Sunday, December 16, 2007

Why the US can't separate benefits from employment

A recent post on Ron Paul and the anti-outsourcing movement reminded me of a host of past posts on outsourcing. Unsurprisingly this discussion was most active in the last election cycle. Back in February 2004 I even had something nice to say about Friedman. Emphases changed for this post:
Gordon's Notes: India and outsourcing: Friedman 1, Kristof 0

...Friedman wins this match. Great column. Reich's recommendations are mine as well, except I think wage insurance won't fly. I do think that the 401K and its equivalents need to become life-event rather than age driven, and all benefits need to be unrelated to employment. Employment should be wages, nothing else.

Friedman/Reich point out that outsourcing is a tax deductible business expense. The tax code should NOT be facilitating outsourcing. It shouldn't obstruct it, but neither should it encourage it. That can be changed.

The world needs China and India to be wealthy. These are two sources of extraordinary power and vigor, and the US is acting as a short-circuit between them. If we capture a fraction of that current we can share in the wealth, but we can't do it with our current social support network. We need another solution...
Protectionist measures, including trade and immigration restrictions, can make some jobs last longer than they otherwise would. The price is typically some complex mix of higher product costs, diminished economic productivity, and reduced value. Still, the cost may be worth paying to reduce extreme social disruption, as China's capital controls demonstrated in the Asian financial crisis of the 1990s.

A better approach, however, is to make it less painful to change employment or retrain by separating benefits, like healthcare and retirement savings, from employment. This is a true win-win, with both individual benefits and economic logic.

Except it ain't going to happen. The only serious move in this direction was a fake Bush proposal that turned out to have a poison core.

It hasn't come up since.

Why not?

I don't know the real confluence of special interests that ended the January 2007 discussion, but I can think of one good reason that employers might want to hold onto benefit control -- no matter what they cost.

It makes it very hard to employees to leave and ... do nothing.

My guess is there's a significant fraction of the US workforce that, if they had affordable guaranteed healthcare coverage, would stop working. Some would take early retirement. Some would go back to school. Some would take six months off and try something different.

Not everyone would want to do this, or could afford to do it. Those that would, however, would be disproportionately upper middle class, confident, and adventurous.

That's one hell of an expensive group to lose. It would be a hard hit for economic productivity, and in the near term there would be a sharp fall in economic productivity. Recession. Big time.

Sure, in the long run it might lead to increased economic productivity, and it could lead to increased happiness -- though happiness tends to be genetically determined except at the margins.

In the short term though, increased freedom could be very bad for business -- and for the global economy.

We're going to be in the employer-based benefits ankle chains for years to come ...

PS. I do note that we haven't done anything in the past four years to reduce the tax incentives that promote outsourcing of software development. I wonder why that is ...


Anonymous said...

What are the tax incentives that promote the outsourcing of software development? I don't mean this sarcastically, I am really curious.

I am in the business of doing software development in Mexico for US software companies and I haven't been aware of tax incentives of any sort.

JGF said...

Dang good question. I was quoting from an old post and I don't remember where I got it back then.

I did a search on it now. The best explanation was a response to a John Kerry plan; in general US corporations can defer paying corporate income tax if they reinvest their profits abroad. So there's supposedly a longstanding incentive to shift production outside of the US.