Jobs and Health Reform
I knew there was a reason why we don’t rely on health economists for macroeconomic predictions. I just never bothered to discover what it was.
Now I know. Health economists don’t know anything about macroeconomics. That’s why they become health economists.
What provokes this observation is Harvard health economist David Cutler’s new study, published by the left-leaning Center for American Progress. Cutler, who admits to a role in fashioning what many call ObamaCare, claims that the new health law is not going to destroy jobs. It’s going to create them: somewhere between 250,000 to 400,000 additional jobs every year over the next decade.
Ah, I know what you’re thinking. How can a law that raises the cost of labor by up to $6.00-an-hour for every worker in the country and has significant taxes on capital as well possibly be a job creator? (See my debate yesterday with the editors of USA Today over the magnitude of expected job losses these provisions will generate.)
The answer: Cutler’s study ignores those things. Ignores them? Yes, ignores them. Like the Andy Griffith commercials that focus on the $1 of benefits for seniors while ignoring the $10 of costs, Cutler’s study focuses only on the sunny, pro-job side of things and ignores the gloomy, anti-job provisions.
What he’s actually produced is not a study at all. Instead, it’s a lawyer’s (one-side-only) brief masquerading as a study. No doubt it will be used like a lawyer’s brief as the House debates the repeal of ObamaCare this week. Still, there’s a silver lining in all this. Read on.
httpv://www.youtube.com/watch?v=TLUgyJP4_wE
Don’t Take Me Half The Way
Cutler does not have a macroeconomic model. Or a computable general equilibrium model. Nor is he borrowing one from some other economist. He doesn’t appear to think he needs one. When I say he’s produced a lawyer’s brief, I’m not exaggerating. There is nothing in the study about:
- The cost to employers of a pay-or-play mandate to provide more generous benefits than what they currently provide.
- The incentive employers will have to drop health insurance altogether and pay a fine instead.
- The incentive employers will have to avoid both the costly benefits and the fines by shedding workers and relying on part-time employees and independent contractors instead.
- The Congressional Budget Office estimates that the bill will cost 750,000 full-time equivalent jobs, or any other estimate of job losses.
Who ever heard of doing a study that ignores all the contrary findings of previous studies? As for the reasons for job losses, here is Cutler, explaining it in his own words:
Increasing [health] costs reduce net income for workers. The increase in the premiums that employees pay for coverage is most noticeable, but family income is affected in other ways as well. The first response of employers to rising health insurance costs is to reduce salary increases. Salaries for high-income workers have grown less rapidly than productivity as health insurance costs have accounted for a growing share of total compensation. Less rapid growth of wages is not possible for all workers — many of whom have already experienced stagnant or declining take-home pay. For those workers the only viable response to rising medical costs is reduced employment — both involuntary part-time work and layoffs. Several studies show that health insurance costs and employment are negatively related.
I couldn’t have said it better. But wait. The passage I just quoted isn’t Cutler describing the effects of ObamaCare. He is writing about the increase in health care costs in the current system. But it fits ObamaCare much better. In the absence of the new law, employers can respond to health cost increases by cutting back benefits, increased employee cost-sharing, etc. Under ObamaCare, they’re greatly limited in their ability to do these things. Under the new law, they are trapped.
Let’s ignore all the job-killing aspects of the new law. How do you find any job-creating aspects, other than more jobs for bureaucrats? Follow this syllogism:
| Major Premise: | Lower health costs are good for job creation. |
| Minor Premise: | ObamaCare will lower health costs. |
| Conclusion: | ObamaCare will be good for job creation. |
But even if we accept that reasoning, how does ObamaCare lower health costs? Especially since no one else thinks that is going to happen. Here the argument gets tricky:
| Major Premise: | Health care costs can be lowered by bundled payments, electronic medical records, managed care, coordinated care, capitated care, comparative effectiveness research, pilot programs, etc., etc., etc. |
| Minor Premise: | The federal government will do all of the above in Medicare and if that doesn’t work (which it almost certainly will not) it will keep payments to doctors and hospitals progressively lower than what private payers pay. |
| Conclusion: | Whoops. Something’s not working here. |
I know what you’re thinking. When Medicare squeezes the providers, won’t cost-shifting occur — making everyone else’s costs (read: employers’ costs) higher than they otherwise would have been?
Would it surprise you to learn that Cutler doesn’t even consider this possibility?
If you’ve stayed with me this far, here’s the silver lining. Just as Cutler can separate the job-creating from the job-destroying parts of ObamaCare (focusing on the former and ignoring the latter), legislators can do the same thing. There really is no connection between the Medicare reforms (which are supposed to lower costs) and the individual and employer mandates, the health insurance exchanges, the new insurance regulations, etc. — all of which will raise costs, cause huge labor market disruption and reduce employment.
So Congress can implement the Medicare reforms — if they really think they will work — and junk everything else.
It’s called having your cake and eating it, too.
Labor economics can explain the negative effects of increasing the cost of labor without boosting productivity. The result is less labor hired at the margin.
I’m surprised the White House didn’t trot out (and misuse) Nobel Prize-winning economist, Theodore Schultz’s Human Capital Theory. In the past, advocates for universal coverage would often argue an employer mandate would lead to better health, which would boost productivity enough to pay for the employer mandate. Of course, if this were true employers would not have to be forced to offer health coverage.
I keep reading that the PPACA will likely increase the number of people working in the health care sector. I guess that’s something of a silver lining for some. But, when more of us are unemployed, uninsured and broke, what then? I guess Medicaid will be in more patients’ futures.
Perfect song pairing.
One can only wonder what is going on in the mind of David Cutler. He used to be a respected economist.
If you think ObamaCare is going to produce jobs, I have a bridge I’d like to sell you.
Cutler’s “study” is a perfect example of the most frustrating (and embarrassing) thing about being an economist. The problem is not that politicians and others misuse economics. That’s frustrating, to be sure, but it’s not what I mean. The problem is that people who say they are economists freely abandon any semblance of professional behavior and write economic garbage that they then present as serious work.
Cutler’s “study” is indeed an embarrassment to the serious economists. He actually does claim to have a model, but it appeared in another CAP report. Apparently it has not been peer-reviewed or subject to professional evaluation.
Cutler’s main conclusion, that eliminating non-price rationing by the government will lower costs, is an undergraduate level mistake. “Price” is not “cost.” If the government sets the price of something below the market-clearing level, shortages arise. The people who are lucky enough to get the product pay less than they would have paid if the market had been allowed to set the price. For them, costs are lower. But what about the fact that there will be less product brought to the market at the artificially low price? What about all the people who don’t get any of the product at all because they happened not to be at the head of the line? For them, costs are higher. It is a standard exercise in 1st-year graduate micro to show that the losses exceed the gains, so in any reasonable sense “costs” actually are higher even though “prices” are lower.
Cutler surely knows all this as well as the other basic mistakes he made. He doesn’t care about getting the economics right because his science is overridden by his political preferences. He is an intellectual whore willing to betray his profession to advance his personal preferences. It happens all the time, I’m sorry to say, but that doesn’t change the fact that he’s a disgrace to the profession, as is his “study.”
I agree with John Seater. This is an embarrassment.
Is Mr. Cutler counting all the new regulatory agencies created by the law?
The editors of USAToday show some surprising honesty in their assessment: “the sad truth is it [the health reform] does little to alter the velocity of medical spending, which at the current rate of increase would push family insurance premiums to $25,000 a year within a decade.”
“Market forces, normally good for holding down spending, are virtually non-existent in health care because patients and providers are mostly spending other people’s money.”
“[the health reform] continues the shift of jobs into medical areas at the expense of jobs in other sectors as the Baby Boom generation ages.”
Ah, yes, the Andy Griffith commercials. That ties in nicely with my comment about the Barney Fife rule (MLR rules) that limits the deputies (insurers) to only one bullet!
-Blake
The knowledge of most experts is limited in scope so when they leave their areas of expertise which they do all the time, they know little more than the rest of us.
In the health care sector this has been proven over and over again by all the so called health care experts that try to recreate a system. They even like to carve out an exclusive niche for themselves to better promote their image calling themselves health care economists instead of economists. They even clone themselves as if consensus is the same as being right.
Why do they leave their areas of expertise and move to those areas in the limelight? Because their own limited areas are boring to the masses and it is the appeal to the masses that generate high incomes and celebrity status.
John is calling people out! I love it.
Thanks, John.
It helps me work through the following puzzle.
When government spends more on defense, that creates job. How do I know. President Bush said so. The added spending tyranslates into jobs at defense manufacturers or defense bureaucrats.
But when government (and others) spend more on health care, it does not create jobs. The number of health care jobs stay constaht. It kills jobs. How do I know? John just told me.
Isn’t that all very interesting?
Uwe writes: “When government spends more on defense, that creates job. How do I know. President Bush said so. The added spending tyranslates into jobs at defense manufacturers or defense bureaucrats.”
It has finally happened, the Blame Bush Syndrome has entered and become one of the theorems of economics.
No one is included in the killing of jobs discussion that MLR rules have drastically affected jobs in the insurance industry. It has forced insurance carriers to lay off employees. One carrier told me they consolidated offices and departments and let 2500 employees go. Insurance carriers have cut agents’ commissions by 50% forcing agents to leave the industry. But not to worry because they can be hired by the state to be “navigators”, adding to the STATE payroll or maybe they can be added to the FEDERAL payroll as one of the 14,000 IRS agents hired to make sure you have a federally approved health plan that meets the mandate. Wait a minute! Obamacare does increase jobs….government jobs.
We’ll rename the Mayo Clinic the Mayberry Clinic.
John,
Your Cutler example below is, regrettably, only an example of a much larger problem for the field of economics – a problem that could seriously undermine the field if it continues unchecked.
I started out in the sciences, psychology, and then philosophy (epistemology) before I settled on economics. Not surprisingly, I was drawn to economics because of its power to help me understand and explain the world around me. Without ever thinking about it, I naturally gravitated to people of like mind; that is, of like scientific orientation.
There is another laudable mindset, but one that creates all sorts of problems that are not immediately apparent. There has always been those who go into economics because they want to change the world for the better and view economics as an excellent means to that end. Economists even like me could be expected to say “bravo – better to have social engineers who understand economics than others,” but this is mistaken. Sometimes IQ and knowledge only drive up hubris and the speed at which you run over a cliff. The more immediate problem is that it is hard to trust those who have a higher calling than truth because they can be seduced by greater good arguments. For evidence of my point one need only reflect on the recent harm done to science generally of leaked emails regarding editorial manipulation of work relating to climate change.
Perhaps I am being nostalgic, but it seems to me that the ratio of such consequentialist economists to mere truth seeking economists has been rising over time. This is not surprising, really, because as the government reallocates a larger share of GDP, the stakes involved in policy analysis has increased. But this has led to a rising proportion of very smart (notice I did not say very good) economists who are intellectually less than honest. They are not dishonest in the sense that they intentionally peddle untruths, but they are not intellectually honest either, in the sense that they start their arguments with the conclusion and then use logic, reason, and evidence to rationalize their foregone conclusion as described by David Hume in his description of how the passions normally rule the roost that is the mind.
This has been a serious problem on the left for some time (there’s more to do on that side by construction) but is producing a rebound effect on the right. To be fair, I do believe that most right-leaning (shall we say free market oriented?) economists are much more intellectually honest than the most visible of the left-leaning ones, but it’s still not a healthy development. I prefer truth seeking economists to dueling economists any day of the week – this is not a court of law where an adversarial relationship has merits.
As a profession we need to take proactive steps to inculcate a genuine desire and enthusiasm for a scientific orientation to the field. The search for truth is a jealous one and should never be subordinated to anything else. But here is the most important point: There is no tradeoff in putting the search for truth first, for this is a splendid beginning even to policy analysis and changing the world for the better.
-Dave
Nice post David R.
@ David Rose
Very thoughtful post.
Al:
Don’t be so paranoid! I am not blaming Bush for anything. I merely point out what he said (and he was right). Defense spending does create jobs.
Will you just relax a bit? I am worried about your health with all that bile in your gut.
Uwe, Don’t play doctor. It was OK with the girls when you were 6, but now your playing can cause damage.
Bush said a lot of things, but that doesn’t make them true unless you believe that if we break everyone’s windows we will be in boom times. Think of all the jobs that will have been created.
By the way Uwe, your comment regarding Bill Gates was wrong.
Al:
What comment asbout Bill Gates was that?
Uwe
B y the way, Al, if you think only the private sector can create jobs in times of vast unemployment, you are welcome to that thought.
Uwe asks: “What comment asbout Bill Gates was that?”
You had made the comment in Raising Arizona: “But are you saying that then the government would also forbid Bill Gates to pay with his own resources what insurance bureaucrats won’t pay for? How would that work in our system?”
If Bill Gates and his doctor were on our single payer for those over 65 the government can forbid Bill Gates from paying with his own resources. As mentioned on an earlier blog that was litigated.
Best, Al
Regarding your second statement: “B y the way, Al, if you think only the private sector can create jobs in times of vast unemployment, you are welcome to that thought.”
Actually I don’t think government effectively creates an increased number of private sector jobs in the long term when they take the money from the private sector to pay for those jobs.
I assume you don’t believe that useful long term employment is effectively increased by breaking windows and then having the government using our money to pay for them to be repaired, do you?
Best, Al
As I see it, Al, at any time a nation has a set of real resources that can be put to work by either the public or the private sector or both.
At full employment, within the private sector one entity can bid away real resources from another entity, creating new jobs by wiping out old ones. Similarly, government can bid away real resources from some private entities in an analogous process.
When the private sector builds a hotel, the construction jobs are not permanent, although the hotel’s staff is reasonably so. Similarly, when government builds a public hospital.
At widespread unemployment things get more complicated. For example, if the private construction industry is dead, as in many ways it is now, and its workers are unemployed, government can borrow and employ these works in the construction of roads, schools, airports, and sop on, and so create jobs.
Finally, Medicare has been in existence since 1965, a pretty long time. Does anyone believe that its cash flow has not created jobs for a long time?
You assume that government only breaks windows and then pays someone to have them repaired. That is a strange view of the macro economy. I do not share it.
Uwe, it appears that not only are you subscribing to the broken window theory but have added the warm body theory of employment. Increase the number of warm bodies and the economy will thrive. Thus your warm body theory and your claim that Medicare provides jobs would make one want to expand the economy by creating Medifood, Mediclothes, Medhouse, Meditransport etc.
What seems to be lacking in these two theories is the concept of productivity. In the end one requires productivity to create the wealth needed to fund all these Medi-programs.
On an aside, you didn’t respond to the Bill Gates question so I assume you recognized the error of your earlier statement, especially since litigation was involved. Alternatively perhaps you are still researching it.
Best, Al
I still believe that the real purpose of this ridiculous health care bill is to throw the entire health care industry into such turmoil that Americans will finally turn to the government and demand a simple, free, single payer system like the UK has. The whole problem with pre-Obamacare health care was the influence of Medicare and the complete disconnect between doctor, patient and costs. I’m hoping the American public is wise enough to demand a true, free-market in medical care when the Obamacare era is brought to an end. You know, that’s when you go to a doctor and both of you know what he’s going to charge for what services, he doesn’t do a lot of tests to cover himself in case of a lawsuit, and you can go to the doctor down the street if the service or price are not to your liking. I should live so long.
Rereading everything I finally understand what you were saying when you said:
“Now I know. Health economists don’t know anything about macroeconomics. That’s why they become health economists.”
Thank you John G. You are very brave. I hope no one puts an abacus in your back.