David R. Henderson  

Krugman and Blinder: Welcome to the Supply Side

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Obamacare defenders and Princeton University economists Paul Krugman and Alan Blinder have granted that the Congressional Budget Office is making a reasonable claim in saying that by 2024, Obamacare, if not repealed or delayed, will reduce the number of hours worked in the economy by the equivalent of about 2.5 million full-time jobs. That doesn't mean that 2.5 million fewer people will work. It means that some people won't work at all and that many millions of people will work a few hundred hours less. If you add up all those hours, according to the CBO, you get the equivalent of a loss of 2.5 million full-time jobs. (A standard work year is about 2000 hours.) The CBO does not break down its estimates into (1) reductions of hours by people who keep working and (2) reductions of hours to zero by people who stop working.

Virtually all of this effect is for lower-income workers. Why? Because the effect comes from the reduction in Obamacare subsidies to lower-income workers as they earn more. In other words, there's a substantial implicit tax rate from the reduction in subsidies. I blogged about this in 2011 here and cited Greg Mankiw's work in 2009.

Many low-income workers facing a marginal federal tax rate of, say, 15%, a combined Social Security (FICA) and Medicare (HI) tax rate of 7.65%, and a state tax rate of, say, 2%, are already in a 24.65% tax bracket. If the subsidy phases out at, say, $15 for every $100 of extra income, this is an implicit tax rate of 15%. Add that to the original tax rate and you get a whopping 39.65% implicit marginal tax rate. It should be no surprise that the CBO recognized this. It also should be no surprise that the CBO recognizes that this is disincentive to work will cause millions of lower-income workers to work less. Why work an extra hour for $15, when you get to keep only $9.05 of it?

But here is the surprise: that Krugman and Blinder agree that high marginal tax rates reduce work effort. They defend that result, saying it's a good effect, but I'll be responding to their defense in an article elsewhere.

Read through various Krugman and Blinder articles and books over the last many years and look for their discussion of the effect of high marginal tax rates on high-income people. High-income people have, for many years, been paying explicit marginal tax rates higher than 39.65%. Currently, for example, the highest-income people pay a marginal tax rate of 39.6%, almost identical to the above-calcuated rate for a lot of low-income people. They also pay a Medicare tax of 2.35 percent. (I'm not including the new Obamacare tax of 3.8% on net investment income because that tax is not on income from work.) So now we're at 41.85 percent. But wait! There's more! If they live in one of the many states with an income tax, their marginal state income tax rate can easily be 6% or more. So we're at 47.85%. (They might get to deduct their state income taxes and so their net income tax rate will be about 2 percentage points lower, for a net rate of about 45%.)

So if low-income people are willing to work less in response to higher marginal tax rates, wouldn't you expect higher-income people to do the same, especially since higher-income people have more options? I would expect that. And yet it's hard to find Krugman and Blinder admitting that fact. That fact was one of the main building blocks behind the "supply-side" revolution in thinking about taxes in the late 1970s and early 1980s. Yet, pretty much whenever Krugman and Blinder discussed that revolution, they were hostile.

Well, better late than never. Welcome to the supply side, Paul and Alan.


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CATEGORIES: Labor Market , Taxation



COMMENTS (20 to date)
Warren Meyer writes:

Wasn't is just a couple of weeks ago that Krugman was denying unemployment benefits reduced employment by reducing the incentive to work? For the life of me I cannot fathom the difference between that case and this one. Both involve government payments that are reduced if one works more. How can Krugman reconcile his positions on these two issues (much less with his position on the same issues in his own textbook)?

David J writes:

The next thing you know, they'll start saying that we've passed the Laffer Curve's inflection point.

Warren Meyer writes:

Oops, I was wrong. Krugman actually argued against the notion that unemployment benefits created a disincentive for work 2 days ago, in his February 9 column. That is just 4 days after his February 5 column where he carefully explained that the job losses from Obamacare were due to a disincentive to work, rather than shifts in the employer labor-demand curve.

Ted Levy writes:

Why is it that I've heard lots of businessmen interviewed on television saying things like "We'd like to expand but frankly the costs of Obamacare are so great we can't afford to. In fact, we've had to cut back some workers to part time employment," but I've never heard any businessmen saying "We'd love to expand but it's harder to find workers giving that they now find it relatively less burdensome to not work."?

[I'm not denying both effects are in play, just wondering why the latter effect is not so evident.]

Tom West writes:

As you move away from policy and into politics (as Krugman has done), you lose the ability to admit the costs of any particular policy you support. (Apparently Krugman is able to spin the natural decline is hours worked on the low end as a positive, so it's okay to admit it there.)

Hence any politician's positions are going to be rife with inconsistencies and missing parts. Their job is to persuade, not to enlighten. There's only going to admissions when the admission can be spun as supporting their policies.

(I don't blame politicians - admitting that your policy has a cost is pretty much fatal in an atmosphere where the job is not to have the public agree with how you weigh costs and benefits, but to have the public see *only* the costs or the benefits.)

Tim writes:

I've never heard any businessmen saying "We'd love to expand but it's harder to find workers giving that they now find it relatively less burdensome to not work."?

It's a lot easier to get a business person to explain their rationale for something than attempt to read the minds of people that are NOT applying for their open positions.

A person whose incentive to work is wiped out by tax rates and subsidies on idleness very much falls into Bastiat's "that which is not seen."

Steve J writes:

The driver here is access to health insurance not marginal tax rates. I think you are completely misunderstanding the incentives driving the reduction in work hours.

The CBO took their sweet time recognizing the disincentives in the ACA, though. But, I guess now that even Obama is admitting they're there....

PC writes:
Why work an extra hour for $15, when you get to keep only $9.05 of it?

Because when you are a low income person, $9.05 is still money you need to put groceries on the table or pay bus fare. Only in the mind of an economist do poor people find more utility from a lower effective tax rate than having $9.05 in their pocket.

Hazel Meade writes:

I look forward to seeing the column where you respond to the argument that people dropping out of the workforce is a good thing.

Personally, I am astonished they are openly saying that.

After all, we're not talking about disability here. We're talking about able-bodied adults who otherwise could, and would, work to pay for their own health insurance premiums, intentionally opting to go on the dole and get a subsidy.

The Democrats keep spinning this as freeing people from job lock, but job lock is about changing jobs, not about dropping out of the workforce to get a subsidy.

It as if the Democrats honestly no longer care what the people who have to pay those subsidies think anymore. The only vote they want to get are from the people who are getting them.


Mm writes:

What I don't get is people buying the spin that this is good news. As in "People will retire early rather than work the last year while in failing or so to get health benefits- or they will quit work to take care of so & so". Is it just partisanship that motivates them to believe that the reduction of work (predominantly in the lowest quartile) will not be a significant problem? It seems clear to me that the reduction in work will decrease SS & Medicare taxes when we need them the most ( ie baby boomers retiring). Furthermore, by avoiding advancing up the wage ladder those workers will significantly degrade their long term earnings. I also believe this will form a large cohort of people seeking to obtain further govt transfers at the expense of the diminished work force- since it will increase inequality etc. OWS will be out in a few years bemoaning how hard it is to live as a single person on $21K ( much more than that & your subsidy gets cut).

Maniel writes:

Random thoughts:
There are liars, damned liars, and Princeton economists.
Now we know for sure that 1000 monkeys at typewriters are more likely to produce a legislative nightmare than a Shakespeare play.
The productive economy may not grow, but the compliance economy certainly will.
The tax-reported economy may not grow, but the underground economy (with some help from the minimum wage) should do fine.
Free the monkeys so that they can solve income inequality.

Andrew_FL writes:

Nevermind Krugman and Blinder, when did the CBO come over from the dark side?

CC writes:

"How can Krugman reconcile his positions on these two issues (much less with his position on the same issues in his own textbook)?"

Easy: the zero lower bound.

David R. Henderson writes:

@Ted Levy,
Why is it that I've heard lots of businessmen interviewed on television saying things like "We'd like to expand but frankly the costs of Obamacare are so great we can't afford to. In fact, we've had to cut back some workers to part time employment," but I've never heard any businessmen saying "We'd love to expand but it's harder to find workers giving that they now find it relatively less burdensome to not work."?
Because these effects I’m talking about above have, by and large, not occurred yet. A large part of Obamacare starts this year.

...when did the CBO come over from the dark side?

As Scott Sumner just related to us, when they listened to Casey Mulligan.

David Boudreau writes:

@Ted Levy;
You may not have heard that complaint, but I've heard it and read it many times since this recession started. Many businesses extend employment offers only to be told that the difference between the offer and what is received on unemployment wasn't enough to give up 8 hours a day for. Besides, it only makes sense for many people. Connecticut pays $14/hour for unemployment (and no SS or Medicare tax!). If an employer offers, say, $18/hour taking the job means working for less than $4/hour and having to pay for commuting, maybe tools, etc.

Bob Read writes:

This is just 10 million people going from 40 hrs/wk to 30 hrs/wk so that they no longer are eligible for employer supplied health care. I'm sure that they'll find a suitable replacement on the exchange that's easily affordable with their reduced salary.

huggy writes:

Federal, State, and Local government workers are the middle class now. All the new money for programs has to come from them. The CBO got real when they figured out how much they were going to lose as individuals.

Amos DW writes:

""We'd love to expand but it's harder to find workers giving that they now find it relatively less burdensome to not work."?"

Because those articles show up in human resources trades. The general media is more concerned with unemployment as an effect on people, rather than as a set of preferences.

A lot of HR people will tell you that they can get you a job if you can show up on time, pass a drug test and read. Those three things rule out a lot of people.

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