direct control. In the United States, Big Macs cost less than a salad largely because our agricultural policies subsidize the price of meat far more generously than the prices of fresh vegetables and fruits.

The low wages the company pays its workers also reflect the economic environment. In this country they average less than $8 an hour, reflecting a federal minimum wage that has been stuck at $7.25 an hour for four years. If the minimum wage were adjusted to correct for inflation, its 1968 peak would amount to about $9.42 today.

More than 88 percent of those who would benefit from a higher minimum are over the age of 20.

Global comparisons demonstrate that macroeconomic conditions and government regulation — not individual skill or effort — determine the level of company wages relative to prices.  In 2005, the now-defunct Asian Labour News estimated that it took American workers at McDonald’s about 30 minutes to earn enough to buy a Big Mac. In China, it took workers behind the counter about 3 hours 58 minutes; in India, 8 hours 34 minutes.

The relative bargaining power of low-wage workers has a far greater impact on burger prices than differences in efficiency. Underlying differences in labor markets — as well as factors influencing international exchange rates — help explain why Big Macs are relatively expensive in dollar terms in high-wage countries such as Norway and Switzerland and relatively cheap in low-wage ones like India and China.

Americans whose top priority is minimizing burger costs should perhaps shop overseas. Low-price fast food offers some quick visible benefits. But consumers who are also workers need to consider its long-run implications for their own wages and living standards. Happy Meals don’t necessarily lead to happy families.

Wage trends in fast food are not simply a result of impersonal market forces. Corporate policy matters. According to Bloomberg News, the disparity between the pay of McDonald’s fast-food workers and its chief executive officer has doubled in the last 10 years, while the company lobbied against minimum wage increases and discouraged unionization.

The budgeting advice that the company management recently offered employees — effectively lampooned in a video posted by the group Low Pay Is Not Okay — reveals a management that is out of touch with the experience of its workers.  It includes estimates for rent and utilities, but it does not mention food, clothing, gas, or child care. It presumes that they will hold a second job and find health insurance costing only $20 a month.

The sample budget assumes hourly gross pay of about $15 an hour (assuming a 40-hour workweek), far more than most McDonald’s employees will ever earn. In other words, the company’s own calculations suggest that it fails to offer a living wage.

It is hard to imagine Ray Kroc, a self-made businessman who started out selling milkshake machines, ever patronizing his employees in such a careless way.

According to a recent Gallup Poll, more than two-thirds of Americans support an increase in the minimum wage, and some restaurant owners are also on board.

McDonald’s could put a living wage on its menu. You could ask for it the next time you hit the takeout window.

Or you could just drive past the golden arches in search of a better monument to your ideals.

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Economix Blog: Let Your Rich Uncle Pay for College

Nancy Folbre, economist at the University of Massachusetts, Amherst.

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

If you borrow money to go to college, you should be able to pay it back from your higher post-graduation income. Rather than a loan, you could offer an equity investment — a share of your future earnings.

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Most education in modern economies is financed either through debt or equity. The big issue is who’s making the investment and on what terms.

The Oregon state legislature dramatized this issue with its decision to develop a pilot program to eliminate tuition and fees for students in the state university system who agree to pay about 3 percent of their income for the next 20 years to help finance the education of future students.

The “pay it forward” scheme, proposed by students at Portland State University and building on a model developed by the Economic Opportunity Institute, has re-energized debate over ways of alleviating the burden of student debt. As it happens, the Oregon legislature voted to pursue it on the same day that federal student loan interest rates doubled to 6.8 percent from 3.4 percent.

Would you be better off paying 3 percent of your income for 20 years, or 6.8 percent on a specific loan amount? The answer depends both on your projected income and the amount you need to borrow. In general, students from low- and middle-income families would fare better than students from rich families under the Oregon plan, because they are more dependent on loans to pay for college.

The Oregon plan would improve educational opportunity and reduce income inequality, raising more payback money from high earners than low earners. Yet it is less egalitarian than the largely free public university system that once existed in the United States and currently survives in countries including Denmark, Sweden and Norway.

Subsidized public higher education is also based on a “pay it forward” principle. College graduates are expected to earn more and, as a result, pay more in income and other taxes over their lifetime. The reciprocity is just less direct. Instead of helping pay only for future college students, graduates help reimburse all past taxpayers — including the older generation — for the taxes they invested in previous years.

At the other end of the spectrum, “human-capital contracts” can be fully privatized, with students offering investors a share of their prospective earnings in return for an upfront investment. This model, originally suggested by Milton Friedman, developed in some detail by Miguel Palacios of the Cato Institute and advocated by Luigi Zingales in a commentary in The New York Times, was put into practice by a student-loan company called My Rich Uncle about 10 years ago.

Both socialized and individualized human-capital contracts help solve an important problem, increasing productive investments and contributing to economic growth. Yet neither type of contract is foolproof.

Critics of public investment in higher education often contend that it is inefficient, because it subsidizes students who goof off along with those who indulge in the development of skills with little market payoff — such as theater arts. Public subsidies can also have the effect of reducing pressure on providers of higher education to cut costs or to encourage students to develop job-specific skills.

Advocates of public investment in higher education assert that there are compensating benefits. They often couch their arguments in terms of political rights to educational access and enhanced equality of opportunity. These political rights have economic consequences. Students develop general skills in college that don’t necessarily pay off in higher wages but may nonetheless generate tangible benefits for themselves and others. College graduates may become better informed citizens, more successful parents and more creative members of society.

Some students who may not seem like a good bet either for private investors or public taxpayers at age 18 can be transformed by their college experience.

It’s pretty hard to assign a specific value to their human capital, however you define it.

The lifetime payoff to a college degree depends on many factors other than individual effort or choice of major, including global supply and demand for educated workers, and a business cycle that economists don’t fully understand.

On the Marginal Revolution Web site, Tyler Cowen registers his skepticism with the Oregon model, suggesting it would suffer from adverse selection: “At the margin I would expect this to attract people who don’t have a vivid image of the distant future.”

But if everyone’s vision of the distant future is blurred, public investment in human capital becomes especially important. The large number of students taking part in the payback scheme pools risk and provides more effective insurance against unanticipated declines in earnings.

This insurance helps encourage human capital investment. As the Economic Opportunity Institute report points out, “pay it forward” systems in Australia and Britain have contributed to increased college enrollments there.

Do you doubt the significance of risks to private investments in human capital? Consider that the lending enterprise known as My Rich Uncle declared bankruptcy in 2009, exercising a legal privilege of getting out from under its obligations that most student debtors are denied.

Students who don’t have a family member or other angel investor willing to finance their college education might consider moving to Oregon. Or, they could start organizing to win more generous support from their Uncle Sam.

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Economix Blog: Confusing the Public on the Affordable Care Act


Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

In my previous post I explained that general statements on the probable impact of the Affordable Care Act on the pocketbooks of Americans often do not make sense and can be quite misleading.

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My point can be illustrated with a recent news release from the Ohio Department of Insurance, “Health Insurance Costs to Increase Significantly Under Affordable Care Act.” The department states that it “released the information today to help health insurance consumers continue to prepare for the expected price increases.” It offers a one-sided perspective.

In its announcement, the department reports:

The department’s preliminary analysis of the proposed plans for the individual market reveal that insurers expect the cost to cover health care expenses for consumers will significantly increase. Based on a report released by the Society of Actuaries earlier this year, the department estimates this increase is an average of 88 percent. … A total of 14 companies filed proposed rates for 214 different plans to the department. Projected costs from the companies for providing coverage for the required essential health benefits ranged from $282.51 to $577.40 for individual health insurance plans.

Presumably these numbers refer to claims cost and not premiums.

The release is silent on whether the reported average of $420 of this wide range of claims costs are those for a given benefit package or an average over quite different benefit packages. If the former, how could the range of cost claims be so wide? If the latter, the reported average of these numbers would be meaningless. After all, how informative would it be to say that the average cost for a group of cars is $110,422, when that includes Chevrolets, Jeeps, BMWs and Ferraris?

If properly informing consumers had been truly the department’s intention, it should have added at least two additional pieces of information.

First, the news release should have reminded readers explicitly that income-related federal subsidies toward health insurance premiums will be available for individuals with household incomes up to 400 percent of the federal poverty level, along with “cost-sharing subsidies” toward out-of-pocket costs for families with incomes between 100 and 250 percent of the federal poverty level. For lower-income people, these subsidies will significantly offset premiums driven up by the reported 88 percent increase in costs.

Second, the news release might have included some explanation of why the “cost to cover health care expenses for consumers” in Ohio is expected to rise as a result of the Affordable Care Act.

A clue to the answer can be gained from the study by the Society of Actuaries cited by the department.

That study reports average claims costs per member per month for what it calls the “pre-A.C.A.” and the “post-A.C.A.” state of affairs. The pre-A.C.A. figure represents estimated claims cost per insured person per month in 2014 if the Affordable Care Act did not exist. The post-A.C.A. estimate reflects the counterfactual assumption that the entire act has been fully carried out in 2014, something that actually will occur only by the latter half of the decade.

Using a highly complex simulation model, the actuaries estimate that if the Affordable Care Act were fully carried out by 2014, the average claims cost per member per month in Ohio’s nongroup risk pools would rise from an estimated pre-A.C.A. level of $223 (Figure S-2, Page 8) to the post-A.C.A. level of $406, an 82 percent increase, assuming no expansion of Medicaid in Ohio. The increase in systemwide total health spending in Ohio brought on by the Affordable Care Act, however, is estimated to be only 3.2 percent.

Aside from the fact that the minimally accepted package of essential benefits under the Affordable Care Act will be more generous and costly than many of the much leaner policies traditionally sold in the nongroup market, that can leave people exposed to high financial risk, a major driver of the projected cost increase — one explicitly flagged by the actuaries — is a projected change in the risk profile of the insured in Ohio’s nongroup market.

The Society of Actuaries projects that the number of individuals insured in that market will increase from the pre-A.C.A. level of 415,000 to the post-A.C.A. level of one million. Many of these newly insured are projected to be relatively sicker individuals who had been excluded from Ohio’s nongroup market, either because they could not afford the high premiums they were quoted, based as these were on the individual’s health status; or because insurers had refused them coverage outright; or because they were in the state’s high-risk pool.

Just last week Julie Appleby of the Kaiser News Network reported on the tribulations that individuals had routinely experienced in the current, pre-A.C.A. nongroup market.

The proponents of the Affordable Care Act should not deny that with this simulated change in the risk profile of Ohio’s nongroup insurance market — which may or may not come about — a switch from medically underwritten premiums to community-rated premiums, coupled with a richer benefit package, could significantly raise premiums for healthy individuals with higher incomes who are not entitled to substantial federal subsidies or any at all. The Ohio Insurance Department’s news release certainly drives home that point.

On the other hand, for projected new entrants into Ohio’s nongroup market who are relatively less healthy, the community-rated premiums even before federal subsidies are most likely to be significantly lower than their medically underwritten pre-A.C.A. premiums — if they had been offered coverage at all. A forthright news release would have mentioned that positive outcome as well.

From the “fact sheet” that the Department of Insurance appended to its news release, one gathers that Ohio’s lieutenant governor, Mary Taylor, who also acts as director of the Department of Insurance, opposes the Affordable Care Act and supports its repeal. In the fact sheet, her department notes:

Health insurance today is priced based on individual characteristics. Those with healthier lifestyles are rewarded with more affordable options. Under the A.C.A., all Ohioans will be lumped together for the purposes of pricing thereby eliminating the benefits of healthier choices. This method of rating is commonly known as “community rating. … Because Ohio is being forced into this type of pricing, health insurance costs are increasing in 2014.

I can understand how community rating violates the theory of justice espoused by libertarians. In fact, I have proposed a way to accommodate their preferred social ethic. The department’s rationale for opposing what it calls “one-size-fits-all pricing,” however, astonishes me.

One can agree that an individual’s choice of an unhealthy lifestyle can reduce her or his health status and increase that person’s use of health care. Community rating gives such people a financial break we would rather not give them.

But many serious and often devastating illnesses afflicting individuals are a result of accidents, or genetic or environmental factors that have little to do with lifestyle choices. The many victims of such illnesses, in Ohio as elsewhere, might interpret the Ohio Insurance Department’s rather crudely put theory of the causation of illness as an insult added to injury.

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Even Pessimists Feel Optimistic Over Economy

But could the New Normal, as this long economic slog has been called, be growing old?

That is the surprising new view of a number of economists in academia and on Wall Street, who are now predicting something the United States has not experienced in years: healthier, more lasting growth.

The improving outlook is one reason the stock market has risen so sharply this year, even if street-level evidence for a turnaround, like strong job growth and income gains, has been scant so far.

A prominent convert to this emerging belief is Tyler Cowen, an economics professor at George Mason University near Washington and author of “The Great Stagnation,” a 2011 best seller, who has gone from doomsayer to a decidedly more optimistic perspective.

He is not predicting an imminent resurgence. Like most academic economists, Mr. Cowen focuses on the next quarter-century rather than the next quarter. But new technologies like artificial intelligence and online education, increased domestic energy production and slowing growth in the cost of health care have prompted Mr. Cowen to reappraise the country’s prospects.

“It’s better than it looked,” Mr. Cowen said. “Technological progress comes in batches and it’s just a little more rapid than it looked two years ago.” His next book, “Average Is Over: Powering America Beyond the Age of the Great Stagnation,” is due out in September.

Certainly, there are significant headwinds that will not abate anytime soon, including an aging population, government austerity, the worst income inequality in nearly a century and more than four million long-term unemployed workers.

These and other forces prompted some leading economists, led by Robert J. Gordon of Northwestern, to conclude not long ago that the arc of American economic growth for centuries was over, to be replaced by decades of stagnation. Productivity might grow steadily, Professor Gordon argued, but the benefits will not flow to most Americans.

Other analysts are challenging that perspective, which they said was colored, in part, by the severe downturn that hit the global economy more than five years ago. And some of them now see a brighter outlook right around the corner, not just far into the future.

Two widely followed economic forecasters, Morgan Stanley and IHS Global Insight, have both increased their estimates for growth in recent days.

“It’s been a long time coming,” said Nariman Behravesh, chief economist at IHS. “There is more optimism about the U.S. and in particular about the second half of this year and 2014. Three months ago, we wouldn’t have come to that same conclusion.”

Indeed, a number of forecasters are now predicting that the expansion, which began in 2009 and has remained subpar ever since, might prove to be far more durable than the typical five-to-six-year growth cycle, in part because of the absence of the traditional boom, then bust pattern.

The optimistic view is hardly universal and there have been premature proclamations of better days before, most famously the “green shoots” spotted by Ben S. Bernanke, the chairman of the Federal Reserve, in 2009.

Whether or not the economy is poised to grow faster in the months ahead will be the central question when Federal Reserve policy makers meet this week, with more volatility expected on Wall Street as traders look for any sign the Fed is ready to taper back its huge stimulus efforts.

Whatever the Fed’s conclusion, many analysts insist the more upbeat view is justified this time.

In particular, Mr. Behravesh and other economists said, the economy has shown greater resilience than expected in the face of tax increases and spending cuts in Washington. As the impact from this fiscal tightening eases, the overall growth rate should pick up.

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Today’s Economist: Nancy Folbre: The Once (but No Longer) Golden Age of Human Capital

Nancy Folbre, economist at the University of Massachusetts, Amherst.

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

Only slightly more than half of college presidents (54 percent) believe that a bachelor’s degree is worth more or a lot more than five years ago, according to a recent survey conducted by the Chronicle of Higher Education.

A majority of Americans (57 percent) say the higher education system in the United States fails to provide students with good value for the money they and their families spend, according to a recent survey by the Pew Research Center.

Today’s Economist

Perspectives from expert contributors.

It seems that the golden age of human capital is losing its shine.

That shine came not just from a high rate of return (both individual and social) on a college degree, but also from a beautiful, if partial, alignment between ideals of human development and the needs of employers.

It was a happy alignment, not just for college professors and their students, but for the soul of capitalism itself. Academic striving would be rewarded. Merit would prevail. Students willing and able to invest in their own abilities had a good shot at permanent prosperity.

Not anymore. Problems are particularly conspicuous on the supply side: declining state support, higher tuition and fees, increased inequality of access and the growing burden of debt. The investment costs more than it once did and remains beyond the reach of those who need it most.

Problems are also increasingly apparent on the demand side: high unemployment and underemployment rates among college graduates.

Historical data suggest that investing in college still offers significant economic benefits to those who actually complete their degree requirements and find employment (especially if they enjoy parental support or generous financial aid).

But private rates of return have begun to decline. Uncertainty about future benefits lowers the expected dollar value of a degree. Rates of return differ widely by personal characteristics, the institutions students attend and the majors they choose.

In their highly respected economic history, “The Race Between Education and Technology,” Claudia Goldin and Lawrence Katz contend that the demand for college-educated workers began to outstrip the supply in the United States about 1980. Since then, the college premium, or difference in lifetime earnings between those with degrees and without, has increased.

But in the 1990s the global supply of college-educated workers burgeoned and large American corporations improved their ability to use skilled labor in other countries. As the economist Richard Freeman points out, developing countries have invested heavily — and successfully — in their higher education systems. In 2005 Chinese universities awarded five times as many bachelor’s degrees as they did in 1999.

This global expansion of the educated labor force is likely to put downward pressure on the college premium in the United States.

Another possibility is that the demand for highly educated workers has changed shape in recent years. With vast improvements in information technology, employers may now seek a small number of specialized, technically trained experts rather than a large number of versatile, diversified liberal arts graduates.

Certainly students are now encouraged to think more strategically about their majors and to specialize in more technical fields. This is good financial advice, but it won’t guarantee success. Unlike financial capital, which can be easily moved from one investment to another, investment in human capital represents a sunk cost.

If more and more students pile into science, technology, engineering, and mathematics, the wage premiums for those majors could decline. With a high rate of technical change and continued globalization of labor markets, some students could also find their specialization obsolete. Someday soon there will probably be an app for writing apps.

The evolution of the global human capital market has momentous political implications. Like many Democrats, President Obama is bullish on human capital. He favors increased public investment in education, ranging from early childhood to post-secondary programs. The assertion that such spending will generate a high individual and social rate of return is based on the optimistic expectation that demand for better-educated workers will remain strong.

On the other hand, many critics of public-education subsidies are bearish on human capital. The economist Richard Vedder, for instance, warns against both private and public overinvestment in education, pointing to the growing tendency for college graduates to land in jobs that don’t actually require the credential they hold.

If the bears are right, we may be moving toward a stage of capitalism less dependent on a growing supply of home-grown human capital. In that case, many of those bullish on higher education investments in the United States could end up as red meat.

Those who believe, as I do, that education has intrinsic value both to individuals and to society as a whole should reconsider their habit of relying on market-based private rate-of-return rhetoric.

Rather than bowing to market forces, an intelligent, well-educated citizenry would bend those forces toward better ends, including the best possible development of human capabilities.

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Economix Blog: Recessions Save Lives


Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

More people die in economic expansions, and fewer die in recessions.  Whether and how policy makers should heed this pattern depends on the hitherto unknown links between mortality and economic activity.

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Recessions can be stressful and depressing, especially for the people who lose their jobs.  Suicide rates spike during recessions, and for that reason alone recessions have been called deadly.  Two researchers, David Stuckler and Sanjay Basu, noted that suicides and binge drinking are positively correlated with unemployment and concluded that “Austerity kills” by adding to unemployment.

Even if we could be sure that austerity and related fiscal policies create recessions, it would be premature to conclude that they literally kill people.  Industrial and construction accidents are more common in economic expansions, and less common in recessions because those industries’ activities follow the business cycle.  Overtime hours may be more dangerous than average, and overtime is more common at the peak of the business cycle.  Moreover, the share of people working in construction – one of the most hazardous industries – increases during expansions and falls during recessions.

Highway accidents also follow the business cycle because more vehicles are on the road during economic expansions, and fewer on the road during recessions. (Mr. Stuckley and Mr. Basu noted that the United States’ Great Depression of the 1930s also had abnormally low rates of fatalities due to traffic accidents.)

With more accidents at work and on the road during expansions, expansions have more deaths by such accidents, and recessions have fewer.

It turns out that the business cycle for suicides is more than offset by the business cycle for other deaths.  Mortality and the unemployment rate are negatively correlated.  Christopher J. Ruhm, a professor of public policy and economics at the University of Virginia, has looked at all causes of death and found that most of them – suicide was the exception – occur less frequently at the depths of the business cycle.

Perhaps most surprising is that the business cycle for overall deaths is dominated by the business cycle for deaths among elderly people, perhaps especially elderly women.  Because so many elderly people are retired, they are especially unlikely to have recently been laid off from their job (which can lead to suicide), to drive their car to work hurriedly, or to take part in a dangerous construction project.

We don’t really know how the business cycle for economic activity is connected to the cycle for elderly deaths.  One hypothesis is that economic expansions create air pollution, and air pollution kills elderly people.  Another hypothesis is that nursing homes have more trouble retaining their staffs during expansions because they have to compete with other businesses.  Perhaps family members who are busy at work during expansions spend less time helping their elderly relatives.

Life is valuable, so it may be at least as important to understand what determines mortality and its cycles as it is to understand what causes recessions.

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Economix Blog: Casey B. Mulligan: Massachusetts Employees Will Keep Their Health Plans


Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

Massachusetts and a few neighboring states are likely to experience the Affordable Care Act a lot differently than the rest of America.

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Massachusetts is often held up as a window into America’s health insurance future, because it embarked on what came to be called the Romneycare reform six years ago. Like the Affordable Care Act provisions going into effect nationwide next year, Romneycare aimed to increase the fraction of the population with health insurance by imposing mandates on employers and employees and by subsidizing health insurance plans for middle-class families without employer plans.

Because the subsidized plans are available for only low- and middle-income families whose employers do not offer affordable health benefits, some analysts fear employers around the nation will drop their health benefits as the Affordable Care Act goes into full effect, resulting in millions of people losing the opportunity to get health insurance through an employer.

But some people say they believe this fear is likely to be unfounded, because the propensity of Massachusetts employees to receive employer-sponsored health insurance was hardly different after Romneycare went into effect than it was in the years before.

The details and dollar amounts in the Massachusetts health care law differ from the national Affordable Care Act, and for that reason alone I hesitate to infer too much from the Massachusetts experience. Even if the two laws were essentially the same, the effects in Massachusetts could be different than the national effects because Massachusetts has a different population and business environment than the rest of the nation.

Last week I explained how specific types of employers could be expected to drop their health benefits during the next couple of years: those employers that currently offer benefits but nonetheless pay much of their payroll to people living in households below 300 percent of the federal poverty line, who are eligible for the most generous federal subsidies as soon as their employer ceases to offer benefits.

Massachusetts has an extraordinary fraction (almost two-thirds) of its population above 300 percent of the federal poverty line, and as a result practically all Massachusetts employers will prefer to retain their health benefits over the next few years, even though a significant fraction of employers elsewhere will not.

One way to quantify the difference between Massachusetts employers and employers elsewhere is in the percentage of payroll going to employees from families below 300 percent of the poverty line. At a national level, the percentage varies from 4 percent in Internet publishing to about 50 percent in restaurants and private household employers. The national average is 20 percent, compared with 13 percent in Massachusetts.

Employers have a variety of factors to consider in their benefit offering decisions, but I have made some estimates that focus on the payroll-composition statistics noted above. By my estimates, employers with percentages of 26 to 35 percent of employees above 300 percent of the poverty level have a sufficiently high percentage that they are likely to have been offering health insurance benefits before the Affordable Care Act. Yet they have a low enough percentage that their employees gain on average if the employer health benefit is dropped and employees take the subsidies available through the Affordable Care Act’s health insurance exchanges.

About 10 percent of employees with health insurance live in a state and work in an industry with compensation percentages in the range where profits are to be gained by dropping employer health insurance. But none of them live in Massachusetts, and some states that border Massachusetts, including New Hampshire and Connecticut, are in a similar situation.

A number of states and industries – especially the industries I emphasized last week – have more than 35 percent of their payroll paid to people in families under 300 percent of the poverty line and are unlikely to be offering employee health benefits.

But those employers in Massachusetts who have 35 percent of their payroll paid to people in families under 300 percent of the poverty line are more likely to offer some kind of health benefit, in part because of Romneycare’s incentives to create “cafeteria plans” in which employees authorize pretax salary to be withheld from their paychecks for the payment of health insurance premiums.

Under the federal law, the Massachusetts cafeteria plans will lose some of their advantages to employers in terms of avoiding penalties for failure to offer health benefits.

Based on the combination of these two factors — that no Massachusetts industries have 26 percent to 35 percent of their employees under 300 percent of the poverty line, and that Massachusetts employers will lose the advantages of their cafeteria plans — I calculate that employers offering health insurance in Massachusetts are one-third as likely to drop their employee health plans over the next couple of years as are employers in the rest of the nation.

That’s because the percentage of the United States work force at risk of losing its employer insurance (because of the tendencies of their industry and states to have low- and middle income employees) is three times the percentage of the Massachusetts work force in the same situation.

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Economix Blog: Casey B. Mulligan: What Job-Sharing Brings


Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

When employer costs are taken into account, it is unclear whether jobs are something that can be efficiently shared.

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Perspectives from expert contributors.

The idea behind work-sharing is that employers have a certain amount of work that needs to be done, and that the work can be divided by many employees working a few hours each or a few employees working many hours each. If hours per employee could be limited, by this logic employers would have to hire more employees to get the same amount of work done.

American labor law has traditionally placed some limits on employee hours, such as overtime regulations. While the recent Affordable Care Act does not strictly limit hours per employee, beginning next year it gives employers a strong push toward part-time employment by levying a significant fee per full-time employee and exempting part-time employees from the fee.

A number of employers have said they would change some work schedules to part time from full time to avoid some Affordable Care Act fees. Because part-time workers generally have fewer benefits than full-time employees, this could save employers a considerable sum. From the work-sharing perspective, the part-time employee exemption by itself would be expected to increase employment, because employers would have to hire more people (probably on a part-time basis) to complete work their employees used to accomplish when full time.

But it is possible that work-sharing would reduce employment rather than increase it, because it prevents employers from accomplishing their tasks at minimum cost, adding administrative and coordination expenses. Higher costs for employers may put them out of business, or at least reduce the scale of their business. When companies reduce the scale of their activities, that means fewer employees.

It is also possible that work-sharing would reduce employment by making jobs less attractive to people who desire full-time work. One reason that people sometimes justify commuting long distances to work or enrolling in demanding training programs – trucking and nursing are two such occupations — is that they expect to recoup those cost by taking advantages of opportunities to earn extra by working long hours.

Work-sharing proponents have credited Germany’s comparative low unemployment rate to its adoption of a work-sharing program, because the program encourages German employers to reduce employee hours rather than lay workers off. Work-sharing proponents may be right, although Germany carried out a number of labor-market reforms at the same time, such as allowing businesses to use temporary workers more easily.

As the Affordable Care Act suddenly pushes business toward part-time employment, we economists will have an unusual opportunity to learn whether cutting employee hours creates jobs, or destroys them.

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You’re the Boss Blog: Sorting Through the New Political Alignments in Small Business

The Agenda

How small-business issues are shaping politics and policy.

In a post for our colleagues at Economix on the divide between small and big — and local and global — businesses, Nancy Folbre, an economics professor, raises a number of issues important to You’re The Boss readers.

In particular, she discusses the emergence of several groups, mostly progressive, that claim to represent local and independent small businesses. They include membership organizations like the American Independent Business Association, the Main Street Alliance, Business Alliance for Local Living Economies, as well as the Small Business Majority and the American Sustainable Business Council, which have no members.

It’s an interesting list, in an interesting column. Ms. Folbre appears to find a connection between local and liberal, painting it in opposition to global interests represented by the U.S. Chamber of Commerce. “The resulting divergence in economic interests” between local and global companies, she writes, “is driving new political alignments.”

But is it? Among the issues she cites is the ability of states to collect sales taxes from online retailers that are based out of state, and in fact the Marketplace Fairness Act now seems likely to pass the Senate very soon. But Internet tax fairness, as its proponents call it, is not necessarily a battle between liberals and conservatives, although more conservatives tend to oppose it. One can support the Marketplace Fairness Act, or any number of measures intended to strengthen small, independent businesses, and still oppose, say, the Affordable Care Act or higher taxes on the wealthy. To complicate matters further, it’s not necessarily a local-versus-global issue either. Much of the backing for the Alliance for Main Street Fairness, the chief lobbying coalition for the Marketplace Fairness Act (and unrelated to the Main Street Alliance), has been supplied by national and international big-box retailers that are anathema on Main Street: Wal-Mart, Target, Best Buy and Home Depot, among others.

Perhaps the emergence of these groups simply reflects that liberal activists — and business owners — have styled themselves in a way that they hope taps into the way small businesses resonate with many Americans. As Ms. Folbre puts it, “We think of small-business owners as men and women who invest in their own communities, work in the same building as their employees, send their children to the same schools and walk their dogs in the same neighborhood parks.”

In any event, it may be a long time before these groups challenge the dominance of the conservative organizations. The groups she lists are all very small compared to the National Federation of Independent Business, which has 350,000 members, or the Chamber of Commerce, which has nearly three million small-business members, despite its often national and international orientation. (Many of those businesses — the Chamber declines to say how many — are actually members of state or local affiliates and may not necessarily buy into the Chamber’s politics. Indeed, Ms. Folbre notes that nearly 60 local chambers have withdrawn from the national organization.)

We’d like to hear from readers who have heard from some these new organizations. How did you find out about them? Did you join? Why or why not?

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Today’s Economist: Casey B. Mulligan: Health Coverage Worthy of a Senator


Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

To promote economic efficiency and the goal of universal health coverage, perhaps members of Congress should not be required to enroll in the new insurance exchanges.

Today’s Economist

Perspectives from expert contributors.

The Affordable Care Act of 2010 seeks to invigorate the nongroup health insurance market – that is, health insurance that people can buy without going through an employer – by creating and subsidizing insurance exchanges similar to the one created by Massachusetts in 2007. In addition, the law seeks to make health insurance affordable for middle-class families by having the federal government pay part of premiums and out-of-pocket costs, but only for people buying nongroup health insurance through the new exchanges.

A provision of the law known as the Grassley amendment requires members of Congress and their staffs to obtain their own health insurance through the exchanges. The amendment gives the authors of the law, and the authors of future tweaks of the law, a personal stake in the success of the plans to be provided through the new exchanges.

Because members of Congress are accustomed to high-quality medical care provided to them through federal employee benefit programs, one might expect that they would push for top quality care to be delivered through the exchanges too. That is one reason why an (ultimately unfounded) report that the Grassley amendment might be reversed prompted so much outrage. (What’s actually at issue is uncertainty over whether the employer contributions in the current health plan for those on Capitol Hill can be applied to coverage through the exchanges.)

But the possibility that middle-class families could obtain care that is both top quality – good enough for your senator – and subsidized creates a number of economic problems. It gives employers a stronger incentive to drop their coverage, because employers and their employees can take comfort in the prospect that the alternative to employer insurance is a health plan that is good enough for your senator.

If the exchange plans were good enough, people who are rushing to find a job, and people considering leaving their job, would no longer have to see employment as their only means of obtaining top quality, subsidized coverage. As a result, some of those would work less (see the Congressional Budget Office on some of health reform’s work incentives, and a 1994 explanation from Alan Krueger and Uwe E. Reinhardt).

The more attractive the subsidized plans are, the more people will join them, and the greater the costs to the federal government. If the Affordable Care Act proves to be too expensive, drastic steps may result, such as closing enrollment in the subsidized exchange plans or repeal of the law all together. Either result would mean that the law’s objectives would go unmet.

There is an alternative approach, pursued in Massachusetts, for those not covered through an employer, a spouse’s employer, or Medicaid or Medicare. They may be eligible to join one of several subsidized plans under the state’s Commonwealth Care program (most are operated by the Medicaid managed care organizations), but those are less desirable than the plans typically offered by employers. With that as the alternative for their middle-class employees, employers would be discouraged from dropping coverage. People would have an incentive to work, because that’s where the best plans would be available.

Massachusetts did not have anything like the Grassley amendment.

For these reasons, economists have long recommended that subsidized goods be of somewhat lower quality than goods available without subsidy. Massachusetts followed that advice, and found that (a) their health reform approach significantly reduced the number of uninsured and that (b) less than 10 percent of the people in Massachusetts whose family income fell in the subsidy-eligible range chose to participate in the subsidized plans.

Although politically incorrect and perhaps unfair, allowing members of Congress to keep their federal employee coverage might be the best thing for universal coverage and reducing the impact of the Affordable Care Act on the federal budget.

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