Obamacare: No Prescription for Economic Recovery

James Sherk / July 20, 2011

The economy is recovering at an unusually slow pace. Typically, employment grows strongly after a severe recession. Not this time. Unemployment remains stuck above 9 percent more than two years after the recession officially ended. What is going on?

Initially, the economy appeared on track for a steady recovery. The economy went from losing 841,000 jobs in January 2009—the recession’s low point—to gaining 229,000 jobs in April 2010. By the spring of 2010, the Administration confidently predicted a “Recovery Summer.”

But that spring, Congress also passed President Obama’s health care legislation. The law does not exactly encourage hiring.

• Businesses with more than 50 workers will see their costs for health coverage rise—they must purchase more expensive government-approved insurance or pay a penalty;
• Businesses with fewer than 50 workers have a strong incentive to maintain this size, to avoid these higher costs; and
• Employers face considerable uncertainty about what constitutes qualifying health coverage and what it will cost. They also do not know what the health care market or their health care costs will look like in four years. This makes planning for the future difficult.

Within two months of Obamacare’s passing, the recovery stalled. The chart above comes from a recent Heritage WebMemo and shows net private-sector job creation from January 2009 onward. The red line shows the trend in job creation before and after April 2010. Private-sector job creation improved by an average of 67,600 jobs per month before April 2010.

In May 2010, the job situation stopped improving. Job creation dropped to just 48,000 net private sector jobs, and private-sector hiring took a new course. From May 2010 onward, private job growth improved by only 6,500 jobs per month—less than one-tenth the previous rate.

The fact that the job market ground to a halt after Congress passed Obamacare does not prove that the health care law caused it—correlation cannot prove causation. It does, however, lend strong weight to the voices of businesses who say the law is strangling them.

In a recent survey, 33 percent of small business owners said the health care law was either their greatest or second-greatest obstacle to new hiring. Federal Reserve officials report similar concerns. The data suggest these businesses are not just blowing steam. The health care law has proven to be no prescription for recovery.