Ponnuru: Conservatives’ income equality argument pure tripe

Congratulations! The cost of your health insurance is increasing.

What? You don’t think that’s a reason for celebration? Good, you’re avoiding a mistake that’s far too common among economic analysts, especially Republicans.

Academic studies and news media regularly report that in recent decades the middle class has been stagnating economically. Conservative and libertarian analysts often downplay these stories by saying that while wages for people in the middle of the economic spectrum may look flat, their total compensation has been rising steadily.

So, for example, Michael D. Tanner of the Cato Institute, trying to present a more optimistic economic picture, recently observed that “incomes among lower- and middle-income workers have been shifting from cash wages to non-cash benefits such as health insurance and pensions.” Count those benefits, he added, and “inequality may not be growing at all.” A recent study reported that median household income had risen only 22 percent from 1979 to 2007. An article in National Review, the conservative magazine where I work, responded by noting that using a broader measure of income raised that number to 46 percent. That broader measure counted health benefits.

Excluding such benefits when measuring inequality, writes Ron Haskins, a conservative scholar of social policy, “is roughly equivalent to estimating the size of a city by counting the names in the phone book, but ignoring all names that begin with ‘R,’ ‘S,’ and ‘T.’”

A Problem

Conservatives are right that trends in total compensation look better than trends in wages. But that’s not a reason for complacency. It’s a problem. What the numbers mean is that increases in health-care costs have depressed wage growth, and sometimes kept wages from rising at all.

If there’s a consensus among health economists about anything, it’s that employer-provided health benefits come out of wages. If health insurance were cheaper, or the marketplace were structured so that most people bought health coverage for themselves rather than getting it with their jobs, people would be paid more and raises would be higher.

If people consciously decided to spend most or all of their pay increases on health care, that would be one thing. They don’t. Current policies elaborately disguise how much health coverage costs people. Because the federal government taxes wages but not health benefits, employers provide more of the latter and less of the former than they otherwise would. Most people have no idea how much money they have forgone in wages because of those benefits. They never see the money.

Health benefits are, of course, valuable to people, and the increase in their cost over the last generation — which those statistics on rising compensation show — partly reflects that medicine can do more than in the past. It also reveals a lot of waste and inefficiency, however, rather than increased well- being.

The less people’s wages rise, the less they feel they’re getting ahead, regardless of what’s happening to their health premiums. During the middle of the last decade, conservatives talked about “the Bush boom” and wondered why it wasn’t more widely appreciated. One reason: Wages were flat even as compensation rose. Because conservatives didn’t see the importance of cash wages, they misunderstood the politics of the economy. Flat or slowly rising wages have probably also reduced public support for useful reforms such as freeing trade and cutting corporate-tax rates.

Health Inflation

The research that conservatives cite, in other words, doesn’t show that wage stagnation is nothing to worry about. It helps explain a troublesome trend. If you ignore the role of health costs in suppressing wage growth, you might be tempted to rely too much on other explanations, such as a technology slowdown or the decline of unions. The data also make clear that reducing health inflation would go a long way toward boosting wages.

President Barack Obama’s health-care law is supposed to bring costs down, although there is reason for skepticism. Conservatives have their own ideas, but Republican politicians haven’t done much to advance them, partly because they haven’t paid much attention to the link between health costs and wages. (In fairness, Democrats sometimes get this link wrong, too.)

Conservatives shouldn’t say that the wage-stagnation problem is an illusion because health benefits have been rising. They should say, instead, that the problem is real and that surging health costs are a major cause. The American dream isn’t to pay ever-higher health premiums.
–Bloomberg News–

(Ramesh Ponnuru is a Bloomberg View columnist, a visiting fellow at the American Enterprise Institute and a senior editor at National Review. The opinions expressed are his own.)