The Affordable Care Act will have a dangerous effect on the American economy. That may sound like a political stance, but it’s a conclusion directly borne out by economic forecasts. In Side Effects and Complications, preeminent labor economist Casey B. Mulligan brings to light the dire economic realities that have been lost in the ideological debate over the ACA, and he offers an eye-opening, accessible look at the price American citizens will pay because of it. Looking specifically at the labor market, Mulligan reveals how the costs of health care under the ACA actually create implicit taxes on individuals, and how increased costs to employers will be passed on to their employees. Mulligan shows how, as a result, millions of workers will find themselves in a situation in which full-time work, adjusted for the expense of health care, will actually pay less than part-time work or even not working at all. Analyzing the incentives—or lack thereof—for people to earn more by working more, Mulligan offers projections on how many hours people will work and how productively they will work, as well as how much they will spend in general. Using the powerful tools of economics, he then illustrates the detrimental consequences on overall employment in the near future. Drawing on extensive knowledge of the labor market and the economic theories at its foundation, Side Effects and Complications offers a crucial wake-up call about the risks the ACA poses for the economy. Plainly laying out the true costs of the ACA, Mulligan’s grounded and thorough predictions are something that workers and policy makers cannot afford to ignore.
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About the Author
Casey B. Mulligan is professor of economics at the University of Chicago. He is the author of The Redistribution Recession: How Labor Market Distortions Contracted the Economy and Parental Priorities and Economic Inequality. More information about Mulligan and his work can be found on www.acasideeffects.com.
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Side Effects and Complications
The Economic Consequences of HealthCare Reform
By Casey B. Mulligan
The University of Chicago PressCopyright © 2015 The University of Chicago
All rights reserved.
The Paradox of Affordability
In our unbelievably rich land, the quality of health care available to many of our people is unbelievably poor, and the cost is unbelievably high.
— Senator Edward M. Kennedy (December 9, 1978, speech at the Democratic National Committee midterm convention)
As the nation has become richer and health technologies have advanced, health care has become capable of delivering results ranging from new knees and hips for the elderly to a good chance at a long life for premature babies, to peace of mind for patients and their families. At the same time, spending on health care has grown faster than the economy itself. Millions of people pay a significant portion of their income, often in the form of voluntary deductions from their paychecks that go toward health insurance premiums, so that they and their families can access good doctors, hospitals, pharmaceuticals, and medical devices when needed. Many people take jobs solely for the purpose of paying for their health insurance. The magnitude of their sacrifices demonstrates the importance that people ascribe to health care.
Take Mike Smith, who was working long hours in California as a district manager for a national auto parts retailer. Despite wanting to help care for his grandchild and elderly in-laws, Mr. Smith kept the manager job into his 60s because he and his wife wanted the health insurance that came with it.
In order for the Smiths and others to receive the health-care results that they value, society has to dedicate workers to diagnose illnesses, administer treatments, think of and experiment with ways to improve health care, manufacture medical devices, adjudicate disputes, administer payment systems, and produce structures, equipment, and software to assist with these tasks. Those working in health care and supporting industries are workers who cannot instead be producing goods and services such as food, transportation, and entertainment.
Because people differ in terms of their income, health status, family situation, and priorities, invariably a segment of the population is unable or at least unwilling to pay for their own health care. After Senator Kennedy's speech, the share of the population without health insurance continued to grow, at least in part because health care continued to get more expensive (Cohen et al. 2009).
In many other markets, it is tolerated and maybe even welcomed when a customer segment stops buying in response to high costs. Many households, for example, have stopped subscribing to cable television as the monthly cable bill grows more expensive and they are no longer able or willing to dedicate the funds to such an expense. The trend toward dropping a cable subscription is not universally viewed as a serious problem. But health care is said to be different: people are supposed to get quality health care even if they have not taken steps to purchase health care themselves.
In the past, the federal government stepped in to deliver health insurance to populations that were least likely to get it on their own. In the 1960s it created the Medicare insurance program, which heavily subsidizes payments to health providers on behalf of elderly patients. But the Smiths did not qualify for Medicare because they were too young. Medicaid is another public health insurance program created in the 1960s and expanded in recent decades, in this case by federal and state governments on behalf of poor families, especially those with children. The Smiths, who do not have young children at home, did not qualify for Medicaid either. The Affordable Care Act of 2010 (hereafter, ACA) is for people like the Smiths to get health insurance without necessarily having a full-time job with benefits.
Medicaid and Medicare help poor and elderly individuals avoid some of the tough sacrifices that would be necessary for them to purchase health insurance without assistance. On average, Medicaid and Medicare permit beneficiaries to work less, spend more on nonhealth-related goods and services, or both. But no program can change the fundamental reality that society has to pay for health care with more people in the workforce, fewer nonhealth goods and services, more productivity, or all of the above. Thus, while Medicare and Medicaid help their target populations and give them a bigger slice of the economic pie, the programs also diminish the pie itself. The programs reduce, among other things, how much program participants work on average, exacerbating the societal problem that the economy as a whole cannot expand its health sector without giving up something else of value. In effect, people who are not receiving assistance from Medicare or Medicaid are paying twice for the programs: once as the total economic pie gets smaller and a second time as they receive a smaller piece.
A reasonable person might conclude that Medicare and Medicaid do relatively little to shrink the economic pie, because even without the programs the vast majority of work would be done by people who are neither poor nor elderly. But the economic effects of the ACA are a different matter since the program involves the bulk of the U.S. population that has been excluded from Medicare and Medicaid, and thereby the people who have been doing most of the work in the economy. Indeed, before the Affordable Care Act, both Mike and Laura Smith were together contributing as much as 100 hours per week to economic activity. But, according to National Public Radio (NPR), they both retired in 2014 because the law gave them health insurance for just $200 per month.
When NPR broadcast its story, it portrayed the Smiths' experience as an economically healthy development because the law had allowed them to "leave unfulfilling jobs," enjoy "leisurely lunches," and Mike to practice guitar. This book explains that, although NPR's conclusion contains a grain of truth because the health-insurance market before the ACA was tilted in the direction of employer-provided plans, a complete economic analysis must also recognize the taxpayer burdens created by retirements, unemployment, and other cases in which able people are not working. Because Mike retired, the federal government was paying four to six times as much for the Smith's insurance premiums as the Smiths were. We also must account for the extra taxpayer-financed Social Security benefits that early retirees may receive, and the income and payroll tax revenues that both California and federal governments lost when the Smiths stopped working.
Other economic stories put in motion by the ACA bear little resemblance to the Smiths'. Among others, workers at many schools, restaurants, and municipal offices are having their hours cut so that the new law does not recognize them as full-time workers (Pear 2014b; Graham 2014). Or take Mr. Ben Winslett, a Baptist pastor, husband, and father of five from Alabama, who describes himself as "securely in the middle class earning nearly the exact average US income each year." His family's health insurance was "taken care of on my own in the previous system," but the ACA outlawed their $250-monthly policy, leaving them with far more expensive options. As he describes it, the ACA "has placed an enormous financial burden on normal, everyday people quite literally forcing us onto government assistance we didn't need before."
Although anecdotes help to illustrate economic ideas, they cannot be the foundation for careful economic analysis. People sometimes get carried away when relaying their stories to a radio-show microphone, television camera, or newspaper reporter. Anecdotes invite overattributing results like the Smiths' retirements or fast-food workers' schedule changes to the new law, when economics tells us that the ACA is just one of many forces affecting decisions by an individual or business and sometimes a law is just the straw that broke the camel's back. Anecdotes are rarely put in a market context, and thereby risk obscuring regular market patterns with excessive individual details. The purpose of this book is to use comprehensive economic reasoning and large representative samples to measure the taxes in the ACA — including both positive and negative taxes — and to offer quantitative predictions about the law's effects on the labor market, capital accumulation, and total production in the U.S. economy.
A. Hidden Taxes
At first glance it might appear that the ACA helps people get access to health care and disproportionately benefits low-income households without many new taxes. By one estimate, the ACA's tax increases are less than 0.5 percent of gross domestic product, and less than several other hardly memorable tax increases of the postwar period (Klein 2012). The White House suggested that health reform would largely pay for itself, without mentioning taxes that, individually or in combination, would have more than a "little effect" on the labor market (Council of Economic Advisers 2009a).
Politicians and journalists use the term tax more narrowly than economists do, but the economic definition is needed to understand the effects of the ACA. Suppose, hypothetically, that the government provided a "universal" $2,000 health benefit to every person and paid for it with a tax, in the narrow sense of the word, of $4,000 per employee. Employees are half the population, so the employee taxes average $2,000 per person and are enough to pay for the universal benefit.
Now consider an alternative "targeted" approach that pays the $2,000 health benefit only to people who do not work and gets the revenue from a $2,000 tax per employee. By excluding workers from the benefit, the targeted approach appears to spend and tax less: only $1,000 per person. But the economic result is the same because, in both systems, employees pay $2,000 more than they receive. In both systems, people who are not employed receive more than employed people do; in the universal system their lack of employment exempts them from a large tax whereas in the targeted system it exempts them from a smaller tax plus it gives them access to a benefit that is withheld from workers.
Withholding benefits from people who work or earn is hardly different than telling them to pay a tax. For this reason, the field of economics refers to benefits withheld as "implicit taxes." What really matters for labor market performance is the reward to working inclusive of implicit taxes, and not the amount of revenue delivered to the government treasury according to economically arbitrary distinctions between implicit taxes and other taxes. The targeted system gives the same economic results, including the economic harms from taxes, as the universal benefit system does but without the (politically ugly) appearance of bringing significant revenues to the government treasury.
The ACA resembles the targeted approach because it is full of implicit taxes, including implicit taxes on employment and income. Mike Smith's district manager job, and tens of millions of other full-time positions, are subject to the ACA's implicit employment tax because anyone employed in it is (together with spouse and dependents) expressly prohibited from getting the ACA's assistance until the employee quits, retires, is laid off, or otherwise ceases that employment. Mike's retirement made it possible for him and Laura to get the law's new and generous benefits.
Many of the law's implicit taxes have remained hidden "in the fog of controversy" surrounding the law and their effects excluded from economic analyses of it. As of 2014, essentially the only place to find an economic analysis of the ACA's large and hidden employment taxes is this book (or drafts of its chapters). No investigation of the economic effects of the ACA should be considered accurate unless it accounts for the ACA's implicit taxes.
Figure 1.1 puts the ACA's new taxes in perspective of federal tax increases over the past 70 years. The taxes include federal personal income taxes (Form 1040, shown in pink), social insurance payroll taxes (gray), and various employment and implicit taxes (red). The figure does not show revenue for the U.S. Treasury — that statistic is vulnerable to some of the arbitrary distinctions noted above — but instead shows the effect of various tax laws on the incentives for workers to earn more labor income rather than less as measured by a marginal labor income tax rate (by marginal labor income tax I mean the extra taxes paid, and subsidies forgone, as the result of working). During a period that included more than a dozen tax increases, the ACA is arguably the largest as a single piece of legislation, adding about six percentage points to the marginal tax rate faced, on average, by workers in the economy. The only way to cite larger marginal tax increases would be to combine multiple coincident laws, such as the Revenue Acts of 1950 and 1951 and the new payroll tax rate that went into effect in 1950. The four payroll tax rate increases between 1970 and 1980 are another example of a large rate increase if we also include the personal income tax rate changes that occurred during the decade owing to inflation causing taxpayer incomes to creep into higher tax brackets without any new legislation. Even with these adjustments, the ACA is still the third largest marginal tax rate hike during the 70 years. Another feature of the ACA that distinguishes it from other large marginal tax rate rises is that the former is, by law, entirely permanent whereas essentially the only other permanent ones shown in figure 1.1 are the payroll tax rate changes.
Figure 1.1 represents the ACA as a single number, but underlying that number are multiple economically distinct taxes. Chapter 2 of this book is an introduction to a dozen or so provisions in the law and offers some indicators of their relative importance. The employer penalty is explained and measured in chapter 3. Chapter 4 features the employee penalties that are hidden in the ACA's arrangements for subsidizing health insurance assistance. The subsidy rules also include a couple of new implicit income taxes, which are discussed and measured in chapter 5.
Economists generally acknowledge that taxes have side effects, and this book is not unusual in terms of its representation of the amount of unintended consequences per dollar of taxation. The real surprises are the wide range and astonishing size of the taxes measured in chapters 3, 4, and 5. Each of the chapters shows how the ACA's new taxes can put millions of workers in a "100 percent tax" situation in which full-time work pays less than part-time work, or less even than not working at all. This is without counting the workers who can raise their disposable income by working less and thereby climbing one of the "cliffs" that are part of the ACA's rules for determining federal assistance on the basis of household income. Anyone interested in the evolution of the labor market in the United States has to understand the ACA's new taxes — they're vastly more important than, say, the interest rate on fed funds — and the first half of this book is so far the only comprehensive and user-friendly introduction to the topic.
B. Using Economics to Forecast Policy Consequences
A complicated law like the ACA has forces pushing in multiple directions. For example, the ACA contains an implicit tax on unemployment benefits. This by itself tends to reduce unemployment and increase employment, which is the opposite result of some of the other taxes in the law. But it does not mean that anything is possible, or that we must wait for more data before having any idea as to which forces dominate. The ACA's various taxes can be quantified individually and collectively. Chapters 2 through 5 show that the law's employment taxes far outweigh its employment subsidies, and its income-earning disincentives far outweigh its income-earning incentives. When the government redistributes by taxing something, the usual result is to get less of it, which is why I expect national income per person and hours worked per person to be less than they would be if the ACA had not been passed.
In writing this book, my exemplar was The Economic Consequences of the Peace, in which John Maynard Keynes (1919) offered his predictions for the effects of the 1919 Treaty of Versailles (between World War I Allied Powers and Germany) on the German economy. Keynes believed that several economic consequences of the treaty were knowable ahead of time, and he wrote his book after the hotly debated document was written but before it was fully executed. He carefully quantified the economic provisions of the treaty, and the economy that would be affected by them. Keynes wrote little about "the ideal question" — what should have been done — and instead focused on the consequences of what was actually written. I tried to include the same basic ingredients in Side Effects and Complications, and treated the implementation of the ACA as an opportunity to learn about the economy and applied economic theory, operating under the assumption that the ACA would inevitably go into effect without significant modification of the law (as interpreted by the Obama administration as of early 2014, with exceptions noted in the book). As it turns out, I reached conclusions analogous to Keynes's: that full execution of the document (the treaty in his case, the ACA in mine) would create significant economic side effects, and that advocates of the document were not fully aware of, or forthright about, the costs created.
Excerpted from Side Effects and Complications by Casey B. Mulligan. Copyright © 2015 The University of Chicago. Excerpted by permission of The University of Chicago Press.
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Table of Contents
Preface 1 The Paradox of Affordability 2 Too Good to Be True: The Health Reform’s Hidden Taxes 3 Some Unpleasant Penalty Arithmetic 4 Some Unpleasant Subsidy Arithmetic 5 Exchange Subsidies and Their Implicit Income Taxes 6 Consequences for Employee Work Schedules 7 Adam Smith’s Equalizing Differences: More Hidden Taxes and More Health Coverage 8 The ACA’s Productivity Distortions 9 Other Significant Causes of Economic Change, 2007–2017 10 Romneycare Times Eleven 11 Conclusions Notation Directory Abbreviations Notes References Index