Washington Post Columnist
Wednesday, July 8, 2009 11:00 AM
Washington Post business columnist Steven Pearlstein was online Wednesday, July 8 at 11 a.m. ET discussing the myth of small business job creation.
Safety Harbor Florida: Why would not health care be considered as necessary OVERHEAD in our Society. With agreement on that....why is it not being considered as important and similarly run as our NATIONAL SECURITY...ARMED FORCES etc.... Federally run and funded through a normal TAX system. We can not defend ourselves if we are not a HEALTHY NATION?
Steven Pearlstein: Exactly. You know, the same arguments used by the small business lobby against any form of health care mandate could just as well be used for the requirement that they pay payroll (SS and Medicare) taxes, or contribute to state-sponsored unemployment insurance, or even maintain a safe workplace. Obviously, we consider these part of what an advanced civilized society offers its employees. In truth, they'd love to do away with those as well, using the same arguments, but they don't dare because of the political optics. But they are trying desperately to draw the line at health care. Nor do they mention that in recent years, their unemployment costs have declined in most states, their capital gains tax rate has declined and for many, their income taxes have declined as well at the state and federal levels.
Northville, N.Y.: Why do myths like the small business myth persist? Is it because there is no effort made to correct these misstatements when they are put into public discourse, like "our health care system is the envy of the world." It would make a great book for someone like you to debunk all the financial clichés that we all get fed every four years which are flat out not true. It might particularly help California!
Steven Pearlstein: This myth has a germ of truth attached to it, as most of these false stories do. If you look at the data in a certain way (net new jobs in two broad categories: businesses with more than 500 employees and under), and you look at a 10 year period, then you can show that "small" businesses generate most of the net new jobs. That doesn't mean only small businesses are generating new jobs -- it means that big businesses are losing lots of jobs these days as a result of technology and outsourcing, domestic as well as overseas. It also shows that Google in year 1 becomes Google in year 10, by the rules of these studies a "small " company (it was small in Year 1) that has now generated tens of thousands of jobs. There are other technical problems with the data. But the real problem is that it paints an untruthful picture, which is revealed when you look at the share of employment at any point in time accounted for by small and big firms. It's tilting smaller all the time, but very slowly, as I recall the last time I checked.
New York: What is your take on Matt Taibbi's article accusing Goldman Sachs of being complicit in every major financial bubble for, well, seemingly forever, including ruinous speculation currently driving the price of gasoline, in which the consumer is being gouged despite a fall in demand and an increase in supply?
Steven Pearlstein: I generally don't believe in conspiracy theories.
Boston Mass.: Don't we already have healthcare rationing by entities other than our personal doctors in the form of insurance companies deciding which procedures and drugs they are willing to pay for and which they are not?
Steven Pearlstein: There are all kinds of rationing going on in health care right now, but as you point out, it is hidden and not called rationing. We ration care by the ability to pay -- hence the uninsured or people who are insured who go without because of co-payments and deductible. That's the most pernicious. Doctors ration care all the time when they say no to patients who want something that the doc knows isn't useful or cost effective. Insurance companies do the same thing. We ration by geography -- certain services just aren't available in some areas that are in others. We ration by who you know -- you don't get into clinical trials often without access to a fancy or well connected doc. So the issue isn't whether there is rationing going on -- there is plenty of it. The issue is whether it is good rationing, that is, whether it is rationalizing the use of a limited resource based on hard evidence of cost and benefits. And the answer to that is clearly not, as pointed out again quite artfully this morning in David Leonhardt's wonderful column that began on the front page of the New York Times. Check it out.
Atlanta Ga.: The 'employer based' health care is the worst model ever. Why are we planning on keeping it in any way? It's a terrible idea to emulate.
Many people who work for small businesses also have a spouse that works for a company that has health insurance.
Seriously - why ARE we even considering forcing businesses to do MORE of what they don't want to do? Are there not enough laws and regulations trying to put our businesses out of business already?
Why not move away from what we have - which isn't working? Or is it because we want people to think more and more that someone else should take care of things (businesses/the government) rather than having people take things on themselves, and be responsible for themselves?
It's a terrible idea. If people who worked for a company that had health care coverage wanted health care coverage...they'd find a new job.
Steven Pearlstein: Its hard to defend the employer based system in theory -- we would never construct it that way today if we were starting out. But moving away from it quickly is simply a political non-starter. There are just too many people and interests who are satisfied with it and will be frightened away from a radical change. That's a political judgment but it has been made by some pretty good politicians, and I'm not going to second guess it. The small business lobby would dearly like us to move away from it because they really don't want to have anything to do with their employee's health care. I understand that. But unless we are going to move away from the current system, everyone's got to play or you get unacceptable distortions in the economy and unacceptable distortions and the health care system. If small businesses can compete and win on a level playing field, great. But if the only reason they now win is because they save by not offering health insurance to their workers, then that doesn't sound to me like a satisfying or fair or economically superior outcome. What if they were to say, "I can't compete if I have to provide a safe work environment for my factory workers?" Would we find that acceptable?
D.C.: One conservative argument on health costs that I think is actually plausible is that consumers of health care are insulated from the true costs. Personally, I have no idea how expensive my health plan is -- I suspect it is quite pricey. If we continue along with employer-based health care, isn't this going to continue to be a problem?
Removing the tax exemption might help. But even so, there is a big psychological difference between buying something yourself (and writing a check for it) and having it bought for you (and seeing a line item on your pay stub telling you what someone else paid). Functionally they may be the same, but we know that people are not truly economically rational actors.
Steven Pearlstein: All true, in theory. And I very much favor more consumer participation in decisions about which plans to chose and what services to consume, through premium sharing and deductibles and co-pays. That has helped to keep medical costs from rising even more than they do. It would also be good if insurers let consumers know how much they, the insurers, are paying for something, so consumers experience the full sticker shock. After all, they are paying for the full costs through their premiums -- not just their out of pocket premium contributions, but the foregone wages they have given up to get the employer share of the premium contribution.
Bowie: Last I heard (ok, my source for this is a Jeopardy question, so maybe I'm off-base) Wal-Mart advertizes that 90% of their employees have health insurance, but only 47% of them get it through the company.
My aunt doesn't get health insurance through her employer, because she's covered by Medicare and works for a company that hires seniors specifically for that reason. For a couple of years I didn't get health insurance through work, because I got it through school. At one point my wife didn't, because she was covered by mine.
Since many of small businesses employ of people who are not a family's principle source of income, would this proposal streamline the redundancies of birthday rules, and just make sure everyone's covered at least once?
Steven Pearlstein: There are lots of ways to handle the question of which worker (and which workers' employer) handles the cost of a family policy. I'm really not too up on that, I'm afraid, although I should be. But I don't think it is an unsolvable issue.
You are right in saying that a lot of employees who are offered insurance by their employers don't take it, and some of those have no insurance at all. They are mostly either too poor to be able to afford it, or so young and healthy they think they don't need it (until, of course, they do). That's why you have to have both an employer mandate of some kind, to level the competitive playing field, and an individual mandate.
That said, you don't have to make the employer mandate very onerous, particularly for the smallest businesses. You can allow them to pay as little as half the premium, and you can even give them subsidies for low income workers through the exchanges or tax credits. The idea here isn't to sock it to small businesses. It is to level the competitive playing field, get everyone covered and everyone into large insurance pools. And this can be phased in over a number of years. But eventually it needs to be done.
New York, N.Y.: Steve, You make some good points, but I object to the employer mandate for different reasons, both from the employer and employee perspective. From the employee's perspective, when your employer provides health insurance, the employee is captive to the employer's choices. The employee must accept the employer's choices, whether or not they are suitable for the employee. Also, if the employee loses his job, his health insurance could go too. From the employer perspective, why should it be the employer's responsibility to provide health insurance any more than it would be the employer's responsibility to provide housing, food or clothing? The only answer I can think of is that the employer based system is entrenched. Separately, what are your thoughts on taxing health benefits? I'm willing to pay taxes on health benefits to help the uninsured, but it seems we're going away from that angle. On the one hand we want to provide benefits, but we're unwilling to sacrifice.
Steven Pearlstein: I think you say it well -- the only reason for continuing with an employer based system is that we have it now. But we can begin to migrate away from it through the exchanges, which is really one of their benefits. Because if the exchanges offer lots of choices of plans at good prices, which is the hope and goal, and the exchanges are open not only to individuals but to companies of any size, then in time I think you'd see that more and more people and companies would move to the exchanges, and companies would simply give their employees a voucher to use to go buy a policy from the exchange. And the more people that use the exchange, the better deals it would get, the more efficient the system would be in terms of administrative costs and the fairer the premiums would be. But that migration would be gradual and voluntary and no disruptive.
As for tax treatment of health benefits, economists are virtually together on this one: the best solution is the one proposed by John McCain, and others before him: A fixed dollar tax credit for anyone with a policy, while making the employer contribution a taxable benefits. For the typical worker buying an average policy, the credit would offset the increased taxable income -- it would be a wash. But for high-bracket workers, it wouldn't. And for people with gold plated plans, it wouldn't. Better still, you could let the credit grow only with the cost of living, rather than the much higher inflation rate of health care, as one way to keep the pressure on health inflation.
Las Vegas, Nev.: I saw that the hospital associations cut a deal with the Senate on the health reform bill. When these deals are cut, is it the case that the hospitals (or whomever the special interest is), are assured that their revenues and profits will actually go up and that they won't feel any pain? Otherwise, wouldn't the hospital associations do everything in their power to scuttle a bill? These "deals" never seem to be in the public interest.
Steven Pearlstein: It's complicated. It could be they think they will still be better off from a reform deal in which they give up something over here (certain reimbursements for free care, for example) in exchange for something over there (47 million more Americans with insurance). They also realize that if they don't play ball this time, they could wind up with an onerous bill that would really be bad for their interests. So the calculations are both financial and political.
Washington, D.C.: Steve thanks for being here. What's your take on the talk about a second stimulus package? I understand the short-term math on the GDP, but I don't feel as if Krugman, et al, are being completely honest with people about the long-term math on paying that debt off. Am I being a budget scold?
Steven Pearlstein: I don't think we need to go to a second stimulus since the first stimulus is really just getting into the economic bloodstream. A second may be necessary, but I don't think we know that yet and won't until the end of the year. As for the deficit, we shouldn't be paralyzed by it but its is a serious issue over the medium and long term and we will deal with the consequences of it one way or another -- inflation, higher taxes, lower incomes.
Arlington, Va.: Steven,
I run a small professional consulting business, and I thought I would give you my perspective on health care. As a "professional" level small business, we have to offer health insurance to attract prospective employees. However, I personally cannot wait for an alternative to employer provided health care. Here's why I dislike the current system:
1. It's a huge hassle. As a small business, I can't afford to hire a specialist to manage my employee health care. Instead, I have to muddle through the various sign-ups and forms myself (an area in which I have little expertise). For a larger company, with a larger pool of employees over which the costs can be spread, it is financially advantageous to have a specialist in-house.
Dealing with employee turnover is also a hassle (managing eligibility, employer vs employee contributions, COBRA payments). I can imagine that for a business with high turnover (like a restaurant), this would be prohibitive.
2. Cost increases. Health care costs increase faster than any other cost (and greater than inflation). This means that I have to give my employees a significant raise each year, just to keep their health care the same. The worst part is that employees don't truly recognize this, and don't mentally work that back into their understanding of their total compensation, so I don't get "credit" for it from them. Further, as a small business, I cannot manage rates by negotiating with the insurance companies the way larger organizations can. I don't have the time, expertise, nor "weight".
3. Appropriateness. I do not purchase my employee's car insurance or house insurance. It doesn't make any sense that I have to be involved in their most personal insurance, for health. We have a single health plan (for simplicity - again, for larger companies it is easier to offer multiple plans). However, this plan is not the best fit for everyone. Some people would prefer a plan that covers one type of doctor, other people prefer different coverage. Some employees are single, some need family coverage.
I would much prefer just to raise everyone's compensation by the amount that I pay for health care, and have them go out and get their own health care, or have them pay the government for their health care. This would free me from the administrative burden, give them more health-care choices appropriate for their own situation, and simplify our cost model. Because the US is primarily an employer-driven health care market, there are few choices for individual purchases, and asking employees that they handle their own insurance is not generally accepted by employees and prospective employees.
In my view, regardless of who is paying, the costs will still be in the system, and could be equivalent. Let's simplify the system, enable coverage for everyone (whether or not they are employed), and get employers out of it (if they want).
Steven Pearlstein: All good points. What I'd say is that several of the reform proposals envision allowing you to do what you propose: pay a "tax" equal to 8 percent of payroll and apply that to your employees purchase of heatlh care at the exchanges, which do all the work. The most you'd have to do is take out a payroll deduction and send it to the exchange. How's that?
Falls Church, Va.: As a small business owner I was honored to be able to offer health insurance to our employees. The cost was significant, but I thought it was an important factor in being able to recruit top talent. Many rinky dink competitors don't offer it and our BCBS plan made a difference on a number of key hires. One key factor in this process was that our employees on average were very young. The costs would have been close to double if we averaged just 2 years older. I don't buy the stifling business argument at all and I have been there. First off it was a small percentage of my profit and an investment in my most valuable asset - my employees. If that's not true of your company the problem isn't health care. Secondly, according to my calculations the government plans are actually more affordable and would have made this decision even easier. Thanks for trying to debunk a bunch of profit motivated dribble on this subject.
Steven Pearlstein: The big, big advantage to small business from the exchanges is that they would no longer be subject to broker's fees, to overall higher rates for insurance and to the risk of big increases in their insurance premiums if the composition of their workforce changes or a few people get very sick. That's the beauty of having a big risk pool with community rating, to use the technical terms. What I should have mentioned this morning is that half of all small businesses provide health care, and these companies would be a huge beneficiary of the exchanges by way of lower premium costs and more choice for their employees and less hassle for them.
Evanston, Illinois: Hey Steven, what do you make of the proposed crackdown on "speculators" in commodity markets? Given that the future is inherently uncertain isn't everyone in the futures market a "speculator". How does limiting the number of traders and liquidity improve price discovery? I didn't hear anyone complain about "speculators" driving the price of oil down. Isn't this a witch hunt?
Steven Pearlstein: It's a witch hunt for real witches. There is too much speculation in these markets and it has very bad real-economy consequences. It is unnecessary. And I'm real glad the government has now set aside the deregulatory dogma and begun to deal with it.
Arlington, Va.: No one is asking the obvious question here (which means you probably won't pick this one), since you seem to want to disagree with what countless economists have said for many years... Where are you getting your data, since you said you didn't have enough room to include? You are fine sourcing BLS/Census data to make your supporting points but you think when it comes to their small biz data that it is hooey? I'm confused.
Steven Pearlstein: I think I've already answered that in the first question. The data is firm-level data that comes from employers SS or unemployment insurance filings, as I recall (it's been a long time). The problem isn't the data source. It is how it is interpreted.
Washington, D.C.: What data source do you use to support your claim that small firms are not major job creators...that small business job creation is mostly a job transfer from large to small businesses?
Steven Pearlstein: There is no data source for the job transfer. It is an observation. We know about outsourcing, we know it is a major source of job reduction at big firms, and if you do any random look at supply chains, you'll see that lots of small firms have big companies as their customers. I didn't put a number on it because I don't have one, although there would be a good Ph.D. thesis to try to nail that down. But just because there isn't a number doesn't mean this is not a significant factor.
Chicago, Illinois: In saying that small business should be required to do their part and provide healthcare falsely assumes that small businesses and large businesses are on a level playing field in purchasing or providing healthcare for their employees. This is totally false. Large employers, especially those that can self fund their healthcare policies don't have to deal with any of the state regulations, aka costs that small employers face. Small employers have very few choices in the marketplace and the choices they have are ridiculously expensive. Something needs to be done to lower the costs and improve the quality of options available for small business.
Steven Pearlstein: The whole points of the exchanges is to put them on the same playing field. But having done that, it seems to me rather selfish of small business to then say, well, we still don't want to pay or play.
Richmond Va.: The funniest thing I heard on the radio last week was some conservative saying "do you want big bureaucracy making your healthcare decisions?!", trying to be really threatening and scary. HELLO! That's how it is NOW ya dummy. Ever heard of an HMO?!
Steven Pearlstein: Indeed.
Columbus, Ohio: I don't understand how you expect small businesses to survive if you think we should just magically be able to afford to pay for healthcare costs? Start-ups often don't make money in the first few years of business? How will anyone in this country be able to start a business when the taxes, regulations and mandated healthcare costs are such a burden?
Steven Pearlstein: There are lots of things that start ups that lose money have to pay for. One more thing will mean it will take them a bit longer to break even. But why should the rest of us have to subsidize their startup by taking care of their employees for free at the emergency room, which is paid for by taxpayers and everyone who pays for insurance. How much subsidy do you think the rest of society should give every startup? $1,000 a year? $10,000? $1 million? Should we exempt startups from payroll taxes? Minimum wage laws? Gee, if all we cared about was making startups profitable in their first year, we could probably reduce their costs to zero, and there would be literally millions of new startups. Would that make for a stronger economy? I somehow doubt it.
Sewickley, Pa.: Regarding rationing health care, it seems very peculiar to deny children care when we sink so much money into Medicare. I'm not advocating that we neglect the elderly-- I'm on the verge of elderly. But it does seem counter productive to spend so much on end of life care and so little on keeping children healthy. What do you make of Senator Grassley's comment that if you want health care as good as his get a job with the federal government? I got mine, pal, now you figure out how to get yours!
Steven Pearlstein: I've had some fun with Sen. Grassley over the years, but I don't think that is what he said or meant.
Boise, Idaho: Perhaps one of the biggest myths relating to small business and health care is the very idea that small business owners are against comprehensive health reform. Certainly, that is the conventional wisdom pushed by the DC lobby groups you reference in your article, but in my experience if you talk to everyday small business owners, you hear a very different story - about hard times with the current system, sincere desire for broad change, and willingness on the part of small business owners to pay their fair share for coverage. How do you account for this disconnect between everyday small business owners and the lobby groups that claim to represent them?
Steven Pearlstein: That is a great question. In the case of the Chamber of Commerce, you have a president who is committed to being a field lieutenant in the case of radical conservative republicanism. He is a member of the House Republican leadership, for all intents and purposes, a determined partisan. And so he will, whenever he can get away with it, sacrifice the best interests of his members on particular issues to further the partisan cause to which he has committed the organization. And since he hand picks his board of directors, nobody really challenges him on this.
The National Federation of Independent Businesses looked like it was changing from its own very conservative outlook a few years ago with a new leader, Todd Stottlemyer, who became very involved in health care and had the organization join a coalition pushing for health reform. NFIB members clearly don't like mandates, so Todd was working toward a reform like that proposed by Sen. Ron Wyden, based on an individual mandate that would move the system away from an employer based system. But Todd is no longer there -- there is some thought he was nudged out because the Republican leadership in Congress stirred up some opposition to his approach among his members. I don't know the truth of that really. In any case, I sense the new leadership isn't so committed to the issue that it is willing to accept some features it doesn't like in order to get insurance market reform, which is the key thing the NFIB has been pushing for (the exchanges, essentially). And that is the disappointing thing.
There is another group that formed, of small businesses that are committed to health reform and are willing to accept, as part of a good reform plan, some form of required employer participation. So the small business lobby is not a monolith. But the big, important players are the Chamber, which is distinctly anti-reform, and the NFIB, which seems to be backing off any plan that has a mandate.
Too much speculation: How does one determine the right amount of speculation given that any bet on the future is, in part, speculative? Is the point simply to reduce volatility? Is it to steer to a lower price range?
Steven Pearlstein: I don't know where the line is, but when you have futures contracts and other derivatives involving $10 for every $1 of oil, you get a situation in which the futures markets drive prices on the real markets, which isn't economically useful. Legitimate hedging is one thing. Speculating is another.
Columbia, Maryland: We've all heard enough about how many jobs small businesses allegedly generate. But what about all the jobs lost by small businesses? 80-90% of them go bankrupt in five years. What about all the people who lose their jobs working for a small business or the small business owner who goes under? And most of the time, the business goes under due to poor planning and execution not due to taxes.
Steven Pearlstein: The "net" job statistics take all that into consideration. Small businesses create and destroy, if you want to use those words, lots of jobs every year, in good economies and bad. That's a real strength of the U.S. economy, by the way.
Alexandria, Va.: You're OK requiring employers paying a tax equal to 8 percent of payroll. Do you have any idea how many firms would see there profits completely obliterated by that tax? Have you checked the data?
Steven Pearlstein: Hey, buddy, many companies do that. In fact, most employers do that now, or more. Welcome to the real world. Again, you assume in your question that you can't raise prices to take care of rising costs, even though all your competitors have that same rise in cost. It happens all the time, when wheat prices drive up bread prices and crude oil prices drive up gasoline prices. There is no difference (or not much of one) here. In the long run, as I said, it won't come out of profits. It will come out of wages. Check your economics textbook on that one.
Bethesda, Md.: Small Bone to Pick:
As I read your article, I took one of your central points as follows: Many small businesses are in fact spin-offs of larger businesses. Therefore, few jobs are created - they are better characterized as 'transferred'.
I would agree if the new small business only serviced the original larger business. In my experience, I have seen this often in the start-up phase of the new small 'spin-off', but many go on to service larger pools of clients - beyond their original 'parent', thereby adding to net job creation. Do you disagree, and do you have any sense of the net impact of this phenomenon?
Steven Pearlstein: You are absolutely right about that. I didn't say they were all transfers. I said a lot of them were. And even the ones that are spinoffs that get new customers -- who do you think those new customers are? A lot of time it is other big businesses?
Arlington, Va.: As someone who used to help manage a small business- your idea of a simple 8% tax to fund our employees' purchase of health insurance at an exchange would be wonderful! I second the previous commenter's comments about the hassle of dealing with health insurance at a small business. Another issue: we never really knew if we were getting a good deal or not, because we never had the time to really shop around for our insurance plan. I know that the staff never really liked any of the insurance plans we were with over the years but we had no ability to figure out what would be better.
Steven Pearlstein: Thanks for that.
Arlington, Va.: Re; Your response to Columbus, OH - We bailed out big biz - and, remember, small biz is helping to foot that bill (there is no bailout for the millions of little guys who don't make). I would rather offer help to small businesses who have to have a competitive business model, versus GM who has a failing business model that they refuse to change and is now relying on the government (AKA the taxpayer) to finance their business. Steve, either you want business to fail when they are non-competitive or not - Free-market purist or Marxist: which one are you?
Steven Pearlstein: Normally, I would have been willing to see GM or Chrysler fail. At this moment in time, I thought it a bad idea. That's what I wrote. That's what I think.
Columbia Missouri: If one wanted to increase the number of small businesses in the economy, I should think that universal health care would be a positive. How many potential entrepreneurs are tied to an existing employer for fear of losing health insurance?
Steven Pearlstein: Actually, a very good point. Also how many small businesses will spring up to take advantage of the big increase in the demand for health services?
Washington, D.C.: Your article is spot on in every way. I own a number of local businesses and am at a competitive disadvantage because 100% of the individual's care. Health care reform would level the playing field and allow me to more effectively compete with people. In addition, it would force my contractor customers to think about the most important investment - human capital.
Along the lines of your other part, it is true that "big spenders" make small businesses and not the other way around. We would not be a small business without federal government dollars and communities in Middle America would not exist without the local factory. The factory worker makes the restaurants, contractors, big box retail viable.
Steven Pearlstein: Thanks for that. We're out of time today. Good discussion. "See" you next week, I hope.
Editor's Note: washingtonpost.com moderators retain editorial control over Discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions. washingtonpost.com is not responsible for any content posted by third parties.