Tuesday, February 4, 2014

CBO budget analysis, Appendix B, Affordable Care Act

I was reading a report today from the Congressional Budget Office which talked about the impacts of Obamacare after reading about how the Republicans cheered for a part in it on how it will supposedly "kill jobs", and I found the following interesting:
  • The ACA's coverage provisions in 2014 will cost the Federal government $41 billion. While this seems like a lot, it is only $132.25 per capita, which can be as much as a family of four will spend on groceries in a week. This is one point I always make to people when it comes to government spending. The US is huge, and numbers in the millions, billions, and trillions seem really large. If we calculate the per capita cost by dividing those numbers by 310 million we get a number we can understand on how much it costs per individual which makes them seem more relevant.
  • The Congressional Budget Office argues that because people are going to see slightly higher taxes. While I understand this logic, and that if you increase the cost of doing something less people will do it, I'm not sure if labor is flexible enough for it to happen. The reason I doubt this is first of all, economists know wages are sticky. Most prices will fluctuate given supply and demand more or less freely, as consumers know when they see the prices of different fruit or gasoline go up and down over time as the market shifts. Despite the changes in the market, wages don't go up and down nearly as much as other goods because they are sticky. Employees see this stickiness firsthand because they have their wages stay the same for an extended period of time through a contract between their employer and either themselves or their union. Even if the market fluctuates and unemployment goes up and down wages will stay more or less constant in nominal terms over the medium-term. On top of this, it is always better to work than not to work which is why we see people look for higher pay because even if it is taxed at a higher rate you are still better off. When they increase the taxes on employment by the very small tax the ACA added (about 1%) and required full-time employees to have health insurance employees are still better off working than not working, so I don't expect workers to significantly change their habits. Similarly for employers, even if employees are each being taxed at a low rate they are better off hiring employees to cover demand than have insufficient employees to cover the demand for their product opening up a door for a competitor to come into the industry and steal business. We observe wages work more like gasoline than apples, because if the price of apples goes up you can purchase oranges, but if the price of gasoline goes up and you have to travel you are better off paying more to go to work than not going to work everyday, and wages work the same way. That is why I am skeptical about seeing a significant change in employment with the new ACA taxes.

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