Mauldin on Jobs, GDP, Unintended Consequences, and Obamacare

This is the best John Mauldin piece I have seen in a while.  I’m a big fan of his, but this really pulls a lot of stuff together.  He starts with some information about the new CBO report on how Obamacare is estimated to affect employment going forward:

Where Will the Jobs Come From?

To me the economic and employment effects of Obamacare are another piece of the larger puzzle called Where Will the Jobs Come From? This may be the most important economic question of the next 30 years. Because this topic has been the focus of my thinking for the past few years, I could be reading more into the CBO’s report than I should, but indulge me as I make a few points and then see if I can tie them together in the end.

First let’s look at what the report actually said. The CBO stated that the implementation of the Affordable Care Act will result in a “substantially larger” and “considerably higher” reduction in the labor force than the “mere” 800,000 the budget office estimated in 2010. The overall level of labor will fall by 1.5% to 2% over the decade, the CBO figures. The revision was evidently driven by economic work done by a professor at the University of Chicago by the name of Casey Mulligan. (When you do a little research on Professor Mulligan and look past the multitude of honors and awards, you find people calling him the antithesis of Paul Krugman. I must therefore state for the record that I already like him.) For you economics wonks, there is a very interesting interview with Professor Mulligan in the weekend Wall Street Journal. For those who don’t go there, I will summarize and quote a few salient points.

Let’s be clear. This report and Mulligan’s research do not say Obamacare destroys jobs. What they suggest is that Obamacare raises the marginal tax rates on income, and to such an extent that it reduces the rewards for working more hours for marginally higher pay at certain income levels. The chart below does not pertain to upper-income individuals but rather to those at the median income level.

What Mulligan’s work does demonstrate is that the loss of government benefits has the same effect on an individual as a tax increase. If you lose a government subsidy because you work more hours, then for all intents and purposes it is the same as if you were taxed at a higher rate. Quoting now from the WSJ piece:

Instead, liberals have turned to claiming that ObamaCare’s missing workers will be a gift to society. Since employers aren’t cutting jobs per se through layoffs or hourly take-backs, people are merely choosing rationally to supply less labor. Thanks to ObamaCare, we’re told, Americans can finally quit the salt mines and blacking factories and retire early, or spend more time with the children, or become artists.

Mr. Mulligan reserves particular scorn for the economists making this “eliminated from the drudgery of labor market” argument, which he views as a form of trahison des clercs [loosely translated, “the betrayal of academic economists” – JM]. “I don’t know what their intentions are,” he says, choosing his words carefully, “but it looks like they’re trying to leverage the lack of economic education in their audience by making these sorts of points.”

A job, Mr. Mulligan explains, “is a transaction between buyers and sellers. When a transaction doesn’t happen, it doesn’t happen. We know that it doesn’t matter on which side of the market you put the disincentives, the results are the same…. In this case you’re putting an implicit tax on work for households, and employers aren’t willing to compensate the households enough so they’ll still work.” Jobs can be destroyed by sellers (workers) as much as buyers (businesses).

He adds: “I can understand something like cigarettes and people believe that there’s too much smoking, so we put a tax on cigarettes, so people smoke less, and we say that’s a good thing. OK. But are we saying we were working too much before? Is that the new argument? I mean make up your mind. We’ve been complaining for six years now that there’s not enough work being done…. Even before the recession there was too little work in the economy. Now all of a sudden we wake up and say we’re glad that people are working less? We’re pursuing our dreams?” The larger betrayal, Mr. Mulligan argues, is that the same economists now praising the great shrinking workforce used to claim that ObamaCare would expand the labor market.

Gary Alexander presented this amazing chart, showing how a single mother earning $29,000 really shouldn’t earn any more unless she can make over $69,000!!!  That’s a true disincentive to work.  I wonder how many of the pundits out there actually know anyone facing these kinds of choices.  I cannot imagine a more frustrating and helpless feeling than knowing that, in order to do what is best for your family, you must choose to take additional government subsidies and work less than you might be able to.  What would be even worse would be someone who really does not have a choice about the hours they work (mandatory overtime,) who then goes over the amount.  This is easy to imagine, and I know people who are in jobs where this situation is likely to occur.  What kind of choice have we left this person?  Find a crappier job?  Not a lot of people are in a position to move directly from a $29,000 job to a $69,000 job.  But lots of people could probably move from a $30,000 job to a $15,000 job.  What an awful choice that would be.

Back to Mauldin.  He then goes on to discuss how this voluntary reduction in hours worked affects GDP (more than you might guess).  So it’s harmful on both an individual and collective level.  Then he discusses one of his favorite topics, how wages have been stagnating, especially for those with lower education levels, and how the job picture will be changing in the future.  I think that the whole “stagnating wages” thing is a little overstated, because if you include all benefits, it’s just not as true (see an older article from the Minnesota Fed here).  But he is undoubtedly correct that the work available in the future will change.  Just as is has for every generation since the industrial revolution began.

But really the best part is his conclusion and how he ties this all together:

A Most Dangerous Era

Now, what does the shifting of jobs in a knowledge-based economy have to do with work incentives in the Affordable Care Act? If we structure a society in which people are incentivized not to work, we are going to create a society that not only produces less but that displays a growing disparity in the distribution of wealth. If we offer people economic reasons not to work, we should not be surprised when they take us up on the offer. We can disguise that offer as all sorts of necessary social reforms, but at the end of the day a smaller labor force will affect the size of the pie that we all want to see grow and to partake of. I refer you back to Bastiat, whom I quoted at the beginning of this letter: it is the unseen things in well-intentioned public policies that will have small, incremental, but finally significant effects upon the whole economic body.

I have struggled with allergies off and on over the years. What I have learned is that allergies are incremental. I can be around many things to which I only have a mild allergic reaction, and I have no symptoms. But when I’m around many of them all at once I have to start looking for my allergy medicine. One can argue, perhaps correctly, that the economic effects of a particular policy like the Affordable Care Act are only a minor problem. But it is the cumulative effect of numerous social policies, regulations, monetary policies, incentive structures, lack of educational reform (and the list goes on and on) that takes a toll on our economic body.

If government is small relative to the economy, then incremental changes in its policies have a lesser effect than when the government is large and its policies pervasive.

The coming Third Industrial Revolution requires a profound realignment and restructuring of the incentive systems built into our society. We are talking about a technological revolution that in its compound effects will accelerate change to such an extent that we will see as much change in the next 10 to 20 years as we saw all of last century. Suggesting that one employment- or growth-reducing policy or another only makes a small difference and is worth the price we’ll pay is a flippant dismissal of the dynamics of the situation we face. These things have consequences.

Jeremy Grantham in his recent quarterly letter looks at the incremental effect of a lower growth rate. He tells us that the remarkably steady 3.3% US growth rate from 1880 to 1980 multiplied income 26 times over that century, that the 2.8% average growth from 1980 to 2000 would compound income 16 times over a period of a century, but that the 1.4% rate experienced over the past 13 years would multiply income by just 4 times over a century.

How Do You Spell Assume?

In the same report mentioned at the beginning of this letter, the CBO gave us its economic and budget outlook for 2014 to 2024. They projected GDP growth of 3.1% this year and 3.4% in 2015 and 2016.

But growth, according to the CBO, will fall to 2.7% in 2017 and continue to slow “to a pace that is well below the average seen over the past several decades,” largely because of slower growth in the labor force due to the aging population and mild inflation (under 2.0%) for the next several years.

How significant is this slowing? The CBO estimates if the economy grows just one-tenth of a percentage point slower each year for 10 years, the cumulative deficit will be $311 billion greater than the $7.9 trillion it is now projecting. That 0.5% less GDP growth per year that Krugman expects would therefore translate into another $1.5 trillion added to the deficit that would have to be dealt with either through reduced spending or increased taxes. That amount is just slightly less than 10% of our current GDP. I think that is significant. But that’s just me, the deficit worrywart.

I agree with the conclusion of Ezra Klein (if not his general thesis), writing in Bloomberg on February 6:

Policies don’t exist in vacuums. By untying the link between employment and health care, the Affordable Care Act reduces the incentive to work. But there are ways to increase incentives to work without making people dependent on their jobs for health insurance. We can help people without taking away their health care.

It’s all connected: healthcare, financial regulation, technological transformation, energy policy, foreign policy, trade policy, immigration, tax reform (and the list goes on and on and on). Everything contributes to the environment for business and economic activity; and when the environment is good, that translates into jobs. It is becoming ever more vitally important to focus on how our policies across the board connect and to see them as parts of a whole rather than in a simplistic one-off manner. Does a policy not only allow us as a society to behave in a more responsible manner but also allow us to grow our economy and create jobs? If it doesn’t do both, then it’s back to the drawing board.

I’ll finish with one final chart (courtesy of my friend Philippa Dunne at The Liscio Report). This is a chart of new businesses being created. New businesses are the true engine of economic growth and job creation. Policy makers need to think about this chart with every decision they make. They need to determine why the trend is clearly down and how to reverse it.


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