Worse Than the Supremes: Obamacare Economics

Larry Kudlow
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Posted: Jun 27, 2015 12:01 AM
Worse Than the Supremes: Obamacare Economics

The judicial decision to uphold all of the president's health care subsidies may be very disappointing, but the economics of Obamacare are far worse than whatever constitutional mistakes have been committed by the Supreme Court.

The economics of Obamacare are very bad. The law is inflicting broad damage on job creation and new business formation. It ruins job incentives by making it pay more not to work, thereby intensifying a labor shortage that is holding back growth and in turn lowering incomes and spending.

And across-the-board Obamacare tax increases are inflicting heavy punishment on investment -- right when the U.S. economy desperately needs more capital as a way of solving a steep productivity decline.

Because of Obamacare, there's an additional 0.9 percent Medicare tax on salaries and self-employment income, a 3.8 percent tax increase on capital gains and dividends, a cap on health care flexible spending accounts, a higher threshold for itemized medical expense deductions, and a stiff penalty on employer reimbursements for individual employee health policy premiums.

Each of these tax hikes is anti-growth and anti-job.

There is so much talk about "secular stagnation," inequality and stagnant wages these days. But there's little talk about the negative economic impact of Obamacare. It's a much bigger story than SCOTUS jurisprudence.

A couple of examples.

First, there's the problem of the 49ers and the 29ers. The business mandates and penalties imposed by Obamacare when small firms hire a 50th employee or ask for a 30-hour workweek are so high that firms are opting to hold employment to 49 and hours worked to 29. Lower employment and fewer hours worked are a double death knell for growth.

The Bureau of Labor Statistics sheds light on this. Although part-time work has fallen during the recovery, from about 9 million to 7 million, it hovered around 4 million during the prior recovery. And part-time employment, which as a share of total employment peaked at about 20 percent in 2010 and has slipped to about 19 percent, hovered around 17 percent during most of the prior expansion. Obamacare?

Everybody is complaining about the low labor force participation rate and the equally stubborn reduction in the employment-to-population rate. But why are we surprised? Obamacare is effectively paying people not to work.

University of Chicago economist Casey Mulligan argues that Obamacare disincentives will reduce full-time equivalent workers by about 4 million, principally because it phases out health insurance subsidies as worker income increases. In other words, Obamacare is a tax on full-time work. After taxes, people working part time yield more disposable income than they would working full time.

Mulligan calculates that both explicit and implicit marginal tax rates within Obamacare may rise to nearly 50 percent, as the law discourages those who attempt to climb the ladder of success. National prosperity and economic growth are again the victims.

And if all that weren't bad enough, Obamacare enrollment is coming up short, and the program is unable to sustain an adequate risk pool. Expert health insurance analyst Robert Laszewski and the consulting firm Avalere find that exchanges are succeeding in enrolling low-income individuals but are struggling to attract middle- and higher-income enrollees.

Meanwhile, it appears that the healthy millennials are not buying enough Obamacare to finance the older and less healthy -- especially those with pre-existing conditions.

So if the sign-ups are lower and the risk pool is shorter and the hoped-for redistribution from young to old isn't happening, insurance companies are forced to jack up premium rates. Again, not surprising. But the crisis is coming earlier than expected.

Laszewski reports that Blue Cross Blue Shield of Texas wants a 20 percent rate hike; in Maryland, it's 34 percent; Oregon's biggest insurer, Moda Health, wants a 26 percent hike; and Blue Cross Blue Shield of Tennessee wants a 36 percent hike.

Not every state is experiencing this. But bad news has a way of spreading. Plus, insurance companies are increasingly worried that the government won't back them through risk corridors or claim reinsurance or risk adjustments. So the dirty secret here is that a major taxpayer bailout is in the cards.

Look, government-run health insurance -- or government-run anything -- won't work. Only free market competition with free consumer choice will adequately set prices, premiums and other costs. Obamacare mandates reduce freedom and raise costs.

Meanwhile, hospitals, doctors and patients will suffer from lower reimbursements. Doctors are leaving in droves. The worst health care, Medicaid, which is completely government-run, is exploding.

All this is why the system must be scrapped. And it won't be missed. In the latest NBC News/Wall Street Journal poll, 65 percent of Americans think Obamacare needs either modifications or a major overhaul. Just 8 percent say it is working well, and 25 percent say it should be eliminated.

The Supreme Court decision is a minor part of the story. The big-picture question is: Can the U.S. not become Greece?