Tag Archives: ACA

Does an income tax make people work less?

Harry Truman famously asked for a one-handed economist since all of his seemed reluctant to decisively answer anything: “on the one hand,” they’d tell him, but “on the other…”

When asked whether an income tax makes people work more or less, the typical economist gives the sort of answer that would have grated on Truman like a bad music critic.

If, however, we change the question slightly and make it more realistic, it’s possible to give a decisive answer to the question. Income taxes do reduce overall labor supply. This is something that economists James Gwartney and Richard Stroup explained in the pages of the American Economic Review some 30 years ago. And last week, the CBO’s much-discussed report on the ACA and labor-force participation illustrated their point nicely.

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What the Affordable Care Act Can Teach Us about Government Failure

Most people probably believe that the recent failures of the Affordable Care Act (ACA) are an anomaly, and that most areas the federal government involves itself in, from education to transportation, operate quite smoothly, or at least adequately well. This belief is misguided, however, and the issues we see from the ACA should not be viewed as anomalies. Problems like unintended consequences of policy, privilege granting to special interests, adverse selection in insurance markets, and other issues, are widespread in countless areas of public policy. It just so happens that we usually fail to associate the pernicious effects of laws with their source: public policy.

First, public policies create many unintended consequences. People will change their behavior in response to altered incentives from policies and when these behavior changes are not anticipated by lawmakers, unintended consequences occur. As an example, the ACA has altered incentives for many employers. Business owners are now likely to cut worker hours and keep their staffs under 50 employees in order to avoid paying penalties imposed by the law. The intention was that people will get insurance through their jobs, while a result is that many people will lose their jobs or work fewer hours.

A similar effect occurred after passage of the Americans with Disabilities Act. This well-intentioned Act of Congress was supposed to level the playing field for disabled workers by requiring that businesses with disabled workers provide accommodations, such as wheelchair access. The Act also sought to prevent discrimination of disabled workers, such as firing someone for having a disability. The reality once the law was in place was very different, however. Economists have found that the law was followed by a steep decline in employment among disabled workers, likely because of increased costs associated with hiring them, exactly the opposite result the law intended. Perhaps the most famous unintended consequence of all is the fact that minimum wage laws actually hurt low skilled workers.

A lot of these effects, while unintentional, are actually quite predictable and any good economist should be able to identify potential unintended consequences before a law is even implemented. So why do these policies get adopted? A big reason is because special interests have enormous influence in shaping policy. The Affordable Care Act literally has provisions allowing handouts to insurance companies to make up for losses they face in the new government health insurance exchanges. Unfortunately, cronyism like this shapes policy at all levels. For example, a recent USDA regulation will require additional food safety inspection of imported catfish. This may sound like a sensible idea, until one finds out there is no evidence of a significant problem from tainted catfish. The new program was actually lobbied for by domestic catfish producers who wanted to hurt their foreign competitors by driving up the price of imports, all at the expense of American consumers.

A final problem created by the Affordable Care Act relates to adverse selection in insurance markets. Adverse selection occurs because of information problems between buyers and sellers of insurance. Healthy people may have trouble signaling that they are a low risk to insurers, and so the healthy drop out of insurance markets when insurers don’t offer them a low priced product that serves their needs. This can lead to mostly sick people signing up for insurance coverage, while the healthy decide to go without coverage. Over time this leads to higher prices, causing more healthy people to decline coverage and the pool of insured to become ever sicker.

The ACA creates this problem through community rating requirements and other regulations, like guaranteed issue, that don’t allow insurance companies to price policies based on the riskiness of the applicant. As insurance premiums rise (because of regulations and because insurance companies must cover many new services), more and more healthy people will find these policies unattractive. The insurance pool will become ever sicker over time. To avoid this problem, the ACA includes a mandate that everyone purchase insurance. However, it is far from clear whether the current mandate is strong enough to prevent adverse selection problems from taking place.

This problem is hardly new. New York State passed extremely strict community rating regulations several decades ago. This led to higher premiums and lots of young, healthy people dropping out of the insurance pool. I should know, I lived in New York and went without insurance for most of my 20s. The prices of policies were simply too high for me to justify paying.

The list of government failures likely to result from the Affordable Care Act is too long for one blog post. The ACA also has regressive effects that tend to favor the wealthy at the expensive of the middle class, and the law will add to moral hazard problems in our healthcare system (i.e. people over-utilizing medical services or not taking adequate care of themselves because the costs of their behavior are passed on to others).

The ACA may have serious problems, but it works great as a teaching device. Nearly every day we see another example of government failure in action.  Maybe once Americans see the effects of the ACA, they will look more closely at the effects of other policies as well.

How many people still have their old health plans?

A few days ago, I pointed out that many people with employer-provided health insurance plans may not be able to keep the same plan, because even some small changes to employer-sponsored plans could make them forfeit their “grandfathered” status. Duke University health care economist Christopher Conover and I noted in 2012 that the “grandfathering” regulation could have been written much more flexibly to prevent some of this.

On October 30, Chris published an article in Forbes that put some numbers on this abstraction. Based on survey data showing what percentage of plans complied with various provisions of the Affordable Care Act (ACA), he estimated that 129 million (68%) will not be able to keep their old health insurance plans, even if they liked them.  That does not mean these people will go uninsured. Rather, they will have to buy more expensive plans that include coverages mandated in the ACA.

This result is consistent with figures the Department of Health and Human Services supplied in its 2010 analysis of the grandfathering regulation that established the very restrictive terms an insurance plan had to meet if employers or policyholders wanted to keep it.

The true promise of the ACA is now clear: “If you like your current health plan, tough luck; you will buy a plan with coverage the federal government has decided you must have.”


If you’re an employee, do you still have your old health insurance plan?

The recent discovery that the federal government knew in 2010 that many people would not be able to keep their old health insurance under the Affordable Care Act has made nationwide news. But most of the discussion has focused on the market for individual and small group policies. A much bigger group of people — those of us with employer-provided insurance — are affected by the same “grandfathering” regulation that affects individual policies. And as I pointed out in an op-ed in The Hill yesterday, the Department of Health and Human Services’ 2010 analysis accompanying this regulation predicted that 39-69 percent of employer plans would no longer be grandfathered by 2013. (If you don’t believe me, you can download the grandfathering regulation and read the analysis yourself, on pages 34,550-34,553.)

Why has the effect on employer-provided policies received so little attention, even though it potentially affects a lot more people?

I suspect it’s a transparency issue.

If the employer makes changes to the plan that prevent it from being grandfathered, the new plan must include a number of new, costly coverages, such as childbirth, children’s vision care, psychological services, and substance abuse treatment. But employees do not receive letters in the mail saying that they can no longer continue their prior insurance plan because it does not comply with the ACA. Instead, the employer and the insurance company simply modify the plan, and the premiums change to reflect the cost of the new mandates.

Since employers usually pay most of the premium, employees do not see the full cost increase. Any increase in the employee’s share of the premiums is paid with pre-tax dollars, which further cushions the blow. And since we’re all conditioned to expect the cost of health insurance to go up every year, employees are not likely to ask how much of the premium increase occurred because of the new mandates versus other factors.

As a result, many employees may believe they’ve kept their old health insurance plan even if they haven’t!


Why a shutdown threat won’t work

There are many people who think that the Affordable Care Act (ACA) is bad policy. I am among them. There are also many who think that the current trajectory of government spending is unsustainable and economically harmful. I am also among them.

Then there are people who think it would be wise to shut down the federal government if they can’t get language passed that threatens to defund the ACA. (Notice that I didn’t say language that “defunds the ACA”; I said language that “threatens to defund the ACA.” Much of the ACA is actually funded through mandatory spending so Congress would need to pass a full repeal of the bill to defund it. What these folks want is language in the budget resolution saying that the ACA ought to be defunded. The bill might strip out some discretionary funding but most of the ACA would go forward.)

I am not among them.

To help us think through the options, let’s borrow from game theory and employ a decision tree. The House (H) can either choose to pass a continuing resolution (CR) that funds the ACA or a CR that calls for de-funding the ACA. The Senate (S) can choose to pass whatever the House sends them or to reject it. If they reject it, and no CR is passed by October 1, the federal government will shut down. In this case, as the CRS puts it, “substantial ACA implementation might continue during a lapse in annual appropriations that resulted in a temporary government shutdown.” If the Senate passes whatever the House sends them, then it will go to the President (P) who can either sign it or veto it.

At the end you can see the outcomes and the way that each group feels about them.

Options are happy, sad, neutral, and outwardly sad but secretly happy. (click on the images to enlarge):

decision tree

 To figure out the most likely outcome (the “equilibrium”) you do a fancy thing called “backwards induction.” It is actually quite simple: think about how each player would act at each stage, starting at the end of the game, and cross off implausible actions. This will help you eliminate unlikely outcomes. This is what I’ve done below, with dashed lines indicating an action that a particular player is unlikely to take.  

We can with confidence cross off the possibility that the President will veto a CR that keeps the government open and fully funds his signature initiative or that the Senate would reject such a bill.

We can also cross off the possibility that the President would sign or that the Senate would send him something that calls for defunding his signature initiative.

That leaves us with two plausible scenarios: the House doesn’t use the CR as a means to attack the ACA, the CR passes the Senate, and the President signs it. This is the top branch of the game tree. House Republicans will be neutral about this outcome since they will have escaped blame for a shutdown but will have done nothing to stop the ACA. Senate Democrats and the White House will be pleased.

The other somewhat plausible scenario is that the House passes a CR calling to defund the ACA, and the Senate rejects it. The government would shut down and the ACA would mostly be untouched. I’m guessing Republicans would get most of the blame for shutting down the government since they lack a bully pulpit, aren’t as gifted as the president at communicating, and the ideological stereotype is that Republicans would like to see the government shut down any way. The White House and Senate Democrats will be outraged—simply outraged—that Republicans would do this but they will secretly be happy to have one more reason to say Republicans should never be trusted with power.

If Republicans see all of this, they will likely flinch, hold their noses, and pass a CR that doesn’t touch the ACA and hopefully come up with more constructive ways to challenge the policy. But, it is a close call for some House Republicans so for this reason, I’ve only partially crossed off the first bottom fork of the decision tree. decision tree 2

What the tree doesn’t indicate is the long run consequences of a government shutdown. Two and a half years ago, when Washington was staring down a different government shutdown, I drew from the experience of U.S. states to conclude that a shutdown is not in the interest of those who advocate for limited government:

As is often the case, we can look to the American states for some guidance. It turns out that in 23 U.S. states, the government will automatically shut down in the event that the governor and the legislature fail to agree on a budget. In his work on budget rulesDavid Primo examined the theoretical impact of these provisions from a game theoretic perspective. He noted that in states with an automatic shutdown provision, “the legislature will be able to achieve its ideal budget, so long as the governor prefers it to no spending.” (p. 102)

He therefore predicted that states with such a provision will spend more than states without such a rule. He then tested the hypothesis, controlling for a number of other factors known to impact state spending and found that states with an automatic shutdown provision actually spend about $64 more per capita than other states. As he notes, “This effect is remarkably large, given that shutdowns occur rarely.” (p. 103)

This suggests that the federal government’s automatic shutdown provision—by making Congress’s desired spending level a take-it-or-leave-it offer—tends to bias the government toward more spending. By extension, it also suggests that a government shutdown will shift negotiating power toward those who favor more spending. So, paradoxically, fiscally conservative tea partiers stand to lose the most if the federal government shuts down.

Perhaps it is time for them to rethink their support of a shutdown.


Governors’ Priorities in 2013: Medicaid Funding, Pension Reform

As the month of March draws to a close, most governors have, by this point, taken to the podiums of their respective states and outlined their priorities for the next legislative year in their State of the State addresses. Mike Maciag at Governing magazine painstakingly reviewed the transcripts of all 49 State of the State addresses delivered so far (Louisiana, for some reason, takes a leisurely approach to this tradition) and tallied the most popular initiatives in a helpful summary. While there were some small state trends in addressing hot-button social issues like climate change (7 governors), gay rights (7 governors), and marijuana decriminalization (2 states), the biggest areas of overlap from state governors concerned Medicaid spending and state pension obligations.

Medicaid Spending

Judging from their addresses, the most common concern facing governors this year is the expansion of state Medicaid financing prompted by the Supreme Court’s ruling on the Affordable Care Act last year. While the ACA originally required states to raise their eligibility standards to cover everyone below 138 percent of the federal poverty level, the Supreme Court overturned this requirement and left up to the states whether or not they wanted to participate in the expansion in exchange for federal funding or politely decline to partake.  The governors of a whopping 30 states referenced the Medicaid issue at least once during their speech. Some of the governors, like Gov. Phil Bryant of Mississippi, brought up the issue to explain why they made the decision to become one of the 14 states that decided not to participate in the expansion. Others took to defending their decision to participate in the expansion, like Gov. John Kasich of Ohio, who outlined how his state’s participation would benefit fellow Buckeyes suffering from mental illness and addiction.

Neither the considerable amount of concern nor the markedly divergent positions of the governors are especially shocking. A recent Mercatus Research paper conducted by senior fellow Charles Blahous addresses the nebulous options facing state governments in their decision on whether to participate in the expansion. This decision is not one to make lightly: in 2011, state Medicaid spending accounted for almost 24 percent of all state budget expenditures and these costs are expected to rise by upwards of 150 percent in the next decade. The answer to whether a given state should opt in or opt out of the expansion is not a straightforward one and depends on the unique financial situations of each state. Participating in the Medicaid expansion may indeed make sense for Ohioans while at the same time being a terrible deal for Mississippi. However, what is optimal for an individual state may not be good for the country as a whole. Ohio’s decision to participate in the expansion may end up hurting residents of Mississippi and other states who forgo participating in the expansion because of the unintended effects of cost shifting among the federal and state governments. It is very difficult to project exactly who will be the winners or losers in the Medicaid expansion at this point in time, but is very likely that states will fall into one of either category.


Another pressing concern for state governors is the health (or lack thereof) of their state pension systems. The governors of 20 states, including the man who brought us “Squeezy the Pension Python” himself, Illinois Gov. Pat Quinn, tackled the issue during their State of the State addresses. Among these states are a few to which Eileen has given testimony on this very issue within the past year.

In Montana, for instance, Gov. Steve Bullock promised a “detailed plan that will shore up [his state’s] retirement systems and do so without raising taxes.” While I was unable to find this plan on the governor’s website, two dueling reform proposals–one to amend the current defined benefit system, another to replace it with a defined contribution system–are currently duking it out in the Montana state legislature. While it is unclear which of the two proposals will make it onto the law books, let’s hope that the Montana Joint Select Committee on Pensions heeds Eileen’s suggestions from her testimony to them last month, and only makes changes to their pension system that are “based on an accurate accounting of the value of the benefits due to employees.”

The Ravitch Volker report: State Budget Crisis is Real

The recession of 2008 pulled the mask off of state budget pathologies that had been identified as institutional weaknesses in the decades leading to the crisis.

The “new normal” for state and local governments does not look like the booming 1980s and 1990s but in fact is riddled with many fiscal challenges.  Revenues aren’t what they were before 2008 though they are expected to reach pre-recession levels in FY 2013. The Medicaid and employee benefits bill is rising. The stimulus pushed forward budgetary reforms. These are some of the findings of the Ravitch-Volker Report, an effort of the State Budget Crisis Task Force which assembled in 2010-2012 to diagnose the major problems facing six states: California, Illinois, New Jersey, New York, Texas and Virginia.

Much of the analysis is non-controversial: Medicaid is eating up budgets, as are pensions costs and health care benefits.

Medicaid, currently at 24 percent of state spending, will continue to increase as enrollment, medical inflation and the increasing caseloads that come with higher unemployment increase costs. This is not a surprise. What is new is that the federal government is making it harder for cost-saving measure to be enacted, and “entrenched provider groups in each state resist reductions in Medicaid provider rates….”  I do not believe this is the intention of the authors of the report but the diagnosis of Medicaid’s future highlights the dysfunctional aspects of this federal-state pact which has led to the creation of special interests that benefit from inflating costs.

On the pension front the Ravitch-Volker report points to the the role discount rates have played in the pension funding problems facing the state and local governments, in particular in New Jersey. And they also note the reliance on budgetary gimmicks that may even result in a kind of budgetary “cynicism.” A point I have made in the past.

But the report also makes a few assumptions about the interplay of federal, state and local spending that I think could benefit from an expanded debate. The authors warn that cuts in federal discretionary spending will doom subsidiary governments. On the surface, that’s true. Cuts in aid mean less money in state coffers for education, transportation and other areas. But the larger question is what are the fiscal effects of grants-in-aid between governments? There is the public choice literature to consider on the role of fiscal illusion in finances. And further, does the current model of delivering these services actually work as intended?

Their recommendations are largely sound. Many of them have been made before: more transparent accounting, a tightening of rainy day fund rules (see our recent paper on Illinois), broad-based tax systems should replace narrow ones, the re-establishment of the Advisory Commission on Intergovernmental Relations (ACIR). Abolished in 1995 ACIR was concerned with evaluating the fiscal impact of federal policies in the states. Further the commission recommends the federal government work with the states to help control Medicaid costs, and the re-evaluation by states of their own local needs including municipal finances and infrastructure spending.

The report is timely, contains good information and brings many challenges to the fore. But this discussion can also benefit from a larger debate over the current federal-state-local spending model which dates largely to the middle of last century. This debate is not merely about how books are balanced but how citizens are governed in our federalist system. The Ravitch-Volker report is sober but cautious in this regard. The report sketches out the fiscal picture of the U.S. in broad strokes and offers general principles for states to follow and it is sure to create discussion among policymakers in the coming months.






To Regulate or to Tax

It has now been a week since the Supreme Court handed down its long-awaited ruling on the ACA. From an individual liberty perspective, it was either a dark cloud with a silver lining or a dark cloud with a dark lining.

I am not a constitutional scholar (though like many Americans, I have spent the last week playing one on Facebook), so I’ll spare you my legal interpretation. But what can we say about the political economy of the decision?

For one thing, the decision highlights the fact that fiscal and regulatory policies can be substitutes for one another. As George Mason University economist Richard Wagner put it some 20 years ago, “a central principle of public finance is that any statute or regulation can be translated into a budgetary equivalent.”

For example, Congress might have passed the individual procreation mandate. It might have fined every childless couple $3,000, every couple with one child $2,000, every couple with two kids $1,000 and every couple with three or more kids $0. Congress, of course, didn’t do this. Instead, they went the fiscal route and created the per-child tax credit, the marginal incentives of which are identical to what I have just described (up to the first three kids).

Alternatively, Congress might have imposed a tax on employers equal to $12,100 for each employee not paid $7.25 an hour. Instead, they went the regulatory route and created the federal minimum wage, the marginal incentives of which are identical to such a tax.

In my paper with Noel Johnson and Steven Yamarik, we explore the inherent substitutability of fiscal and regulatory instruments. Specifically, we look at state behavior in the presence of fiscal limits. We are interested in whether politicians substitute into regulatory policy when fiscal rules bind their decisions (we find evidence that they do). The ACA ruling essentially gets at the opposite phenomenon: the Court has ensured that Congress’s regulatory hands are relatively more constrained. Does this mean that Congress will substitute into fiscal policy, using taxes, tax credits, and spending to address questions that they might have addressed with regulatory instruments? My guess would be: yes.


When Taxpayer Dollars Are Used to Advocate for More…Taxpayer Dollars

Back in 2010, I noted that government spending can beget further spending. I cited research by Russell Sobel and George Crowley which shows that when the federal government transfers money to the states (as the stimulus bill did), the states tend to increase their own future taxes after the federal money goes away. They found that for every $1.00 the feds send to the states, states increase their own future taxes between $0.33 and $0.42.

Image by scottchan

It recently came to my attention, however, that little-noticed aspects of the 2009 Stimulus and the 2010 Affordable Care Act go even further: they fund advocacy on behalf of further state and local government spending.

Here is the story:

The stimulus bill set aside $650 million for the Department of Health and Human Services to spend on “evidence-based clinical and community-based prevention and wellness strategies.” The idea was to encourage state and local governments to adopt policies that get people to stop smoking, to eat better, and to get exercise.

HHS used the money to create a new grant program called Communities Putting Prevention to Work (CPPW). According to the CPPW website, it features “a strong emphasis on policy and environmental change at both the state and local levels.” (emphasis added).

Grants can go to local governments or to non-profits. You can see a list of approved grantee strategies here. Many of the strategies seem to be regulatory in scope (e.g. media and advertising bans for cigarettes, bans on branded promotional items, etc.). A number are also focused on getting state and local governments to spend more money. For example, they suggest efforts to get money for “hard-hitting counter-advertising” against tobacco. Or for “safe, attractive accessible places for activity” such as “recreation facilities, [and] enhance[d] bicycling and walking infrastructure.” They also call for “Reduced price[s] for park/facility use” (which, of course, means increased taxpayer support).

Interestingly, the Affordable Care Act doubled down on these activities. “Phase Two Funding” for CPPW was buried in the ACA.

It seems more than a little unseemly to have federal taxpayers bankroll an advocacy campaign like this. How would progressives feel if federal tax dollars were spent on a campaign to get state governments to cut taxes and regulations? Or how about a taxpayer-financed campaign to promote awareness of the Economic Freedom of the World index or the Freedom in the 50 States Index? Studies suggest, by the way, that economic freedom is associated with improved health outcomes (see Exhibit 1.16 of the EFW on p. 24). So maybe such a campaign would qualify for a grant under the program?