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Beyond the Spin: Why it’s Terrible News that the ACA Lowers Employment

Charles Blahous | March 3, 2014

On February 4, 2014, the Congressional Budget Office (CBO) released a report that instantly became a focus of intense controversy and competing political spin. The report found that the Affordable Care Act (ACA or “Obamacare”) would reduce US employment by the equivalent of 2 million full-time workers by 2017, 2.5 million by 2024. This news from CBO was received in the context of the polarizing politics surrounding the ACA, with commenters choosing sides over the report according to their attitudes toward the health law itself. 

When CBO’s findings are instead viewed from the standpoint of our larger economic policy challenges, it becomes clear that this consequence of the ACA is unambiguously bad, as well as unnecessary and warranting of bipartisan correction. ACA supporters are certainly justified in pointing to the good that comes from the law’s provision of subsidized health coverage to low-income Americans (this good would be greater if the ACA’s focus were solely on health rather than health insurance, but that is a debate for another day). But causing many Americans to stay out of the workforce altogether in order to retain insurance subsidies is unequivocally a problem, irrespective of one’s general attitude toward the ACA. 

To clarify this, let’s step back from the debate over the ACA for a moment and examine the current state of our economy. 

Our prosperity basically derives from two factors: the first being how much Americans work, the second being how productive we are while working. Anything that systematically reduces either factor lowers the standard of living that Americans experience as a group; it means that our economy will be smaller, federal deficits will be larger, financing shortfalls in programs like Social Security will be larger, and so on.

Perhaps America’s biggest economic problem right now is that workers are leaving the labor force by the millions (we will get our next update on this in the March 7 jobs report). Part of the worker drain is due to population aging and was a widely-anticipated problem. But other factors have also arisen to make the exodus much worse than foreseen. Below I will use information from recent Social Security trustees’ reports to illustrate this. 

In 2007, we knew we had a significant problem on the horizon when the baby boomers would begin to leave the workforce. The net annual growth of our labor force would slow, and our economic growth would slow right along with it. 

 

 

 

Unfortunately, what has happened is that the labor force has shrunk much more than anticipated then. The number of workers dropped through the floorboards, and economic growth fell alongside (see the 2009 plunge in the next two graphs). The current expectation – some would say hope – is that these will rebound in the middle of the current decade, but by nowhere near enough to offset recent damage both to the labor force and to the economy.

 

 

 

Part of the explanation, of course, is that the great recession arrived, causing unemployment to rise just as many boomers were starting to retire. But other phenomena also entered the picture. 

One is that Social Security disability benefit awards skyrocketed, as often happens (albeit usually to a lesser extent) during a recession. This means that many who otherwise would have continued to look for work are now extremely unlikely to ever return to the labor force.

 

 

Our sagging economy also caused net immigration to plummet, further depressing the ranks of workers. People are much less likely to arrive within our borders – whether legally or illegally – to join an economy in which it is tough to find work. Recently immigration has recovered, but not nearly enough to replace the immigrants lost from 2007-11. 

 

On top of all that, there is a deeply concerning phenomenon of “discouraged workers” – those who have simply given up finding work. Put all these factors together, and we now have an economy with far too few workers. CBO’s latest projections for labor force participation are sobering indeed.

Inadequate labor force participation has long been a central concern of economists on both sides of the political aisle. The problem of individuals heading into permanent retirement undesirably early has prompted efforts by myself, former Obama OMB director Peter Orszag, former Obama OMB official Jeff Liebman, former acting SSA deputy commissioner Jason Fichtner, and many other esteemed economists to correct flawed work incentives facing middle-aged Americans. 

Those who leave the workforce at younger ages constitute an even more serious problem. Former BLS Commissioner Keith Hall has noted how important it is for the prospects of young adults that they join the workforce soon after leaving school. The left-leaning Center for American Progress think tank expressed similar concerns:

Some of the negative impacts of high youth unemployment are already clear: Young people are increasingly failing to make payments on their student loans, delaying saving for retirement, and moving back home with their parents. Other consequences will be felt long into the future. According to our analysis, a young person who experiences a six-month period of unemployment can expect to miss out on at least $45,000 in wages—about $23,000 for the period of unemployment and an additional $22,000 in lagging wages over the next decade due to their time spent unemployed.

Until the recent CBO report was released, the Obama White House had also been a part of the bipartisan consensus that employment is the key to economic advancement. NEC Director Gene Sperling said the following at a January 6 press conference: 

I think there’s no question over the last 50 years things have been done wrong, but I think we’ve learned from lessons. I think that both Democrats and Republicans have learned you have to look at -- to make sure about the incentives you’re creating and that policies are better if they are designed to reward work. One of the reasons the earned income tax credit has been so important is that it’s an incentive for work. You get that assistance as you are working. It has positive incentives and it’s giving positive support for the program.

Both Sperling as well as the White House’s CEA chair Jason Furman have routinely emphasized the importance of government’s helping those who are “actively looking for work.” This is no accident; earlier in the “War on Poverty,” federal assistance to the poor was structured with insufficient attention to whether it disrupted Americans’ movements up the ranks of the workforce, contributing to a cycle of despair and unrest. Federal policy makers learned something from that experience about how better to assist those in need. It is especially important now that those lessons not be discarded. 

The ACA did not by itself cause our declining labor force problem, though it is now understood to be making it worse. Importantly, this is not – as have some have claimed – a desirable effect of ending “job lock” (the phenomenon of being stuck in a bad job by the need to maintain health insurance). Alternative reform proposals would have enhanced health insurance portability, lessening the dependence of insurance on employment status, without having anti-employment effects; examples include proposals by President George W. Bush and presidential candidate John McCain. These proposals avoided the ACA problem in they would not have imposed a high marginal tax rate on employment income. 

Given the central role of the ACA in our national political dialogue, it’s inevitable that advocates would try to spin the recent CBO report according to how they want the ACA to be perceived. But when the spinning is put aside, there’s no avoiding reality: we simply cannot afford to be implementing policies that drive our sagging labor force participation even further downward. 

 

Charles Blahous is a senior research fellow for the Mercatus Center, a research fellow for the Hoover Institution, a public trustee for Social Security and Medicare, and a contributor to e21.


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