qotd: CBO: Repeal of ACA would raise economic output (per dynamic scoring)

CBO
June 2015
Budgetary and Economic Effects of Repealing the Affordable Care Act

In this report, the Congressional Budget Office and the staff of the
Joint Committee on Taxation (JCT) analyze the main budgetary and
economic consequences that would arise from repealing that law.

What Would Be the Major Effects of Repealing the ACA?

CBO and JCT estimate that repealing the ACA would have several major
effects, relative to the projections under current law:

** Including the budgetary effects of macroeconomic feedback, repealing
the ACA would increase federal budget deficits by $137 billion over the
2016–2025 period. That estimate takes into account the proposal's impact
on federal revenues and direct (or mandatory) spending, incorporating
the net effects of two components:

* Excluding the effects of macroeconomic feedback — as has been done
for previous estimates related to the ACA (and most other CBO cost
estimates) — CBO and JCT estimate that federal deficits would increase
by $353 billion over the 2016–2025 period if the ACA was repealed.

* Repeal of the ACA would raise economic output, mainly by boosting
the supply of labor; the resulting increase in GDP is projected to
average about 0.7 percent over the 2021–2025 period. Alone, those
effects would reduce federal deficits by $216 billion over the 2016–2025
period, CBO and JCT estimate, mostly because of increased federal revenues.

** For many reasons, the budgetary and economic effects of repealing the
ACA could differ substantially in either direction from the central
estimates presented in this report. The uncertainty is sufficiently
great that repealing the ACA could reduce deficits over the 2016–2025
period — or could increase deficits by a substantially larger margin
than the agencies have estimated. However, CBO and JCT's best estimate
is that repealing the ACA would increase federal budget deficits by $137
billion over that 10-year period.

** Repealing the ACA would cause federal budget deficits to increase by
growing amounts after 2025, whether or not the budgetary effects of
macroeconomic feedback are included. That would occur because the net
savings attributable to a repeal of the law's insurance coverage
provisions would grow more slowly than would the estimated costs of
repealing the ACA's other provisions — in particular, those provisions
that reduce updates to Medicare's payments. The estimated effects on
deficits of repealing the ACA are so large in the decade after 2025 as
to make it unlikely that a repeal would reduce deficits during that
period, even after considering the great uncertainties involved.

** Repealing the ACA also would affect the number of people with health
insurance and their sources of coverage. CBO and JCT estimate that the
number of nonelderly people who are uninsured would increase by about 19
million in 2016; by 22 million or 23 million in 2017, 2018, and 2019;
and by about 24 million in all subsequent years through 2025, compared
with the number who are projected to be uninsured under the ACA. In most
of those years, the number of people with employment-based coverage
would increase by about 8 million, and the number with coverage
purchased individually or obtained through Medicaid would decrease by
between 30 million and 32 million.

* About 14 million fewer people would be enrolled in Medicaid.

* About 18 million fewer people would have nongroup coverage. That
reduction is the net effect of a projected decline of about 22 million
in nongroup coverage purchased through exchanges (which would no longer
serve as a conduit for federal subsidies and might not exist at all) and
a projected increase of about 4 million enrollees in nongroup coverage
purchased directly from insurers.

* About 8 million more people, on net, would have employment-based
coverage—roughly mirroring the agencies' estimate of the extent to which
the ACA will reduce employment-based coverage in future years.

* About 24 million more nonelderly U.S. residents would be uninsured.

The Macroeconomic Feedback Effects of a Repeal and Their Impact on the
Federal Budget

CBO and JCT also have analyzed the effects that repealing the ACA would
have on the U.S. economy and estimated the budgetary impact — or
feedback effects — of those macroeconomic changes. CBO and JCT estimate
that the net effect on the economy's output would be negligible in 2016
but would grow after that. According to the agencies' estimates, from
2021 through 2025, a repeal would increase GDP by about 0.7 percent, on
average — mostly by repealing provisions that, under current law, are
expected to reduce the supply of labor.

Labor Supply

CBO and JCT estimate that repealing the ACA would increase the supply of
labor and thus increase aggregate compensation (wages, salaries, and
fringe benefits) by an amount between 0.8 percent and 0.9 percent over
the 2021–2025 period. Those effects would be the result of repealing
various provisions of the ACA that are estimated to reduce the amount of
labor that people choose to supply. In particular, the subsidies and tax
credits for health insurance that the ACA provides to some people are
phased out as their income rises — creating an implicit tax on
additional earnings — and those subsidies, along with expanded
eligibility for Medicaid, generally make it easier for some people to
work less or to stop working without losing health insurance coverage.
For other people, the act directly imposes higher taxes on labor income,
thus discouraging work. Repealing the ACA would reverse those effects.
In percentage terms, the increase in total hours worked is estimated to
be larger than the increase in aggregate compensation because the
largest increases in labor supply would occur among the lower-wage
workers whose incentives would be most strongly affected. Specifically,
repealing the ACA would increase the aggregate number of hours worked by
about 1.5 percent over the 2021–2025 period, CBO and JCT estimate.

How Would a Repeal Affect the Budget and the Economy Beyond 2025?

CBO and JCT expect that the trend projected for the latter part of the
coming decade would probably continue after 2025, whether or not the
effects of macroeconomic feedback are incorporated into the analysis. To
generate rough estimates for the decade beyond 2025, CBO and JCT
extrapolated the budgetary effects that a repeal of the ACA would have
in the years before 2025. According to that analysis, and excluding the
budgetary effects of macroeconomic feedback, a repeal would increase
annual deficits over the 2026–2035 period by amounts that lie within a
broad range around one percent of GDP. Although the macroeconomic
feedback stemming from a repeal would continue to reduce deficits after
2025, the effects would shrink over time because the increase in
government borrowing resulting from the larger budget deficits would
reduce private investment and thus would partially offset the other
positive effects that a repeal would have on economic growth.
Consequently, taking that feedback into account would not substantially
alter the increases estimated for federal deficits that would occur over
that period. A repeal of the ACA would probably increase deficits in
subsequent decades as well, whether or not the effects of macroeconomic
feedback are included.

http://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/50252-Effects_of_ACA_Repeal.pdf

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The New York Times
June 19, 2015
Mixed Effects Are Seen on an Affordable Care Act Repeal
By Robert Pear

The nonpartisan Congressional Budget Office said Friday that repealing
the Affordable Care Act would significantly increase federal budget
deficits and the number of people who are uninsured.

But, it said, repealing the law would also raise economic output because
it would create incentives for some people to work more.

The estimates came in the first major study issued by the new director
of the budget office, Keith Hall. It was also the first report to use
new methods of fiscal analysis, according to instructions from the
Republican majority in both houses of Congress.

Repealing the law would increase federal budget deficits by $137 billion
in the decade from 2016 to 2025, Mr. Hall said in the report. In
addition, he said, the number of uninsured people, estimated at 35
million under current law, would increase by 24 million if the law was
repealed.

Senator Michael B. Enzi, Republican of Wyoming and the chairman of the
Senate Budget Committee, said the report showed that "repealing the
president's health care law will increase economic growth." But
Representative Nancy Pelosi of California, the House minority leader,
said it showed that "repeal will explode the deficit."

The report analyzes the economic effects of the health care law and the
ways in which those effects may, in turn, influence federal spending and
revenues — a technique known as dynamic scoring. Democrats fear that
Republicans will use that approach to help justify tax cuts. But at
least in the report on Friday, Mr. Hall was cautious in using the new
technique and carefully documented the economic assumptions that led to
his conclusions.

http://www.nytimes.com/2015/06/20/us/politics/mixed-effects-are-seen-on-an-affordable-care-act-repeal.html

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The New York Times
February 28, 2015
Dynamic Scoring in Congress Is Defensible but Slippery
By N. Gregory Mankiw

… congressional leaders appointed Mr. Hall, a veteran of the Bush
administration, to be the new head of the budget office.

Until now, conventional budget analysis has used a process called static
scoring, which assumes that the path of gross domestic product remains
the same when the government changes taxes or spending. This procedure
has the virtues of simplicity and transparency.

We don't yet know how Mr. Hall's leadership will differ from Mr.
Elmendorf's but we do know that he will face a big challenge. House
Republicans have recently changed the rules: The Congressional Budget
Office and Joint Committee on Taxation are now required to use "dynamic
scoring" when evaluating major changes in tax and spending policy. This
is the can of worms that awaits Mr. Hall as he takes on his new job.

http://www.nytimes.com/2015/03/01/upshot/a-slippery-new-rule-for-gauging-fiscal-policy.html

****

The New York Times
June 20, 2015
Obamacare and Labor Supply
By Paul Krugman

I was critical of CBO yesterday — probably excessively — for giving what
seemed like undue cover for deficit scolds in its long-run budget
projection. So credit where credit is due: the new report on the
consequences of repealing the ACA is definitely not what the
Congressional majority wants to hear. Despite including "dynamic
scoring", the report finds, unambiguously, that Obamacare reduces the
deficit and repealing it would enlarge the deficit.

Is there anything in the report that provides fodder for the opponents?
I see that the Times report says that there are "mixed effects", because
CBO says that GDP would be higher if the ACA were repealed. And maybe
the usual suspects will try to spin it that way.

But the truth is that this report is much, much closer to what
supporters of reform have said than it is to the scare stories of the
critics — no death spirals, no job-killing, major gains in coverage at
relatively low cost.

And there's another important point: while the ACA may lead to somewhat
lower GDP because it reduces labor supply, this does not imply a
one-for-one loss in welfare. Suppose that a family's second earner, now
assured of being able to get health insurance, chooses as a result to
work shorter hours and spend more time taking care of the children. GDP
goes down — but there is a compensating non-monetary gain.

In fact, in a perfectly competitive economy the gain would fully offset
the fall in GDP: if workers are paid their marginal product, the fall in
GDP from the ACA is equal to the lost wages, but workers choosing to
work less clearly prefer to have the extra time to the extra wages. Or
to put it a bit differently, other things equal it's a good thing if
workers, freed from the fear that they won't be able to get health
insurance, respond by voluntarily working less.

OK, the story is made more complicated by taxes, which place a wedge
between wages paid and income received; so there probably is a net cost
to a fall in labor supply. But this effect is fully captured by the loss
in revenue, which CBO doesn't think would be large.

So overall this isn't at all a "mixed" report — it's a very big win for
Obamacare supporters.

http://krugman.blogs.nytimes.com/2015/06/20/obamacare-and-labor-supply/

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Comment by Don McCanne

This report from the Congressional Budget Office (CBO) is important
because it describes the consequences of repealing the Affordable Care
Act (ACA) - a goal of many conservatives in Congress. But there also is
an important sub-story here - the advent of the use of "dynamic scoring"
by the CBO and its potential implications.

One of the more severe deficiencies of ACA is that when it is fully
implemented about 29 million people will still be uninsured. This CBO
analysis indicates that repeal of ACA will increase the numbers of
uninsured by another 24 million - bringing the total to over 50 million.
If no other lesson is drawn from this report, it is that we should not
move backwards with efforts to reject what progress has been made, but
that instead we should move forward with real reform that would cover
everyone (in case you need any hints, that would be single payer).

From the perspective of the federal budget, this report also shows that
repeal of ACA would cause significant increases in the deficit which
presumably would require either increased revenues (taxes) which the
conservatives reject, or decreases in spending which would be
intolerable when considering that our discretionary federal budget is
already spartan. If we moved forward with more effective reform - single
payer - the provisions of that reform would include equitable financing,
and thus the budgetary damage done by the displacement of ACA would
become a moot point.

But what about dynamic scoring, and what is it? It seems to have more to
do with politics and less with economic science. When the CBO analyzes
the potential impact of proposed legislation on the federal budget, they
look at not only the direct impact of the legislative requirements, but
they also look at the macroeconomic impact - the changes in the economy
at large that can result from the legislation. They can do this with
static scoring - assuming that the gross domestic product remains the
same when government changes taxes or spending - or they can use dynamic
scoring - evaluating how fiscal policy influences the course of the economy.

The Republicans who now control Congress have changed the rules for the
non-partisan CBO and now require dynamic scoring, and this is the first
CBO report in which this tool has been applied. Does it represent
economic science or political posturing?

They determined that repeal of ACA would reduce the supply of labor, and
this reduction would result in a 0.7 percent increase in the gross
domestic product (GDP) - an example of dynamic scoring. Why would the
supply of labor be reduced? They say that loss of insurance would drive
greater employment rates amongst the unemployed and underemployed. With
a continued sluggish economy, limited employment opportunities, and the
permanent exiting of millions from the job market, do they really
believe that health insurance status is a significant driver when
everyone already wants income and job security? Do they really believe
that people are not working because having insurance makes "it easier
for some people to work less or to stop working," as the CBO report
states? Do they really believe that employers are not hiring now because
there is a robust job market, whereas they would start hiring if the job
market contracted? Does anyone of any integrity really propose that we
do the experiment of repealing ACA and then follow the change in the GDP
to see if it increases, while ignoring declines in insurance coverage
and increases in the federal deficit?

Another concept implicit in this report is that the reduction in
government expenditures for health care brought about by repealing ACA
would somehow improve the economy. Yet health care is one of the most
important sectors of our economy, and its strength likely prevented the
Great Recession from becoming a full-on depression. Sidestepping the
issue of precisely how GDP is or should be defined, wouldn't the
stimulus to the health care industry provided by ACA (confirmed by Wall
Street reports) have a much greater impact on the economy than would
this reduction in labor supply caused by more people being insured?

Considering the numbers who would become uninsured and considering the
increase in the national debt that would occur with ACA repeal, it
sounds like repeal would be a cruel and fiscally irresponsible act. Yet
the conservatives are celebrating the fact that the CBO has allegedly
implied in this report that repeal of ACA would be good for the economy.
As Senate Budget Committee Chairman Mike Enzi said, "repealing the
president's health care law will increase economic growth" (Robert Pear,
New York Times, June 19), and Senate majority leader Mitch McConnell
said, in a tweet, "The CBO says an Obamacare repeal actually boosts the
American economy" (Kate Gibson, CBS Moneywatch, June 19).

The CBO has always been the source of highly credible, non-partisan
reports on important matters before Congress. Dynamic scoring could be
used to increase the accuracy of CBO analyses, but it would have to be
very carefully applied to avoid analyses driven by political ideology.
Through the appointment of a conservative economist with an order to
institute dynamic scoring, the Republicans may be impairing the
credibility of the CBO. Imagine how they might use dynamic scoring to
try to discredit single payer.



(In fairness to CBO Director Keith Hall, economist Paul Krugman does
remind us, "the ACA may lead to somewhat lower GDP because it reduces
labor supply." Also respected New York Times reporter Robert Pear
concludes, "Mr. Hall was cautious in using the new technique and
carefully documented the economic assumptions that led to his
conclusions." So a generous application of this economic principle
allows CBO to include in its summary the statement, "Repeal of the ACA
would raise economic output, mainly by boosting the supply of labor; the
resulting increase in GDP is projected to average about 0.7 percent over
the 2021–2025 period." But this isolated statement does allow, as
Krugman indicates, fodder for the usual suspects to try to put a
positive spin on repeal - exemplified by the statements of McConnell and
Enzi. Nevertheless, I still contend that the loss of health insurance
would not cause a major incremental increase in the labor supply for a
population that already craves employment security. "Hey, I got
insurance; forget about food and rent.")