Saturday, February 22, 2014

Funding the Affordable Care Act

Or not. With 2.5 million Americans leaving the workforce, that's 2.5 million less paying into it. Even the CBO (Congressional Budget Office) can do math:

White House: It's A Good Thing That Obamacare Will Drive 2.5 Million Americans Out Of The Workforce
[...] By 2024, says the CBO, Obamacare will reduce the size of the U.S. labor force by 2.5 million full-time-equivalent workers. That’s roughly triple what the CBO had estimated three years ago. Such a sizeable decline in the labor force will have substantial detrimental effects on the U.S. economic and fiscal picture.


In its annual, 182-page Budget and Economic Outlook, the CBO undertook an overhaul of the way it analyzes the effect of Obamacare on the job market. The new, larger estimate of the law’s negative impact on the labor force derives from three factors: (1) Obamacare’s employer mandate, which will discourage hiring and reduce wages offered by employers; (2) Obamacare’s $1 trillion in tax increases, which will discourage work and depress economic growth; and (3) the law’s $2 trillion in subsidies for low-income individuals, which will discourage many from remaining in the labor force.

Let’s focus on that last point, because it’s the one that has been the least-discussed in the media. In the past twelve months, a spate of research from academic economists has concluded that the health law, by offering economic benefits to low-income individuals, will disincentivize some of these individuals from continuing to work. Casey Mulligan of the University of Chicago has been particularly persuasive on this front, publishing two papers with the National Bureau of Economic Research.

Several economists, like Harvard’s Kate Baicker, MIT’s Amy Finkelstein, Texas A&M’s Laura Dague, and Northwestern’s Craig Garthwaite have found that expanding Medicaid is associated with rising unemployment. “Taking that research into account, CBO estimates that expanded Medicaid eligibility under the ACA will, on balance, reduce incentives to work.”

More significantly, as Casey Mulligan has warned, the new subsidized insurance exchanges will allow low-income workers to work less while maintaining the same effective income: what economists call the income effect. In addition, because the subsidies decline on a sliding scale as you make more money, that sliding scale means that as workers work more, they make less per hour worked: what economists call the substitution effect.

When Mitt Romney signed his health-reform legislation in Massachusetts in 2006, economists didn’t discern a substantial impact on the labor market. That led many Obamacare cheerleaders to dismiss concerns that the law would depress the workforce. But Mulligan observes that the Massachusetts law did not have a meaningful impact on income tax rates, unlike Obamacare. The ACA “increases national rates about 12 times as much as the Massachusetts law increased rates,” notes Mulligan; “among other things, [Massachusetts’] employer penalty is an order of magnitude less.”

CBO staff, to its credit, read the sheaf of new research on this topic, and revised its estimates accordingly. Hence all the hubbub about the new report. But wait—there’s more!

Carney: Americans should stop working ‘to pursue their dreams’

After the CBO review came out, White House Press Secretary Jay Carney published a statement in which he declared, remarkably, that it’s a good thing that millions of Americans may drop out of the work force:

Over the longer run, CBO finds that because of this law, individuals will be empowered to make choices about their own lives and livelihoods, like retiring on time rather than working into their elderly years or choosing to spend more time with their families. At the beginning of this year, we noted that as part of this new day in health care, Americans would no longer be trapped in a job just to provide coverage for their families, and would have the opportunity to pursue their dreams.

Bored with your job? No worries—now you can quit, thanks to the generosity of other taxpayers. Want to retire early? No worries—now you can, thanks to the generosity of other taxpayers, and also thanks to the higher premiums that young people will be forced to pay on your behalf. The White House’s apparently sincere belief—echoed by progressive pundits at MSNBC, The New Republic, and the L.A. Times—is that it’s a good thing for fewer Americans to be economically self-sufficient.

If you’re one of the chumps out there who still toils away at a challenging job, and still pays taxes so that others can “pursue their dreams,” you have a right to resent the White House’s argument. And the “dream-pursuers” themselves should become aware of all the research suggesting that earned success, through hard work, is the most reliable path to true happiness.

Participation in the labor force was already declining, thanks to the poor economy and the retirement of the Baby Boomers. Obamacare, it appears, will accelerate that process, forcing fewer and fewer taxpayers to support a greater number of government beneficiaries.

No universal-coverage plan is immune from this problem

I should issue two caveats before I go on: any health-reform plan that seeks to offer coverage to the uninsured will have this type of effect on the labor market. As Josh Barro notes, the new Republican plan to replace Obamacare offered by Senators Tom Coburn (Okla.), Richard Burr (N.C.), and Orrin Hatch (Utah) also has a means-tested subsidy to help the poor buy health insurance.

In addition, it is genuinely a good thing for us to move to a system where people control their own health dollars and their own health coverage, and aren’t stuck at a job because they’re afraid of losing the coverage they have. But giving people the opportunity to switch jobs is quite a different goal from encouraging them to drop out of the work force altogether.

The negative effect of Obamacare on the labor market is far worse than any Republican alternative would be, because the ACA dramatically expands Medicaid, and because the law heavily subsidizes health insurance for those nearing retirement. In addition, Obamacare depresses economic growth through a $1 trillion tax increase, and increases the cost of hiring new workers, because of its employer mandate requiring most businesses to offer health coverage to every worker.

The CBO report harbors more bad news

The new CBO report contained a lot of other interesting information. CBO projects that economic growth will be more sluggish than they had previously projected. From 2018 to 2023, nominal GDP growth will average 4.2 percent, compared to the CBO’s previous estimate of 4.4 percent. Over the same period, unemployment will average 5.6 percent, higher than the previous estimate of 5.4 percent.

Because of this slower economic growth, CBO projects that from 2014 to 2023, the federal government will receive $1.4 trillion less in tax revenue than it had projected last year. As a result, “CBO now estimates that the cumulative deficit for the 2014-2023 period…would be about $1.0 trillion greater than it projected in May [2013].” [...]
The biggest problem with the ACA, the way it is, is funding it. Parts of it were fine, and the Republican plan embraced those parts. But other parts are unsustainable. What is the point of passing legislation that is unsustainable?

Ideally, the president should have worked with Democrats and Republicans in Congress to combine aspects of both their plans, into something that would work. But that didn't happen. We got the Democrats plan shoved down our throats. Now what's going to happen, as this disaster continues to unfold, and it starts to fail?

It looks like we shall see. We will all have front row seats, whether we want them or not.

The full article at has many embedded links, graphs, and videos.


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