The Economist Who Exposed ObamaCare

From the Wall Street Journal The Economist Who Exposed ObamaCare

The weekend edition of the Wall Street Journal has an article on Casey Mulligan and his analysis of explicit and implicit taxes in Obamacare and the impact those taxes have on the supply and demand for labor.

A few selections:

The CBO's intellectual conversion is all the more notable for accepting Mr. Mulligan's premise, which is that what economists call "implicit marginal tax rates" in ObamaCare make work less financially valuable for lower-income Americans. Because the insurance subsidies are tied to income and phase out as cash wages rise, some people will have the incentive to remain poorer in order to continue capturing higher benefits. Another way of putting it is that taking away benefits has the same effect as a direct tax, so lower-income workers are discouraged from climbing the income ladder by working harder, logging extra hours, taking a promotion or investing in their future earnings through job training or education.

This is the liberation lauded by the White House, the NY Times and MSNBC, "Some people will have the incentive to remain poorer in order to continue capturing higher benefits."

The stimulus caused a spike in marginal rates, but at least it was temporary. ObamaCare will bring them permanently into the 47% range, or seven percentage points higher than in early 2007. Mr. Mulligan says the main response to his calculations is that people "didn't realize the cumulative effect of these things together as a package to discourage work." 

For years the White House, the Democrats, the NY Times and MSNBC have been screaming for higher marginal tax rates on the rich. It is tragic that their signature piece of legislation raises taxes on the poor and the result is exactly what you would expect:

when you pay people for being low income you are going to have more low-income people 

and

 if you pay unemployed people you're going to get more unemployed people. 

This Time is Different-The Prince of Poyais

I'm reading Reinhart and Rogoff's "This Time is Different: Eight Centuries of Financial Folly." I love this passage from Chapter 6, External Default Through History. It's a long build up to the Prince of Poyais, but worth it.

The volatile and often chaotic European financial markets of the Napoleonic Wars had settled down by the early 1820s. Spain had, in quick succession, lost colony after colony in Central and South America, and the legendary silver and gold mines of the New World were up for grabs.

Forever engaged in an endless quest for higher yields, London bankers and investors were swept away by silver fever. The great demand in Europe for investment opportunities in Latin America, coupled with new leaders in Latin America desperate for funds to support the process of nation building (among other things), produced a surge in lending from (mostly) London to (mostly) Latin American sovereigns. 

According to Marichal, by mid-1825 twenty-six mining companies had been registered in the Royal Exchange. Any investment in Latin America became as coveted as South Sea shares (by 1825 already infamous) had been a century earlier. In this “irrationally exuberant” climate, Latin American states raised more than 20 million pounds during 1822-1825.

“General Sir” Gregor MacGregor, who had traveled to Latin America and fought as a mercenary in Simon Bolivar’s army, seized the opportunity to convince fellow Scots to invest their savings in the fictitious country of Poyais. Its capital city, Saint Joseph (according to the investment prospectus circulated at the time), boasted “broad boulevards, colonnaded buildings, and a splendid domed cathedral.” Those who were brave and savvy enough to cross the Atlantic and settle Poyais would be able to build sawmills to exploit the native forests and establish gold mines. London bankers were also impressed with such prospects of riches, and in 1822 MacGregor (the Prince of Poyais) issued a bond in London for £160,000 at a price of issue to the public of £80, well above the issue price for the first Chilean bond floated. The interest rate of 6 percent was the same as that available to Buenos Aires, Central America, Chile, Greater Columbia, and Peru during that episode. Perhaps it is just as well that Poyais faced the same borrowing terms as the real sovereigns, for the latter would all default on their external debts during 1826-1828, marking the first Latin American debt crisis.

CBO, Obamacare and the Demand for Labor

From the CBO's "Budget and Economic Outlook 2014 to 2024."

Page 124, "Effects of the ACA on the Demand for Labor"

The ACA also will affect employers’ demand for workers, mostly over the next few years, both by increasing labor costs through the employer penalty (which will reduce labor demand) and by boosting overall demand for goods and services (which will increase labor demand).

The Employer Penalty:

Beginning in 2015, employers of 50 or more full-time- equivalent workers that do not offer health insurance (or that offer health insurance that does not meet certain criteria) will generally pay a penalty. That penalty will initially reduce employers’ demand for labor and thereby tend to lower employment. 

Over time, however, CBO predicts wages will fall and the supply of labor will fall instead of the demand. (The White House, NY Times and MSNBC will undoubtedly find this liberating).

A second and more durable constraint is that businesses generally cannot reduce workers’ wages below the statutory minimum wage. As a result, some employers will respond to the penalty by hiring fewer people at or just above the minimum wage—an effect that would be similar to the impact of raising the minimum wage for those companies’ employees. 

I guess the CBO didn't get the memo that minimum wage does not have a negative impact on labor demand.

Businesses also may respond to the employer penalty by seeking to reduce or limit their full-time staffing and to hire more part-time employees.

The CBO discusses part-time work and the impact of Obamacare and concludes:

In CBO’s judgment, there is no compelling evidence that part-time employment has increased as a result of the ACA.

It would be useful to read the last sentence of that paragraph:

In any event, because the employer penalty will not take effect until 2015, the current lack of direct evidence may not be very informative about the ultimate effects of the ACA.

I think the CBO's analysis of the demand for labor is just as devastating as it's analysis on the supply of labor. It would be useful if the White House, NY Times, MSNBC and knee-jerk supporters of this, "ugly piece of garbage" that has been implemented with "incomprehensible incompetence," read the damn report before commenting on it.

 

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.

The Head of the CBO Answers Your Claim

Bill

In response to your recent claim that the ACA is a job killer, Doug Elmendorf replies

"On Wednesday, Congressional Budget Office (CBO) director Doug Elmendorf refuted the claim that the Affordable Care Act is a job killer — a misleading takeaway from his agency’s new report that is being touted by Obamacare critics.
Testifying before the House Budget Committee on the CBO’s newly released economic projections for the next decade, Elmendorf addressed the report’s finding that the Affordable Care Act will reduce the labor participation rate and the total number of hours worked by an equivalent of 2 million jobs in 2017. According to Elmendorf, that statistic is being taken out of context to suggest that Obamacare will eliminate jobs.
“The reason we don’t use the term ‘lost jobs’ is there is a critical difference between people who like to work and can’t find a job — or have a job that’s lost for reasons beyond their control — and people who choose not to work,” he explained. “If someone comes up to you and says, ‘The boss says I’m being laid off because we don’t have enough business to pay,’ any other person feels bad about that and we sympathize for them having lost their job. If someone says, ‘I decided to retire or stay home and spend more time with my family and spend more time doing my hobby,’ they don’t feel bad about it — they feel good about it. And we don’t sympathize. We say congratulations.”
Even Budget Committee Chairman and former GOP vice presidential nominee Paul Ryan conceded that point in part. “Just to understand, it is not that employers are laying people off,” said Ryan at the beginning of the hearing.
In fact, the CBO report explicitly states that the estimated reduction in labor “stems almost entirely from a net decline in the amount of labor that workers choose to supply, rather than from a net drop in businesses’ demand for labor” and that “there is no compelling evidence that part-time employment has increased as a result of ACA.”

Eli

Can I (rebuild) the Brooklyn Bridge For You?

Bill,

Reading your insightful post about the dark side of infrastructure projects, I was immediately reminded of David McCullough's classical account of the building of the Brooklyn Bridge. I imagine that you, lover of history that you are, have already ready the book, and I know you've walked across the bridge more than once. Reading this  riveting story of America's 1st great infrastructure project, one notes immediately how little has changed. Intense skepticism abounded. The usual NIMBY politics provided vociferous opposition . Graft and corruption were rampant. Payoffs, and later on, prosecutions, came in equal measure. Workers were exposed to the most appalling hazards (this is the event that led to our modern understanding of decompression sickness, or the "bends " as it popularly known). Careers were made, lives were ruined. The economy of New York and the possibilities for the nation were transformed. Today the bridge endures, solidly as ever, as a symbol of the kind of private public partnership that's made America, well, America.

Do you have any reason to believe that anything like it is ever going to be built again?

Meanwhile, I'm locked in mortal combat with potholes by the yard as I drive into the decrepit, impoverished city that contains the hospital where I work

Eli

An Alternative View on Why Politicians Love Infrastructure Spending

From The New Yorker, "The Sochi Effect" by James Surowieki

 “Whatever happens on the ice and snow of Sochi in the next couple of weeks, one thing is certain: this Winter Olympics is the greatest financial boondoggle in the history of the Games. Back in 2007, Vladimir Putin said that Russia would spend twelve billion dollars on the Games. The actual amount is more than fifty billion. (By comparison, Vancouver’s Games, in 2010, cost seven billion dollars.) Exhaustive investigations by the opposition figures Boris Nemtsov, Leonid Martynyuk, and Alexei Navalny reveal dubious cost overruns and outright embezzlement. And all this lavish spending (largely paid for by Russian taxpayers) has been, as Nemtsov and Martynyuk write, “controlled largely by businesspeople and companies close to Putin.” “Sochi is emblematic of Russia’s economy: conflicts of interest and cronyism are endemic. But the link between corruption and construction is a problem across the globe. Transparency International has long cited the construction industry as the world’s most corrupt, pointing to the prevalence of bribery, bid rigging, and bill padding. And, while the sheer scale of graft in Sochi is unusual, the practice of politicians using construction contracts to line their pockets and dole out favors isn’t. In the past year alone, Quebec learned about systematic kickbacks and Mob influ­ence in the awarding of city construction contracts. In Turkey, Prime Minister Recep Tayyip Erdoğan has become embroiled in a vast scandal involving friendly construction tycoons who were given cheap loans and no-bid contracts. And a recent report from the accounting firm Grant Thornton estimated that, by 2025, the cost of fraud in the industry worldwide will have reached 1.5 trillion.” “What makes construction so prone to shady dealings? One reason is simply that governments are such huge players in the industry. Not only are they the biggest spenders on infrastructure; even private projects require government approvals, permits, worksite inspections, and the like. The more rules you have, and the more people enforcing them, the more opportunities there are for corruption. And, in many countries, the process of awarding contracts and permits is opaque. As Erik Lioy, a forensic accountant and fraud expert at Grant Thornton, told me, “When it’s not clear how projects get approved, people assume the worst, and that provides incentives to do a bribe or kickback.”

Joe Biden on infrastructure here.

"A fateful choice between passing nothing or passing an ugly piece of garbage"

I like much of Walter Russell Mead's writing.

Some intra-party tension between the executive and legislative branches is normal, but the amount of tension in this case is not. Why is this time different? It’s not trade or environmental issues that are driving the rift; it’s the dog that hasn’t barked, the issue that was supposed to unite Democrats even as the President pulled the party to the center on peripheral issues. It was, in short, Obamacare. The Democratic plan for 2014 was to run on achievement of the Holy Grail of blue ideology and Democratic politics since the time of Harry Truman. 

But the Democrats chose…poorly. In Congress, they wrote a horrible mess of a law, filled with all sorts of political land mines and time bombs. Democrats banked on being able to fix the glaring flaws in a conference committee, but when they lost the sixtieth vote in the Senate, they weren’t able to do that. They had to make a fateful choice between passing nothing or passing an ugly piece of garbage, and they picked the garbage. It’s been stinking up the place ever since. 

That’s a self inflicted wound. The Democrats in Congress did that to themselves, and if the continued disintegration of Obamacare is hurting them at the polls…well, that’s democracy in action. 

But the White House, which has actually done a fairly good job using waivers, extensions, and orders to shore up the train wreck of a health care law produced by Congress, committed an act of incomprehensible incompetence. Not only did the administration fail to develop the website for the health care exchanges on time; the President himself was also painfully and publicly clueless about the impending fiasco. The White House’s ineptitude focused the attention of the electorate like a floodlight on all the other deep flaws in Obamacare. And so the GOP, despite also being a house divided, is on the offensive in 2014.

The roll out of Healthcare.gov was "an act of incomprehensible incompetence," of a law that was "an ugly piece of garbage."

I think that sums it up.

How Much Will the ACA Reduce Employment in the Longer Term?

From the non-partisan Congressional Budget Office. "The Budget and Economic Outlook: 2014-2024." Appendix C, Page 117

How Much Will the ACA Reduce Employment in the Longer Term?

The ACA’s largest impact on labor markets will probably occur after 2016, once its major provisions have taken full effect and overall economic output nears its maximum sustainable level. 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. Because the largest declines in labor supply will probably occur among lower-wage workers, the reduction in aggregate compensation (wages, salaries, and fringe benefits) and the impact on the overall economy will be proportionally smaller than the reduction in hours worked. Specifically, CBO estimates that the ACA will cause a reduction of roughly 1 percent in aggregate labor compensation over the 2017–2024 period, com- pared with what it would have been otherwise. Although such effects are likely to continue after 2024 (the end of the current 10-year budget window), CBO has not estimated their magnitude or duration over a longer period.

"The largest declines in labor supply will probably occur among lower-wage workers." Good thing the Democrats are on the side of the working man.

Keep your plan? No.
Keep your doctor? No.
Lower premiums? No.
Lower the number of uninsured? So far, no.
Bonus for the low wage workers? Less work.

Tell me again the Democrats were so anxious to pass this law?