Blog 2017-06-03T09:45:07+00:00

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.

Wednesday, 5 February 2014|

Has President Obama given up?

For two weeks President Obama and his team have been setting up the argument that since he can’t get Congress to enact his proposed legislative agenda, this year he will use the formal power of executive action and the persuasive power of the bully pulpit to do what he can to solve economic problems. President Obama seems to be writing off major legislative progress on economic policy this year, conceding that he cannot find compromises with a Republican majority House. He will therefore take mostly symbolic actions this year to energize his political base and reinforce his party’s ballot box chances this fall. Whatever your view on a minimum wage increase and the extension of unemployment insurance, they are economic small ball. The only significant economic legislation he seems likely to ask for is trade promotion authority (which I support).

I’m sure President Obama understands just how constrained are his options for executive action. Even with lawyers willing to push the constitutional envelope and a friendlier DC Circuit Court to back them up, the president’s ability to make major economic policy changes without Congress is quite limited, and he has to hope a future Republican president won’t unilaterally undo what he unilaterally does. His pen is more like an erasable pencil, and the “he has a phone” argument is a bit pathetic. Without a legislative agenda and the ability to enact it, a president can affect economic policy only around the edges.

I therefore don’t understand the next step in President Obama’s “phone and a pen” argument. While the Senate majority is in play this November, the House majority is not. It is extremely likely that Republicans will keep the House, and almost as likely that they will continue to struggle to function as a governing majority party in 2015 and 2016. Next year and the year after President Obama will face a legislative challenge as big or bigger than he faces now.

I agree that it’s quite hard to build a legislative strategy in the current legislative and political environment. But does that mean you don’t even try? Working with a Republican House and Senate, President Clinton signed Gramm-Leach-Bliley into law in 1999, the year after Republicans impeached and tried him. Working with a Democratic House and Senate, and when he was fiercely unpopular with Democrats, President Bush enacted an energy law in 2007 and TARP in 2008. All three of these laws were enacted in intensely partisan legislative environments only because of strong presidential leadership.

If President Obama has given up hope of finding principled economic policy compromises with a Republican majority House this year, what is his game plan for his final two years? Next year will he try to figure out a way to cut the legislative Gordian knot, or instead just recharge the phone and buy some more pens and pencils? Has President Obama given up on Congress, and therefore on economic policy, for the next three years?

(photo credit: White House photo by Pete Souza)


Monday, 27 January 2014|

Two presidential errors on unemployment insurance

Last week President Obama said:

But there’s an economic case for

[extending additional unemployment insurance benefits], as well. Independent economists have shown that extending emergency unemployment insurance actually helps the economy, actually creates new jobs.  When folks like Katherine have a little more to spend to turn up the heat in her house or buy a few extra groceries, that means more spending with businesses in her local community, which in turn may inspire that business to hire one more person — maybe Kathy.

By leaving out one word, President Obama got this exactly wrong. The missing word is temporarily.

The “helps the economy” case for increased government spending on additional unemployment benefits is a traditional fiscal stimulus argument: if the government increases spending, people will have more income. They will then spend some/most of it, generating more income for others, and so on. Depending on the type of spending, economists estimate/guess the fiscal multiplier of a dollar of increased government spending (or tax cuts!), then calculate the increase in GDP that will result. From this they estimate the increased employment that will flow from the government’s fiscal stimulus.

Economists like to argue about the size of multipliers for various types of fiscal stimulus. But as best I can tell, they don’t argue that a temporary fiscal stimulus results in permanent economic growth. Once government stops spending money, the beneficial growth effect, however big or small it may be, dissipates.

Now the hope of a traditional fiscal stimulus is that it jump-starts an economy stuck in a rut, providing a big enough temporary boost that the recovery becomes self-sustaining even after the stimulus is withdrawn. Think of it like a strong cup of coffee early in the morning. If all goes well, the initial jolt gets you going enough that you maintain a high energy level even after the caffeine hit has worn off.

It is quite difficult to make such an argument for such a small proposed policy change. An additional $25 B in government spending, in a $16.6 trillion economy, doesn’t come close. It would be like hoping that one sip of coffee will jump start your day. Qualitatively the argument can hold, but it’s not big enough to be credible (assuming you buy the assumed fiscal multipliers in the first place).

President Obama should have said “extending emergency unemployment insurance temporarily helps the economy.” But he didn’t say that because it’s a much weaker argument. By omitting this key word, he implied that this policy is unambiguously good for the economy as a whole, and not just for the recipients of the added benefits.

President Obama then doubled down on his flawed argument by adding:

That’s why, in the past, both parties have repeatedly put partisanship and ideology aside to offer some security for job-seekers with no strings attached.  It’s been done regardless of whether Democrats or Republicans were in the White House.  It’s been done regardless of whether Democrats or Republicans controlled Congress.  And, by the way, it’s been done multiple times when the unemployment rate was significantly lower than it is today.

In the current legislative context “with no strings attached” mostly means “without cutting other government spending, either now or in the future, so there is no net deficit increase.” President Obama wants to increase government spending by $6 B over the next three months (or $25 B over the next year when it inevitably gets extended) without any budget offsets. Deficits and debt would be higher if he gets his way.

His problem is that this turns his fiscal stimulus into a net economic loser over time. If you buy the Keynesian models, the initial positive bump to GDP from the fiscal stimulus is temporary, but in exchange for that you get a permanent increase in debt because you’re not offsetting the added government spending.

That added debt creates an additional fiscal burden (higher interest payments) and the higher budget deficits create an economic cost as well, as lower national saving leads to a smaller future capital stock, slower productivity growth, and lower future wages.

So, even in a CBO-scored view of the world, in which fiscal stimulus works and fiscal multipliers are big enough to matter, a temporary, not-offset increase in government spending like that proposed by the President, results in:

  • a temporary increase in economic growth and jobs;
  • a permanent increase in debt and net interest costs;
  • and a net decline in economic growth and income over time, as the short-term benefits dissipate and the long-term costs gradually accumulate.

This does not definitively mean you shouldn’t do the policy, by the way. You might conclude that a little added growth and job creation now is worth a bigger economic and fiscal downside in the future. Or you might think the compassionate benefit of helping the unemployed is worth the aggregate downsides of a policy that is a net fiscal and macro negative over a longer timeframe. The President said this yesterday when he said that helping some (unemployed) Americans is more important than economic growth for all Americans. Even if you agree with the President’s value choices, that does not excuse his flawed economic arguments.

If you limit your view to only the next year, then what President Obama said is true: the traditional macro models show increased economic and job growth from his proposed policy change. A more comprehensive, longer view allows you to see both the costs and benefits of the President’s policy, and you have to decide whether slamming a couple of Red Bulls now is worth the caffeine crash later.

Although, given the size of this policy, maybe this is more like taking a couple of sips of Red Bull. While the President got his economic arguments precisely backward because he ignored the out-year costs, this is a debate about a fairly small policy change. Relative to a $16+ trillion economy, this really isn’t big enough to matter much either way.

Still, that doesn’t excuse bad economic arguments.

(Official White House photo by Pete Souza)

Wednesday, 15 January 2014|

Redistribution vs. Growth

Here is President Obama today, speaking before meeting with his Cabinet.

We want to maximize the pace of our recovery, but most importantly, we want to make sure that every American is able to benefit from that recovery, that we’re not leaving anybody behind and everybody is getting a fair shot.

With “but most importantly,” President Obama is prioritizing distribution over growth. He is saying that helping some Americans is more important than economic growth for all Americans.

Kudos to the President for actually making a choice–most politicians would falsely assert that there is no tradeoff between faster economic growth and greater equity. There often is.

Too bad he’s chosen the prioritization that’s opposite of my own: growth, growth, growth, in the short run and the long run.

Here is what I wish the President had said instead.

We want to maximize the pace of recovery. The surest way to help the greatest number of Americans is for government to create conditions that allow for rapid economic growth and job creation. And the best way to make sure every American has the chance to benefit is to create an expanding economy with opportunities for all.

(photo: Official White House Photo by Pete Souza)

Tuesday, 14 January 2014|

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.


Friday, 8 November 2013|

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.


Wednesday, 6 November 2013|

The fiscal Gordian knot

Here is the fiscal Gordian knot:

Congressional Republicans will only agree to sequester relief if offset by mandatory spending cuts, but President Obama and Congressional Democrats will only agree to mandatory spending cuts if taxes are also increased, and Republicans won’t raise taxes.

This fiscal Gordian knot caused the Super Committee to break down in late 2011. There was no agreement to replace the automatic discretionary spending cuts (aka the sequester) that President Obama proposed and signed into law in the Budget Control Act of 2011. He made a fundamental miscalculation when negotiating that law: he mistakenly assumed that Republican defense hawks would squawk so loudly at the disproportionate defense cuts imposed by the sequester that some Republicans would be willing to support tax increases in exchange for higher defense and non-defense discretionary spending.

The sequester replacement negotiations earlier this year were a second attempt by the President to untie the knot. That time he used political force, trying to bludgeon Republicans into agreeing to tax increases. Again he failed.

As the Republican demand to defund ObamaCare dissolved last week, the President and Leader Reid once again erred. Unsatisfied with a straight extension of current law spending and the debt limit and a political victory over Republicans, they increased their demands. They shifted from a sure-win defensive posture to an aggressive but risky offensive posture, demanding higher spending offset in part by tax increases.

House Budget Committee Chairman Ryan floated a sound and predictable Republican alternative: substituting mandatory spending cuts (specifically, changes to entitlement programs proposed by the President in his budget) to offset higher discretionary spending for defense and (I think) non-defense. This formed the core of Speaker Boehner’s recent offer to the President. The President rejected this offer because House Republicans were unwilling to also raise taxes. For a third time the President failed to untie the fiscal Gordian knot.

The negotiation now lies with Senate Leaders Reid and McConnell. (VP Biden, the only member of the President’s team with a proven track record of closing deals with Republicans, has apparently been locked away at Leader Reid’s insistence.) While the form of the Reid-McConnell negotiation is about the timing for when short-term extensions of the continuing resolution and the debt limit would next expire, the underlying substance of the negotiation is this fiscal Gordian knot. Both leaders are trying to structure both this negotiation and the next to maximize their leverage to achieve their respective fiscal goals.

Democrats had the advantage last week when they were playing defense, trying to block Republican demands to defund or delay parts of ObamaCare. The combination of the Cruz-Lee vaporware defund strategy, a House Republican conference unable to agree on anything, a Republican party message that was muddled at best, and an effective use of the bully pulpit by the President led to plummeting poll numbers for Congressional Republicans. Many Senate and some House Republicans seemed anxious to negotiate a deal that would temporarily both end the government shutdown and extend the debt limit deadline. With Leader McConnell’s tacit approval, Senator Collins kicked off the compromise attempt by initiating a rump group negotiation with a few Democrats. Leader Reid killed this fledgling bipartisan negotiation and once again took matters into his own hands, leading to the current discussion with his Republican counterpart.

Republicans now have a slight medium-term advantage for three reasons. I suspect that Democratic appropriators don’t feel as strongly about wanting to raise taxes as Congressional Republicans feel about not wanting to raise taxes. When they are eventually forced to choose, I’ll bet that enough Democrats (specifically, the appropriators) will accept entitlement spending cuts to fully offset higher discretionary spending, without any tax increases.

In addition, current law defaults to a position Republicans are more willing to accept than Democrats. Senators Cruz and Lee learned that he who favors current law has a significant tactical advantage in a shutdown fight. President Obama’s sequester in current law means the same is true on spending, but this time it favors fiscal conservatives.

Finally, when the public debate was “government shutdown vs. defunding ObamaCare,” Democrats had a communications advantage. Now the debate is shifting to “whether to bust the 2011 bipartisan budget deal by increasing spending and taxes.” That is right in the wheelhouse of today’s Republican party.

By insisting on tax increases to offset higher discretionary spending, Leader Reid and President Obama are doing what neither Boehner nor McConnell has been able to do for several weeks: unite Congressional Republicans. And Republicans have a strong counter: we will agree to higher discretionary spending as long as it’s offset only by entitlement spending cuts proposed by the President. I appreciate that many Democrats think it’s outrageous not to also raise taxes (and they’re nuts for thinking that), but that’s not the point. The key is that while most House and Senate Republicans felt forced into a shutdown over “defunding ObamaCare,” I’d bet that most of them will reject any Reid proposal to unravel the only bipartisan fiscal success of the past five years or to increase spending funded by higher taxes, even if such a rejection means that the government shutdown continues.

If Leader Reid and the President continue to insist on more spending and higher taxes, and especially if they want to try to enact it now, I think it backfires on them. They will reunite Congressional Republicans and give Republicans a much stronger rhetorical perch than they have had so far. Unfortunately, they would also continue the current stalemate.

(photo credit: Jay Allen)


Monday, 14 October 2013|