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The difference between being pro-business and pro-market

In the introduction to the Roosevelt Institution's 'Make Markets be Markets' report, Rob Johnson quotes Chicago University economist Luigi Zingales making an important distinction on the nature of lobbying.

Most lobbying is pro-business, in the sense that it promotes the interests of existing businesses; not pro-market, in the sense of fostering free and open competition.

Of course, pro-business lobbying cloaks itself in pro-market rhetoric, which makes things a bit confusing. Take the corporations arguing that the Affordable Care Act is wrecking their balance sheets. AT&T says it's writing off a billion dollars. Caterpillar took a $150 million hit. But what's going on here isn't a new mandate or a hefty tax, but the elimination of a subsidy that advantaged firms who provide drug benefits to retirees.

What happened was this: When George W. Bush and the Republican Congress passed Medicare Part D in 2003, they were presented with a problem: The fact that the government was now offering prescription drug coverage might encourage these companies to dump the prescription drug coverage they were already offering employees. So Congress gave them a kickback: Companies that provide retiree drug benefits get a subsidy of about $1,300 per retiree per year in order to keep companies from ending their retiree drug plans at once and dumping everyone into Medicare. This subsidy is not just tax free but also tax deductible. Let me make sure that's clear: Not only did companies get a subsidy, but they could also deduct that subsidy from their taxes. Sweet deal.

This looked a bit nuts in retrospect, so Democrats ended the subsidy's deductibility. Again, let's be clear: They didn't end the subsidy. And they didn't make it taxable. They just said that it couldn't be used as a tax deduction. And ultimately, this doesn't raise that much money: About $4.5 billion over 10 years (the sums look large on the corporate side because they're writing down the deduction's expected future value, not just its annual value). But oh, the hue and the cry. This is "a small measure of the destruction that will be churned out by the rewrite of health, tax, labor and welfare laws that is ObamaCare, and only the vanguard of much worse to come," fretted the Wall Street Journal's editorial page.

Huh. So the Wall Street Journal is terrified that ObamaCare will...end the deductibility of certain federal subsidies that helps perpetuate retiree drug benefits in the employer-based health-care system. To give you an idea of how such policies are normally viewed by free-market conservatives, the Journal's editorial page recently reprinted excerpts of speech Milton Friedman gave on health-care costs. "The best way to restore freedom of choice to both patient and physician and to control costs would be to eliminate the tax exemption of employer-provided medical care," Friedman said.

But free-market conservatism is no match for pro-business lobbying. And so today, the Journal is loudly defending the deductibility of tax subsidies for certain businesses, and those businesses are putting their muscle behind policies that advantage them rather than their competitors. That's all fair enough, but let's be clear: It is corporate welfare being defended, not the market.

By Ezra Klein  |  March 29, 2010; 9:10 AM ET
Categories:  Health Reform  
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Comments

I made exactly this point over the weekend:
http://quantchat.com/?p=430

Also see:
http://quantchat.com/?p=399

Posted by: kennethcheinecke | March 29, 2010 9:43 AM | Report abuse

Amen.

Posted by: luko | March 29, 2010 9:46 AM | Report abuse

The distinction can be further refined because only large businesses can afford PR and lobbying services. Small businesses sometimes see the benefit as well, but when it comes to tax deductions that overwhelmingly favor size, their interests aren't being served.

Posted by: etdean1 | March 29, 2010 9:50 AM | Report abuse

I was talking to a libertarian lobbyist at the MN state capital who made the exact same point, but added that his favorite politicians are Democrats, because they like good policy (and are open to considering libertarian arguments against over-licensing professions, tax-subsidies, local land use craziness, etc) whereas Republicans only like to protect businesses' pocketbooks instead of supporting open markets.

Posted by: Chris_ | March 29, 2010 10:01 AM | Report abuse

I suppose people have said that reform is wrecking the balance sheets of corporations, but I haven't read AT&T or the other *saying* such things. They are merely writing down the charges that they *must* take.

What *is* emblematic of the wholesale disgrace steaming out of health care reform is that Waxman and Stupak have now *summoned* the respective CEOs to his stupid, corrupt, political show theater. We no longer live in a free country, by any stretch of the imagination.

Posted by: msoja | March 29, 2010 10:07 AM | Report abuse

As I posted on my own blog, the actual impact to cash flows will probably be more like a few million dollars per year in increased taxes for AT&T. As you intimated in your post, the $1 billion charge is the estimated present value of this modest increase in taxes over the entire lives of AT&T's retirees. And AT&T took the biggest hit on this accounting issue because they cover the most retirees - the impact to other corporations is modest.

Posted by: weiwentg | March 29, 2010 10:09 AM | Report abuse

Liberal justification is nice!! Remember come November its about the economy. Were those jobs made under "false" market pretenses not real?

Posted by: visionbrkr | March 29, 2010 10:19 AM | Report abuse

I think it's fair to say that what business spokespeople mean when they talk about "competition" is quite different from what economists mean when they talk about competition.

Posted by: bdballard | March 29, 2010 10:20 AM | Report abuse

Chicago University? C'mon: it's the University of Chicago. That would be like saying the University of Princeton. I have to defend that, since my son is a doctoral student there (not in economics). To be specific though, Zungales is not at the (infamous) U of C economics department but the School of Business (whence Austan Goolsbee, as well).

Posted by: JJenkins2 | March 29, 2010 10:21 AM | Report abuse

Companies like GE said they will not write down costs of the new health care system.

As Waxman points out, companies like ATT are supposed to se rate reductions as well as subsidy reductions, so the fact they are writing down costs of the new HCR are indeed suspicious. Congress should investigate ATT and Catepillar. I may even drop ATT as a carrier, though I would dearly miss my iPhone.

Posted by: Lomillialor | March 29, 2010 10:22 AM | Report abuse

Regarding subsidizing big business, this article claims that only 14 cents in every federal subsidy dollar for medicare advantage actually goes to the medicare policy holder. The rest goes to the insurer.

http://motherjones.com/kevin-drum/2009/09/who-benefits-medicare-advantage

Posted by: Lomillialor | March 29, 2010 10:24 AM | Report abuse

What JJenkins2 said. You might was well call Berkeley, California University.

Posted by: leoklein | March 29, 2010 10:29 AM | Report abuse

Similar to the difference between Pro union and pro employee

Posted by: visionbrkr | March 29, 2010 10:32 AM | Report abuse

@Lomillialor: "Congress should investigate ATT and Catepillar."

I'm not sure, after a victory on the healthcare front and moving forward with recess appointments, it will be a good idea for Democrats to selectively target for investigations (which will be called "political witch hunts") those corporations that have the temerity to suggest that they believe HCR will cost them money.

As for losing your iPhone, I agree. I don't seriously look at other carriers, because of my iPhone, but I have generally been underwhelmed with AT&Ts service. Once the iPhone is available on other carriers, I'm going to look seriously at moving. No matter what they write down on HCR.

Posted by: Kevin_Willis | March 29, 2010 10:36 AM | Report abuse

"It is corporate welfare being defended, not the market."

I'm no longer convinced of the usefulness of this distinction. There used to be, I believe, a subset of libertarians who would argue that externalities, such as environmental costs of production and disposal, be dealt with via market-based solutions (cap and trade, being one). Honestly, I've never met one of those libertarians, so I can't say whether such a creature ever existed.

The only free-market defender we ever hear from anymore is one that prefers to simply ignore the problem of externalities altogether. And such a free marketer is nothing more than a corporate welfare defender.

In other words, the true free marketer doesn't exist, so why pretend otherwise? It is just a brand label, after all.

Posted by: slag | March 29, 2010 11:19 AM | Report abuse

kevin

I agree I shouldn't have used the word "investigate". I didn't intend to suggest a full-blown criminal investigation.

I should have said something like Congress needs to seriously look into these practices and, if unwarranted, put pressure on these greedy companies to do the right thing.

Now, if you also disagree with my clarification, then too bad. ha ha

Posted by: Lomillialor | March 29, 2010 11:25 AM | Report abuse


In the case of AT&T, Verizon, John Deere, etc “Corporate Welfare” was created to keep the number of individuals off the federal government drug program and therefore be less of an expense for the government. Close the “loophole” but it has a consequences: on the corporation’s ability to provide a product and make an income AND to the individuals who will realistically lose insurance coverage.

The SEC requires corporations to file information like this to their shareholders. That is the law. Waxman and Democrats are hypocrites to be shocked about the impact on health benefits in corporations. The only reason they are having this hearing April is to bully, intimidate, and marginalize. That is what Democrats do best.

Congress in writing and approving this legislation made lots of deals to unions, corporations, and political allies. So please do not be so sanctimonious about companies like ATT, Verizon, John Deere stating the impact on them. This is called shooting the messenger due to negative news.

Posted by: debmat511 | March 29, 2010 2:17 PM | Report abuse

There is an assumption here that pro-market is good for consumers or for people other than a few established businesses. I'm not so sure that free markets are necessarily the universal good that is assumed here. In some sectors, NOT having a free market is better for consumers and for businesses.

Businesses also have to make a profit to survive, hire new workers, pay their workers decent salaries etc. In your theoretical absolutely free market, profit margins are zero or near zero and many businesses are teetering on the verge of going under. An absolutely free market is a bonanza for consumers but a hell for both businesses and workers.

I am not in favor of crony capitalism either but the ideal of the free market that is propounded both on the so called left and the right is way, way over-sold.

Posted by: michaelterra | March 29, 2010 2:30 PM | Report abuse

Ezra- are you being willfully obtuse here? The 2003 MMA provided this subsidy to companies to encourage them NOT to dump all their retirees onto Medicare Part D. In other words, the gov't was paying about 1/3 (or less) of drug coverage for the retirees insead of paying 75% of the total if these retirees were dumped onto Medicare. What do yout think will happen now? Well, I think companies like Deere and AT&T will rethink even giving their retirees any drug coverage at all. On the margin, some companies will dump retirees onto Medicare now and more will do it in the future. But of course, the CBO does not score this behavior.....

Posted by: MBP2 | March 29, 2010 3:31 PM | Report abuse

Just to be clear, a tax deduction is when you are allowed to reduce the amount of your taxable income. According to this article, under the original plan, the companies received a subsidy and then simply were able to reduce their taxable income by the amount of the subsidy (which would make sense, why would the government give money to the companies only to take part of it back again by taxing the money they gave it, it would be like making people pay taxes on the money they receive from Social Security). This article then suggests that the Democrats adjusted the plan so that now the subsidy is also given, and also not taxed i.e. not included in taxable income....which would be the exact same thing as it was before. There is something wrong with this article.

Posted by: saq5 | March 29, 2010 3:52 PM | Report abuse

"We no longer live in a free country, by any stretch of the imagination."

This is how msoja describes a the United States of America expressing its will and providing for the general welfare of its people, through the constitutional process of decision-making by democratically elected representatives.

It is puzzling that msoja spends so much time wasting his breath at a public policy blog, since he does not believe in government, let alone public policy, or even the US Constitution.

He belongs in a far better place like Somalia or Yemen, places which have no functioning government to steal from him and crush him with their tyrannical mob rule. But apparently msoja lacks the intellectual honesty to migrate to such a place. Our favorite rural anarchist prefers to mooch off of the stolen goods of American public works, and endlessly pontificate his boring rants about his bondage under the yoke of society.

Posted by: Patrick_M | March 29, 2010 7:20 PM | Report abuse

Apparently you don't understand the economics of the drug subsidy that is given under Medicare Part D. The subsidy was a win-win situation for the government and the companies. It gave the companies an incentive to keep their prescription drug benefit under their health and welfare plans instead of dumping all their partcipants onto Medicare. In fact, even with the subsidy, companies are already paying 72% of the benefit. Now if a company determines that losing the tax-free treatment of the subsidy makes it no longer economically advantageous to support the plan, they will dump the plan and all participants will be moved over to Medicare. At that point, instead of paying only a 28% subsidy, Medicare will now pay 100% of all costs.

I don't know about you, but I'd rather pay 28% of the costs rather than 100%.

Now are the large corporations playing a game of chicken with Obama? Maybe, but if they dump their OPEB plans, Medicare will just get a huge influx of new participants without a corresponding increase in revenue.

Posted by: heffer32 | March 30, 2010 9:30 AM | Report abuse

So this is some kind of great insight: pro-market and pro-business are not the same thing? This is THE libertarian position. What's most abominable about this is not the posturing of the WSJ editorial pages but the posturing of Waxman and his ilk to haul these CEO's in front of a congressional committee to "investigate" the write-downs. Maybe it would be simpler for Waxman to just propose legislation to repeal the laws of mathematics!

Steve

Posted by: FatTriplet3 | March 30, 2010 10:03 AM | Report abuse

Like a stopped clock you are right twice a day. This is one, what will be the next?

Posted by: kingstu01 | March 31, 2010 2:33 PM | Report abuse

"Democrats, because they like good policy (and are open to considering libertarian arguments against over-licensing professions, tax-subsidies, local land use craziness, etc) whereas Republicans only like to protect businesses' pocketbooks instead of supporting open markets."

Is this a joke? Take a look at states where Democrats hold the majority (i.e. California and New York) and you will find the most heavily licensed, taxed and regulated economies.

Posted by: kingstu01 | March 31, 2010 2:35 PM | Report abuse

kingstu, take 2 seconds out of your day and do a quick search of state gdp per capita.

http://en.wikipedia.org/wiki/List_of_U.S._states_by_GDP_per_capita_%28nominal%29

do you see a trend where unregulated red states dominate everyone in their economies? is nyc some sort of dystopia of over-regulation? of course not. subtracting out the oil oligarchies (alaska), the blue states have all the quality of life measurements and all the wealth. the red states don't.

Posted by: Chris_ | April 1, 2010 10:48 AM | Report abuse

... besides, it's not really "regulation" we're talking about, anyway. Red states are far from "free markets..." -->

I could point to Alabama farm subsidies or any other market-altering regulations that the GOP has no problem with. And that's the thing: the GOP mouths BS about markets only where it coincides with interests of big business. There's no concern when it conflicts with those interests (licensing, farm subsidies, endless trademark/patent terms, property tax breaks to attract business, prescription drug benefit, no-bid contracts, etc).

So it's extremely dishonest for the GOP to blather on about regulation, etc when both sides are bad in their own ways. HOWEVER, it still seems as if the markets in your "over-regulated" states still do far better.

Posted by: Chris_ | April 1, 2010 11:02 AM | Report abuse

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