Path dependence and the road not taken

Job perks

Beyond the obvious global consequences, the upheaval of the Second World War was causing significant reverberations in the American labor market. Millions of workers who would normally have been filling jobs on the home front were instead deployed around the world as soldiers. For domestic businesses this meant intense competition for the people needed to sustain operations. In keeping with the basic predictions of Econ 101, limited supply in the face of high demand was inflating wages and prices all around.

As a response the federal government made unprecedented interventions in the economy, establishing detailed price ceilings and even rationing scarce goods whose main supply was redirected to the military. As the war progressed, Congress passed a law regulating the wages that employers could pay, specifically restricting increases. A minor term, tucked away at the end of the statute, exempted insurance and pensions from the definition of wages.

This meant that employers unable to distinguish themselves on salaries would have to find another lure to attract candidates. The nascent market for health benefits fit the bill. Providing such coverage became common, a trend that continued in earnest long after the war concluded. In 1954 the tax courts added their imprimatur to this practice by clarifying that companies could pay health premiums for their workers with pre-tax dollars, with no limits on generosity.

Combine these policy decisions with society’s growing wealth, along with advances in medical science that made it both more effective and far costlier, and the stage was set for employer-provided insurance to be the dominant paradigm for healthcare financing in the United States.1 It became de facto obligatory, as the average job seeker wouldn’t consider jobs that didn’t provide it. This also meant that individual insurance products never developed in a substantial way.

This structure contained the seeds of significant problems that current generations are now painfully reaping. Insurance is tied to one company, excluding those outside the embrace of a largish employer and adding significant disruption to any job changes. Medical inflation continues with little natural checks as costs are opaque to patients, subsidized by the tax code, and generally under the purview of human resources departments with little expertise in managing the complex medical needs of their staff—understandable, since most companies are in the business of selling things, not managing the minutiae of diabetes treatments or knee pain.

Employees need housing, meals, education, and any number of other necessities that are much more regularly accessed than medical care. Yet if employers choose to provide these essentials their value is considered income and taxed like the cash portion of one’s salary.2 As a result most generally steer clear of managing their workers’ real estate or dining needs.

In the United States healthcare remains the glaring anomaly, devouring a greater share of the economy every year and weighing down salaries as total compensation shifts in its favor. Proposals to change the system are growing more dramatic as the strains are building. Rumblings of a single-payer system that would detonate the entire existing infrastructure and rebuild from the wreckage are becoming plausible.3

Butterfly effect

Interlocking phenomena like the U.S. healthcare system exhibit a condition known as path dependence. Each step taken is influenced by and constrained by upstream decisions, many of which were made without fully anticipating the consequences or conditions that would later apply, some of which would have been impossible to predict. Whatever one’s political persuasion, no one building a healthcare system from scratch would choose the path implicitly chosen by the United States as a whole, yet here we are.4

Path dependence also means that no matter how obvious the problems are, the solutions are frustratingly limited. Minor attempts to tweak the tax code to treat healthcare like other benefits has led to loud backlash from those who have oriented their own professional arrangements around the status quo.5 Attempting to introduce cost discipline and price transparency for the healthcare consumer seems to generate more confusion than efficiency, given that multiple generations have adapted to the current world and the normal signals that make traditional markets work are absent.6

In transportation, Tesla is the herald of the electric car revolution in the 21^st century, but the concept was around at the very inception of the industry, in some ways out-competing the internal combustion engine. In 1900 electric vehicles had 28% share in the United States, before plunging to effectively zero by the 1920s. It has since begun the long slow climb back and is just under 2% today—changing decades of societal and industrial choices based on gasoline power has not been straightforward.

Micro examples are even closer at hand. If it’s oriented to the English language, the digital device on which you’re reading this has a keyboard that follows no discernible rules of spelling or alphabetization.7 The QWERTY layout was first codified in the era of typewriters that used individual metal levers that would swing with each key press. The exact rationale for the current order is hazy, but it likely had something to do with ensuring the smooth functioning of the mechanical innards of the typewriter that became the market standard.

The inventor of the first commercially successful machine had contracted with arms manufacturer Remington to produce his device, which happened to take an early lead in the crowded battle for dominance. As more typists became trained on this layout it became the primary one demanded by the market, so innovators deviated from it at their peril. The familiar layout used today was more or less fixed by 1878, and the massive technological innovations of the intervening century and a half, including computing capabilities unimaginable at the time, have done little to dislodge it.8

Choices reinforce themselves in unexpected ways, and eventually an ecosystem hardens around a particular set of conditions. The costs of changing the system are much higher than the immediate inconvenience, and the cycle repeats itself. Other possibly superior options never have the space and attention needed to develop and so wither away.

Choose your own adventure

For an individual embarking on a career, the choice of major can lead to a first job, which establishes credibility in one field while reducing the potential for it in another. Choose with foresight or luck and the trajectory may be comfortable, with your pick of options and flexibility to live where you prefer. Select a declining field and a career devolves into scrabbling to put that degree to use while stringing together side hustles just to make rent.9 For instance, in recent years countless students pursued expensive degrees in the humanities only to find the academic job market shriveling up, leaving them few ways to recapture their investment.10

Path dependence is the dark side of relentless commitment and persistence. While going deep is necessary for significant achievement in many fields, the constraints it entails can make this option fragile, inflexible to external shocks and not easily redirected if the choice starts looking irrelevant. In such cases early action, ignoring sunk costs, is preferable to getting locked in. In startup circles, the concept of minimum viable product has become popular for its potential to address this problem.

In the case of healthcare in the United States, it’s not clear that disassembling and rebuilding the system is economically or politically viable, making stasis or breakdown more likely. Focusing on greater efficiency would have been much easier before an entire modern economy was built around it. Similarly, organizational strategies are easier to modify before staff are hired and entire departments cohere around an idiosyncratic way of operating.

How are the choices you’re making constraining your possible futures? What happens if the underlying assumptions change? How can you ensure your organization chooses the best path, even when inertia forces it strongly down a different one?

---

Not receiving these articles automatically? 1/week, subscribe here.

---

References

NPR’s story on the genesis of the U.S. healthcare system is available in written and audio form.

The U.S. Congressional Research Service reported on the history of the tax exclusion for health insurance and its continuing role in sustaining the current system.

The original text of the Stabilization Act of 1942 is brief and available here, with the health insurance exclusion in section 10.

BBC reviewed the murky origins of the QWERTY layout.

Electric car history from PBS, and current market share data from the Edison Electric Institute.