Income Disparity Explained (again)

This post is a rerun of one previously posted in A Reasonable Man:

Income disparity in a nutshell:

1.  When the cost of running/starting a business increases, fewer businesses remain/are started.
2.  With fewer businesses, there is less overall demand for employees.
3   With less demand for employees, employees' income declines.
4.  With fewer businesses, existing businesses face less competition.
5.  Less competition means that remaining businesses can raise their prices.
6.  Higher prices and lower wages mean more profits for the owners of remaining businesses.
7.  Lower wages to employees and higher profits for owners means increased income disparity.

Now let's reverse the process:

1.  When the cost of running/starting a business decreases, more businesses remain/are started.
2.  With more businesses, there is more overall demand for employees.
3   With more demand for employees, employees' income rises.
4.  With more businesses, remaining businesses face more competition.
5.  More competition means that remaining businesses must lower their prices.
6.  Lower prices and higher wages mean less profits for the owners of remaining businesses.
7.  Higher wages to employees and lower profits for owners means reduced income disparity.


So, the net-net is that anything that increases the cost of running/starting a business (say Obamacare, 10 years of wars,...etc.) increases income disparity and increases prices and anything that reduces  the cost of running/starting a business will reduce income disparity and reduce prices.  

Insuring Known Events Guarantees Increased Prices

Lost in the entire discussion of healthcare insurance is what should insurance actually cover?  The whole concept of insurance revolves around the notion of risk--insurance is meant to cover events that might occur, not events that absolutely will or won't occur.  Insuring against events that might happen is prudent; insuring against events that absolutely will or won't happen is just stupid.  The health insurance offered by American employers and that now mandated by Obamacare does both.  Annual check ups are a prime example.  There is absolutely no risk to an insurance company that covers annual check ups. They know you will get one and know how much it will cost. They add their markup to the cost and add it to the price of your insurance. So instead of simply paying the doctor $x you pay the insurance company $(x+y).  

Imagine how much your auto insurance would be if it covered oil changes?  The mechanic would have to hire people to interface with the insurance company. The insurance company would have to hire people to interface with the mechanic. Both sides would want to make more money. The cost of all of this would be borne by you!  That's exactly the case with our healthcare insurance system!

Tax Policy Distorts Healthcare Pricing

America's healthcare crisis is just another example of what happens when government control and regulation seeks to influence the outcomes of a private market. Obamacare is just the latest extension of government's pervasive reach into this arena.

Far and away the most egregious intrusion, however, relates to one very simple government policy--that employers are able to deduct the cost of the health insurance they provide to their employees from their taxes while those same employees, if they purchase insurance directly, would not be able to take a similar deduction. Coupling this with the fact that employees are not taxed on the value of the insurance they receive from their employers has contributed in substantial part to the rise of healthcare's cost in the United States.  This policy has encouraged employers to add more and more items to the coverage they provide their employees enabling employees to essentially arbitrage between the market price of the services the receive and the after-tax cost to their employers of those services. The problem is that if millions of employed people with healthcare insurance provided by their employers who may not have undertaken an activity because of its cost now see a significant artificial reduction in that cost, then the increased demand for that activity will drive up the cost for everyone that does not have employer provided insurance.  Furthermore, by increasing the demand for many services beyond that which would exist in a non-distorted market, this policy has also contributed to the upward price pressure on the insurance itself.

Tax policy has distorted the demand for healthcare services and when demand is distorted so are prices.