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The CBO Report on the ACA: Between Right and Left

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A recent report from the CBO contains an appendix detailing updated estimates of the labor market effects of the Affordable Care Act (ACA). Pundits for and against the ACA have wasted no time in putting their own particular spin on the projections. Republicans and some other opponents have seemingly celebrated the idea that these estimates may show that the ACA is “a job-killing, economy-crushing villain,” while Democrats and some other supporters have claimed that in times of high unemployment, it’s “an economic benefit” that some will be voluntarily reducing hours or dropping out of the labor force because that means greater demand for labor — those currently unemployed would therefore have more options.

So who’s right? These are mutually contradictory claims, or so it appears. The report is ultimately limited and mixed, but nevertheless raises some serious concerns, caused, in part, by the polarization of Congress both when the law was passed and up to the present.

In the short run, supporters are right, at least according to the CBO. The ACA will likely mitigate some effects of unemployment through new taxes and incentives: “CBO estimates that the ACA will cause smaller declines in employment over the 2014–2016 period than in later years.” Furthermore, during this time period, “if some people seek to work less, other applicants will be readily available to fill those positions and the overall effect on employment will be muted.”

In addition, the CBO offers the following mixed projection with regards to short-term labor demand:

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).

We could give a point to each side for this one. On the one hand, “the employer penalty … will reduce labor demand.” On the other hand, increased “demand for goods and services … will increase labor demand.”

The ACA may also encourage some to look for more or different work:

the ACA could shape the labor market or the operations of the health sector in ways that affect labor productivity. For example, to the extent that increases in insurance coverage lead to improved health among workers, labor productivity could be enhanced. In addition, the ACA could influence labor productivity indirectly by making it easier for some employees to obtain health insurance outside the workplace and thereby prompting those workers to take jobs that better match their skills, regardless of whether those jobs offered employment-based insurance.

On the other hand,

Some employers, however, might invest less in their workers—by reducing training, for example—if the turnover of employees increased because their health insurance was no longer tied so closely to their jobs. Furthermore, productivity could be reduced if businesses shifted toward hiring more part-time employees to avoid paying the employer penalty and if part-time workers operated less efficiently than full-time workers did. (If the dollar loss in productivity exceeded the cost of the employer penalty, however, businesses might not shift toward hiring more part-time employees.)

Yet these two possibilities may cancel one another out:

Whether any of those changes would have a noticeable influence on overall economic productivity, however, is not clear. Moreover, those changes are difficult to quantify and they influence labor productivity in opposing directions. As a result, their effects are not incorporated into CBO’s estimates of the effects of the ACA on the labor market.

Thus, this is one example of how the projection is both limited and mixed. There is much that remains uncertain and impossible to quantify and project.

The long-term trend, of what is considered and measurable, is negative, however:

CBO’s updated estimate of the decrease in hours worked translates to a reduction in full-time-equivalent employment of about 2.0 million in 2017, rising to about 2.5 million in 2024, compared with what would have occurred in the absence of the ACA.

To be clear, this is not precisely a loss of 2.0 and 2.5 million jobs or potential jobs — “job-killing” would certainly be hyperbole:

The reduction in full-time-equivalent employment that CBO expects will arise from the ACA includes some people choosing not to work at all and other people choosing to work fewer hours than they would have in the absence of the law.

A sliding scale of subsidies for lower-income households is one factor, as well as a higher payroll tax for those earning $250,000 or more.

While some still think this is negligible given increase in labor demand, the CBO limits those benefits to 2014-2016. At a certain point, while demand for labor may continue to increase, supply of willing laborers will not match this demand. A supply shortage of labor forces employers to choose one or both of the following: increased labor costs or decreased production. Increased labor costs come in the form of shifting some workers (if they are willing) from part-time to full time — including the ACA requirement of insurance costs for full-time workers — and/or overtime pay, which is often time-and-a-half and thus far less efficient than simply hiring more workers. Decreased production would result if an employer cannot through these means meet demand for production.

Thus, we may say that a likely result, under current law, would be either increased prices of goods (to compensate for increased labor costs) or supply shortages (which themselves increase demand and price) or both. Increased prices of goods disproportionately hurt the poor, who may not be able to afford the increase as easily as others.

In addition to all of this, there is still the question of whether the taxes of the law will be able to compensate for the increased spending. As Joe Carter recently pointed out, the Laffer Curve, at least, suggests otherwise.

Regardless, the same CBO report projects an increase in the federal deficit in the long-term after a decrease in the short term:

As it does regularly, CBO has prepared baseline projections of what federal spending, revenues, and deficits would look like over the next 10 years if current laws governing federal taxes and spending generally remained unchanged. Under that assumption, the deficit is projected to decrease again in 2015—to $478 billion, or [a decrease of] 2.6 percent of GDP (see Summary Table 1). After that, however, deficits are projected to start rising—both in dollar terms and relative to the size of the economy—because revenues are expected to grow at roughly the same pace as GDP whereas spending is expected to grow more rapidly than GDP.

If the Laffer Curve is correct — and even if it is not, so long as spending outpaces revenue due to the law — then the ACA will be one factor affecting this increase. And as I said in my Acton Commentary after an earlier CBO projection, “In short, when it comes to the federal budget, the self-discipline we put off today is tomorrow’s hardship.” And that is a matter of intergenerational injustice, as the next generation will have to pay for the sins of their fathers and make the hard decisions that the previous generation refused to face.

In general, I have been dissatisfied with both Republicans and Democrats on this issue. The latter have implemented a law with several problematic consequences, economically and otherwise. The former, knowing that the law would surely pass, did nothing to mitigate the extent of those consequences, choosing to stand on principle in a battle they would surely lose instead of attempting bipartisan negotiation. Successful politics requires prudential steps toward principles, not an all-or-nothing mentality.

Healthcare and the health insurance industry (which are not synonymous) in the U.S. was and is in need of reform. Regulation is not out of place in such an instance, so long as it favors freedom of competition, which in turn favors equilibrium prices, which tend to be the most just. As Walter Eucken put it, “State planning of forms — Yes; state planning and control of the economic process — No!” The former promotes social justice, the latter tends toward rent-seeking behavior (i.e. crony capitalism) and supply shortages. The ACA is a mix of these, but might not the latter have been reduced if Congress had not been so polarized?

The current law is due as much to this unprecedented polarization of Congress (worse than just after the Civil War, according to Jonathan Haidt) as it is to poor design in the first place. According to the recent report from the CBO, it promises some benefit to the poor and some short-term economic gains, but it also carries with it some serious, unintended, long-term consequences, which are just as much a matter of social justice and ought not to be downplayed nor, for that matter, celebrated.

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Dylan Pahman Dylan O’Brien Pahman is a research fellow at the Acton Institute, where he serves as managing editor of the Journal of Markets & Morality. He is also a fellow of the Sophia Institute: International Advanced Research Forum for Eastern Christian Life and Culture.