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The Costs of Healthcare

The Application of the Broken Window Fallacy

In the spirit of standing with Sen. Ted Cruz I am re-releasing this article. This article talks about the unseen cost of Obamacare and its direct effects on my family. 

[This article was originally written as my final paper for a Healthcare policy class I took in the fall of 2012. It's the same class I wrote about in my article  Destruction of the Liberal Arts.]

In today’s society people seem to be more driven by the wild fluctuations of their emotions and passions.  With being driven by emotion and passion comes the abandonment reason and being about track actions past the immediate effect.  Often in modern political policy making lawmakers and other political elites do not think about the consequences of the policies they pass, past what the policy is meant to do.  They are often blind the effect it would have on the people that are actually paying for the policies they enact.  These politicians and their supporter prefer to feel like they are doing good than actually doing good.  This is all known as the “broken window fallacy.”

This paper will review healthcare legislation in the United States of America and apply the broken window fallacy to them.  The Obamacare law is the law that will be reviewed.  I will then be looking at how these policies that are meant to “do good” are actually hurting many people and our economy.  I will also cover how the broken window fallacy is not taken into account by politicians that are just out to boost themselves and not doing what is best for the nation.

The Broken Window Fallacy

Before there can be an analysis of the healthcare policies stated above and have the broken window fallacy applied to them one must understand what the fallacy is.  The broken window fallacy was first created by world renowned economist Frédéric Bastiat.

The fallacy basically describes what is known in modern economics as opportunity cost.  Opportunity cost is the cost one pays to something that could have been used to pay to do something else.  The broken window fallacy is often told through a story and the story usually goes like this:

“A young hoodlum, say, heaves a break through the window of a baker’s shop… It will make business for some glazier… The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum… But the shopkeeper will be out $250 that he was planning to spend for a new suit… instead of having both a window and a suit he must be content with the window and no suit… The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier.  They had forgotten the potential third party involved the tailor… They see only what is immediately visible to the eye.” (Hazlitt, 23-24)

In Henry Hazlitt’s book Economics in One Lesson he talks about how this fallacy can be applied to many economic situations.  Healthcare policies are not immune from the broken window fallacy.  What may seem like a very helpful policy may actually be doing harm that is unseen to someone else.

Unseen Problems with Obamacare

Before the passage of Obamacare Speaker of the House Nancy Pelosi was quoted as saying “Trust me, we need to pass it to find what’s in it;” (www.Breitbart.com).  A comment like that should be unsettling for anybody, no matter their political affiliations.  It begs to have the broken window fallacy applied to it to see what is really going on.  The Obamacare bill was over 2,000 pages long and had many people adding their own parts to it.  The idea that Obamacare can be smoothly implicated with no parts contradicting and there being no unintended consequences is foolish.

Obamacare may be able to help some people but it hurts many more.  President Obama and Congressional Democrats sold Obamacare as not a tax hike but a fee.  In the early summer of 2012 the country learned that the bill was exactly that, a tax hike.  The lawyers hired to argue in favor of the bill in the Supreme Court of the United States said that it was a tax and not a fee.  The Supreme Court agreed with them that it was a tax.  Since Obamacare is now ‘Obamatax’, what exactly is being taxed?

In Obamacare there is a huge tax increase on small businesses.  “In addition, the tax rate on… Subchapter S Corporation[s] (which many small business are organized as, allowing the owners to claim all business income as personal income) will rise from 35% to 43.4%.” (www.breitbart.com).  That tax is huge to small businesses and they are afraid of what it will mean to their businesses.  My family will personally be negatively affected by this tax hike on small businesses.

My mother owns a small variety store in a small village in upstate New York.  The store is lucky if it makes over hundred thousand dollars before taxes and other expenses.  The business is a Subchapter S Corporation which means that the business is open to the tax hike.  A tax, like the one Obamacare imposes, on a business as small as my mother’s can put it out of business.  If the business goes under than the two employees my mother hires will be out of work.

In order to have the opportunity to buy the business my family had to make great sacrifices.  My parents had almost no money after my father lost his job and we lost our house in Pennsylvania.  We moved into New York to be closer to family try to start over.  My father’s new job was not good enough so my mother got a job in the store.  Their savings started dwindling fast so in a last ditch effort to create an income my parents opened my father’s Individual Retirement Account.  They used the money to buy the store my mother worked in and the merchandise in it.  The store is everything my family has.

One might be wondering, how does the broken window fallacy play into your family’s store?  The broken window fallacy can be applied to my family’s business in a very simple way.  The seen in this scenario is that the money being taxed away from my family’s store is going to fund Obamacare.  The unseen in this scenario is what my family could be doing with the money being taxed.

There are numerous things that could be purchased or things the money could be put towards.  The nature of the unseen is that you do not know with certainty what the money can be used for so any assertion is guess an assumption.

The money being taxed from my family’s store could be used to fix up the store.  The building the store is in is around a hundred years old.  There are some renovations that could be done.  The taxed money could be used to buy merchandise for the store.  My mother has to travel to vendor shows to meet vendors and buy products.  The last time she went she bought thirty thousand dollars in merchandise.  The tax money could go to purchases like that or buying new products to experiment and see how they sell in the store.  There is something the money could have gone towards that I know my mother was planning on buying.

The building my mother’s store is in does not belong to her.  The building is owned by the previous owner of the store and my mother rents out the space.  My mother’s goal was/is to save up enough money to buy the building.  She wanted to buy the building show she can be the sole owner of the whole facility and so that is one less expense she needs to pay out.  She also wanted the building so that we can have the income from the rent from the apartment above the store.

Obamacare does more than threaten to sink my mother’s business in threatens many small businesses.  It also threatens one entire industry arguably more than any other industry.  The industry that is threatened most by Obamacare in the trucking industry.

[All the numbers and statistics that are going to be presented on the trucking industry were obtained from www.truckinfo.net.

In the United States there are 3.5 million truck drivers and many of those truck drivers are what are known as ‘owner operators.’  Owner operators are drivers that own a truck or trucking company and drive a truck as a worker.  In the United States there are 1.2 million trucking companies.  Out of those 1.2 million trucking companies 90 percent of them operate 6 or fewer trucks.

Those numbers show that the trucking industry is dominated by very small operations that operate locally, and if they are lucky regionally.  Many of those small operations are small businesses.  As with many small businesses those trucking companies file as Subchapter S Corporations.  Their filing as Subchapter S Corporations means they are subject to the Obamacare tax hike.  So the question that must be asked; can a trucking company pay for the tax hike?

Truck drivers get paid for every mile they drive, which makes them unique compared to other businesses that pay per hour.  The average pay per mile for truck drivers is about 30.3 cents.  At the rate of 30.3 cents per mile the average truck driver makes about thirty two thousand per year.  The reason for such a low salary is because how expensive it is to own a truck.  The cost to keep up on the maintenance and the other operating costs for a truck are astronomical.  For every dollar in revenue a trucking company makes 95.2 cents are used for the maintenance and upkeep for the truck itself.  With an operation cost of 95.2 cents of every dollar that leaves only a profit 4.8 cents.

Being that the profit for truck drivers and trucking companies are so low they will have a very hard time dealing with the Obamacare tax hikes.  This will lead to many trucking companies and truck drivers going out of business.  The negative effects on the trucking industry will be felt through all the other industries in our economy.

By applying the broken window fallacy to the situation with the trucking industry we can understand how other industries might be affected.  A number of things can happen because of the Obamacare tax hikes on the industry.  One of the things that could happen is that trucking companies may have to raise their prices for shipping, transport, and freight.  By the trucking companies raising their prices, to pay for the taxes, they put the burden on to the businesses they serve.  Now because of the increase in the price, for shipping and freight, businesses not need to charge more for their goods and services.  So, now the burden of the tax increase on the trucking industry is now put on the shoulders of the consumer, which hearkens back to the old saying “No business pays taxes.”  That old saying comes from the fact that businesses past the cost off to the consumer.  But, what happens if the increase in prices by the trucking company or store does not fly with consumers?

In order to try and pay for the tax hike trucking companies may try to raise their prices, as stated above.  In some parts for the county that may not be a viable solution to the tax hike problem.  In those areas businesses and consumers may not be able or willing to pay the higher prices demanded by the trucking companies or the drivers.  The businesses’ and consumers’ unwillingness to pay the price means that the trucking companies will be pricing themselves out of the market.

The idea that the trucking companies will price themselves out of the market does not only apply to the trucking industry.  Any business affected by Obamacare runs the risk of pricing themselves out of the market.

All of the examples of businesses and industries affected by Obamacare in this paper are examples of what is known as the “Crowding Out Effect.”  The crowing out effect is a simple economic principle.

“An economic concept where increased public sector spending replaces, or drives down, private sector spending. Crowding out refers to when government must finance its spending with taxes and/or with deficit spending, leaving businesses with less money and effectively “crowding them out.” One explanation of why crowding out occurs is government financing of projects with deficit spending through the use of borrowed money. Because the government borrows such large amounts of capital, its activities can increase interest rates. Higher interest rates discourage individuals and businesses from borrowing money, which reduces their spending and investment activities.” (www.investopedia.com)

The crowding out affect is a very big and unseen effect of Obamacare.  As stated above, Obamacare is meant to help people get healthcare coverage, which is the ‘seen’ of the policy.  The effects of the legislation, i.e. the crowding out effect, are a massive ‘unseen’ consequence of the law.  It is a consequence that has huge implications for many small businesses and whole industries.  These are a prime example of the broken window fallacy in action.  It is clear that there may have been little thought into the policy beyond ‘seen’ of helping people get healthcare coverage.

Seeing the Unseen

Through this paper’s analysis of the Obamacare law one thing has become really clear.  What has become clear is that there was very little thought about the effects the law.  The negative effects on businesses and industries are deep and expansive.  The implications of the law are broader than this paper can encompass.  The politicians that passed the law did not look beyond what the main effect of the law.

With the broken window fallacy we were able to see passed the main effect of the Obamacare law.  We were able to see how the law puts a huge burden on small businesses all around the country.  An example of the burden put small businesses is my mother’s small business.  Because of Obamacare the opportunity cost for my mother’s business is really high and can really hurt the business.  The money being taxed can be used as capital to buy new merchandise or to buy the building the store is in.  We also saw how other industries are affected by Obamacare.

The paper went over how Obamacare negatively affects the trucking industry, an industry many do not think about.  It was reviewed how Obamacare effects owner operators and other trucking companies and drivers.  It also covered how the negative effect on the trucking industry will be felt my other businesses and consumers.

With my analysis it is clear that the politicians and supporters of Obamacare did not think of the implications for the law.  It is also clear that they were thinking about how they can feel good but were not doing good.

 

Work Cited

Hazlitt, Henry; Economics in One Lesson; Three Rivers Press, New York; Copyright © 1962 and 1979 by Henry Hazlitt

http://www.breitbart.com/Big-Government/2012/07/27/words-matter

http://www.theblaze.com/stories/these-are-the-top-5-worst-taxes-obamacare-will-impose-in-2013/

http://www.breitbart.com/Big-Government/2012/06/29/Seven-new-taxes

http://www.truckinfo.net/trucking/stats.htm

http://www.investopedia.com/terms/c/crowdingouteffect.asp#axzz2EVd48Xcx

 

[Please follow me on Twitter at @NickFondacaro]

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