Fringe With Benefits? The Case for Welfare Capitalism.

Ever since the 1990s, most policy wonks on the left, center, and right have assumed that our existing employer-based health insurance system is defective, obsolete, and needs to be phased out in favor of a radically different system like “Medicare for All” or subsidies to help individuals purchase their own health plans. I know, because I was one of the wonks.

In 1999, with Ted Halstead, Sherle Schwenninger, and Walter Russell Mead, I co-founded the New America Foundation (now New America) to help rethink the social contract in America for the 21st century. As a new nonprofit startup, New America had no health care program and no donors funding research on the topic at the time. We chose to decide what the best health insurance policy reform would be on the basis of our own conception of the public interest, and only later to seek possible funding for research and advocacy for the policy option that we had chosen.

After a prolonged internal discussion involving New America staffers, board members, and outside experts, we decided that we should favor only health coverage options that had the potential to sever health insurance from employment, to minimize “job lock” caused by the fear of employees that they will lose health benefits if they take another job. For that reason, we ruled out the employer mandate or pay-or-play option, which would have extended and entrenched the existing employer-based health insurance system by requiring all employers to provide their workers with health insurance or pay a fine.

We concluded that the creation of a single-payer system by means of the nationalization of health insurance in the United States was as politically impossible in 2000 as it had been for the previous century. By a process of elimination, with the long-term goal of severing health insurance from employment in mind, we opted for what was known as the individual-mandate system—a requirement that all individuals purchase health insurance, with the government paying for part or all of the cost. This approach, pioneered by the Heritage Foundation’s Stuart Butler, provided the initial rationale for New America’s health care program headed by Laurie Rubiner and then Len Nichols, and inspired elements of the Massachusetts health care reform of 2006 (“Romneycare”) and the federal Affordable Care Act (ACA) of 2010 (“Obamacare”).

In passing the ACA, Congress ultimately chose not to choose among the three options. The ACA included a version of pay-or-play by imposing a mandate on all employers with more than 50 employees to provide health insurance or pay a fine, an employer mandate that went into effect in 2015. In addition, the ACA included a version of single-payer by providing a federal subsidy for Medicaid expansion in every state (the Supreme Court later ruled that states could opt out). Finally, the ACA included an individual mandate, plus sliding-scale federal subsidies, to help those without employer insurance who earned too much to be eligible for Medicaid to purchase insurance in state or federal exchanges. In 2017 the Republican Congress repealed the penalty that enforced the individual mandate, but the subsidies and exchanges remain.

These three policies reflect the three major models for distributing benefits like health insurance and retirement income to all workers or all citizens: welfare capitalism, welfare statism, and welfare individualism.

In a system of welfare capitalism, benefits are provided by employers and come with the job. The employer-provided benefits can be paid for wholly out of the share of firm profits that goes to overall worker compensation, or they can be partly or wholly subsidized by government and administered through the workplace.

Welfare capitalism sometimes has been favored by employers as a way of sweetening the deal so that disgruntled workers are less likely to attempt to unionize. Paradoxically, organized labor has also frequently favored welfare capitalism. The ability of unions to negotiate good benefits packages with employers gives workers an incentive to sign up with unions.

In a system of welfare statism, government provides benefits directly to citizens in the form of universal or means-tested government programs paid for out of taxation. In addition to basic public benefits, supplementary private health insurance or tax-favored retirement savings programs can be allowed to exist in a welfare-statist system.

In a system of welfare individualism, individuals are responsible for purchasing their own health insurance and saving for unemployment and retirement. Welfare individualism is not purely libertarian. Government may play a role by providing tax breaks for health insurance premiums and various specialized savings accounts. Government may also mandate purchase of some kinds of benefits like health insurance.

Two other possible benefit systems—welfare mutualism, in which benefits are provided by voluntary membership organizations, and welfare philanthropy, in which most or all benefits are provided by charity—are unrealistic, so we can ignore them.

In passing the ACA, then, Congress did not come down decisively in favor of one of the three alternate models of benefit provision. A future Congress could move the country further in the direction of welfare capitalism by incremental expansion of one or more of the elements of the ACA. Congress could expand the pay-or-play mandate to include a greater number of businesses. Or it could move America in the welfare-statist direction, by expanding Medicaid subsidies or altering eligibility rules. Or Congress could expand the new system of subsidies to individuals who purchase their own health insurance plans on exchanges, moving America further in the direction of welfare individualism.

In the decade since the ACA was enacted, I have come to wonder whether those of us who supported the individual mandate approach back then were mistaken.

The argument that employer-provided health insurance is on the way out seems much weaker in 2020 than it did in 2000. The nearly universal consensus of the early 2000s that employer-provided health insurance would soon be as extinct as dinosaurs and dodo birds turned out to be wrong. In a 2018 essay titled “What’s Wrong With Employer Sponsored Health Insurance,” Ed Dolan of the Niskanen Center writes that “the transition from EHSI is already underway.” But the data that he offers as evidence shows that the percentage of all U.S. firms that offer health benefits has declined only from 66% in 1999 to 57% in 2018—a paltry drop of 9 percentage points over 19 years.

At this rate it would take three decades for employer-provided health insurance to vanish entirely. This extrapolation assumes that the downward trend continues and does not stabilize or reverse. However, from 2017 to 2018 the number of firms offering health benefits to their workers jumped from 53% to 57%, possibly as a result of the ACA’s pay-or-play mandate on firms with more than 50 employees, which went into effect in 2015. Clearly the imminence of the death of employer health benefits has been greatly exaggerated.

Another view that was widely shared among public policy thinkers of both parties and all ideologies in the 1990s and the early 2000s was the idea that many if not most people in the future would be self-employed freelancers or, to use more recent terminology, gig workers. Here we find another lesson in the danger of straight-line extrapolation from temporary trends. According to the Bureau of Labor Statistics, the number of Americans in “alternative employment arrangements” like Uber drivers was only 10.1% of total employment in 2017, more or less what it was in 1995 (9.9%) and 2005 (10.7%).

In the late 1990s, the conventional wisdom held that the U.S. economy, undergoing a boom at the time, was more dynamic and innovative than the sclerotic economies of Europe and Japan because of “labor market flexibility”—laws that made it easier to hire and fire workers or substitute part-time contractors for full-time employees. Making labor markets more flexible would accelerate the transfer of workers from big, stagnant, “old economy” firms like automobile companies to small, dynamic new startups, the next Microsofts and Googles, in the “knowledge economy” of Silicon Valley and other tech hubs. And one way to make labor markets more flexible was to eliminate “job lock”—the reluctance of employees to quit bad jobs for better ones for fear of losing their health insurance.

During the economic boom that took place during Bill Clinton’s second term in office, the alleged connection between job lock and economic stagnation in Europe compared to the United States seemed plausible. But for the past two decades, U.S. productivity growth has been unimpressive, notwithstanding America’s extremely high levels of labor market flexibility. The bubbles that burst in 2001 and 2008 were driven by asset inflation in stocks and housing, not by dramatic productivity growth (the crash of 2020 was caused by both voluntary and compulsory social distancing).

In retrospect, the idea that flexible labor markets are the key to technological innovation was wrong. Technological innovation depends on a national innovation ecosystem that depends not only on feisty startups but also on government research institutions like the NSF, NIH and DARPA, research universities like Stanford and MIT, and giant national and multinational corporations that can scale up and diffuse innovations.

Even worse, making labor markets more flexible for workers in the nontraded domestic service economy like janitors does not promote technological innovation or economic growth. It just ruins the lives of many service workers and their families. For example, decently paid janitors with regular schedules and benefits, and sometimes union representation, are replaced by janitors defined as contractors, with low wages, unstable schedules, and no benefits.

The American public has never shared the bipartisan policy elite’s enthusiasm for gig jobs and the separation of benefits from employment. Employer-provided health insurance is particularly popular. According to Gallup, 69% of those with employer plans are satisfied with their health insurance. In spite of being told for decades by progressive, centrist, and conservative think tank and university experts that jobs with employer benefits are doomed relics of the postwar U.S. economy, Americans obstinately prefer the 1950s definition of a good job.

Maybe the public is right. A case can be made that the way to strengthen America’s social contract is to build on the existing employer-provided benefit system, not to replace it by socializing benefits (the social democratic approach) or privatizing, individualizing and voucherizing benefits (the libertarian approach).

Expanding rather than replacing the existing system of employer-based health coverage was the goal of President Richard Nixon’s health care proposal, submitted to Congress in 1974. The two main elements were a mandate on all employers to provide health insurance to their employees combined with a federal program for the nonworking poor that would replace Medicaid. Sen. Ted Kennedy, who opposed the Nixon plan at the time in favor of single-payer, told a reporter shortly before his death: “That was the best deal we were going to get.”

The Nixon plan failed. But what if Kennedy was right? What if a universal employer mandate is the best way to achieve the goal of health benefits for all workers that we can get in the United States, even in the 21st century? As we have seen, the ACA requires all employers with more than 50 full-time employees to offer health insurance or pay a fine. Why not enlarge the mandate to offer health insurance to include firms with 25 full-time employees, or 10, or simply on all firms with no exceptions?

There could be reasonable exemptions for part-time workers and contractors in certain industries—accompanied by reasonable penalties imposed on firms that try to evade the employer mandate by illegitimately reclassifying full-time employees as part-time workers or contractors. Genuine freelancers could use the existing system of exchanges and subsidies to purchase individual plans, while Medicaid would continue to exist for the long-term unemployed and unemployable.

Having opened the door to more welfare capitalism, let us boldly walk through it.

Why stop with health benefits? Why not impose a mandate on employers to offer private retirement benefits as well, to supplement the future Social Security payments of their employees? In recent decades many employers have shifted risk from themselves to employees by replacing defined benefit pensions, which employers must pay in fixed amounts regardless of economic conditions, to less predictable defined contribution systems like 401ks with employer matches, invested in the stock market and fluctuating with it. The glory days of defined benefit pensions may never return, but why not at least require all employers to make contributions to employee 401ks?

We are just warming up. If you have followed the story so far, we have now decided to impose universal employer mandates for health insurance and retirement benefits. While we are at it, just for the hell of it let’s add an employer mandate for two weeks of annual paid vacation time, paid parental leave, and a certain amount of paid annual family leave as well, bringing the total number of new, universal employer mandates up to five.

At this point many of you are crying out, “But what about small business?”

Ah, yes. Small business. The ultimate public policy conversation-stopper.

The statistic that more than 99% of American businesses are small businesses is a misleading artifact of the tax code, because the majority of these are sole proprietorships with no employees. And many of these are side jobs; according to the government, only 10% of Americans are truly self-employed, and of these only around a quarter have any employees of their own.

The federal government’s definition of a small business is one with fewer than 500 employees. Even by that expansive definition, according to the U.S. Census Bureau’s Annual Survey of Entrepreneurs, using 2016 data, firms with fewer than 500 employees accounted for less than half of the private sector workforce—46.8%—and firms with fewer than 20 workers employed only 16.8% of the private sector workers. Inasmuch as the majority of Americans in the private sector before the coronavirus pandemic already worked for firms with more than 500 employees, shouldn’t big business be described as the backbone of America?

Would some small businesses be burdened by an employer mandate to provide health insurance? Undoubtedly. Most economists agree that the costs of health insurance premiums and other employer-provided benefits are not paid by the employer but are taken out of the worker’s overall compensation of wages plus benefits. While there are three ways to deliver individual benefits—welfare capitalism, welfare statism, and welfare individualism—in practice there are only two ways to pay for them. Benefits can be paid for out of a worker’s total compensation or they can be paid for by government expenditures, including tax breaks (which economists treat as subsidies), or some combination of both.

It is true that the employer mandate, by increasing overall compensation per worker, would make low-wage workers more expensive to the employer to hire and keep. Providing health benefits, in particular, would raise overall compensation costs for low-wage workers dramatically more than for well-paid workers. This is because health insurance firms generally charge similar premiums for all workers, regardless of their pay.

One response of champions of a universal employer mandate might be: So what? After all, raising overall compensation for low-wage workers by any means, including a higher federal or state or local minimum wage, or higher wages negotiated by unions, or higher wages caused by tight labor markets, will be denounced by some as a threat to small business viability. Maybe small firms that cannot afford to pay decent benefits ought to go out of business and be replaced by other firms that are more productive and profitable, thanks to labor-saving technology or better business models.

But let us be generous to small firms with low-wage workers, even if they are not generous to their employees. A case might be made for the government to subsidize part of the cost to small firms of the new health insurance premiums under a universal employer mandate, at least as a temporary, transitional measure.

If we rule out single-payer socialism, there are two ways for the government to subsidize health insurance for the workers at the small firm.

One method is the welfare-individualist approach embodied in the ACA’s complicated machinery of exchanges and means-tested, sliding-scale subsidies. Employers with fewer than 50 workers can choose not to offer health insurance, and the government will subsidize the purchase of individual plans by individual workers.

The welfare capitalist method is simpler and more straightforward. A corner bakery with eight employees could be required by a universal employer mandate to offer health insurance to its staff. Rather than subsidize eight individual bakery workers to help them buy eight individual plans via an online exchange, the government could simply pay subsidies that reduce the total costs of premiums for the workers directly to the bakery firm, mitigating or neutralizing the increase in the cost of compensation that results from the employer mandate.

Plug in “retirement benefits,” “paid vacations,” or “parental leave” and the argument remains the same. Any subsidies to help lower-income workers pay for benefits should go to employers, not employees. Even if the cost of subsidies to the government is the same under both systems, a system of welfare capitalism administered by companies would be much simpler and more effective than the complicated and baffling Rube Goldberg machines of welfare individualism, like voucher systems and single-purpose, tax-favored personal savings accounts.

If I am right, then the mainstream debate about the future of the American social contract has been profoundly misguided for the last quarter century. All sides of the debate have assumed that our employer-based version of welfare capitalism is on the road to extinction. For decades the only debate has been about whether welfare statism or welfare individualism will replace welfare capitalism in America.

Maybe the democratic socialist Bernie Sanders and the libertarian Milton Friedman both have been wrong. Maybe we need an evolution, not a revolution. Maybe—to paraphrase the architect Robert Venturi on Main Street—the company-based health insurance system is almost all right. It is time to consider the possibility that, in the United States, our inherited system of employer-based benefits is not a rotten structure to be knocked down and replaced, but a decent foundation on which to build a better future for all American workers.