2/10/14

Last week was a week of bombshells.

The first relates to the publication by the CBO of their periodic Budget and Economic outlook 2014–2024. Tucked neatly in the appendixes to this regular report was Appendix C—Labor Market Effects of the Affordable Care Act: Updated Estimates.

This is the subject of this blog.

The second bombshell and the subject of my next blog is the astonishing news tucked deeply in the Senate report on Benghazi that the former deputy director of the CIA is the one who KNOWINGLY changed the talking points from terror attack to a “demonstration” gone bad.

The two bombshells have few things in common:

  • They show the complete lack of understanding by this administration regarding the way the real world works. Be it in economics or national security, they both expose an unbelievable degree of naiveté, lack of experience, and bad decisions and policy that has and will continue to substantially weaken the USA.
  •  They show the skilled and unscrupulous way in which this administration manipulates the truth, spins it, and brings the spin to the level of propaganda and misinformation. In this area they are masters—the world’s best. Once you peel all the layers of spin and misinformation, the truth comes out—this administration lies all the time. They are simply LIARS.
  • They show the amazing level of help this administration gets from the media—the media who are, to paraphrase the famous Churchill idiom, “lazy wrapped in ignorance inside complete negligence.”
  • They show the complete lack of eloquence on the Republican side. There is simply NO ONE there who can match or even come close to the administration in their ability to articulate their case and unfold the truth. It is simply so frustrating. They are amateurs.

The CBO report states a very simple truth: because of the ACA 2,500,000 less FTE (full time equivalent) jobs will be worked in the economy by 2024. It starts in lower numbers and at the end of their projection period in 2024 it reaches the full 2,500,000. It will continue later and will probably increase but they do not forecast beyond 2024.

This report is an update of their previous reports that originally came in at 800,000 FTEs. So the effect of the ACA to reduce the size of the labor force in the economy was always known. To start with, one wonders why was it okay to lose 800,000 FTEs in the first place? Was that not bad enough to create a storm back in 2010? But further, the huge underestimation by the CBO throws their entire credibility into question. If they can be wrong by a factor of three in the space of three years during which time the ACA was NOT in force, how can we rely on their predictions anyway? That is an overbearing question but both sides of the political aisle seem to accept the CBO as authoritative.

I, however, do NOT. I do not because I read the appendix, because I DO understand how things work, and because I detect heavy partisan language in the appendix words and the testimony of Doug Elmendorf, the Director of the CBO, on Wednesday before congress—even though the CBO and its director are supposed to be “bi-partisan.”

An interesting element of the debate on this report, one which is extremely suspicious and is very similar to the Benghazi talking point affair, is the fact that the words used by the report and by the director in his testimony seem to have been chosen by the White House. The report provides bare facts and they are bad. The words and terms chosen by the CBO to describe these facts are not the best; the CBO is avoiding standard terms devised by economists to describe these types of facts and are using bland terminology instead. This allows the White House to spin the facts to the level that they have and that results in LYING to the American people. My suspicion is that there was coordination between the CBO and the White House that led to the choosing of these non-standard and bland terms. My suspicion is reinforced by the fact that the White House had a prepared response to this element of the report within minutes of the report being published. They knew what was coming and their response dovetails the language of the report. How convenient. The fact that it is not true is not important as no one in the media or even Republicans will put their feet to the fire.

I will try to expose the lies used by the White House and adopted dogmatically by their cohorts in this blog.

There are a number of talking points but the main one is that this loss of jobs is by choice. They try to put lipstick on this pig by suggesting that people had to work in the past but now they will be able to afford not to work and stay at home, paint, and retire early etc. THIS IS RUBBISH.

The phenomena explaining how entitlement programs and subsidies create incentive for people not to work is nothing new. It is well known and has an established term in economics. The term used to describe this situation is NOT “choice”—it is the “Poverty Trap.”

The acceptable definition of the “Poverty Trap” is: “a situation in which an unemployed person will lose money by working because more will be lost in welfare than is gained in income.” There you go. Clear, succinct, and to the point. It applies as well to a person currently employed who will lose more in welfare income than gain in income by working more.  It is a choice that is true, but only in a very narrow sense. It is a choice between working more and bringing home LESS money, or working less and bringing home more money. Is this really a choice? Of course I will work less if my take-home pay is more. Who wouldn’t? That is why it is known as a TRAP. It is a negative thing for the person who is faced with this Hobson’s choice.

Why did the CBO not use the correct and standard term to describe the effects of the ACA? “Poverty Trap” is the exact and CORRECT economic term to describe the situation here. The “Choice” of the CBO is the “Demonstration” of Benghazi.

This is how this phenomenon will work in the real world:

Many tens of millions of employees will be faced over the next few years with the option to take the next job on the promotion ladder and earn a little more money or with the option to work a few more hours and make a little more money.

Most people will choose yes in both these situations. However some of them (way more than 2,500,000) will then be faced with the following dilemma: If I earn more money, I move to the next step in the earning scale and I lose the subsidy that I got to cover the cost of ObamaCare. The NET result for me is that if I work more hours or a more responsible job I bring home LESS money. The additional incremental amount of revenue from the IMPROVED job offer will not be sufficient to cover the loss of the subsidy that is triggered by me moving to the next economic level.

This is no surprise and not a mistake; it is common for all progressive entitlement programs. They all work in steps, so that in the margin a small increase in your revenue moves you to the next step in the entitlement (a lower entitlement). It is impossible to have this plan work perfectly so that for each $ in earnings you lose just few cents in subsidy. It is way too complicated to administer. They always go in steps. This is why the term “Poverty Trap” was invented.

Many people will overlook the immediate loss of net take-home pay and will still choose to get promoted because they expect that in the future they will continue to be promoted and very quickly the temporary loss will reverse and their net take-home will be higher. But some will decide not to suffer the immediate loss of take home pay, mostly because they simply cannot afford the immediate loss of net take-home pay.

The result is as the CBO now projects that the economy will lose 2,500,000 FTEs. So let’s stop this nonsense about “choice.” There is no choice here. A single mother with one child at home earning annual wages of say $20,000 per year cannot afford to lose in the present $1,000 a year by working MORE just so that in the future she can compensate for this immediate loss. So she will stay in her old job and will be TRAPPED.

The next BS spewed by the government is that people will be able to work less and spend more time at home, with their kids, developing their artistic sides. That is, well . . . I already said that—BS!

The vast, vast majority of the FTEs being lost will be people who will stay as they were. They will not work less; they will reject the opportunity to work MORE. So sure it would be more free time compared to the alternative but not more free time compared to where they are today. True, at the margins there will be a spouse who will decide to stop working and leave the family with one earner only. That spouse may be lucky. It is possible that he/she did not want to work in the first place and now they can afford it but this will be very much in the margin. And this brings us to the next misleading talking point.

On the face of it, it seems clear that the loss of 2,500,000 FTEs is bad for the economy. IT IS CLEAR! It is BAD. No matter how much spin Democrats try to put on it by saying that:

  • It will allow people to spend more time at home as discussed above.
  • People will not be laid off; it will be their “choice” to leave the job.
  • There will be other people who will work these jobs.

This is all nonsense.

If the loss of 2,500,000 FTEs is a good thing for the economy, then let’s all stay home. Surely this will be heaven, right?

To start with, as I explained before, the actual number of people that will leave the job market as a result of the ACA is minimal. The vast majority will simply get trapped where they are—no promotion, no mobility. Indeed the exact opposite of the effect that liberals and progressives are claiming will occur—the removal of the job-lock. The vast majority of people will not only be locked to their place of work but they will be locked within it to their job position, as any change will cause them to lose take-home pay that they cannot afford—hence a “trap.”

Furthermore, it is obvious that if the economy has 2,500,000 FTEs less, the economy will be smaller. The GDP will be smaller. The GDP per Capita will be even smaller still. These are NEVER good things for the MACRO economy, the country as a whole. The people staying home, those very, very few that actually made that choice to stay home are doing it at the expense of OTHERS! We are paying for them to stay home. This makes the economy smaller, the tax burden higher (fewer and fewer people working and need to pay more and more for those who are not working and getting paid by the government from the taxes collected by the government from those fewer that are working), all of which results in a smaller economy, a less productive one, and one more sclerotic.

If there is any doubt about that, look at two examples:

  • Europe: Europe has enjoyed the characteristic of the ACA for decades. Many entitlement programs create incentives for people to not work. The result? A very high level of persistent and long-term, structural unemployment (about 10–11%); a very low level of population participation in the work force; low productivity, low economic growth, high taxes, and huge public debt—bankruptcy.
  • North Carolina: NC decided a year ago to cease paying extended unemployment benefits. From the point of view of an anti-incentive to work, this is equivalent to the ACA. The result? Over the last twelve months NC enjoyed one of the biggest job growth spurs in its history and one of the biggest in the nation. How shocking: when people do not get paid to stay at home, they actually find work.

Progressives view what they believe is an individual’s happiness (they decide what is good for others) as more important than what is good for the whole, for the country. So they will create a huge government program that will drag the entire economy and country back and do enormous damage only to help the very few get health insurance or choose not to work. The job of government is to make tough decisions between the benefit of the whole and the benefits of the individual.

While I suspect that there will be very few who would like the option of retiring early because they have this huge government subsidy, the vast majority would rather work, get promoted, and achieve individual success, than stay at home. Furthermore, as we see in Europe, the effects of these entitlement programs are corrosive. Over the years the only way to fund them is to borrow more and more until you reach bankruptcy. When you do you discover that the nation, your people, have all become fat slobs, couch potatoes with no ambition or sprit to work, succeed, and achieve: “The Road to Serfdom”!

I can go on. The CBO says in its report that these 2,500,000 jobs lost to the economy are only from the employees’ point of view and that they cannot quantify if there will be any job losses from the employers side. While I cannot QUANTIFY the employer-side job losses, I assure you there will be such losses. Anyone who does not understand that the ACA is a disincentive for employers to hire has zero understanding of how the real economy works. Maybe they do not have the data to be able to put numbers on this element, but it is clear that it will be significant.

Furthermore, the CBO says that because the vast majority of the 2,500,000 FTE lost will be at the very low-wage level of the economy, that will actually have less of an effect on the economy to the tune of 50 percent. So that if 2,500,000 FTEs represent about 2 percent of the economy, the actual $ effect will only be 1 percent. This shows, once again, a lack of understanding of the way things work. If employers will have less supply to fill in the low-level jobs that they need, they will either have to increase the price of labor to attract people to work or they will have to close the business. You see, they cannot build a business starting in the middle.

BOTH effects will occur. Closed businesses will contribute further to the losses to the economy, lost jobs, lost GDP, etc.

Increases in labor costs will produce inflation, will increase the costs of product and services, and the result will be that we will pay more and that the people most in need will suffer most.

One thing is clear—even if you take the CBO report on its face value, it clearly indicates that the ACA will INCREASE the income inequality in the economy. If the vast majority of those who will work less are low-wage earners, they will earn even less and thus the inequality will be worse. Is that not exactly the opposite of what the president is trying to achieve by declaring recently “war” on income inequality?

Why am I the only person who calls a spade a spade? Where are all the pundits, Republicans in Congress? Why is it that no one uses the term “Poverty Trap”? Why is it that no one sheds the light on the terrible effects of this policy on income inequality?

It is so frustrating!