Friday, May 28, 2010

The war on the working class continues

I personally hate conspiracy theories. like most, I hear such and my eyes begin to glaze over and I eagerly wait for the person to stop talking so I can move on to another conversation. However, there is something about the Obama administration that makes it very difficult to not question the intent, as well as the consequences, of their policy choices.

Recently Eric Holder, the Attorney General of the United States, gave the commencement address at Boston University at which he told the students about the wonderful and "progressive" reforms that came out of bad economies. Essentially, he is arguing that major actions by government can only happen under the worse possible economic circumstances, because people are otherwise fine with the status quo. Holder's remarks reminded me of White House Chief of Staff Rahm Emanuel who quipped, "You never want a serious crisis to go to waste," Emanuel then went on to discuss the major changes you can make in just such an environment.

Essentially these high ranking public officials are sounding a mantra of more problems leading to more change. With such a philosophy, it should not be a surprise that we continue to see policies that are contributing to the continued destruction of the economy. Unemployment is at the highest level in over a quarter of a century, the national debt is growing at over $1 trillion dollars a year (in the early 1980s the accumulated debt of the US government was only making that mark for the first time), and inflation looms around the corner as cheap money is being produced to pay for this massive government expansion.

Particularly harmful will be the President's far reaching health care reform legislation, which will require small businesses to provide health insurance to their employees. It is being marketed by the administration as having a minimal adverse effect because this burden will be offset by a tax credit for each of the covered employees. Without such, it is unlikely the bill would have ever navigated through the Congress. However, with the federal government's incredible appetite, that will like be modified as the law is implemented. Even without a single change in the current law, the present credit is already arbitrarily reduced as a business grows, essentially discouraging employers from hiring more workers or increasing their salaries. Devon Herrick and Pamela Villareal (both of the National Center for Policy Analysis) have noted that this bill is going to clearly undermine job growth and be particularly harmful to higher paid workers.

The tax credit is suppose to be helpful to small firms. Businesses in select industries that have 25 or fewer employees will quality for a tax credit worth up to 35 percent of the employer's contribution to health insurance during the period of 2010 to 2014. After 2014 this is how the picture looks:

  • Although employers may qualify for a 50 percent health insurance tax credit for the first two years, they must pay for at least half of the expense.
  • Employers will have to make these purchases through newly formed "health insurance exchanges" in order to qualify. It is yet to be seen if these will be competitive. Since they are largely government controlled (and potentially monopolistic), it is highly unlikely.
  • Than the law begins to get sticky and companies will likely slip through the tax credit cracks when it comes to being qualified as employers must have fewer than 11 workers, earning an average of $25,000 or less, in order to qualify for the full tax credit. Therefore the law is punitive towards individuals who make more than $25,000 a year. This is not affluent by anyone except the government.
  • Finally, the credit is not available to sole proprietorships and their family members, yet this is one of the most common type of small business in the United states.

The policy implements an ugly trade off for firms that would like to do more for their employees. As the company's average pay goes above $25,000, the credit is withdrawn at a rate of 4 percentage points for every additional $1,000 in average pay. Eventually it is completely withdrawn once the average pay reaches $50,000. In addition to this, the credit is also incrementally withdrawn for each increase in the size of the business beyond 10 workers (regardless of average pay), and it disappears once the firm reaches 25 workers.

Therefore this legislation will mandate businesses to pursue low wage workers and avoid those who enjoy better skills and typically receive higher pay. It may also simply force employers to avoid the costs of having many employees by choosing technology over workers (which has a higher initial cost, but would clearly become cheaper over time in the new health care environment). Another option could find companies pursue vendors (particularly overseas) in order to avoid these prohibitive employee costs entirely.The war on the working class continues.

Kevin Price is a nationally syndicated columnist and host of the Price of Business on CNN Radio. Learn more about him and his activities at www.PriceofBusiness.com.

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