MPS on subsidies

I think Kevin Drum is getting something wrong on healthcare subsidies and the economy in a liquidity trap:

 don’t have access to the full Goldman Sachs report, but I’m dubious about this for two reasons. First, Obamacare is roughly revenue neutral, which means federal subsidies are all paid for via tax revenue. Obamacare really shouldn’t have any first-order net stimulative effect on personal income or GDP. Second, although subsidies will reduce health insurance bills for people who were previously covered—thus freeing up income for other purposes—the individual mandate will force previously uncovered people to buy insurance they didn’t have before. This will reduce the income they have for other purposes.

Let’s think through the basic financing of Obamacare cash flows.  At its simplest, Obamacare transfers money from high income individuals to lower income individuals through the form of either subsidies for health insurance or Medicaid expansion payments.  The taxes that pay for Obamacare are primarily a surtax on high incomes via income taxes and an expansion of what is considered taxable income for OASDI-HI taxes.  Those taxes mainly hit people who are making more than $200,000 in MAGI.  There are a few other taxes (tanning, medical devices, reinsurance etc) that hit people at all income scales, but most of the new taxes are paid for by higher income individuals.

Subsidies are limited to family units making less than 400% Federal Poverty Line.  More subsidy dollars go to families who are poorer. Medicaid expansion dollars are limited to families making less than 138% FPL. 

Going back a few years, the CBO estimated the multiplier effects of various ARRA (stimulus) programs.

CBO multipliers
The key insight is that an economy that is operating significantly below potential, and where there is a significant class of people who are fundamentally tapped out of both ability to spend and ability to borrow, giving those people more money at the expense of taxing people who have unused capacity to spend and borrow should produce a significant burst of economic activity.  That is the basic financial transfer mechamism of PPACA — money goes to poorer people with a high marginal propensity to spend and it comes from people with a high marginal propensity to save. 

Does this analysis hold in all conditions. Hell no.  It holds when we’re stuck at the zero-bound and getting out of a massive debt overhang.  If we’re seeing an economy expanding like it is 1943, this analysis fails miserably, but we’re not seeing an amazing and unsustainable boom right now.



18 replies
  1. 1
    kindness says:

    I like Kevin. I read Kevin. Kevin is an Orange County moderate imo. He accepts many things I question. I do think his reads are generally pretty fair but sometimes he gives opponents more of a benefit of the doubt than I would. Such is life I guess.

  2. 2
    dmsilev says:

    Redistribution! Class warfare! Brawwwk! Socialism!

  3. 3
    Zach says:

    There’s also a stimulative effect from forcing insurance companies to pay out 80% of what they take in. That’s a hard-cap on profits that can be parked in cash. Not sure of what the real impact would be, though. I actually think companies will just get reeeeeally inventive in what they call “care”; they’ll also petition HHS to have each and every little thing deemed ‘care”.

  4. 4
    satby says:

    Anecdote is not data of course, but I’m doing my bit: money that would go to COBRA is now going into building my soapmaking business. Actually, what I would have spent in just 2 months on COBRA got me a good start-up stake, advertising, and more materials to produce my goods, so that’s a ripple effect to all my suppliers too.

  5. 5
    NobodySpecial says:

    My anecdote is the other way – I’m now paying ~$120/month to insurance companies that I wasn’t before the ACA, and of course the income didn’t change at all, so I have less disposable income. Drum is correct for some people as far as that goes.

  6. 6
    japa21 says:

    Well, if you discount the increased hiring of workers in the health care industry, all of whom are taking cash home and spending it and many of whom either weren’t working or working at lower paying jobs, the people hired in other professions to cater to the needs of the people now working who weren’t before, the ability of healthier people being more productive in the work place, and all those other pesky little details, Drum might have a point. But even then, it is still iffy if he does or not.

  7. 7
    Schlemizel says:

    Its tough, particularly around here sometimes. If the day ever comes (Pasta, hear my prayer) when liberals actually have control and don’t have to fight the damned wingnuts we can easily give it all away based entirely on purity. I can read Kevin or GG or several others and note where I disagree but still accept that we agree on some things.

    If that day ever comes we had damn well better be prepared to make bargains with people who are not 100% pure in our eyes, to work like hell for the things we agree on & argue respectfully over the things we don’t. Yes, we may have to hold our noses and embrace egotistical asshole and petty self-involved jerks in order to push the ball forward.

  8. 8
    scav says:

    getting money to spend on health care/insurance to people not spending money on health care/insurance has no effect. Because it necessarily must be doing something more valuable sitting the the vaults and portfolios of “our” betters? Is he trying to weasel out by throwing in ‘first order’? Because I’m really not getting the revenue neutral point whatsoever, either. I’m guessing it works if you value all forms of money being spent equally (doughnuts to infrastructure), assume the money sitting in vaults is equally productive as the stuff flowing through medical channels, and ignore all multipliers. These aren’t my usual mental games, but I’m smelling simplistic assumptions.

  9. 9
    Mnemosyne says:


    And if your gall bladder suddenly decided to explode tomorrow — as happened to one of my co-workers last month — you have the $30,000 saved up to pay the hospital bill out of pocket, right?

    Or you could be like my other co-worker, who tripped and broke her wrist. That was only billed at about $8,000 without follow-up visits — you have that kind of money sitting around waiting for an emergency, right?

  10. 10
    scav says:

    @NobodySpecial: But the money is still going out your door, disposable dollars v. other sort isn’t really the issue. They had an impact on the economy before, they have an impact now, only they’ve changed channels where the impact is felt.

  11. 11
    patrick II says:

    Kevin Drum yesterday:

    Obviously, preventing death is important, but it’s by no means the primary value of health insurance, especially in the non-elderly population. The primary value is (a) financial and (b) the ability to get routine health care that improves your life even if it doesn’t prolong it.
    Even if health insurance had zero impact on mortality, we’d still want it. It provides us with medical care that makes life more livable and it prevents us from living with the constant fear that we’re one expensive treatment away from bankruptcy.

    This seems at odds with what he is saying today. People who do not are generally more healthy and capable and don’t live in constant fear of bankruptcy and economic ruin are much more likely to earn and spend more than not. It is not just the category of dollar amounts from the study, but the actual effect they have on peoples lives. Healthy, confident people will work more and spend more than sick fearful ones.

  12. 12
    kindness says:

    @Schlemizel: I used to get into the comments over at Kevin’s blog but have found that far too often the conversation ends up going round and round with the trolls that live there. They make that the focus rather than what ever it is that Kevin has written about. I have asked several times why they are doing this and am now considered a troll myself over there. So I don’t comment. I don’t typically read the comments because….waste of time, far too much wheel spinning for me. But I do appreciate what ever moderates/liberals (Kevin isn’t a liberal no matter how much he likes & posts about cats) Southern Cal can bring to the net.

  13. 13
    RSR says:

    I have a friend who is utilizing health care, especially routine check ups/preventative care, for the first time in a long long time, due to OCare. That’s money that wasn’t flowing through the system previously.

    He’s been, thankfully, pretty healthy before. No emergency room visits, etc.

    And yes, somebody with a Cadillac plan (heck, our gold-plated teachers union care might come close…but they’re trying to cull that anyway) will pay more so our friends can be healthy. I’m okay with that.

  14. 14
    jl says:

    Thanks for a very useful column. From a purely old fashioned ‘plumbing’ fiscal Keynesian view, I think RM has a much better angle on the issue than Drum, and that olde tymey simple fiscal Keynesian viewpoint is the appropriate one for the short term in current economic conditions. If we are in a situation where fiscal multipliers are greater than one, then moving disposable income to groups with a higher marginal propensity to consume out of current income will have effects. A second order effect would be effect of lower probability of medical bankruptcy and extremely tight budget constraints due to fact the future medical expenditures will be easier to predict.

    And increased allocational efficiency for people who are not altering other economic decisions just to keep their health insurance. (And note that the anti-Keynesians should make a big hoop-te-doo over this, since increasing allocational efficiency is really the only thing they recognize as a cure for macro problems.)

    I would also add that there is also evidence that the ACA is already reducing long run projected health care expenditure, which will have important fiscal implications over the medium to long run, since if current signs are correct, would result is lower debt burden and much more flexibility on government fiscal policy from year to year.

    I don’t see how Drum’s post is very useful.

  15. 15
    low-tech cyclist says:


    Redistribution! Class warfare! Brawwwk! Socialism!

    Welfare! Solar Power! No nukes!

  16. 16
    David in NY says:

    Yes, you’d think the fact that hospitals recently noted, that they have fewer “private pay,” which often means “non-pay,” admissions from emergency rooms (I think), signals a real infusion of money into the economy. Hospitals buy and pay for a lot of stuff, and that’s gotta be a stimulus.

  17. 17
    PST says:

    I want to place a bet that within 24 hours Krugman posts a blog entry that echoes Mayhew’s point.

  18. 18
    mclaren says:

    In this post, Richard Mayhew makes the kind of grossly incompetent error in basic economics you’d expect from a high school student. No — strike that. A high school student would be smarter and more knowledgeable.

    The key insight is that an economy that is operating significantly below potential, and where there is a significant class of people who are fundamentally tapped out of both ability to spend and ability to borrow, giving those people more money at the expense of taxing people who have unused capacity to spend and borrow should produce a significant burst of economic activity. That is the basic financial transfer mechamism of PPACA — money goes to poorer people with a high marginal propensity to spend and it comes from people with a high marginal propensity to save.

    Can you see the error here?

    Sure you can.

    Health care is not consumption spending for the typical consumer and the health care “market” is not really a market.

    So the normal economic effects of spending don’t increase aggregate demand when you spend money on health care. Here’s why: in a normal consumer purchase, the consumer has choice about what to spend money on, and can choose to spend more or less money. Let’s say there’s a big tax refund due to the stimulus — in an imaginary world, the congress gives everyone $10,000 to spend. Consumers can choose to spend that money on furniture, a big-screen TV, restaurant meals, whatever.

    But when the ACA reduces the cost of health insurance for the typical consumer, they have no choice. They must pay whatever the fuck the hospitals charge and they don’t spend that money — their health insurer does.

    So here’s the essential difference twixt the two situations: a consumer who gets a $10,000 tax rebate may choose to spend all of it on restaurant meals or whatever and then develops a taste for nice meals in restaurants, and may wind up spending more of hi/r personal income eating out. This increases the amount of cash going to the restaurants in that local area, and if enough people do this, more entrepreneurs build restaurants, the restaurants hire cooks and waiters and maitre’ds and so on. The whole local economy booms.

    But if lots of people get sick and use the ACA to pay for their health care and lots of cash flows into the local hospital, all that happens is that the local hospital raises the price of cotton balls from $5 each to $10. The local hospital charges $1000 per thermomemter instead of $200 per disposable thermometer. This benefits no one in any practical sense. A handful of people working att the hospital get even wealthier, and a handful of medical devicemakers and specialty surgeons become even more fabulously wealthy. But the general economy does not benefit at all.

    It’s exactly like the bogus argument Dubya and his cronies used for their tax-cuts-for-the-rich: the rich will buy more yachts, the yachts buidlers will hire more workmen, and the economy will boom!

    Nope. Because only a tiny sliver of the population benefits from that kind of spending. Ditto for the ACA. The people who benefit from ACA spending are: surgeons who make millions per year, medical devicemakers and medical device salepeople who make milllions per year, doctors’ imaging clinics that make obscene amounts of money per year, and so on.

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