James Surowiecki

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The myth of small businesses and healthcare

One of the favorite talking points of the Republicans who oppose the Affordable Care Act (ACA) is that it will kill job growth and hurt small businesses.  Quite honestly, I think that their government shutdown which they admit is largely about defunding/delaying/repealing the ACA is doing a fine job of doing both.  Forget what they think “Obamacare” will do.  But in the current issue of the New Yorker, James Surowiecki takes on the myth, at that, according to him, is what it is, that the ACA will do horrible, terrible, no good things to the economy.

The G.O.P.’s case hinges on the employer mandate, which requires companies with fifty or more full-time employees to provide health insurance. It also regulates the kind of insurance that companies can offer: insurance has to cover at least sixty per cent of costs, and premiums can’t be more than 9.5 per cent of employees’ income. Companies that don’t offer insurance will pay a penalty. Republicans argue that this will hurt companies’ profits, forcing them to stop hiring and to cut workers’ hours, in order to stay below the fifty-employee threshold.

How much of this is true?

The story is guaranteed to feed the fears of small-business owners. But the overwhelming majority of American businesses—ninety-six per cent—have fewer than fifty employees. The employer mandate doesn’t touch them. And more than ninety per cent of the companies above that threshold already offer health insurance. Only three per cent are in the zone (between forty and seventy-five employees) where the threshold will be an issue. Even if these firms get more cautious about hiring—and there’s little evidence that they will—the impact on the economy would be small.

Meanwhile, the likely benefits of Obamacare for small businesses are enormous. To begin with, it’ll make it easier for people to start their own companies—which has always been a risky proposition in the U.S., because you couldn’t be sure of finding affordable health insurance. As John Arensmeyer, who heads the advocacy group Small Business Majority, and is himself a former small-business owner, told me, “In the U.S., we pride ourselves on our entrepreneurial spirit, but we’ve had this bizarre disincentive in the system that’s kept people from starting new businesses.” Purely for the sake of health insurance, people stay in jobs they aren’t suited to—a phenomenon that economists call “job lock.” “With the new law, job lock goes away,” Arensmeyer said. “Anyone who wants to start a business can do so independent of the health-care costs.” Studies show that people who are freed from job lock (for instance, when they start qualifying for Medicare) are more likely to undertake something entrepreneurial, and one recent study projects that Obamacare could enable 1.5 million people to become self-employed.

English: This is a diagram depicting the perce...

English: This is a diagram depicting the percentage in US who have no health insurance by age. (Photo credit: Wikipedia)

Remember that large employers get tax incentives to provide health insurance.  The ACA will actually do the same for small businesses.

Obamacare changes all this. It provides tax credits to smaller businesses that want to insure their employees. And it requires “community rating” for small businesses, just as it does for individuals, sharply restricting insurers’ ability to charge a company more because it has employees with higher health costs. And small-business exchanges will in effect allow companies to pool their risks to get better rates. “You’re really taking the benefits that big companies enjoy, and letting small businesses tap into that,” Arensmeyer said. This may lower costs, and it will insure that small businesses can hire the best person for a job rather than worry about health issues.

Surowiecki ends his short piece with this kicker.

The U.S. likes to think of itself as friendly to small businesses. But, as a 2009 study by the economists John Schmitt and Nathan Lane documented, our small-business sector is among the smallest in the developed world, and has one of the lowest rates of self-employment. One reason is that we’ve never had anything like national health insurance. In a saner world, changing this would be a reform that the “party of small business” would celebrate.

So it seems that implementation of the ACA with small business health insurance exchanges will actually help lead to more job growth.

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Credit Card Blues

Like most Americans I use credit cards.  I use them to buy online and to save the hassle of carrying cash.  Mostly these days I use my debit card but credit cards are great if your stove dies and you need to pay a repairperson or buy a new stove.  Or help with expenses if you are going to graduate school late in life as I did.  But they are a trap.  I remember a time when I cringed if I didn’t pay off the balance each month.  Those days are long gone.

James Surowiecki wrote a great piece for the New Yorker’s  Financial Page  in which he explains very clearly why credit cards companies need regulation as badly as the other financial markets.

It’s little wonder, then, that credit-card companies are now scrambling to shed the customers they think are most likely to default, and to limit the amount that others can spend. In effect, they’re trying to follow the advice given by Larry Selden and Geoffrey Colvin in a book called “Angel Customers & Demon Customers.” Not all customers are equal, it turns out: some are tremendously profitable, while others, like the guy who calls customer service six times a day to check his account balance, cost more than they’re worth. To boost profits, you must cultivate the angels and protect yourself against the demons.

That sounds easy enough. But credit-card companies have created a strange business, in which there’s a fine line between good and bad customers. Their best customers aren’t those who dutifully pay off their balance every month; instead, they’re the ones who charge a lot and pay only a little every month, carrying a sizable balance and racking up interest charges and late fees. These are the “revolvers,” and the credit-card business feeds on them. Credit-card companies don’t necessarily want revolvers to pay off their debts; if they did, there’d be no interest or fees to collect. They want their loans to be, in the words of a banking regulator, “a perpetual earning asset.”

One of the things that credit card companies are doing is increasing interest rates – even on money borrowed at a lower rate.

This increase is partly a response to the greater risk of default, but it also takes advantage of the recession. Many cardholders don’t have enough money to pay off their balance in full, so when interest rates rise they aren’t able to just close their account and get a different card. Effectively, they’re captive customers. And since credit-card companies, unlike most lenders, are allowed to change the terms of their loans at any time, people who borrowed a big chunk of money at, say, nine per cent may now be paying seventeen per cent on the loan.

These tactics are not going to improve the credit-card industry’s dismal reputation. They’re also not going to help an economy in recession, since reduced credit lines take away an important cushion for consumer spending, and higher interest rates and increased fees are likely to drive more people to default. But the odd thing is that while less access to revolving credit is a bad thing for us in the short run, having people rely less on credit cards is a good thing in the long run.

Will Congress and the administration step up to help ease this transition?  A good first step would be higher rates only on new balances to let people pay off the old ones at a reasonable rate – both time and interest.