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Saturday, November 14, 2009

Why McCain was right about health care reform: Tax subsidies for employer-provided health benefits & corporate feudalism

It is a familiar point that the keystone of America's corporate welfare state is the absurdity of employer-provided health care. The arrangement is absurd, because it ties health care to one's job, impeding the mobility of labor, forcing employers to delve into social controversies over (for instance) whether to provide same-sex health benefits, and leaving the unemployed, the under-employed, and those employed by small firms uninsured. We long ago got rid of most company towns on the theory that one's boss ought not to be one's landlord. Employers do not arrange meal plans for their workers. Employers do not buy our clothes for us or choose our kids' schools. Why, then, should they choose our insurance plan?

Like many absurdities that are difficult to eliminate, employer-provided health care is a product of pure accident: In 1943, the War Labor Board tried to assuage union demands for wage increases beyond the 15% hikes allowed by the Board's "Little Steel" formula by exempting fringe benefits of health insurance from wartime wage controls. The Board's theory at the time was that this concession would avoid wildcat strikes during wartime while keeping down inflation. But, along with the 1942 Revenue Act's provision exempting funds for employer-provided insurance from the excess profits tax, the WLB's decision created enormous incentives for employers to get into the health care business. No one at the time gave a thought to the idea that employers' controlling medical care might be a sort of corporate feudalism, tying workers' rights to social services to their jobs like a serf is tied to the lord's land. The corporate financing of health care had virtually no support from unions: Both the AFL and the CIO wanted health care to be funded by the feds. But the CIO's ability to win concessions on health benefits from big employers during the 1945-46 wave of strikes lulled unions into the complacent belief that they need not lobby hard for national health insurance because they could get the private version through collective bargaining.

With the flush '50s far behind us, this naivete now seems as quaint as flannel suits and fedoras. So when McCain campaigned on a platform of eliminating the tax exemption for employer-provided health benefits, I applauded the guy for courage and candor. And when Obama played the anti-tax card, denouncing taxation of health care benefits as "the largest middle-class tax increase in history," I cringed at his demagoguery. Of course, he had to back-pedal after he won, but the rhetoric haunts the debate: Unions are aggressively defending the tax exemption against the Senate's effort to kill the beast.

Is there any serious case for exempting employer-provided health benefits from taxation any more than any other in-kind benefit -- housing, food, clothing, transportation, etc? Or is this simply another instance of the immortality of every mistake that has lasted long enough to acquire a constituency?

Posted by Rick Hills on November 14, 2009 at 02:19 PM in Current Affairs | Permalink


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Rick: You say now you aren't primarily blaming unions, but in response to your post I wrote:

"So the lesson is that unions should have lobbied harder, earlier, for some form of national health care, and that right-minded people in this country should have and would have supported that?"

And then you responded, "Yep, that's the lesson, more or less."

Which made it sound to me as if you felt unions were the primary villains in the piece: but for their not-as-enthusiastic-as-you-would-have-had-it support, helth care would have passed. And in your original post and early replies, there was no mention of the active opponents of health care reform, like the AMA, insurance companies, and employers.

I'm glad that you've expanded your discussion. Labor history is better with employers included, and political history is better with both sides included.

As to your last question, counter-factual history is tricky, and while I do have a "union card" (PhD) in labor history, I'll admit that I haven't gone back and double-checked the Flanders-Ives bill for what labor might have liked or disliked about it, or how possible it would have been to pass. I will, however, repeat that post-war period was a tough one for labor's political agenda, what the inability to defeat Taft-Hartley.

Finally, I would not underestimate the importance of "voluntarism" in the U.S. labor movement, nor the role of law -- specifically courts -- in forging that voluntarism. As Willie Forbath has shown, labor in the mid-later 19th century was quite active in passing various types of social and worker-protective legislation, only to see much of it struck down by courts as unconstitutional. This, Forbath and others argue with some force, turned the labor movement away from statutory reform and toward voluntarism. Eventually the Lochner era ended and labor finally got the NLRA and FLSA passed, but there's a decent argument that labor had internalized lessons about the difficulty of legislative reform from earlier decades, and those lessons would influence strategy in at least the 1940s and 1950s.

Posted by: Joseph Slater | Nov 16, 2009 10:47:32 AM

Absolutely, Rick, I completely agree with your point about the craziness of providing a special subsidy for employer-financed benefits. But, at the same time, I do not favor eliminating the subsidy by itself without taking action that will protect employees (especially in the middle class) from bearing the brunt of the resulting system.

I don't believe, however, that President Obama played the role of a demagogue in attacking McCain's proposal. Standing alone, without meaningful health care reform, the elimination of the subsidy could have led to middle class employees bearing the brunt of health care reform (especially if employers responded to the elimination of the subsidy by refusing to sponsor health plans).

Quoting Scott Moss above: "I suppose yes, McCain was "right" about this issue in isolation, but his health care plan was so negligible-to-awful overall (i.e., in all other respects) that I have trouble conceding that he gets any credit on this one issue."

Posted by: Paul Secunda | Nov 16, 2009 10:37:35 AM

Two quick comments in response to Joe's and Paul's thoughtful remarks:

(1) Paul: I did not purport to defend McCain's health care plan across the board: I defended his proposal to repeal the tax exemption for employer-provided benefits. That exemption is senseless on two levels. First, an indiscriminate subsidy for health care is probably a bad idea, but, more to the point, it truly makes no sense to provide a discriminatory subsidy in favor of employer-financed but not self-financed health insurance. the burden of my post was that this discrimination in favor of corporate feudalism -- the provision of in-kind services contingent on continued work for a particular employer -- is simply nuts. That Obama would defend the exemption with anti-tax rhetoric that I associate with the most lunatic of Republicans is, I repeat, the height of demagoguery.

Do you disagree with this point about the craziness of providing a special subsidy for employer-financed benefits? All of your other criticisms of McCain's proposals are not germane to the point that I was making: Although they might be perfectly fair criticisms of McCain, they do not lay a glove on the point that Obama played the role of a demagogue in attacking McCain's one good idea with a lot of anti-tax hooey.

(2) Joe: I never blamed the unions for sinking Truman's and Wagner's bills. I did blame them for not backing such bills enthusiastically and for opposing other bills -- say, the Republican's grant proposal in the Flanders-Ives bill. I attributed their indifference to national health to their success in winning private benefits through collective bargaining. Put another way, because they felt that they could safeguard their own members, they decided to take a lukewarm stance in favor of benefits for the unemployed and the non-unionized. (Some like Lewis opposed national health insurance out of a sort of voluntarist principle). No surprise that unions act like any other interest groups, protecting dues-paying members at the expense of others: That's what interest groups do.

I never argued that unions were "primarily" responsible for health care's defeat: Chalk that defeat up to the AMA, to NAM, and perhaps -- if Jennifer Klein is correct -- to private insurance companies. Instead, I made a very narrow point: Unions' self-interested embrace of employer-financed benefit plans contributed to the defeat of the various proposals for a saner health-care system in 1949, some of which (for instance, the Republican's own Flanders-Ives bill) would certainly have passed had the unions embraced them. Do you disagree?

Posted by: Rick Hills | Nov 16, 2009 9:47:17 AM

To follow up my previous post, Rick, if we are to assume that you think something like Truman's national health plan would have been a good idea, why not blame the folks who explicitly, actively, and effectively opposed it -- the AMA, the Chamber of Commerce, NAM, Republicans -- as opposed to trying to blame unions who were at least officially in favor of it?

Posted by: Joseph Slater | Nov 15, 2009 10:53:52 PM

Wow, a lot to respond to (from Rick, that is).

on the sidelines: grow some cahones, and if you are going to attack me without knowing anything about me as a teacher or scholar, do so without hiding your comments behind this veil of anonymity. Then we can engage on your asinine post.

Rick: My tone was supposed to be incredulous and not irate. I apologize if that was lost in translation. Also, I think novel was the wrong word - unconvincing was more what I was aiming for.

I appreciate your attempt to explain where you are coming from. But going back for one second to the object of your post, wasn't it to suggest that McCain had a better proposal on health care reform than Obama? I responded directly in my comments to why I don't think that that is the case and I still don't see any evidence that McCain's "no tax exemptions plan without a single payer system" makes any sense. Indeed, on the merits of the matter, I believe you and I are of the same mind in believing that elimination of the employer tax exemptions and the creation of a single payer system makes the most sense. If I am right about that, I find that interesting given your scholarly emphasis on regulatory decentralization.

On the historiography that you mention, I believe I am as familiar with it as much as you are (of course, neither of us have a PhD in labor or political history, though I have been teaching labor history for eight years now). I certainly get your point on unions not supporting national health care for various reasons in the 1940s and 50s, but on that point I would suggest that unions were last to the party as Lichenstein and others have argued (indeed, and probably not surpising to you, I don't find Brown and his "de facto closed shop" persuasive at all).

I think the relevant historical evidence suggest that it was actually employers and the government that were more responsible for the employer-provided health care system we have today than the unions. Employer and governmental efforts in this vein pre-date the Wagner Act and the formation of union strength in the 1930s. BTW, here's a good article on that history from The American Prospect from 1993: http://www.prospect.org/cs/articles?article=coming_unfringed. Also quoting NYU sociologist Beth Stevens, this article observes:

"We have, then, a history in which private employers invented the fringe benefit, government adopted their models for the public sector, and labor, representing the good worker, ultimately championed the result. The product is the work-based welfare state, an odd mix of public and private provision, including contractual benefits (like health insurance), statutory benefits (like unemployment insurance), and benefits that are both (OAI and private pensions). This structure fits well with an ideology that glorifies individual initiative in the private sector and mistrusts government provision. It is, as a Ford Foundation blue ribbon panel once described it, "the peculiarly American system of employment-related social welfare protection."

So, count me still unconvinced that the McCain proposal makes sense and that the relevant historiography supports your claims about unions (including the CIO) being primarily responsible for the current state of affairs with regard to employer-based healthcare and the existence of tax exemptions. No, I recognize that there were national health insurance plans going back to the 30's and 40's. I just think that given unions waning influence from the 70's forward that ERISA and its history better explain employers' primary role in continuing the tax exemptions for employer-provided health care schemes.

Posted by: Paul Secunda | Nov 15, 2009 10:46:27 PM


Organized labor in the immediate post-war period was trying -- unsuccessfully -- to defeat Taft-Hartley. Do you really think the AFL and CIO (then two separate and competing organizations) could have gotten national health insurance passed by the Congress that passed Taft-Hartley if unions had been less distracted / more enthusiastic about the subject? And given that large parts of labor have been in favor of national health for some time now (see, e.g., Reuther and the UAW), are you sure the blame should fall mostly on the shoulders of the labor movement?

Posted by: Joseph Slater | Nov 15, 2009 10:28:28 PM

Secunda wrote: Have you ever studied this area, Rick, besides the essay you referred to? I don't see such evidence on your faculty page. As someone who has studied employee benefits law for over a decade and who is the incoming chair of the AALS Section on Employee Benefits Law, I would suggest that you...

Since Hills is one of the nation's top public-law scholars and is widely published in fields related to the subject of his post, while Secunda is a little-known teacher at a mediocre school, obviously, Rick is right and Secunda is wrong. Moreover, since the AALS is well known as an organization of teachers, not scholars (see Solum for multiple elaborations on this), holding an AALS position signals nothing about an individual's scholarly stature, but everything about an individual's low opportunity cost of time. Thus, clearly Hills is right and Secunda is wrong.

On the second thought, strike all that. I am used to evaluating arguments on the merits -- the concept that's apparently lost on Secunda. He cannot address Rick's arguments directly, so he attacks his formal credentials to have a view... how dull, embarrassing, and unsurprising.

Posted by: on the sidelines | Nov 15, 2009 3:44:20 PM

Judging by your comment's irate tone, Paul, I guess that I stepped on your toes by opining on a topic without a union card in the relevant field. But my suggestion about the effect of the CIO's position on universal health insurance in the late 1940s, while perhaps mistaken, is hardly novel: It is familiar to anyone who has read the relevant historiography.

Historians and political scientists have widely acknowledged that, between 1945 and 1949, the UAW, UMW, and USW (under Reuther, Lewis, and Murray, respectively) opted for a system of private contractual benefits, giving lukewarm support to Truman's proposed health insurance bill providing universal coverage. Indeed, John L. Lewis, head of the UMW, actively opposed Truman's health insurance legislation because he preferred the UMW's own union-administered health and welfare fund. Likewise, the CIO opposed the Flanders-Ives bill of 1949 (a bill providing subsidies for the purchase of health insurance by everyone, union and non-union), because CIO unions were making big gains in negotiating company plans and had no need of a law that would eliminate the link between union membership and health insurance.

But don't take my word for it: Michael K. Brown, Bargaining for Social Rights and the Reemergence of Welfare Capitalism, 1945-1952, 112 Pol. Sci Q. 645 (1998) provides a fairly detailed narrative of the various union leaders' positions. There are other views, of course: The conventional Left view is that the CIO was forced by conservative forces into abandoning "social unionism" of national health insurance for the second-best option of "commercial unionism." On this theory, because Truman's national health insurance was DOA, Reuther, Murray, Lewis, etc, sensibly cut the best deal possible with employers. See, e.g., Nelson Lichtenstein, From Corporatism to Collective Bargaining: Organized Labor and the Eclipse of Social Democracy in the Postwar Era (published in The Rise and Fall of the New Deal Order, 1930-1980, at 122-52(Steve Fraser & Gary Gerstle, eds., Princeton, 1989)).

I think that Michael Brown effectively rebuts this theory, arguing that union elites actually wanted to tie their workers to particular jobs with the "golden handcuffs" of private benefit plans, because such a tie would increase workers' support for unionization and thereby promote a de facto closed shop. Incidentally, even those who buy the argument that anti-labor forces (e.g., NAM, the AMA, etc) doomed Truman's health insurance bill in 1949 seem to agree that the CIO's leaders erred in failing to support other bills on the theory that somehow private benefits plans would induce industry to embrace national health insurance. See, e.g., Alan Derickson, Alan Derickson, Health Security for All? Social Unionism and Universal Health Insurance, 1935-1958 , 80 J. Am. Hist. 1333, 1353 (1994)("By adhering to the flawed notion that social insurance would simply supplant private security provisions, unionists passed over viable legislative alternatives").

But, to my admittedly limited and amateur knowledge, no historian seriously disputes that union support for a system of private benefits obtained through collective bargaining weakened support for a national health insurance system for everyone. So do not accuse me of novelty: My position is conventional wisdom among folks with the requisite credentials.

As for your remarks about ERISA, I have to confess that I am utterly perplexed: What in the world has ERISA -- a law originally intended to control organized crime's influence on benefit trust funds -- to do with the 1940s debate over health insurance? Yes, I've read Jim Wooten's book on ERISA. (Indeed, I rely heavily on it in my own article against federal preemption). But Wooten's book is irrelevant to the tax exemptions for employer-provided health benefits that antedate ERISA by more than thirty years, being a creature of IRS rulings from the 1930s and 1940s. (The exemption was formally codified by the 1954 Revenue Act). I assume that you are not somehow suggesting that national health insurance was not on the Congress' agenda until 1974, when ERISA was enacted. To the contrary, FDR appointed an interdepartmental committee to propose a national health insurance program chaired by Josephine Roche in 1938, and Robert Wagner introduced a bill based on the committee's findings. The 1938 bill was sunk by opposition from the AMA, Henry Morgenthau, and the intractable recession. Wagner proposed another national health insurance bill (along with Murray and Dingell) in 1945, and Truman proposed a bill in 1949.

Given the irrelevance of ERISA to the genesis of health policy in the 1940s, it seems that both of us are trespassing on someone else's turf. You are a labor law guy who, despite being "the incoming chair of the AALS Section on Employee Benefits Law," apparently lacks any Ph.D in labor or political history. I am a blogger who perversely derives pleasure from annoying people who are easily offended by criticism of unions (a group that, in my experience, seems to include a large majority of the AALS Section on Labor Law).

So enough of this trying to crush each other with faux credentials. Instead, 'fess up that you, like me, have to rely on the historiography sans any mantle of scholarly authority. In this humble but liberating role of autodidact, I challenge you to cite something aside from your impressive but, alas, irrelevant cv. Find me one article arguing that the union pursuit of private benefit plans through collective bargaining did not at least distract the CIO from supporting Truman's health insurance bill. If you can do so, then I'll be happy to acknowledge my error in a new post.

Posted by: Rick Hills | Nov 15, 2009 12:47:00 PM

What a novel view of employee benefits law. Have you ever studied this area, Rick, besides the essay you referred to? I don't see such evidence on your faculty page.

As someone who has studied employee benefits law for over a decade and who is the incoming chair of the AALS Section on Employee Benefits Law, I would suggest that you read some of Prof. Jim Wooten's work on the history of ERISA and maybe then you will stop absurdly blaming the unions for everything that is wrong with the current health system.

For instance, you might learn that health insurance reform was an afterthought in 1974 when ERISA was passed, and that the primary focus of the tax exemptions initially was on pension reform, given the then wide-spread abuse of employers in handling employees' pension assets.

As far as McCain's plan, no praise there is deserved. He would have eliminated the tax subsidy which would have taken away any incentive for employers to sponsor health plans. Remember the whole ERISA system is voluntary. McCain's reform would have only made sense if the savings from the tax exemptions were plowed into a single-payer system. As far as I know, and unless Rick has other evidence that I am not aware of, McCain's idea was a non-starter (like a like of his other ideas - see Sara Palin).

Posted by: Paul Secunda | Nov 14, 2009 8:55:42 PM

I agree with much of this, except for the same-sex domestic partner part. I'm not an expert in this area, but impression is that companies offered same-sex benefits long before states recognized them because the issue was not political at all for them - it was good business. If they didn't offer such benefits, then they risked losing good workers to those companies that did offer them.

Posted by: Michael Risch | Nov 14, 2009 6:10:32 PM

Yep, that's the lesson, more or less.

Beth Stevens' essay, “Blurring the Boundaries: How the Federal Government Has Influenced Welfare Benefits in the Private Sector,” provides a nice account of how the CIO gave short shrift to "social unionism" in the mid-1940s, preferring to focus their energies on negotiating generous deals for their members. (John L. Lewis, in particular, refused to throw his weight behind plans for comprehensive insurance such as the Wagner-Murray-Dingell bill).

The CIO calculated that employers might back national health insurance to relieve the burden of their collective bargaining agreements. But the CIO did not count on the tax subsidy that greatly relieved that burden. Moreover, some "enlightened" employers like Marion Folsom actually the welfare capitalism inherent in CBAs, which gave employers more influence over labor relations.

But it is not too late: Unions could back a grand bargain in which revenue raised by getting rid of the preposterous subsidy for employer-provided (but not self-provided) health insurance would be re-directed towards a general health insurance system. Of course, this would require unions to care about the coverage (or lack thereof) of the non-unionized and unemployed.

Posted by: Rick Hills | Nov 14, 2009 4:50:17 PM

So the lesson is that unions should have lobbied harder, earlier, for some form of national health care, and that right-minded people in this country should have and would have supported that?

Posted by: Joseph Slater | Nov 14, 2009 3:03:03 PM

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