Ladder vs. Safety net

Ladder vs. Safety net

When designing economic policies there is often a trade-off between our desire to provide immediate financial assistance to those who have our sympathy and our desire to maximize the opportunities for their long run success. If you give financial assistance to someone in need but tell them you will take it away once they no longer need it, you water down the incentive they have to make the effort to improve their own condition. This diminished incentive has an effect on labor supply.

In other words, there’s a trade-off between the ladder and the safety net. The higher we make the safety net the less economic sense it makes for someone in that safety net to grab the bottom rungs of the ladder and begin to climb. Rather than becoming a net that protects us from hitting the hard ground, we get caught in it and cannot escape, not because we don’t want to, but because government policies financially discourage us from doing so.

Politicians, especially on the left, love to express/feign outrage when this point is made, and suggest that (a) it’s not true and (b) the person suggesting it is accusing people of being lazy. But while the magnitude of the incentive effect is often subject to debate, the existence and direction of those effects is most often not. CBO’s latest analysis of the labor supply effects of ObamaCare reinforces this point: if you make work less financially rewarding you’ll usually get less of it.

Poorly designed policies don’t change the motivations of people with modest income, they change the calculations people make about whether they should make short-term economic sacrifices for longer-term economic gain. Why pay $500 for a night course (and give up your evenings) to get a $1,000 annual raise if the government will “grab back” a significant portion of that extra $1,000 by reducing your benefits? You may be driven to advance yourself professionally but make the rational decision that it’s not worth the sacrifice because of the amount of government subsidies you receive and the way they’re designed to phase out as your income climbs. CBO’s labor supply conclusions assume people who cut back on paid work because of their big new health insurance subsidies are rational, not that they are lazy.

Let’s look at three examples.

1. Extended unemployment insurance: The academic evidence is pretty clear that extending unemployment insurance benefits increases the amount of unemployment. In some cases that’s driven by individuals, some of whom ramp up their job search only as their UI checks are running out. In other cases it’s driven by employers who temporarily lay off workers (like an auto manufacturer closing an assembly line) and keep the line closed until right before benefits run out. I’ve seen estimates that the current extended UI benefits add anywhere from 0.1 percentage points (CBO) up to 0.5 percentage points to the unemployment rate.

Does that mean UI benefits should not be extended? No, it simply means that there is a cost to do doing so that should be weighed against the benefits. Policymakers must balance the compassion benefits of helping those who don’t have jobs and are trying to find them, with the costs of providing taxpayer assistance to those who could find jobs but just aren’t looking, and the broader macroeconomic costs of slowing the pace of economic recovery. Reasonable people can disagree on where and how to draw this line based on how they value those conflicting goals. But it’s silly to suggest, as President Obama has done, that there isn’t a trade-off, or that it’s somehow offensive to suggest that extending UI benefits could hurt workers and economic growth. There is a trade-off, an unavoidable one, between helping those now unemployed pay their bills and getting the most people back to work as quickly as possible.

2. Minimum wage: If you’re now making $7.25 an hour and the minimum wage were increased to $9 an hour you would fall into one of three categories. If you still have your job after the minimum wage increase, then you’re better off. If your employer replaced you with a friendly robot that was cheaper than paying you $9/hour, then you’re worse off. If your employer cut back your hours, you may be better or worse off, depending on how much your hours were cut back and what else you can do with that time.

This then provokes a value-neutral analytic question and a values question. We ask the economists, “For any given proposed minimum wage, how many people will fall in each category?” Then we must ask if the benefits to those in category one are worth the costs paid by those in categories two and three.

Reasonable people can disagree on the values question, and depending on where policymakers fall, they tend to pick and choose the economic analyses for the analytic question that support their value choice. But if you listen to President Obama you’d conclude that raising the minimum wage has only benefits and that anyone who opposes a minimum wage increase is driven only by selfishness and malevolence toward low wage workers. That’s absurd. Increasing the minimum wage will reduce constrain the available labor supply and hurt some low-skilled workers. We can debate how much and whether it’s worth it, but there are unquestionably winners and losers.

3. ObamaCare: Providing low and moderate-income individuals and families with subsidies to buy health insurance outside of employment helps the bottom lines of those families. Phasing those subsidies out as income climbs allows taxpayer resources to be targeted based on economic need. But it also changes the incentives people have to work, to go to school, to get additional job training, and to try for a promotion. The bigger the subsidies and the sharper the slope of the phaseout, the bigger the disincentive created for people to try to make more money so they can get off these government subsidies and provide for themselves. This disincentive matters: CBO says ObamaCare will reduce hours worked by 1.5 to 2 percent, and that “the largest declines in labor supply will probably occur among lower-wage workers.” Fewer people will work, and others will work fewer hours. Total wages will decline by about one percent.

I am not arguing for no social safety net or for no unemployment insurance. I am instead arguing what should be obvious and shouldn’t need saying, but does: every time we raise the safety net, we provide immediate beneficial aid to many, and we make it less profitable for them to “climb onto the ladder of opportunity” and push themselves to earn more, and this calculation has an effect on people’s behavior. Ongoing UI checks help pay the bills but also relieve the pressure to find a job immediately. A higher minimum wage increases the wages of those low-skilled workers who still have jobs, but it also reduces the opportunities for an unskilled teenager to learn how to hold down a first job and learn basic professional skills. Subsidized health insurance helps the people who receive it. When those subsidies phase out as income increases, they also reduce both the number of hours worked and the number of people working. The reduced labor supply hurts the economy as a whole and is generally bad for those people receiving subsidies as well, because they are being pushed by government policies to forego economic opportunities that could help them even more in the long run than do the immediate benefits they are getting.

And these government programs and subsidized benefits stack. The cost-benefit calculation of short-term compassionate aid and long-term compassion to create opportunity depends on your starting point. Most everyone would say that some unemployment insurance is good, but it’s not surprising that there is disagreement about the costs and benefits of providing more than three years of UI benefits. Similarly, there are few who would say we shouldn’t subsidize health care for the poor, but when CBO says that a new law will reduce labor supply by 1.5 to 2 percent, that’s a really big cost. And it’s bigger because ObamaCare’s subsidies are layered on top of other programs that also have income phaseouts.

The costs of all three of these policies include higher structural unemployment and fewer people building additional skills to move up the income scale over time. When the U.S. economy eventually recovers fully, our unemployment rate should be in the low 5s. Because they keep layering on “protections” and “assistance,” France’s comparable rate is around 10 percent. Imagine if the U.S. steady-state unemployment rate were 10 percent. We’re not there yet, but all of President Obama’s policies push us toward a European-style model.

I think movement in that direction is a huge mistake, but my point today is a more basic one. These trade-offs must be considered and debated openly, and the Obama Administration is doing a disservice by suggesting that no trade-offs exist, and that those who oppose these programs do so because they are mean. Extending unemployment insurance benefits, raising the minimum wage, and ObamaCare have long-term labor supply costs that must be weighed against their more immediate benefits. There is no free lunch here. Do you want a stronger ladder or a higher safety net?

(photo credit: Jonathan Khoo)

ObamaCare’s trap makes it harder to reach the middle class

ObamaCare’s trap makes it harder to reach the middle class

I will give you, fresh from the oven, either a home-baked Toll House chocolate chip cookie or a Krispy Kreme donut. Your choice.

Let’s say you choose the donut.

Now I pour rancid ketchup on the donut and offer you the choice again.

You now choose the cookie.

Based on his press briefing yesterday, the President’s CEA Chairman, Dr. Jason Furman, would say I didn’t kill the donut option because taking the cookie was your choice.

The individual health insurance market subsidies in the Affordable Care Act do two things: they subsidize some low wage workers, and they make work less attractive for those workers by increasing the effective marginal tax rate on higher income.

Because the ACA premium subsidies depend on income, the higher your income, the smaller your premium subsidy. This makes sense if a policymaker has limited resources to spend and wants to help those who need it most. The problem is that it also means that as your income climbs you lose some of those government subsidies. It works the same way as a marginal tax rate increase: you get less net financial benefit for additional income. This is an unavoidable downside of a social safety net based on income.

This downside is independent of what the subsidies are used for. This same problem applies to food stamps, the Earned Income Tax Credit, low-income housing vouchers, and in fact any government benefit that gets reduced as one’s income climbs. The effect results from phasing out subsidies as income climbs, any kind of subsidies.

ObamaCare’s defenders are taking two tacks today. First, they are emphasizing the significant financial benefits of those subsidized premiums to the people who receive them. That’s totally fair. They are also trying to argue that, when people choose not to work after the government increases their [effective] marginal tax rate, that’s OK because it’s the person’s choice not to work. That is Orwellian.

Here is CBO:

For example, some provisions will raise effective tax rates on earnings from labor and thus will reduce the amount of labor that some workers choose to supply.

If you choose to work less because you want to spend more time with your kids, that’s a good thing. If you choose to work less because the government raised your marginal effective tax rate and made work less financially rewarding, that’s a bad thing.

Here is an example:

  • A family of four with one wage-earner has $35,300 of income this year and no health insurance through work. Because of the significant Affordable Care Act subsidies, this family can buy health insurance for only $1,410/year.
  • The other spouse wants to take a part-time job to supplement their family income. This part-time job would earn them an additional $12,000 per year (gross).
  • But this additional income would reduce their ACA premium subsidy, so they would now have to pay $2,970/year for the same health plan.
  • This reduced subsidy, a direct result of the spouse’s part time work and higher family income, reduces the value of the $12,000 of added income by $1,560 (=$2,970 – $1,410). That subsidy reduction is 13 percent of the gross income increase.
  • So maybe this spouse chooses not to take the new part time job because the net financial benefit of additional paid work just isn’t worth it.

My back-of-the-envelope calculation, using H&R Block’s tax calculator, is that the ACA increases this moderate income family’s marginal effective [federal] tax rate by 13 percentage points, from about 37% to about 50%. The 37% includes very little income taxes, but a lot of reduced EITC and reduced refundable child credit, as well as higher employer and employee-side payroll taxes. The ACA subsidy phaseout adds another 13 percentage points, getting this family up to about a 50% marginal effective tax rate. I doubt State taxes change it much for a family with this moderate level of income. I may be understating the base 37% rate because I’m not looking at other in-kind benefits for which this family might be eligible. I’m confident in the 13 percentage point increase number for this income change.

Do the ACA premium subsidies help this family afford health insurance? Absolutely.

Is that a good thing for this family? Yes.

Does the 13 percentage point increase in this family’s effective marginal tax rate harm them? Everyone except the Obama Administration and a few of its doublethink allies would say yes.

Does the spouse take a part-time job? It depends. The higher marginal tax rate could cause her [him] to work more to get a higher net income, or less because the additional work just isn’t worth the additional pay. Economists call the first the income effect and the second the substitution effect. CBO’s analysis says that, on net, the second effect dominates, and the premium subsidy phase-outs as income rises will cause people to work less.

A lot less.

Finally, the hard one: Do the benefits of the premium subsidy to this family outweigh the costs of trapping this family at this income level by killing the financial benefit they receive from more work, education, training, or other professional advancement? I say no, but that’s a value choice where others might differ.

Team Obama and their allies don’t want to debate it, though, and for good reason. They’d lose. Nobody wants to trap people and discourage further economic advancement, even if they do so by helping that family with generous subsidies. Unfortunately you can’t have one without the other, and so Team Obama obfuscates.

For the past month elected officials have been talking about making sure the “bottom rungs of the ladder of opportunity” are strong. If, however, you raise the safety net so high that it is above those bottom rungs, then people would be irrational to start climbing the ladder at the bottom. That’s the unavoidable downside of the generous income-targeted premium subsidies in the Affordable Care Act. Choose your poison: give these people less immediate assistance, or punish them more as they try to improve their own lot. President Obama and ObamaCare’s supporters chose the latter course.

Note also that this subsidy phaseout doesn’t only discourage additional work, it discourages anything that increases one’s income, including additional job training, education, or even a promotion to a better-paying job. The marginal benefit one gets from any of these income-increasing opportunities is smaller because the government “claws some of it back” by reducing the generous ACA premium subsidies as one’s income grows.

Yes, many ObamaCare critics were imprecise yesterday when they said “2 million jobs” would be lost. CBO actually said the ACA would reduce “the number of full-time-equivalent workers” by about 2 million in 2017, rising to about 2.5 million in 2024. Some of that will be people choosing not to work at all (like maybe our example spouse), while the rest will be people choosing to work less. Both are reductions in the labor supply, and both are indisputably bad when they result from government making work less financially rewarding. This is, however, a minor language error, not a core flaw in the argument being made by ObamaCare’s opponents.

Now is it fair to say that ObamaCare “kills jobs?” I think it is. Some on the Left argue that since the reduced employment comes from workers “choosing” not to work rather than employers choosing not to hire them, it’s somehow not a lost job. That’s silly. There will be fewer people employed and fewer hours worked because of this law. Jobs result from the interaction of supply and demand curves for labor. If policy moves the demand curve down or the supply curve left, the number of jobs will decline and jobs will be “killed” by the policy change. And please don’t tell me that it’s OK because these workers are choosing to work less, unless you also think that me pouring rancid ketchup on your donut didn’t make you worse off because you then chose the cookie.

But the new policy vulnerability revealed by CBO does not rely on the phrasing “killed X jobs.” If my semantic argument is too confusing, there are plenty of other simple ways to make the same underlying point and explain the damage this law does to employment, income, and opportunity, especially for those with moderate incomes who are trying to improve their economic situation.

What should opponents of ObamaCare say? Here are a few variants of the same concept.

  • ObamaCare contains a big hidden [effective] tax rate increase on moderate income workers and families trying to climb the economic ladder to the middle class.
  • ObamaCare encourages moderate income people to work less, and drives some out of the workforce entirely, by effectively raising their taxes. (hat tip: Charles Blahous)
  • ObamaCare will shrink our economy by driving millions of moderate income people to work less, and discouraging some of them from working at all.
  • ObamaCare pairs generous premium subsidies for moderate income individuals and families with a massive hidden tax rate increase on additional work.
  • ObamaCare punishes additional work, especially for those who want to climb into the middle class. A family of four with income in the mid 30,000 range would face about a 50 percent effective tax rate.
  • ObamaCare punishes additional work, education, job training, and professional advancement, anything that generates additional income, for those trying to climb into the middle class.

Finally, I think Paul Ryan nailed it today with the word trapped. Yes, these new subsidies benefit the families who receive them. They also trap these workers and families by killing much of the economic benefit one gains from additional hard work. Elected leaders across the policy spectrum have been stressing the importance of making it easier for people to improve their own lot. This law undermines that goal for millions of people.

Another unforced error?

Another unforced error?

I didn’t think it was possible for Team Obama to make their problems with the individual insurance market any worse.

I was wrong.

In an interview with Chuck Todd yesterday, President Obama spoke about the 8-10 million Americans whose insurance policies are being canceled:

THE PRESIDENT: So — the majority of folks will end up being better off, of course, because the website’s not workin’ right. They don’t necessarily know it right. But it — even though it’s a small percentage of folks who may be disadvantaged, you know, it means a lot to them. And it’s scary to them. And I am sorry that they — you know, are finding themselves in this situation, based on assurances they got from me. We’ve got to work hard to make sure that — they know — we hear ’em and that we’re gonna do everything we can — to deal with folks who find themselves — in a tough position as a consequence of this.

… But obviously, we didn’t do a good enough job in terms of how we crafted the law. And, you know, that’s somethin’ that I regret. That’s somethin’ that we’re gonna do everything we can to get fixed. In the meantime —

MR. TODD: By the way, that sounds like you’re supportive of this legislation.

THE PRESIDENT: Well, you — you know — Various things that are out there.

We’re — we’re looking at — a range of options.

On Air Force One today, Deputy Press Secretary Josh Earnest followed up by answering a reporter’s question:

Q    Josh, the President last night mentioned, when he apologized for problems with the cancellations of policies, that he was going to instruct his administration to go back with some sort of a loop.  Can you flesh that out?  What are you guys looking at in terms of canceled policies?

MR. EARNEST:  I’m not in a position to add a whole lot of additional detail to what the President said last night.  The President did acknowledge that there are some gaps in the law that need to be repaired.  He has directed his team to consider some administrative solutions to those problems, some steps that his administration could take unilaterally that would address some of those gaps.

Sounds good, right? There’s a problem, that “a small percentage of folks” (8-10 million people) are facing canceled individual market health insurance plans, and some of them are “disadvantaged” by the new options, or will be once they can see them on a functioning The President has directed his team to consider some administrative solutions to fix the problem, to “address some of those gaps.”

The problem with the President’s public statement is that he has now frozen the individual insurance market in place until he announces his new solutions. If you are one of the 8-10 million Americans with a canceled insurance policy, President Obama just created an enormous incentive for you to hold off on buying a new policy, to wait for the Administration to offer you a new solution.

Had they announced a new solution today, they would not have created this problem. The disincentive to buy a new plan comes from offering hope of a better outcome with no specificity or timeframe.

This new disincentive to buy insurance applies nationwide and is independent of the broken federal exchange website. I expect states running their own exchanges like California and Colorado, Minnesota and Maryland, DC, New York, and Connecticut, will see their new enrollments now drop as those with canceled policies wait for the President’s next move. States participating in the federal exchange won’t see any drop because the broken website is already preventing signups. Still, even in those states the President has created a new reason not to buy insurance on the exchange when it eventually does work, at least until he announces his new policy.

Because the story is so hot, and because the President’s allies in Congress are desperate to offer their angry constituents some hope, we can be assured that the President’s ambiguous offer of future hope, and the purchasing disincentive it creates, will get a lot of attention.

The optimistic interpretation for this new policy signal is that President Obama and his team understood this balance when the President spoke yesterday, that they weighed the cost of further discouraging new signups against the benefit of partially relieving growing pressure to help angry citizens who liked their canceled policies.

The pessimistic interpretation is that this is yet another unforced error, another self-inflicted wound.


Ensuring presidential accuracy & honesty

Ensuring presidential accuracy & honesty

Three recent articles and columns prompted me to write about President Obama’s oft-repeated false promise, “If you like your health care plan, you can keep your health care plan, period.”

One was my former White House colleague Marc Thiessen’s column, “A Dishonest Presidency.” The second was Ron Fournier’s column: “Lying About Lies: Why Credibility Matters to Obama.” The third was this Wall Street Journal article last Saturday.

In that third article this sentence grabbed my attention:

One former senior administration official said that as the law was being crafted by the White House and lawmakers, some White House policy advisers objected to the breadth of Mr. Obama’s “keep your plan” promise. They were overruled by political aides, the former official said.

Overruled by political aides? On a question of accuracy and honesty?!?

I won’t belabor the substance of the “keep your plan” promise. It is unequivocally and incontrovertibly inaccurate. Glenn Kessler does a good job of walking through it. I instead want to focus on the process point from the WSJ story and compare it to my experience.

In more than six years on the staff of President George W. Bush’s National Economic Council, I had the type of conversation described in the WSJ article hundreds of times. As a policy aide one of my core responsibilities was to make sure the President’s policy was accurately communicated and that we could back up every word in the President’s prepared remarks. This was mission critical for us policy aides–I knew that if President Bush said something incorrect on which I had signed off, I was at serious risk of being fired, even if it was just an honest mistake.

Continue reading

Responding to some of President Obama’s Medicare claims

Responding to some of President Obama’s Medicare claims

Let’s examine a few quotes from President Obama’s weekly address, which this week is about Medicare.

THE PRESIDENT: I saw how important things like Medicare and Social Security were in [my grandparents’] lives.  … That’s why, as President, my goal has been to strengthen these programs now, and preserve them for future generations.  Because today’s seniors deserve that same peace of mind.  And the millions of Americans who are working hard right now deserve to know that the care they need will be available when they need it.

Medicare, Social Security, and Medicaid are growing at unsustainable rates. The “millions of Americans who are working hard right now” are paying taxes into a system that will be unable to afford to pay the benefits it is promising them today. President Obama says these workers “deserve to know that the care they need will be available when they need it,” but he has not proposed policy changes to produce that outcome.

THE PRESIDENT: We’ve extended the life of Medicare by almost a decade.

No you haven’t. The Affordable Care Act (ACA, also known as “ObamaCare”) slowed Medicare spending growth. The Medicare Hospital Insurance Trust Fund includes less than half of Medicare spending. You can argue that you have extended the life of this trust fund by “almost a decade,” but trust fund accounting ignores a more immediate cash flow problem.  Since the HI trust fund contains only IOUs from the government to itself, this accounting ignores the question of where to find the $296 B in cash this year to pay for Medicare spending above that covered by Medicare payroll taxes and premiums.  Medicare has never been a fully self-funded program, and even with the savings enacted in the Affordable Care Act, it is still an enormous pressure on the rest of the budget.

And that’s the positive portrayal of what the President and his Congressional allies did, because at the same time they “cut” Medicare spending, they increased spending on new health entitlements in the ACA by the same amount. So the budgetary savings and reduced future deficits they legitimately achieved by slowing Medicare spending were then undone by new government spending. This is why Governor Romney and Mr. Ryan say the President “used Medicare savings to pay for [part of] ObamaCare.”

THE PRESIDENT: And I’ve proposed reforms that will save Medicare money by getting rid of wasteful spending in the health care system and reining in insurance companies – reforms that won’t touch your guaranteed Medicare benefits.

In his budget President Obama proposes to slow spending growth by about $[200] B over the next decades. He then proposes to spend that same amount increasing Medicare payments to doctors. His budget therefore proposes no net savings in Medicare.

In the grand bargain negotiations with Speaker Boehner last summer, the President proposed more significant incremental reforms (often mislabeled as “spending cuts”) to Medicare. Since then he has been unwilling to propose those changes publicly. Even if he did, they are far from sufficient to create a sustainable spending path.

THE PRESIDENT: Republicans in Congress want to turn Medicare into a voucher program.  That means that instead of being guaranteed Medicare, seniors would get a voucher to buy insurance, but it wouldn’t keep up with costs.

A version of this horrible voucher system described by the President is now in effect for more than 100 million Americans who get their health insurance through work, and will, if President Obama is reelected, take effect soon for millions more under the Affordable Care Act. The phrase “seniors would get a voucher” is designed to maximize fear among today’s seniors, especially those who vote in Florida.

(photo credit: White House photo by Chuck Kennedy)

The President is correct that “Republicans in Congress” proposed reforming Medicare such that old-style government-run Medicare would not be an option for new Medicare enrollees in the future, but the latest version of Republican reform is the Ryan/Wyden plan, which would allow seniors to choose to stay in traditional fee-for-service Medicare. The President appears to be trying to scare today’s seniors by describing an out-of-date proposal that would have only applied to future seniors.

THE PRESIDENT: As a result, one plan would force seniors to pay an extra $6,400 a year for the same benefits they get now.

This is a great example of a tactic I warned about two weeks ago:

[me]: Every “cut program X by Y%” quote about the Ryan budget will be relative to an unsustainable spending path. The irresponsible part isn’t the proposed spending cut, it’s the promise to keep spending growth going without specifying how you’ll pay for it.

The following chestnut returns as well:

THE PRESIDENT: And it would effectively end Medicare as we know it.


Technically, to end Medicare as we know it simply means to change Medicare. Campaigning Democrats use this language, “end Medicare as we know it” to scare the listener when describing Republican proposals. To the untrained ear it sounds a lot like “end Medicare,” and the speaker uses it to mislead the listener into thinking his or her opponent proposes to eliminate this popular program.  In reality, most Republicans elected officials want to end ObamaCare but only to change Medicare.

THE PRESIDENT: [Medicare is] about a promise this country made to our seniors that says if you put in a lifetime of hard work, you shouldn’t lose your home or your life savings just because you get sick… I’m willing to work with anyone to keep improving the current system, but I refuse to do anything that undermines the basic idea of Medicare as a guarantee for seniors who get sick.


This is interesting – I think it’s fairly new language for him. It provokes a few reactions.

  1. What about losing some of your life savings if you get sick if you’re wealthy? Given that Medicare spending is both unsustainable and a transfer of resources from younger workers to older retirees, I think it makes sense to slow Medicare spending growth in part by reducing the subsidies for future seniors who are wealthy.
  2. The “undermin[ing] the basic idea of Medicare as a guarantee” point ties back to the voucher attack, an attack which is now out of date because of Ryan/Wyden.
  3. The Medicare guarantee that the President trumpets is significantly weakened by the President’s unwillingness to explain how he intends to extend that guarantee into the future. Under current law Medicare benefits are not guaranteed for future generations because the President has not proposed and Congress has note enacted changes to Medicare that produce a reliable guarantee.

America needs to slow significantly the growth rate of government spending on the major old age entitlements. Language such as that used by President Obama may scare some seniors into voting for him, but it will make needed reforms that much more difficult after the election.

Lame Ducks and Fiscal Cliffs (part 1)

Lame Ducks and Fiscal Cliffs (part 1)

This is the first of a few posts on the policy decisions stacking up for the end of this year.  In this post I will simply list the moving parts, deadlines and timeframes, and which election scenarios are most important to analyze.  To some extent this is just a setup post for strategic analysis to follow over the next few days.

Moving parts

  1. taxes;
  2. spending, including the sequesters;
  3. debt limit;
  4. repeal of all or part of the Affordable Care Act (aka ObamaCare);
  5. tax reform;
  6. a potential Grand Bargain on fiscal policy.

The first three categories will be dealt with between now and the end of Q1 of next year.  Deadlines under current law will force the Congress to make decisions on each, even if in some cases the decision is not to enact new legislation.  I label these must-do parts.

The last three categories may or may not come to a head over the next eight months.  Each has no fixed deadline forcing legislative action, and whether they are even priorities depends on who is elected President. I list them because they might, in some form, be included in legislation at the end of this year or the beginning of next, and because discussion about them can heavily influence the must-do items in the first three categories.

While the public tax battle is entirely about extending the top income tax rates, there are many other tax issues expiring at the end of 2012.  The tax category can be further broken down into buckets of tax issues:

  • extending income tax rates;
  • extending capital tax rates;
  • extending the President’s refundable tax credit (sometimes referred to as a payroll tax credit);
  • extending estate and gift taxes;
  • extending other changes from the 2001 and 2003 tax laws (e.g., child credit, education and retirement incentives);
  • “patching” the Alternative Minimum Tax again;
  • a collection of recurring tax extenders covering a wide range of policy areas.

The spending category also breaks down into several buckets important enough to be considered separately:

  • twelve regular FY13 appropriations bills and/or a Continuing Resolution[s];
  • the defense sequester;
  • the nondefense sequester;
  • the sequester on Medicare and other entitlements.

There are a lot of moving parts.  I won’t drill down into each subpart in this series, but I want you to get a sense of how substantively complex this will be.

There is nothing magic about the way I have grouped issues.  One could just as easily separate the sequester issues from other spending, or group all appropriations issues together, or combine the discussion of tax rate extensions and tax reform.  For now I just want to lay out all the moving parts and propose a reasonable categorization so that it’s not all jumbled together.

Deadlines and timeframes

There are three hard deadlines and two soft deadlines that matter.

Hard deadline 1:  Election day is Tuesday, November 6.

Hard deadline 2:  December 31, 2012 – Taxes increase, automatic spending cuts begin to take effect.  This is also the last day of the outgoing Congress, and maybe of the Senate Democratic majority.

Hard deadline 3:  January 20, 2013 is Inauguration Day if Governor Romney wins.  If President Obama wins this date doesn’t matter much legislatively.

Soft deadline 1:  Whenever short-term Continuing Resolutions expire.  Policymakers can set this date.

Soft deadline 2:  At some point Treasury will run out of cash and debt management tricks and need a debt limit increase. Treasury isn’t saying when this will occur, but it’s likely between December and March.

These deadlines create a few important legislative timeframes:

  • Campaign positioning window:  Between now and Election Day;
  • Lame duck sessions:  November 7 – December 31;
  • Pre-inaugural sessions:  January 1 – January 19;
  • 2013 really begins:  January 21 and later.

Nothing big legislatively will conclude between now and Election Day.  House and Senate votes in July and September are mostly attempts to influence the election and to preposition forces for lame duck session negotiations.  Congress recesses in August and will spend much of October home campaigning.

The pre-inaugural timeframe is usually dead and often Congress doesn’t even meet.  This makes the December 31 deadline separating the outgoing Congress from the incoming one the most important break point after Election Day.

When legislative decisions are made influences who makes them, which in turn determines the policy outcomes.  I’ll go into this in more depth in a future post.

Election scenarios

There are two big scenarios to consider, plus one important variant.

  1. Republican sweep:  Romney elected, Republicans keep the House and take the Senate majority;
  2. Status quo election:  Obama re-elected, House stays R majority, Senate stays D majority;
  3. Divided government:  Same as status quo except Republicans take the Senate majority.

There are plenty of other possible scenarios, the most notable of which is a Democratic sweep.  I think all scenarios other than the three I listed are remote enough that I’ll ignore them.  This is already more than sufficiently complicated.


To get your gears spinning in anticipation of strategic analysis posts over the next few days, I’ll offer a few observations and questions.

  • Don’t fall into the trap of thinking this is straight R-vs-D. The intraparty conflicts and tensions are at least as important.
  • If President Obama loses, will he stick to his veto threat on taxes, knowing Congressional Republicans can wait him out? Or will he look for away around his veto threat and try to negotiate a deal during the lame duck so that he can extend some of his policies before he leaves?
  • Same scenario — Suppose lame duck President Obama offers Speaker Boehner and Leader McConnell a good but not great deal (from their perspective) during the lame duck session.  Should Congressional Republicans take the deal and lock in this bipartisan consensus, or wait for Romney to be sworn in so they can jettison the parts they don’t like?  How much of a substantive sacrifice is bipartisanship worth to Congressional Republicans?  To President-elect Romney?
  • Who would have the upper hand in a tax stalemate in which everyone’s tax rates increase on January 1?
  • The legislative dynamics on each part can be complex.  What makes this analysis challenging are the interactions among the components when you start legislatively combining them.  What makes it super challenging is when you realize that different people may get to make these packaging decisions during different timeframes.

More tomorrow.

(photo credit: jjjj56cp)

Why not expand Medicaid?

Why not expand Medicaid?

Correction: I got the match rates in my example wrong because I ignored the second law which overrode the ACA on the match rates.  The text below is now accurate.  My error doesn’t change any of my substantive arguments.

Last week former Michigan Governor Jennifer Granholm (D) argued that any Governor who rejected the Affordable Care Act’s new Medicaid expansion was either stupid or evil.  This is a common refrain from the law’s defenders, that only an irrational or uncaring Governor would reject the ACA’s new Medicaid subsidies to provide health insurance to poor adults without kids.

This question is now relevant thanks to the Supreme Court’s recent ruling.  The Roberts Court ruled that the federal government may not deny the federal share of funds for a state’s existing Medicaid program if that state refuses to avail itself of the new subsidies offered for expanding program eligibility.  In the wake of this ruling several Governors have said they will not, or may not, expand their Medicaid programs, notwithstanding the ACA’s offer of generous matching federal funds.

How generous?  Under the ACA the Feds will pay all benefit costs for this new population through 2016, and then phase down to a 90 percent federal share from 2020 on.  That compares to an average federal share of 57 cents of each dollar spent on Medicaid benefits for existing populations.  The exact federal share varies by state and ranges from 50 cents federal to 78 cents federal for basic Medicaid benefits.

New Jersey Governor Chris Christie might say,  “I have to pay 50 cents of state money for each Medicaid dollar spent in New York.  If I expand my Medicaid program to these poor childless adults, I’ll have to pay ten cents of state money for each Medicaid dollar spent on them after the first few years.”  From a state’s perpective, the decision to expand Medicaid means higher state expenditures but at a drastically reduced cost in state funds per new enrollee.  Adding new people still costs you scarce state funds, but these new enrollees would be cheaper to the state than the people already in your program.

Why, then, would a Governor reject such a generous offer?  She can provide health insurance for poor residents of her state for no cost in the first two years and at an extremely reduced cost after that.  If a Governor refuses, ACA defenders argue she will be leaving enormous amounts of federal money “on the table.”  Governor Granholm points out that states already subsidize hospitals to cover some of the costs of the uncompensated care delivered to these poor uninsured people.  And since in most cases Medicaid pays providers low payment rates, adding them to Medicaid is a relatively inexpensive way to provide them with health insurance.

Charles Blahous was first to publicly explain how the Court’s decision could make the ACA’s finances untenable.  He examined the incentive the Court’s decision would have for Governors to abandon Medicaid expansions in favor of federally-funded subsidies through state exchanges.

Let’s briefly review seven additional challenges to the case made by advocates for Medicaid expansion under the ACA.  The bar is low: we don’t have to prove that a Governor should not expand Medicaid, only that one can make this decision without being irrational or evil.  Thanks to a knowledgeable friend for helping me with these.

1.  “Leaving federal money on the table” looks at the problem backwards.  The law does not offer states free money without conditions, it reduces the price to the state of covering these new people.  A state must still find the funds to cover its 10 percent of the new Medicaid costs.  While that’s a tiny fraction of the total new costs, Medicaid is a huge program and many states are already in dire financial condition.  If a state can’t afford its share it doesn’t matter how much the Feds are offering.  A Governor must look at her budget and prioritize the state resources at her disposal.  Medicaid spending is one of the two largest components of most state budgets.  It is  reasonable for a Governor to conclude she would rather use her limited resources for other needs (education, emergency services, public infrastructure) than to expand her state’s obligations for its biggest and fastest-growing entitlement.

2.  A smart Governor recognizes that a commitment to expand Medicaid eligibility is likely to be permanent, so she may be risk averse.  It is quite difficult to cut off eligibility for a group of people once it’s been granted.  Our Governor must also consider political and legislative risk from Washington.  Sure, the Feds are offering to pay all benefit costs for the first three years, and most costs after that.  But the law might be repealed in 2013.  Even if it’s not, Congress could cut federal match rates in the future to address federal spending pressures.  In his budget President Obama has proposed to “align” match rates in Medicaid and CHIP, code for cutting CHIP match rates.  A federal “Grand Bargain” fiscal negotiation would certainly consider cutting federal match rates for Medicaid and CHIP.  In any of these scenarios the state and our Governor bear the downside fiscal risk.

3.  A Governor must also worry about creeping federal requirements for this new population.  States have some flexibility designing benefit packages for their Medicaid populations and a lot of flexibility in designing insurance structures and setting payment rates.  The Feds, however, are looking at this new group of people as part of their “ACA eligibility expansions,” along with others who will buy subsidized insurance through state exchanges.  What happens, then, if the Feds want to impose new requirements on the exchanges, and then require states to do the same with their Medicaid programs?  The Feds have a history of doing this in Medicaid.

4.  There are hidden costs to this expansion.  Any time a program like Medicaid is expanded there is a woodwork effect.  Some mothers and their kids who were eligible for Medicaid before the ACA, but who had not enrolled, would be drawn to enroll with the increased publicity to enroll newly eligible poor childless adults.  If your focus is on enrolling poor people in Medicaid this is a good thing.  It is also an increased cost to the state budget, especially since these mothers and their kids are not eligible for the higher federal match rate in the ACA.  A Governor considering whether to expand her program must include these additional costs in her decision, even though they don’t directly impact the target population.  A state also bears the administrative expenses and challenges of expanding its program.

5.  Adding new people increases government spending and total spending on health care.  Yes, those who lack prepaid health insurance impose uncompensated care costs on hospitals.  Yes, the states pick up some of these costs through subsidies to those hospitals.  Both would be reduced if more people had prepaid health insurance.  But while expanded Medicaid eligibility means more and better medical care for those who were previously uninsured, it comes at an added cost to the government (Feds + States).  There is no free lunch here, only a reduced price lunch.  More people X more medical care = more spending.

6.  A Governor creates negotiating leverage with the Feds by saying no, even temporarily.  The Feds and States are constantly engaged in negotiations over funding and rules for Medicaid and CHIP.  Governors know that the Obama Administration needs them to expand their Medicaid populations for PPACA to approach its coverage goals.  Congress wrote the law with an effective mandate on states to cover these people.  The Court inverted that power dynamic, and any Governor who says no to an expansion gains leverage for more federal funds or flexibility in other areas.

7.  If it’s such a good deal why did the Feds mandate it?  There’s a parallel here with the individual mandate and accompanying subsidies.  The law’s authors knew that subsidies would encourage some individuals and some states to buy health insurance or expand their Medicaid programs.  They knew that others would not take advantage of these subsidies, so they mandated participation with penalties for noncompliance.  The individual mandate and penalty tax survived the Court challenges while those imposed on states did not.  It is reasonable to assume that, without the mandate, some states will now choose not to expand their biggest (or second-biggest) state spending program any further.

When the ACA was enacted in 2010 CBO estimated that the Medicaid expansions would result in 17 million more Medicaid enrollees by 2016.  The Supreme Court’s ruling and subsequent decisions by Governors should reduce that.  We will see by how much if the law is not repealed next year.

(photo credit: White House photo by Pete Souza)

Who will pay the ObamaCare uninsured tax?

Who will pay the ObamaCare uninsured tax?

Now that the Supreme Court has upheld the constitutionality of the Affordable Care Act, who will pay the tax for not having health insurance?

CBO answered this in April 2010. They projected that in 2016, when the mandate is in effect and the tax is fully phased in, there will still be 21 million uninsured people.  This belies the advertised “universal coverage” label.

Oversimplifying a bit, for most people the tax in 2016 will be $750 per adult and $375 per kid.

But while 21 million people will be uninsured, CBO said “the majority of them will not be subject to penalty.” That’s an understatement.

You won’t have to pay the tax if:

  • you’re not in the U.S. legally;
  • you’re in prison;
  • you’re poor (measured two different ways);
  • you’re a member of an Indian tribe;
  • you’re in a period of being uninsured that’s less than three months long;
  • your religion forbids getting health insurance; or
  • you get a waiver from HHS.

Given HHS’ behavior in handing out waivers since the law was enacted, this waiver authority bears further observation and scrutiny.

In addition, some who are legally required to pay the tax will not do so.  CBO/JCT therefore assumes a certain amount of noncompliance (aka cheating).

This gets CBO’s 21 million uninsured in 2016 down dramatically to 3.9 million who will be both uninsured and pay the tax.  Total U.S. population in 2016 will be about 327 million. This means that, in 2016:

  • almost 94 out of every 100 people will have health insurance in some form;
  • five out of every 100 will be uninsured and pay no tax;
  • a bit more than one out of every 100 will be uninsured and pay a tax to the government.

If I’m that one person out of 100, I’m going to be pretty ticked off at those five.  All six of us are uninsured but I’m the only one of the six who has to pay higher taxes.

CBO also estimated the income levels of those 3.9 million uninsured who will pay higher taxes.  More than 3/4 of them are not rich.

Income relative to
federal poverty line
# of people
paying tax 
Income range

Income range
(family of 4)

Below poverty 400,000 $0 – 11,800 $0 – 24,000
100% to 200% 600,000 $11,800 – 23,600 $24K – $48K
200% to 300% 800,000 $23,600 – 35,400 $48K – $72K
300% – 400% 700,000 $35,400 – 47,200 $72K – $96K
400% – 500% 500,000 $47,200 – 59,000 $96K – $120K
> 500% 900,000 > $59,000 >$120K
Total 3,900,000


Reading the first line of this table, CBO says that under this law in 2016 there will be 400,000 people below the poverty line who will be uninsured and pay the tax. (More will be required to do so — this is the number who will comply with the law.) Singles in that income range will have annual income less than $11,800, and families of four in that range will have annual income less than $24,000.  These are 400,000 poor uninsured people who will be forced to pay higher taxes.

Similarly, if we add up the rows up to 500% of poverty, we see that under this law there will, in 2016, be three million people with incomes less than $59,000 (singles) or $120,000 (families of four) who will be uninsured and have to pay the tax. These three million people are not rich, they will be uninsured, and they will be required to pay higher taxes. The tax increases on these people, as well as some fraction of those in the “>500%” category, clearly violate the President’s pledge not to raise taxes on anyone earning less than $250K.

Jim Capretta points out that these estimates may be low. In 2010 CBO assumed a mandate enforced by a penalty for noncompliance.  Before today’s ruling, the law created both a legal and a moral obligation to buy health insurance. If you didn’t buy insurance, you would be violating the law and have to pay a penalty to the IRS.  Some people would buy health insurance even though financially it would make more sense for them to just pay the penalty, because they didn’t want to be perceived as breaking the law and paying a penalty.

Chief Justice Roberts’ opinion converts the mandate+penalty into a “pay or play” choice model by turning the penalty into a tax you can choose to pay, without moral opprobrium, rather than buying health insurance.  By removing the “should” implication of the mandate, the Roberts opinion should increase CBO’s estimate of how many people will go uninsured and pay the tax instead.


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