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CBO report low balls Obamacare impacts on employment, economy

By Peter Morici
web posted February 10, 2014

In a recent report, the Congressional Budget Office once again low-balls the impact of the Affordable Care Act on labor force participation and the economy. GDP, growth and employment for most workers will be harmed.

It estimates employment will be cut by 1.5 to 2 percent, thanks to workers choosing to cut hours or not work at all to obtain Obamacare subsidies for private insurance or maintain eligibility for Medicaid.

According to the report, lower employment only translates into a 1 percent reduction in workers’ compensation, owing to the concentration of those in low-wage categories. However, the report fails to adequately calibrate the impact of higher Medicare taxes and the surcharge on interest, dividends and capital gains on the participation of older workers—especially high productivity and entrepreneurial workers and business owners over 50 but heretofore not yet inclined to cut hours or retire altogether.

In addition, it fails to consider the consequences of distorted career paths on labor productivity, negative effects on R&D spending and lower investment overall in the United States. Those activities will be lost to China, Japan and Germany and other competitors in Asia and Europe owing to their lower health care costs.

Major industrialized competitors in Europe and Asia spend 9 to 12 percent of GDP, and often attain higher health care outcomes, while the United States spends 18 percent. And Medicare and Medicaid’s own actuaries expect the latter figure to rise under Obamacare, thanks to the inadequacies of cost controls.

Whether paid through direct taxes, business outlays for health insurance or penalties for failing to provide health care, as mandated by the Affordable Care Act, those costs weigh heavily on cost competitiveness and decisions to locate manufacturing and service activities in the United States, especially those critical to R&D effort and innovation.

The Obama Administration argues that subsidies for health care and Medicaid give Americans more personal choices, and decisions not to work improve the performance of the economy. Taken to its logical conclusion, the Administration should provide direct cash payments to workers to abstain from seeking employment.

Rolling it all up, the impact on the economy beginning this year and escalating through the decade is likely in the range of $240 to $320 billion. This will damage the viability of the Social Security trust funds and shake state and local government finances. More cities, like Detroit, will face bankruptcies. States like Illinois will face lower credit rating and be forced to reduce funding for education, public safety and the like.

By failing to address the handicap imposed on American businesses by higher health care costs, the Affordable Care Act, like other efforts to equalize income, will slow growth to a pace more akin to lethargic European economies than emerging competitors in Asia. ESR

Peter Morici is an economist and professor at the Smith School of Business, University of Maryland and a widely published columnist. He tweets @pmorici1

 

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