The New CBO Budget Update: The Need for Faster Growth (and the ACA is minor part of that)

February 4th, 2014 at 5:34 pm

I’m working my way through the new CBO budget update and here’s my main takeaway so far:

The absence of full employment and the persistence of large output gaps is projected to take a toll on our fiscal health.  If we want to improve that health, we need to grow faster.

The Affordable Care Act is taking tremendous heat for this result but it has little—not nothing; maybe 16% (read on)—to do with it.  The budget office notes two factors for their growth downgrade: slower growth of both productivity and the capital stock.  And because the economy grows more slowly than in their last forecast, it generates less revenues and slightly worse fiscal outcomes.

What about the ACA?  CBO reports “little net change to projected growth of potential hours worked, as revisions to historical data that suggest a stronger trend were roughly offset by more negative estimated effects from the recession and weak recovery and from the ACA.”  So the ACA is implicated in the slower growth projection but it’s nothing like the lion’s share that opponents are trying to make it.

Let me try—and I’ll want to revisit this as I get deeper into this dense report—to quantify the extent to which the ACA is contributing to slower growth.  The CBO says that because of their growth downgrade, compensation will be 3.6% lower than in their last projection.  They later say that the ACA will lower compensation by about 1% (the years covered aren’t identical, but they’re close; btw, that 1% is up from 0.5% in their previous forecast).  So, about 30% of the slower-growth-induced compensation decline is due to the ACA.  Now, compensation amounts to about 53% of GDP in these years, according to the budget office.  That assigns about 16% of the downgrade in GDP growth to ACA impacts.  That ain’t nothin’ but it’s far from the whole shooting match, which is what I’m seeing from some commentators today.

While deficits are projected to remain below 3% of GDP and the debt-to-GDP ratio declines for the next few years, they begin to rise starting in 2018, and the CBO projects the deficit to be up $1 trillion or 0.5% of GDP above the previous estimate, over the next decade.

This deepening of the deficit is, however, fully a function of their slower growth expectations.  Legislative changes in CBOs current-law baseline have reduced outlays and increased revenues, so they’re pushing toward smaller budget deficits.  It’s weaker growth spinning off fewer revenues that are responsible for the slightly worse fiscal outlook.

Back to the ACA for a moment.  As they have in the past, CBO projects diminished labor supply by subsidy recipients because if they work more and thus earn more, their subsidy, which declines as income goes up, would fall.  In fact, in today’s update they significantly boosted these supply effects; they’re now projecting “a decline in the number of full-time equivalent workers of …about 2.5 million in 2024.”

This needs some unpacking.  It’s not nearly as bad as it sounds.  In fact, it’s partially good.  As Josh Barro points out here, some people will be better off in that they’ll work less because they want to—the subsidy makes them better off by increasing both their income and thus their options.  Barro also stresses that some will choose to work less because the loss of subsidy as your earnings rise is like a higher tax rate.  So, it’s not all roses.

Second, the CBO is very careful to stress that what’s declining here is labor supply, not labor demand.  The result should be slightly fewer people in the labor force looking for the same number of jobs, which sounds like something we want: a slightly tighter labor market.

Finally, there’s the essential “compared-to-what” question.  Before you go bananas over these estimated ACA labor-market effects remember that health care reform that actually covers everyone works like this: to cover everyone you need a large risk pool and that means you need an individual mandate and that means you need subsidies.  There’s no plan that purports to cover broad swaths of the population that doesn’t work that way.  And once you do that, you’ve got precisely the same issues the CBO surfaces in their update today.

More to come on this, but—and I say this knowing you’re going to accuse me of “if your only tool is a hammer everything looks like a nail”—what this report is actually saying is “get your economy back to full employment and a lot of problems, fiscal and otherwise, will be significantly mitigated!”

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9 comments in reply to "The New CBO Budget Update: The Need for Faster Growth (and the ACA is minor part of that)"

  1. Larry Signor says:

    Hogwash from the CBO. The subsidies will have an anti-austerity impact, and economic actors in the lower 80% don’t have to worry about huge compensation increases. How about an increase in labor demand because of market expansion? The ACA is not a zero sum game. Give me 10k$/year to spend on insurance and I have 10k$ to put somewhere else in the economy if I already had insurance. The newly insured will drive demand for preventive and childrens healthcare as well as innovations in the supply chain. This will drive employment…I won’t go all Keynes on you, as well as tax revenue. The ACA and employment are very similar: the more players, the merrier.


  2. Larry Signor says:

    Yup…already in the pundits sights…”Obamacare To Lead To Less Hours Worked”. How? The ACA is not a cash benefits program so working less equals less income. If I work less to get cheaper health insurance, what do I do? Patronize my physician?I have less income and more time. What are these people thinking? And the good news, the deficit falls. Bozos.

    http://hosted2.ap.org/vastr/d12bda5e607d45b3b04d235120cb7ee7/Article_2014-02-04-Health%20Overhaul-Jobs/id-a15399838b694830b05dac6e4d80deaa


  3. Larry Signor says:

    “Now, compensation amounts to about 53% of GDP in these years, according to the budget office.”

    Not what FRED says:

    http://research.stlouisfed.org/fred2/graph/?g=2Xa

    I question many things in this report, especially the “facts”. I’m reading it closely but feel as if I’m being flim-flammed.


    • Jared Bernstein says:

      I think that FRED graph is just wages/salaries; you need to look at total comp, including benefits.


      • Larry Signor says:

        Thanks. You are right about the compensation issue. I am still very leery of the conclusions I have read from the CBO report. It seems they may be transferring micro behavior to macro conclusions. I may be doing the same thing. The macro effect still seems to be anti-austerian. I am not an economist and don’t have the math, but sometimes you just know where them cows is gonna graze. My money is on the ACA, not the CBO.


  4. Th says:

    I’m with Larry. I think the CBO botched it. Why wouldn’t those foregone hours not be worked by others? Maybe rising productivity but CBO says “no.” Maybe decreased economic growth but CBO doesn’t explain how that is supposed to work. Will taxing capital gains and dividends of really high earners and giving that money to health care providers and insurance company stockholders all while improving the health and financial stability of millions really reduce economic growth? Count me skeptical.


  5. rjs says:

    this statement from the CBO strikes me as incorrect:
    CBO estimates that the ACA will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor—given the new taxes and other incentives they will face and the financial benefits some will receive.

    just because a percentage of workers decide to work less hours does not mean that hours worked in the aggregate will fall…if someone quits their extra job, whoever they had been working for will just hire someone else…the only way ACA could cause a reduction in hours would be if there were a labor shortage…is that what they’re forecasting?


    • Jared Bernstein says:

      Sort of–they’re predicting a decline in the labor force (meaning smaller than it would be absent the ACA) at full employment.


  6. urban legend says:

    This excellent comment at Dean Baker’s site by skeptonomist hits the nail on the head and reinforces what Larry, Th and rjs say above:

    “Workers don’t control the number of hours, nor can the CBO predict them. This paragraph contradicts itself – it says there is no net drop in demand for labor and then says there will be a reduction in hours worked. If a number of workers drop out, their places will be taken by the unemployed, causing a net decrease in unemployment. The work force is reduced, not hours.”

    The CBO does not have a crystal ball or any other means of predicting how many people will drop out, much less how many hours will be demanded of the work force. Anyone could make guesses about these things and there is little that makes the CBO report authoritative or more reliable than any other economic projection – the reliability of any such projection is negligible at more than a year or two. The report itself seems ill-considered, and of course the reaction in the media is absurd. ”

    At best, the CBO’s prediction is that those currently employed will exit the work force or reduce their hours. If demand is not affected by this, and it should be marginal at most, either the remaining currently employed will work longer hours or unemployed members of the work force will become employed. There should, in fact, be a net increase in demand because (1) pay should theoretically rise somewhat with a smaller work force for employers to chase (although any good news on the hiring front will pull the marginally attached back into the game of looking, so that may be a wash); (2) people who were unemployed but are now filling in the abandoned jobs will have more money (or those working longer hours will have more money), while (3) those leaving the work force because of insurance availability will likely not reduce their demand much and will use other resources to maintain the same standard of living (otherwise, they would not be ones who quit). More job openings will raise consumer confidence, which in turn will increase business confidence and total demand. (Knowing now and for the first time ever that loss of a job does not mean the possibility of no health insurance and financial devastation from an unpredictable health problem — a direct and tangible but grossly unappreciated and under-promoted benefit for the tens of millions who are insured now through their jobs and are often said to be “not affected” by the law — will also boost consumer confidence and, presumably, speed up demand. Have any of these likely phenomena been factored into the analysis. For that matter, how about improved productivity as people hanging on to a job by their fingernails for the benefits leave the work force?)

    There is something screwed up about the CBO’s logic. There is no obvious mechanism for its conclusions. Look for a correction soon.


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