David R. Henderson  

Why We Can't Conclude that Obamacare Plus Subsidies are Good for Low-income People

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All three factors can combine to make the value of the insurance policy well below its price. Let's say that the family values the insurance at $3,500. That family is worse off because it is paying $4,000 net of the subsidy. The family can do a little better if one family member works less in order to increase the subsidy. But we cannot, like Krugman and Blinder, naively conclude from the fact that a family member chooses to work less that the family is definitely better off. All we know is that the government dealt the family a hand that could be very bad. The family has no choice but to play the hand it was dealt. By working less, the family makes the hand less bad. But we can't say for sure that the hand is good.
This is the concluding paragraph of my article, "Obamacare's 'Disincentive' Scheme," Defining Ideas, February 18, 2014.

Check out my Trabant analogy.


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COMMENTS (15 to date)
Kevin Driscoll writes:

This is an EXCELLENT insight. At first, I accepted Blinder and Krugman's argument that since the reduction in work was voluntary, low-income workers must be better off (otherwise why would they do it?). I had forgotten a key question that one should always ask when talking about people being better/worse off, "Compared to what?"

Thanks for the reminder

Hazel Meade writes:

Good point. If you are a healthy young adult, then even if you are getting a subsidy, the net price of insurance after the subsidy is applied may still be more than your actuarial risk justifies. You're still worse off because you're forced to pay *some* portion of your income towards subsidizing health care for the old and sick. Which you weren't forced to pay before.

Worse, as a young adult early in your career, you're going to be facing these steep marginal rates and work disincentives just at the point where you need to be making an investment in your career that will pay off in the long term. This is going to induce many younger workers to forgo making investments in skills and training that would push them up the income ladder. Not only are they saddled with student loan debt, with prohibitively high housing prices, but they have to pay a substantial chunk of money to buy health insurance. Pretty soon these kids will realize they will never be able to make a down payment or afford a house. So why bother? Why spend years in school and work your ass off at a 9/5 job if you're never going to be able to afford to buy a house, the most basic symbol of financial success?


David R. Henderson writes:

Thanks, Kevin and Hazel,
Also, the point becomes even stronger for lower-income people who get less than a $6,000 subsidy, as frequent commented Charley Hooper pointed out to me after this piece went to press.
Also, Hazel, good point about the young. That’s what makes Jason Furman’s analogy, in his press conference, with cutting Social Security for 95-year olds so inapt.

RPLong writes:

Government subsidies as puppies:

Every kid likes to get a puppy for Christmas, despite the fact that the kid hasn't taken the time to do the utility calculus: feeding the puppy, walking it, grooming it, spending time playing with it rather than playing video games, the potential risk for the disutility of a poorly trained dog, and on and on.

The warm-fuzzies of owning a puppy may indeed ultimately be deemed worth it the long run (hey, I love dogs, myself!), but has the kid actually made the assessment, or is s/he just excited to get a puppy?

David R. Henderson writes:

@RPLong,
Good analogy. I would change it slightly: the parents give the kid a puppy without consulting him.

John Csekitz writes:

Increasingly I have trouble with the left.

Assuming the CBO is correct which the Administration and its backers have not disputed, to them 2.5 million low wage workers exiting the workforce is good…..

A reduction in the prime age labor force participation rate will occur; how does that improve the wealth of the nation?

The safety net morphs into a sticky web becoming increasingly difficult to exit as employable skills increase for others, but not for the newly freed from productive gain.

As 2.5 million low wage workers exit stage employment income inequality would go up and income mobility go down… I thought the left were supposed to be solving that not exacerbating it?

The positives I see are for those who make the web sticky; they get to feed off the votes of those who become trapped and will blame others for the rise in income inequality and reduction in income mobility.

Rob Rawlings writes:

As David describes it ACA is a bit like a poll tax that you have to pay even though you get no benefits from it. If you have to pay it you will beneift if your payment is subsidized. If the subsidy is means tested then you may work less as a result of means-testing. Even with the increased leisure you would still have been better off with no poll-tax.

However I think the economic logic may be a bit more complex and possibly invalidate David's conclusions.


Unlike with a poll tax there is a market for health insurance. ACA in effect moves the supply curve to the right (due to the subsidy) and flattens it (due to price control element) which means that even without the compulsion to buy the actual qty bought would go up significantly. The compulsion will make the demand curve vertical at the point where the old demand curve intersected the horizontal axis (or possibly to the right of this point)

So David's conclusions only hold if the utility lost due to the compulsory nature of ACA outweighs that who gained by those who benefit as result of the subsidy. This would require an interpersonal utility comparison and so we would never know if it were true or not.

RPLong writes:

@Rob Rawlings - there is an added element here: The quantity of insurance plans has increased, but the quality has decreased. It is thus not immediately obvious that total supply has increased.

So a previously uninsured person who now receives an insurance plan, with the subsidy, has increased his/her quantity of insurance, because any positive number is greater than zero.

But many (possibly most?) who held $X in total health insurance compensation before now hold $X - n in total insurance compensation because the old plans are either more expensive or totally unavailable. If they're also giving up employment income to get it, that subsidy had better be pretty good...

Rob Rawlings writes:

To clarify my comment.

David's point can obviously hold for an individual family (which is what he correctly says in his post), but cannot be shown to hold for all recipients of ACA subsidies in the aggregate.

Daniel Kuehn writes:

John Csekitz -
Who is "them"? The administration? The CBO? The left? For that matter who is "the left". You're treating it as an awful monolithic thing. When you act like it's monolithic and then impute views you don't like to it of course you "have trouble" with the left.

Rob Rawlings writes:

@rplong

You are correct that ACA plans should be seen as a separate good to pre-ACA health insurance not the same good subsidized.

But as long as ACA-plans have supply and demand curves then I think my point is correct that you can't tell if ACA is a net gain or a net loss to those who get subsidies in aggregate.

However David's main point is that people were overlooking the fact that the compulsory nature of ACA means that some people will lose even if they end up getting additional leisure time and subsidized health insurance.

I agree with that point. In fact it is an excellent point.

RPLong writes:

Rob - you do make a great point. Actually, your clarification just below my first comment to you drove it home for me.

John Csekitz writes:

Hello Daniel,
The “them” I was referring to are the Administration, the HufPo, John Stewart, and Paul K as I read or listened to their spin of the CBO report.

I would have been less troubled if those noted above took the position that the CBO was flat out wrong.

Daniel, I freely admit that I am a learner and would like your professional take. Of the three conclusions I believe are baked in if the CBO is correct- those leaving will negatively affect prime labor force participation rate; those leaving will find it harder to re-enter as skills atrophy, work history has a significant lapse; and income inequality will go up/income mobility will go down from the millions who would find the new incentives desirable; did I go wrong on any/all of these, if so where, and if not how far do we have to deviate from how the policy was sold to have it declared a lemon? As a reminder here is how it was sold.
http://www.youtube.com/watch?v=QJKGWEkkE7E

John Csekitz writes:

Hello Daniel,
The “them” I was referring to are the Administration, the HufPo, John Stewart, and Paul K. as I read or listened to their spin of the CBO report.

I would have been less troubled if those noted above took the position that the CBO was flat out wrong.

Daniel, I freely admit that I am a learner and would like your professional take. Of the three conclusions I believe are baked in if the CBO is correct- those leaving will negatively affect prime labor force participation rate; those leaving will find it harder to re-enter as skills atrophy and/or work history has a significant lapse; and income inequality will go up/income mobility will go down from the millions who would find the new incentives desirable; did I go wrong on any/all of these, if so where, and if not how far do we have to deviate from how the policy was sold to have it declared a lemon? As a reminder here is how it was sold.
http://www.youtube.com/watch?v=QJKGWEkkE7E

John Csekitz writes:

Hello Daniel,
The “them” I was referring to are the Administration, the HufPo, John Stewart, and Paul K as I read or listened to their spin of the CBO report.

I would have been less troubled if those noted above took the position that the CBO was flat out wrong.

Daniel, I freely admit that I am a learner and would like your professional take. Of the three conclusions I believe are baked in if the CBO is correct- those leaving will negatively affect prime labor force participation rate; those leaving will find it harder to re-enter as skills atrophy, work history has a significant lapse; and income inequality will go up/income mobility will go down from the millions who would find the new incentives desirable; did I go wrong on any/all of these, if so where, and if not how far do we have to deviate from how the policy was sold to have it declared a lemon? As a reminder here is how it was sold.

I’m having trouble attaching the link but a youtube search of the following will get you there
Pelosi: Obamacare Will Supply 400,000 Jobs Almost Immediately!

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