Friday, January 27, 2006


Government is little more than a coercive transfer machine. If you can't acquire something through consent and exchange, you ask politicians to compel others to provide it. This goes on every day. Never was it more blatant than when the Maryland legislature passed a law to compel Wal-Mart to spend at least 8 percent of its payroll on health benefits or pay tribute to the state's welfare system.

The Maryland legislature did not name Wal-Mart in the bill. It imposed its requirement on all companies with more than 10,000 employees. But everyone knew that only Wal-Mart was affected. Of companies in the state with more than 10,000 employees, only Wal-Mart (with 17,000 at 40 stores) spends less than 8 percent on health insurance. (It reportedly spends close to that percentage.) Moreover, the most active backers of the bill were organized labor, which would like to unionize Wal-Mart employees, and the retailer's biggest rival in the grocery business, Giant Foods, which is already unionized.

Whatever one thinks of Wal-Mart (it really should disavow eminent domain), when government tampers with prices and wages, bad things happen to the supposed beneficiaries. If the law compels a company to provide health insurance, it will most likely do one or more of the following: hire fewer employees, lay off employees, reduce future cash wages, open fewer stores, or close stores. If someone works at Wal-Mart we can assume that, in his or her judgment, the job is the best available option. Anything else will be no better than second best. Wal-Mart has to pay what it takes to attract and keep good employees, consistent with keeping prices low. So, generally speaking, under current conditions the retailer pays its employees market-determined wages, which ultimately are set by consumer demand.

This is not to say that the market is free, that employees have the full range of opportunities they would have if it were, or that Wal-Mart does not benefit from government favors. Far from it. Taxes and regulation take a greater toll on small competitors, potential competitors, and would-be self-employers than on big companies. This reduces workers' options. It's not impossible for a small company to grow big (Wal-Mart did it); but it is harder than it would be in an unfettered marketplace. Still, market forces operate to some extent.

Companies don't scrimp on medical benefits because they are stingy. They do so in part because medical care is increasingly expensive and workers may prefer cash to insurance. Government intervention is the reason. The best way to make health coverage cheaper is for government to quit inflating the price of medicine through burdensome regulation and competition-throttling licensing. As medical costs came down, so would the price of health insurance.

But we should go further. Were it not for the income tax there would be no good reason for employees to tether themselves to their bosses with health insurance. Better to take your compensation in cash and buy the health coverage best for you, than to let your employer make the decisions. But the tax laws push many people into often-lavish employer-provided insurance. This raises the price of medical care, pricing other people out of the market and leading to problems like "job lock," in which workers are afraid to change jobs because it might mean adverse changes in coverage. Working for someone else can be unpleasant enough. Why mix health insurance into the relationship?

Once again politicians have tried to fix a problem that they helped cause. The same people who made health insurance artificially expensive by mandating coverage for services most people don't want now are trying to force Wal-Mart to clean up their mess. When will they learn that, as Henry David Thoreau put it, "this government never furthered any enterprise but by the alacrity with which it got out of the way"?



A better example of the perverse incentives and absurd results of government micro-management came to light last week in Maryland, where a few well-placed geniuses decided they were going to endanger thousands of jobs in their state in order to make a point. Democrats, who completely dominate the state House and Senate in Annapolis, overrode Gov. Bob Ehrlich's (R) veto of a bill requiring any business with more than 10,000 employees in the state to spend on health care an amount equal to 8% of its payroll. Wal-Mart has 16,988 employees in Maryland, and it is the only private corporation that meets the 10,000 threshold. For that reason, the bill is widely known as "the Wal-Mart bill."

Regardless of how you feel about Wal-Mart, this bill is just plain stupid, and in too many ways even to explain in a 1,000 word column. But here are just a few of the absurdities that could result:

* If Wal-Mart fires or relocates 6,989 Maryland employees, it will immediately be in compliance with this law. Maryland is a small state with lots of border, and a few stores just across the Delaware line could continue to serve many Maryland customers, without the burden of Maryland's sales tax.

* Likewise, if Wal-Mart dismisses 6,989 employees and hires them back as independent contractors, it could skirt the new law and, in fact, avoid paying those workers any health benefits whatsoever or even payroll taxes.

* Wal-Mart could also comply with this law by reducing its employees' salaries, but spending the same amount it does now on health care, as long as the latter number comes out to 8% of the former.

The stated reason for this bill is that Wal-Mart pays its workers so little that they cannot afford the company health plan, which is inexpensive if minimal. This ends up costing the state when Wal-Mart workers sign up for Medicaid. Entirely aside from the fact that this is a problem of Maryland's welfare generosity more than Wal-Mart's stinginess, Maryland is getting the better end of this deal. According to its web site, Wal-Mart paid $112.2 million in Maryland sales taxes and $13.2 million in other state and local taxes in 2004. It also employs thousands of Marylanders directly and tens of thousands of others indirectly through its dealings with in-state vendors -- and they all pay state taxes too.

Wal-Mart's full-time associates in Maryland make an average of $9.97 per hour, plus a four percent contribution to their 401k. It's not a great package -- it comes out to about $21,000, plus an occasional bonus -- but there's more to the story than that number alone. The lower-paying Wal-Mart jobs attract those who would have trouble getting a job that pays more -- young people getting a first job, poor and unskilled workers, and recent immigrants (including illegal ones, as the government discovered last spring). Moreover, Wal-Mart says that 220,000 of its 1.3 million workers in the U.S. are older than 55, suggesting that many employees are looking to supplement their retirement. The workforce is also disproportionately female (775,000 women work for Wal-Mart), suggesting that a Wal-Mart income may be a second income for many families.

If Wal-Mart scales back its presence in Maryland because of the state legislature's hostility toward businesses, it is the workers and the unemployed who will suffer. Until this bill passed, Wal-Mart had been planning to build a distribution center in economically depressed Somerset County, on Maryland's Eastern Shore. The facility would have brought 800 jobs to the area. The company may now decide to relocate a few miles in either direction, either to Delaware or to peninsular Virginia, both of which are nearby.

So you might say that this law hurts those it is intended to help. But you would be wrong. The Wal-Mart bill was never intended to help the workers at Wal-Mart. It is intended to help Democrats and labor unions. This bill is part of a nationwide campaign by labor unions to recover their rapidly declining share of the U.S. labor market. In 1945, unions represented 35% of the labor force. Today they have fallen to 12.5%. In the private sector, unions represent a mere 7.8%, and they have become desperate for more members. In recent years, they have tried, in vain, to find fresh blood by opening into new sectors of the economy. Wal-Mart is big enough to qualify as its own sector of the economy, meaning that if the unions can get a toe-hold in its stores, they will have an excellent crack at the company's million-plus employees, plus a good shot at creating closed shops in some states.

Most Democratic politicians would lose their jobs if unions stopped contributing millions of dollars for political campaigns and thousands of bodies on Election Day. The decline of unionism has been disastrous for the Democrats, and its resurrection would be a political boon. For that and no other reason did the Maryland legislature pass this bill, and for the same reason they will try it in other states as well. The United Food and Commercial Workers Union, which has been unsuccessful in unionizing any Wal-Mart workers to date, will continue to harass Wal-Mart until it capitulates.

More here


In Big Labor's war against Wal-Mart, "collateral damage"--in the form of lost jobs and income for the poor--is starting to add up. Of course, since the unions and their legislative allies claim that their motive is to liberate people from exploitation by Wal-Mart, these unintended effects are often ignored. Here in Maryland, however, that's getting hard to do. The consequences of our Legislature's override of Republican Gov. Robert Ehrlich's veto of their "Fair Share Health Care Act" on Jan. 12 will be tragic for some of the state's neediest residents. The law will force companies that employ over 10,000 to spend at least 8% of their payroll on health care or kick any shortfall into a special state fund. Wal-Mart would be the only employer in the state to be affected.

Almost surely, therefore, the company will pull the plug on plans to build a distribution center that would have employed 800 in Somerset County, on Maryland's picturesque Eastern Shore. As a Wal-Mart spokesman has put it, "you have to take a step back and call into question how business-friendly is a state like Maryland when they pass a bill that . . . takes a swipe at one company that provides 15,000 jobs."

Unfortunately, in Somerset, the new law looks more like a body blow than a "swipe." The rural county is Maryland's poorest, with per capita personal income 46% below the state average and a poverty rate 130% above it. Somerset's enduring problem is weak labor demand that greatly limits its 25,250 residents' economic opportunities. There are just 0.8 jobs per household in Somerset, barely half the 1.5 figure that applies to the rest of the state. Somerset's top 10 list of employers features sectors like food services (average annual compensation per employee: $9,637), poultry and egg production ($14,320) and seafood preparation and packaging ($19,190).

It is hard to exaggerate how much the planned distribution center might have meant to Somerset's economy. Using an input-output model, we forecast the "ripple effects" of the new income and spending that could have emanated from Wal-Mart's facility as follows:

* The center's 800 employees would have created an additional 282 jobs among "upstream" suppliers and "downstream" retailers and service establishments; all told, the center would have boosted county employment by 14% and private-sector employment by 20%.
* Total annual employee compensation in Somerset would have risen by $46.5 million, or 19%.
* Annual output (or "gross county product") would have risen by $128.3 million, or 19%.
* State and local tax receipts would have increased by $19.2 million annually; this would include $8.5 million in property taxes, $5.6 million in sales taxes, and $1.4 million in personal income taxes.

Those losses, though dramatic, probably understate the full extent of the damage in this case. They do not include forgone employment and income from construction of the facility and related infrastructure improvements. What is more, Wal-Mart's tentative plans for a second distribution center in Garrett County, in mountainous western Maryland, also appear dead. Garrett, with a poverty rate that is 70% above the state's, is only slightly better off than Somerset

How could our legislators turn a blind eye to such areas? Partly, of course, they are simply eager for Big Labor's votes and money and therefore subservient to its interests. The Service Employees International Union actually helped draft what became known as the "Wal-Mart bill." Unable--so far--to organize workers at the company, the union's immediate national strategy is to limit Wal-Mart's competitive reach by raising its costs. Maryland was a shrewdly chosen place to kick off this campaign. Some estimate that as much as a third of the state's economic activity stems from federal employment and purchases. Over 150,000 Marylanders--six times the population of tiny Somerset--are on the federal (nonmilitary) payroll; they are concentrated in central Maryland, near the nation's capital. Nearly 268,000 more Marylanders draw checks from state and local government.

With so many workers in a sector where revenues appear to arrive automatically and inefficiency never leads to bankruptcy, our state's resulting political culture is quite predictable. Many Marylanders are simply unmindful of the necessities of survival in the private sector: pleasing customers, controlling costs and satisfying shareholders. Thanks to the federal tax dollars collected from the rest of the country and spent in Maryland, the prevailing view of economic reality is inverted: The public sector is seen as the engine of prosperity, with the private one along for the ride.

Reflecting this culture, our legislators often behave as if business is a problem to be solved. On Jan. 17, they also overrode a gubernatorial veto of a $1-an-hour increase in the state's minimum wage. Like the health-care mandate, the hike is a job killer--though not in affluent areas of the state, where strong labor demand long ago pushed the going wage above the minimum. In those areas, the law is largely symbolic and enables well-meaning voters and legislators to conclude that they are "doing something for working families." Safely out of their view, however, at Maryland's impoverished margins, already weak labor demand will be further diminished

What remains to be seen is whether Maryland will be a leading political indicator or an anomaly, for Wal-Mart bills have been drafted in 33 other states. Emboldened by success here, lawmakers in some states have set the threshold for companies to be hit with mandated health benefits as low as 1,000 workers.

In these upcoming battles, legislators should be mindful that companies like Wal-Mart are not the enemy but rather frontline soldiers in a real war on poverty. The profit motive leads them to seek out areas where there is much idle labor and put it to work. Where they are prevented or discouraged from doing so, the alternative job prospect is rarely a cushy spot in the bureaucracy. Rather, it is continued idleness and hardship.



For greatest efficiency, lowest cost and maximum choice, ALL hospitals and health insurance schemes should be privately owned and run -- with government-paid vouchers for the very poor and minimal regulation. Both Australia and Sweden have large private sector health systems with government reimbursement for privately-provided services so can a purely private system with some level of government reimbursement or insurance for the poor be so hard to do?

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