Friday, February 7, 2014

The Head of the CBO WROTE My Claim

The CBO wrote, and followed that with Congressional testimony, that Obamacare creates incentives for workers to reduce their supply of labor. The most recent estimate by the CBO is

"CBO estimates that the ACA will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor—given the new taxes and other incentives they will face and the financial benefits some will receive."

See the CBO report here, and our post here.

Casey Mulligan, believes the impact is about 3% and laid it out in some detail in "The Redistribution Recession." (Oxford University Press, 2012). I've referred to Mulligan in a number of posts, here, here, here, and briefly here.

At least from my seat Mulligan has been far ahead of everyone on this issue and as time passes his analysis is increasingly driving the debate and his predictions look to be remarkably prescient.

There is a labor supply impact, which the CBO addressed in its most recent report. And some took that to mean the CBO was referring to a labor demand impact, which clearly it wasn't. However, that doesn't mean there is no labor demand impact, because there is. I would suggest reading Mulligan.

His analysis is thick but boils down to relatively easy to understand concepts.
1) If prices go up, demand goes down. Taxes laid on employers for labor results in higher prices.
2) When labor faces high marginal tax rates, the tax on working that extra hour, their is a dis-incentive to work.
The CBO report spoke to point 2. But certainly point 1 is just as valid even if not analyzed by the CBO.

Remarkably, Mulligan and others who pointed out these rather obvious truths were castigated by the Obamacare Amen Corner as liars, idiots, racists, fools, knaves and film-flam men. So much for the party of science.

The response by the chattering class to this report has been, unfortunately, typical. The White House, the New York Times, MSNBC (the usual suspects) are all echoing each other: It's GOOD people opt out of the labor force or opt to reduce their wages. It's GOOD there are incentives to encourage people from working more hours.

But is it? Is it GOOD people maintain their income at low levels? What happened to the fight against inequality? Is it GOOD to create a system of dependency and poverty traps?

It seems the supporters of Obamacare are so wedded to the law that they refuse to see any flaws. I think it's a classic example of Barry M. Staw's "Knee-deep in the Big Muddy: A Study of Escalating Commitment to a Chosen Course of Action," where
the phenomenon where people justify increased investment in a decision, based on the cumulative prior investment, despite new evidence suggesting that the cost, starting today, of continuing the decision outweighs the expected benefit.

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