Congressional Budget Office (CBO) Director Douglas Elmendorf recently spoke at the University of Southern California about the economic impact of Obamacare. He predicts that Obamacare will further depress the nation’s employment picture.
CBO’s analysis of Obamacare predicts that it will reduce the amount of labor being used in the economy by roughly half a percent. Elmendorf states that this impact will be small, but in reality the impact is small only in relative terms. For instance, a half-percent loss in jobs in the American economy today would translate into about 750,000 additional Americans losing work.
The reason for the job loss is twofold. First, Obamacare raises costs on businesses with additional mandates and taxes, which will negatively impact hiring. Second, Obamacare increases the social safety net with a massive Medicaid expansion and generous subsidies to purchase insurance. This increases implicit marginal tax rates and discourages work.
Elmendorf’s recent remarks focus on the impact Obamacare will have on lowering the amount of unnecessary spending on health care. The answer appears to be no as CBO projects that health care spending will be at least 25 percent of GDP by 2035, up from 17 percent today.
CBO projects that health care spending will increase by around $800 billion between 2014 and 2019 because of Obamacare. Over the next decade, Obamacare is projected to reduce the federal budget deficit, primarily because of substantial Medicare cuts, large tax increases, and net revenue from the CLASS Act scheme. However, these projections are dependent on the key assumptions that CBO made regarding how individuals will react to the legislation and the political feasibility of certain components of the law taking effect. CBO’s “score” of the bill could be very different if the assumptions CBO made prove to be erroneous.
In his recent remarks, Elmendorf goes beyond the 10-year purview of the CBO’s budget “score” time frame to look at the long-range impact of Obamacare on health care spending. He expresses doubt that the new health care law can drive efficiency improvements and reduce wasteful spending.
Elmendorf’s skepticism is based in sound reasoning. It is very difficult for government to enact regulatory changes in order to drive efficiency improvements. An alternative to relying on government to improve efficiency is to utilize market forces. In general, market forces lead to improvements in products and lower prices. A key problem in health care is that only about 10 percent of the dollars used to purchase health care are controlled by patients at the point of service. Instead of dealing with the root of the problem, Obamacare expands government’s role in the provision of health care. Government’s track record at improving quality and lowering prices does not inspire confidence that the new health care law will work as intended.
