Krugman on the Cadillac-as-Chevy
A number of people have pointed to this Krugman post, in which he seemingly agrees with the excise tax apologists.
I think that states his position too strongly. What Krugman does is argue is that it makes sense to limit the tax exclusion for benefits. At the same time, he admits there are problems with imposing the excise tax as a flat dollar amount, not least because it’ll end up targeting older workers and those with chronic medical issues. In that stance, Krugman endorses a key point raised by excise tax critics–that it is taxing people who need the insurance, rather than just the affluent.
Here’s how Krugman weighs in on the Excise Tax Raise claim.
Second, there’s the argument that any reductions in premiums won’t be passed through into wages. I just don’t buy that. It’s true that the importance of changing premiums in past wage changes has been exaggerated by many people. But I’m enough of a card-carrying economist to believe that there’s a real tradeoff between benefits and wages.
Maybe it will help the plausibility of this case to notice that we’re not actually asking whether a fall in premiums would be passed on to workers. Even with the excise tax, premiums are likely to rise over time — just more slowly than they would have otherwise. So what we’re really asking is whether slowing the growth of premiums would reduce the squeeze rising health costs would otherwise have placed on wages. Surely the answer is yes.
I’ll come back to that, but first I want to treat his rebuttal of the third complaint about the excise tax–that it targets unions that have exchanged salary increases in the past for benefits–because I think it is illustrative to the question of the Excise Tax Raise.
The last argument is that this hurts unions which have traded off lower wages for better benefits. This would be a bigger issue than I think it is if the excise tax were going to kick in instantly. But it won’t, giving time to renegotiate those bargains. And bear in mind that this kind of renegotiation is exactly what the tax is supposed to accomplish.
Krugman suggests, I think, that the unions that will be disproportionately affected by this tax will have three years to negotiate new contracts that (presumably) take more compensation in wages and less in health care.
Nationally, one of the unions that will be most affected by this is AFSCME–national, state, and local government workers. The teachers unions are also likely to be affected.
So what do you think the chances are, in an economic environment in which many states are struggling to close budget deficits, in which states are cutting basic services and educational resources dramatically, that any contract renegotiation in the foreseeable future would involve a one-to-one swap of wages for health care costs or even any raise at all? What are the chances that elected government officials would give public employees salary increases when all their constituents were struggling, rather than putting that money back into the services that constituents need?
Not. Gonna. Happen.
In another economic environment, unions might be in a position to negotiate for raises to offset hits to their benefits package. But not in this economic climate, not these unions.
Which brings me back to Krugman’s take on the Excise Tax Raise.
Krugman starts by ceding that “the importance of changing premiums in past wage changes has been exaggerated by many people.” “The Shrill One” is being polite here in not naming names. But the report he links–the EPI report I’ve cited–introduces the claim this way:
Jonathan Gruber, an economics professor at M.I.T., argued in an op-ed in the Washington Post on December 28, 2009:
And when firms reduce their insurance generosity, they make it up in higher pay for their workers. We saw this in the late 1990s, when the rise of managed care temporarily lowered insurance costs, and wages rose in real terms for the first time in many years. But as soon as managed care was weakened and health costs rose again, we once again saw flat or declining real wages in the United States. (Gruber 2009)
The paper then goes on to name Ezra Klein and NYT’s David Leonhardt as the others making this claim.
In other words, Krugman starts by saying that Gruber and others are exaggerating the degree to which wage increases in the late 1990s were caused by a slowing rise in health care premiums. So Krugman’s rebuttal is, in part, a Nobel Prize winner affirming that the excise tax’s biggest boosters are overselling their case.