A Report’s Real Message: It Wasn’t About Health Care

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

Only in Washington could the following occur: the Congressional Budget Office releases a dense, technical report wherein it tweaks its estimates of how labor supply will be affected by the health care act over the next decade … and the whole town goes nuts.

Not only that, but in our mass nuttiness, we missed the actual message from that potboiling page-turner also known as the Budget and Economic Outlook, 2014-2024.  That message had almost nothing to do with the Affordable Care Act.  It was instead a stark warning about the damage to our fiscal outlook from diminished economic growth, jobs and incomes.

First, let us dispose of the Affordable Care Act silliness, at least among ourselves (as much as I’d like to, I can’t stop the warring parties down here from their predictable responses).  Those who want to bash the health care act argue that it’s a job killer, and thus they latched onto the budget office’s estimate that there will be “a decline in the number of full-time-equivalent workers of about … 2.5 million in 2024.”

Sounds like a job killer, right?

Wrong.  There’s a difference between workers (labor supply) and jobs (labor demand).  The budget office bent over backward to make this distinction, claiming that employers’ demands for workers will not change much at all because of the health care law.

So what do you get when there’s less labor supply around stable labor demand?  A tighter job market. 

The economist Dean Baker uses Congressional Budget Office numbers to make this point:

“If hours fall by 1.5 to 2.0 percent, but compensation falls by 1.0 percent, then compensation per hour rises by 0.5-1.0 percent due to the ACA. If this is bad news for workers then someone must have been enjoying the new found freedoms in Colorado or Washington State too much.”

There is thus no support in the Congressional Budget Office report for the claim that the health care act kills jobs.  As the report put it, the estimated reduction in hours of work “stems almost entirely from a net decline in the amount of labor that workers choose to supply, rather than from a net drop in businesses’ demand for labor.”

In fact, as some of the fog is clearing in our benighted capital, a smidgen of clearer thinking is breaking through.  What the Congressional Budget Office is saying is that because people receiving subsidies through the health care act will see those subsidies reduced as their earnings rise, they’ll choose to work less to avoid that loss.

An editorial in The New York Times on Wednesday provides a positive view of this impact of the law, stressing that if those locked into a job because of a pre-existing condition or working more hours than they’d like in order get health coverage now have a choice to do otherwise, isn’t that a plus?

The principled conservative response to this, which I haven’t seen anywhere, is not “but it’s a job killer!”  Remember, the job still exists. The Affordable Care Act gives that job holder an option and, for some, an incentive to work less without losing health coverage. Conservatives might well object to making that choice on the taxpayers’ dime.  But there’s no model of health care reform from the left or the right that doesn’t involve a subsidy that fades out as income rises.  So this labor-supply-choice problem is endemic.

Were we to have a real debate on what the budget report is saying, we would instead focus on what to do about the truly disturbing news in the chart below.  The chart, using Congressional Budget Office data also released Tuesday, compares the office’s “guesstimates” of potential growth in gross domestic product, inflation-adjusted, made in 2007 (orange line) and most recently (blue line).  “Potential G.D.P.” is how much the economy should be expected to produce when we’re in the midst of a robust recovery with our economic resources fully deployed.

Source: Congressional Budget Office.

Clearly, something happened between these two periods that led to an economically large and significant decline in this key indicator.  What was it?

You might think, “demographics!” â€" we’re getting older, more workers are retiring, and we should thus expect slower growth.  Except that there’s little known about the age structure of the work force now that wasn’t known in 2007 when the Congressional Budget Office made its more optimistic forecast.

What happened was a huge housing bubble inflated by “financial innovation,” which brought us the great recession and the slow slog we’ve come to know as the current recovery.  At least by the budget office’s estimates, the damage from that period is now baked into the cake.

In fact, the budget office reported Tuesday that the fiscal outlook has worsened slightly, as it now expects the budget deficit over the next decade to exceed its previous forecast by 0.5 percent of G.D.P.  This increase in the deficit has nothing to do with actual fiscal policy (taxing and spending decisions that are on the books).  It is fully a function of the expectation of slower growth spinning off fewer revenues.

Actually, let me correct myself.  The decline in potential G.D.P. has a lot to do with fiscal policy … lousy fiscal policy that injected large doses of austerity into the United States economy when it clearly needed the opposite.  I believe the damage can be reversed â€" that the blue line can come up closer to the orange line â€" with much better policy that focuses on job creation, better pay and increased opportunity. If so, an added benefit of that reversal would be a much stronger fiscal outlook.

But we’ll never get there if we’re mired in foolish debates that have nothing to do with the facts of the case.