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!”