Nobel Prize-Winning Economist Milton Friedman on AFCM's Goals
By Milton Friedman
Toward the end of World War II, I served as an
instructor in a quality-control course for Navy procurement
officers. It was held in Hershey, PA. As I recall, we stayed at the
Hershey Hotel, on the corner of Cocoa Avenue and Chocolate
Boulevard, across the street from the Hershey Junior College, where
the actual instruction took place, a block or so from the Hershey
Department Store, and so on. You get the idea. The stench or perfume
of paternalism was heavy in the air.
Early in the century such company towns, most far less benevolently
paternalistic than Hershey, were common. Workers who were employed
at mines or factories located far from large cities, in towns that
typically had only a single major employer, were often required, or
induced, to live in company housing and buy their food and other
supplies at company stores. In effect, they were paid in kind rather
than in cash the so called truck system. As Merle Travis put it in
his song, made popular by Tennessee Ernie Ford: "You load 16 tons
and what do you get? / You get another day older and deeper in debt. /
Saint Peter, don't you call me, 'cause I can't go, / I owe my soul to
the company store."
Reformers objected strongly to the practice, maintaining that
workers should be paid in cash and be free to spend their incomes
where they wanted. As the country grew and the isolated company town
became far less common, reformers had their way and the payment of
wages in cash became the norm. By the 1940's, Hershey was an
Not so today. The company town has been revived in one major area:
medical care. It is taken for granted that workers should receive
their pay partly in kind, in the form of medical care provided by
the employer. How come? Why single out medical care? Surely food is
no less essential to life than medical care. Why is it not at least
as logical for workers to be required to buy their food at the
company store as to be required to buy their medical care at the
The revival of the company store has less to do with logic than with
pure chance. It is a wonderful example of how one bad government
policy leads to another.
During World War II, the government imposed wage and price controls,
while at the same time financing wartime spending by printing money.
The resulting inflationary pressure, along with price controls,
produced shortages of all kinds, including labor. Firms competing to
acquire labor at government-controlled wages started to offer
medical care as a fringe benefit. That benefit proved particularly
attractive to workers and spread rapidly.
Initially, employers did not report the value of the fringe benefit
to the Internal Revenue Service as part of their workers' wages. It
took some time before the IRS realized what was going on. When it
did, it issued regulations requiring employers to include the value
of medical care as part of reported employees' wages. By this time,
workers had become accustomed to the tax exemption of that
particular fringe benefit and made a big fuss. Congress responded by
legislating that medical care provided by employers should be
Wage and price controls ended but the tax-exemption of medical care
provided by employers did not, which explains the survival of the
company store in this area. That survival is unquestionably a major
reason for the present crisis in medical care.
The obvious solution is to eliminate the tax exemption of medical
care in which case employers and employees would find it mutually
advantageous to convert the fringe benefit to a cash wage
supplement. However, this solution is widely regarded as not
An alternative often proposed is to continue the tax exemption but
end requirement that medical care by purchased through the company
store. Let employers now providing medical care and their employees
agree on a specified sum to be added to cash wages in lieu of
employer-provided medical care. Let that sum be tax-exempt to the
employee if deposited in a so called medisave account. Let employees
have complete discretion over how they use that sum, provided they
use it for medical care. If they do not use all of it, let it
accumulate and under specified conditions be withdrawn by the
employee for other purposes.
I have little doubt that the introduction of such medisave accounts
would significantly reduce the total cost of medical care. I hasten
to add that this proposal is not a panacea for present difficulties.
Medicare and Medicaid would still remain powerful impediments to the
efficient and effective use of medical facilities and personnel.
Milton Friedman is a distinguished, Nobel Prize-winning economist
and author (Free to Choose, written with his wife, Rose), and an
ardent advocate of free-market capitalism. Dr. Friedman has endorsed
the ideas of Americans for Free Choice in Medicine (AFCM).
This article was published in the July 1994 print edition of
AFCM's newsletter, Pulse.
Copyright © 1994 Americans for Free Choice in Medicine. All rights reserved.
For reprint permission, contact AFCM.