OBAMACARE FEBRUARY 13, 2014
The economics profession is famous for its balance—as the joke goes, we always need more hands to express all the caveats to our conclusions. (“On the other hand … and on the other hand … and on the other hand…”) That is why arguments about last week’s report from the Congressional Budget Office have become so frustrating, even when accomplished scholars are the ones doing the arguing. Instead of addressing a subtle and complicated issue with (at least!) two sides, the law’s critics keep turning it into a single-sided moral diatribe about the work ethic and the supposed damage Obamacare is doing to it. A perfect illustration is a recent New York Times Economix column by Casey Mulligan, a University of Chicago economist whose own research has become part of the debate — and who, in the course of dismissing the Affordable Care Act’s virtues, took a swipe at me, as well.
The genesis of Mulligan’s article is the surprisingly famous appendix to that CBO report—the part where the agency predicts that the Affordable Care Act will be associated with a reduction in the workforce of the U.S. The bottom line of that report is that the ACA will result in 2 million fewer jobs by 2017. And, as is typical of the generally excellent CBO studies, this report is careful in describing the genesis of this conclusion. The CBO highlights that there are essentially two different sources of the reduced labor supply. The first is voluntary job leaving by those who have been “locked” into their jobs by fear of losing health insurance. Some of these individuals would happily turn down their wage to be retired or caring for children, but were previously unable to do so because they had no other insurance options; now they are able to pursue those preferred approaches. The second is those who are deterred from working by higher marginal tax rates. In particular, since the Affordable Care Act’s financial assistance phases out as income rises, the incentive to work more also declines at higher incomes. In other words, the law’s financial assistance is an implicit tax on earnings—and the tax gets higher as people earn more.
Mulligan’s article, and a number of his recent papers, are focused on the effects of these tax rates. He performs detailed computations which show that, for some individuals, that the tax rates can be quite high. In his recent post, Mulligan implies that these high tax rates are the reason for the CBO conclusions on reduced labor market participation. He dismisses the job lock effects as “a completely different issue…and far less prevalent.” He even cites the sentence on page 119-120 which ends with a footnote citing his work as evidence that CBO’s report is focused on high tax rates.
But Mulligan doesn’t mention that, in the very next paragraph, CBO dismisses his argument. According to the report, his suggested effect doesn’t impact labor supply, but rather health insurance offering (which they model elsewhere). Mulligan claims that CBO was “aware of instances of 100% tax rates,” which may be true, but the entire Appendix doesn’t mention this fact even once. It is not surprising that, unlike Mulligan, CBO economists did not harp on examples of 100% tax rates. They are uninterested in calculations that highlight extreme cases. They are more interested in modeling the overall impact on the workforce. Showing that tax rates might be high for a small number of workers is not as important as assessing what happens to aggregate labor supply.
More important, though, is Mulligan’s casual dismissal of the other reason why the labor market is shrinking, which was highlighted by a broad array of analysts. The CBO explicitly states that at least some of the labor supply reduction that they measure is from loosening “job lock,” and they never say anything which would lead the reader to conclude that job lock concerns are “far less prevalent” as an issue. That is simply Mulligan’s editorializing with no substantive basis.
Moreover, the CBO also includes a lengthy discussion of the potential positive productivity effects of loosening job lock. Since the CBO is cautious, and there is no consensus evidence on the productivity effects of job lock, they do not provide any estimates of the countervailing benefits of loosening job lock in their labor supply modeling. But at least they don’t ignore the topic, as Mulligan’s article would lead you to believe.
Mulligan says that the Obama administration “spun the high marginal tax rates as a policy achievement,” when, in fact, the post he cites is about job lock—not implicit marginal tax rates. Mulligan then goes on to misuse a quote of mine (as well as of Paul Krugman’s) that implies that we applaud the reduction in labor supply due to high marginal tax rates. Nothing could be further from the truth. My quote came from a Los Angeles Times opinion column. In it, I laid out clearly both of the effects documented by the CBO. Since this was, after all, an opinion piece, I also offered my view that—on balance—the CBO report was positive, because the benefits of the first labor supply effect (ending job lock) would be larger than the costs of the second (the implicit marginal rates). But I don’t claim that I know for sure that this is the case. Krugman’s quote came as part of a series of posts he wrote, describing the economics case for allowing those who are better off not working to leave their jobs rather than to continue to work just to get health insurance. Krugman also gave a more balanced view, acknowledging the downside of implicit marginal tax rates but arguing that, in the end, the upsides were greater.
Mulligan—like so many of the law’s critics, in and out of the economics profession—gives a more one-sided view. He talks only about the marginal tax rates. A reader who relied exclusively on his column would have no idea the CBO cited multiple reasons for the shrinking workforce—and that some of these reasons were utterly defensible. Ironically, while making a surprisingly moral case against examples of 100% tax rates, he ignores the moral case for leveling the playing field by breaking the link between work and insurance, so that workers are not chained to jobs where the value of their compensation is well below their disutility of working.
The Affordable Care Act, like any major reform, has its virtues and its flaws. The best economists, like the best public officials, are the ones who deal with both.
Jonathan Gruber is a Professor of Economics at MIT. He was a technical consultant to the Obama administration during the development of the Affordable Care Act.