Some Second Thoughts on the Benefits of Obamacare to Virginia’s EconomyEconomicsPolicy

In February, 2014 the non-partisan, independent Congressional Budget Office released a comprehensive analysis of the likely employment impacts that Obamacare will have on the economy over the next several years, and its conclusions sent shockwaves through the already heated healthcare debate. Among its many findings, the CBO study estimated that up to 2.5 million workers nationwide would respond to the newly available Obamacare benefits by simply choosing not to work, and instead sustain themselves through a variety of state and federal social programs, of which Obamacare would be one of the more generous.

While some critics of the President have incorrectly interpreted this finding as a “job loss” that will lead to hardship among the citizenry, and have castigated the President for worsening the economy, the reality of the finding is actually much worse, and has profound and serious implications for the economy. The usual sorts of job losses due to a bad economy, plant closings and/or technological change are regrettable, but they are also only temporary, and those affected soon return to full employment and financial independence. Not so with Obamacare, which now offers, as far as CBO reveals, a lifestyle choice of government-funded leisure for as long as you wish.

Sadly, if not bizarrely, many government officials are defending and endorsing this counterproductive aspect of the plan. Indeed, in his congressional testimony, CBO’s Director Elmendorf acknowledged the lost workers, but argued that:

“If somebody comes to you and says “I’ve decided to retire” or “I’ve decided to stay home and spend more time with my family” and “I’ve decided to 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. And we don’t say they’ve lost their job because they have chosen to leave that job.”

The White House offered a similar endorsement, as did many in Congress, suggesting that we are in the process of creating a new right for the American people, a right to pursue your hobby, or hang out with your family 24/7, at taxpayer expense.

Though the CBO did not provide state-by-state estimates of how many will exercise this right to leisure, a simple, back-of-the-envelope calculation suggests that as many as 62,500 members of Virginia’s work force might opt for subsidized leisure under the assumption that the typical Virginia worker embodies the same approach to financial incentives as does the typical American worker hypothesized in the CBO study. In the case of Virginia, none of the opt-outs will be paying income taxes to the state.

If this is the case, then the majority of Virginia’s House of Delegates has every reason to hold off on an endorsement of the Medicaid expansion, at least until this flaw, and the many others, are remedied. What is at stake here is the future prosperity and financial integrity of Virginia. Prosperity is not created by more government spending, more leisure and more hobbyists, but by the goods and services that people produce when they go to work. If fewer people go to work, then there are fewer goods and services produced, and less available for investment and consumption. As a consequence, standards of living stagnate or decline. It is as simple as that.

This latest, weekly, revelation of a serious flaw in Obamacare has had repercussions in Virginia, where the issue of accepting federal funds to expand Medicaid in the state has led to a standoff between the opposing House of Delegates and the supporting new Governor. In turn, this has led some in the pro-Medicaid faction to recirculate and promote the findings of a December 2012 analysis by Chmura Economics & Analytics, which was paid for by the Virginia Hospital & Healthcare Association. Titled “The Economic Impact of the Medicaid Expansion on Virginia’s Economy”, it is a fine piece of work using state of the art models and providing considerable detail on the impact of the expansion, and its influence of the moment is that it estimates that accepting the government’s offer would create as many as 43,015 new jobs in the state by 2019, thus blunting the impact of CBOs finding that 2.5 million people would withdraw from the workforce nationwide.

However, the problem with this study is not so much with the study itself, but with the methodology such studies use to measure impact. As the author notes in the piece, he uses a popular mathematical model built on the concepts of input-output analysis and multipliers. And while these models have important uses, they are also frequently used to justify spending more public money on some controversial project (notably stadiums and convention centers) and they generally show that the more money government spends on any activity or purpose, the better off will be the state, local and national economy.

One reason for these rosy scenarios is that these input-output/multiplier models generally do not consider an important economic concept called the “substitution effect,” which will offset some or all of the estimated gains from more spending (the Chmura report acknowledges, but does not estimate, these effects). Such important offsetting substitution effects include:

(1) the impact on the economy of the resources borrowed or taxed to fund this program;

(2) the economic impact of using the same volume of money to support a better designed healthcare program free of the manifest deficiencies associated with Medicaid;

(3) the number of Virginians that will be encouraged to substitute work for leisure if the program is implemented; and,

(4) the massive effort underway by businesses to restructure their operations to use less labor so as to limit the costs imposed on them by Obamacare.

By avoiding consideration of these substitution effects, most of the models used in this type of analysis assume that the money being spent is “manna from heaven.” But the last reported incident of a blessing of manna occurred about 2,600 years ago (see Book of Exodus 16: 1-36).

This is not to criticize Chmura for their work; these issues were not likely included in the scope of the study requested by their client. But confronting, considering and resolving these issues are certainly well within the mandate, duties and responsibilities of the elected officials who lead the executive and legislative branches of our state government. As such, it is perfectly appropriate, indeed absolutely essential, that they do so because the implications of the new law for the state of Virginia are profound. And this dispute over one facet of Obamacare should not be used as a smokescreen by its proponents to disregard the negative economic impacts of the program in general. Indeed, Virginia’s Delegates should be commended for their broad approach to this problem.

In taking a broader approach, and focusing on the implications of these neglected “substitution effects,” it is worth considering how some of them would negatively impact the nation in general and Virginia specifically. As readers of this site and daily newspapers are well aware, the U.S. Congress has been struggling for the last few years to limit the deficit by capping or reducing federal government spending, while the White House has been doing its share by raising taxes. And some of this effort is to make room for the new federal spending to pay for the many provisions of Obamacare.

As an example, a recent deal to approve an FY 2014 federal budget included cuts in food stamps, unemployment compensation, military retirement benefits, and slowing defense spending, to name just a few. Over the same time frame, the President was successful in getting Congress to approve a major tax hike on higher income households, and prior to that, Congress allowed the temporary payroll tax cut to expire. In the short run, at least, all of these will depress consumer and business spending, and this will lead to job losses nationwide and in Virginia.

At the same time, Virginia is particularly vulnerable to some of the cuts that are being made in defense spending to make room for new spending programs and reduce the deficit. As a consequence, jobs in Dahlgren, Quantico and in the Hampton Roads area, to name just a few, are places where national defense spending has local impact. Added to this are the many defense contractors throughout the state who are at risk. These losses, and the others described above, will offset some, or all, of the gains predicted by the input-output models.

Having noted some of the negatives, there is no question that the health care options for many working Americans of low to moderate incomes could be improved. But it is essential that any reforms be done in a cost-effective way so that corruption is deterred and that recipients of these benefits are not discouraged from working.

On a final note, more than two centuries ago, talented and energetic men from the then-colony of Virginia – George Mason, Patrick Henry, George Washington, Thomas Jefferson, James Madison, James Monroe and many more – were instrumental in liberating the American people from the oppressive forms of government then common in Europe.

Today, in that spirit, the Virginia House of Delegates has the opportunity to prevent President Obama from re-establishing the Europeanization of the American Experience. Destiny beckons.

Dr. Utt holds a Ph.D. in economics and is, most recently, the author of “Ships of Oak, Guns of Iron: The War of 1812 and the Forging of the American Navy.”

  • Arlingtonvirginia

    This country and commonwealth destroys every horrible thing coming to it given we keep on electing liberal lunatics. Only through pain will the morons in the population finally learn that you should vote with your logical b rain, not your pwecious wittle feewings.

  • Arlingtonvirginia

    King Obama, constitutional violator in chief, just delayed the employer mandate until 2016. I thought liberals claim republicans are anti people and pro business? Why is Obama requiring individuals do so something he doesn’t expect companies to do until 2016?

    • Socialism: Organized Evil

      Liberalism is a serious mental illness that renders its hosts impervious to reason.

  • Alex70

    Dear Dr. Utt,

    I’m confused. Didn’t your colleagues at the Heritage Foundation provide the basis for Obamacare, which you refer to as the “Europeanization of the American Experience”? I’m including a link to fellow economist Dr. Stuart Butler’s 1989 Heritage Foundation paper: “Assuring Affordable Healthcare.”

    http://thf_media.s3.amazonaws.com/1989/pdf/hl218.pdf

    I think that within various sections of the paper, such as “MANDATE all households to obtain adequate insurance” (p. 6), “MEDICAID REFORM”–providing help via Medicaid eligibility changes for those who cannot afford insurance (p. 7.), and “USING SUBSIDIZED RISK POOLS,” which would be supported “equally by all insured families” (p. 7), I pretty much see the genesis of the Affordable Care Act.

    The Heritage proposal previously provided the basis for the “Europeanization of the American Experience” in Massachusetts—arguably the birthplace of even more intense opposition to British rule than Virginia’s. Of course I’m referring to Heritage Foundation-inspired Romneycare. Please see this exchange between Newt Gingrich and Mr. Romney:

    http://www.forbes.com/sites/theapothecary/2011/10/20/how-a-conservative-think-tank-invented-the-individual-mandate/

    ROMNEY:
    Actually, Newt, we got the idea of an individual mandate from you.

    GINGRICH:
    That’s not true. You got it from the Heritage Foundation.

    ROMNEY:
    Yes, we got it from you, and you got it from the Heritage Foundation and from you.

    GINGRICH:
    Wait a second. What you just said is not true. You did not get that from me. You got it from the Heritage Foundation.

    Best wishes,

  • DJRippert

    I’ve been trying to understand the debate over the CBO’s 2.5M estimate for a couple of days now. I’m not sure I understand it still.

    Who are these people who will substitute work for hobbies and leisure? I am guessing that they are people near retirement but not yet old enough for Medicare. The only reason they kept working was for the medical coverage supplied by their employer. They couldn’t afford private insurance because they couldn’t afford it (maybe they had a pre-existing condition). Under Obamacare, they can afford their own health insurance so they no longer need to work in order to keep their insurance coverage.

    Is that about it?

    How will these people support themselves? I am again guessing that they have saved some money and will use the savings to support themselves until they are able to collect social security, use their 401(k)s, start drawing their pension – whatever.

    If I am right, then claiming these people won’t pay income tax in Virginia might be a stretch. If they have their savings in mutual funds then they’ll have to sell their stocks and pay capita gains (taxed at the same rate as income in Virginia). If they have bonds then the interest is also taxable at ordinary income rates.

    Realistically speaking, how big of a deal is this?

    • Turtles Run

      “Realistically speaking, how big of a deal is this?”

      Depends on who you ask. Most rational people would claim it is not a big deal. People are not going to lower their standard of living for subsidies.

      Then there are other people, well I think we have all read their comments.

  • Arlingtonvirginia

    You now have liberals in Washington state refusing to use the death penalty despite it being their job to carry out those sentences. This is what happens when you let liberals get away with it, like we are doing in VA. Soon we will have these sissies refusing to execute prisoners here as it catches on.

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