Economics, Health Care

CBO’s ACA report bodes ill for work

Image Credit: Shutterstock

Image Credit: Shutterstock

In case you hadn’t heard, the Congressional Budget Office projects that the Affordable Care Act – aka, Obamacare – will reduce the number of working Americans by over 2 million in coming years. That can’t be a fun number for the ACA’s defenders to defend.

So far, they’re focusing on the positive: say, the worker in poor health who would like to retire, but who prior to the ACA had to work to secure health coverage; or, the new mother who would prefer to stay home with her child and, thanks to the ACA, can now do so. Economists refer to this as an “income effect” – you’ve got more income, and so there’s less need to work.

These examples aren’t illegitimate, though since some people will be leaving the workforce on other people’s dime, we should think carefully about how much we want to subsidize early retirement, stay-at-home moms, and so forth. We also want to consider that not working today might prevent lower-income Americans from gaining the skills that lead to a more prosperous and fulfilling life in the future. So even the outcomes that progressives highlight are a mixed blessing.

But there’s an entirely different effect that progressives downplay, and from my reading of CBO’s report it seems to play a larger role in reducing employment. As the CBO points out, “the health insurance subsidies that the Act provides to some people will be phased out as their income rises—creating an implicit tax on additional earnings.” According to the University of Chicago’s Casey Mulligan, the ACA will add about 10 percentage points to marginal tax rates for low-income workers and 5 percentage points for middle-income employees. As a result of this “substitution effect” – that is, of substituting leisure for labor as the rewards to work decline – Americans will work less.

Perhaps this is inevitable: any time you give something to low-income people and phase it out for high-income people, you’re going to get both income and substitution effects that reduce the rewards to work. But if we consider the non-financial aspects of work to be important, maybe that’s the more essential thing to understand.

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5 thoughts on “CBO’s ACA report bodes ill for work

  1. The GOP and AEI seen content with the VA model of care and it works for millions of veterans—why not expand to cover everybody? Has Biggs ever written that the VA reduces work incentives?

    • I’m not sure it does (or at least not as much as the ACA) because, as far as I know, the VA subsidy doesn’t phase out in the same way that the ACA subsidy does.

  2. I hate to bring this up, but the CBO is comprised of, you know, people… who make projections that, however well-intended, don’t necessarily come true.

    The argument that it is likely to come true is pretty sound. But, so is its counter: The target audience for this social program is unlikely to “do the math” to determine the break-even point for total income. Consequently, the impact on labor will be negligible.

    Which one will prove out? We won’t ever know for sure. The only way to know for certain would be to “turn back time” and replay the next few years without the ACA. Since that can’t happen, we’ll be down to anecdotes and projections once again when we try to “calculate” the law’s effects at some future date. It will be a pointless effort that can only yield opinion, not fact.

    All social programs produce winners, losers, and unintended (and/or unmeasurable) consequences. Social Security almost certainly influences people to retire rather than keep working. Welfare almost certainly influences people to lower their ambitions. But these programs are generally popular, in part because their absences would seem to be far worse alternatives. So, maybe “popularity” is the sole yardstick for measuring the worth of a social program? If a program proves popular, we keep it. If not, we either change it or get rid of it. I give enough credit to the collective wisdom of the people being governed to be able to discern the difference.

    • Dagbone, Your point isn’t irrational — you can’t respond to incentives you can’t figure out — but the incentives in the ACA are pretty clear-cut. Moreover, the CBO’s estimate relies upon other studies of how people actually do react to incentives, so (at least in theory) they’re catching the fact that people don’t respond as theory says they might.

      • The incentives may be clear-cut to you as a skilled economist with very strong intellect and a vested interest in sorting out this particular issue. But for the rest of us–myself included!–I’m not so sure.

        And yes, I’m sure the CBO is as good as it gets when it comes to methodology, practice, interpretation, and projection. But when it comes to “knowing the unknowable”, I’m just not sure that being the best is particularly useful.

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