Thursday, August 08, 2013

Obamacare and Incentives -- Why They Matter

Today's Politico has an op-ed by Jared Bernstein and Paul Van de Water arguing that firms aren't cutting workers back to part-time to avoid the employer mandate. (Bernstein was VP Biden's Chief Economic Adviser for two years.) But the article contains a couple weaknesses I want to highlight:
"In the case of health reform, we recognize that the part-time incentive exists. But it hasn’t shown up in the data yet..." 

Key word: "Yet." The local news doesn't seem to have problems finding workers whose say their hours are being cut due to the Affordable Care Act's employer mandate. Indiana University, for example, is eliminating all 30+ hour positions. Even in my small offline world, I'm meeting people who say "I was told my hours are being cut due to the ACA..."

Fact: Rational people (and firms) respond to incentives. Where the incentive exists, actions will follow. Journalists and pundits on the Left have realized this. Ezra Klein, for example, argues for repeal of the employer mandate.

Bernstein's statements strike a nerve because I'm reading through Freedom from Fear: The American People in Depression and War, 1929-1945 (Oxford History of the United States) having recently completed Amity Schlaes' work as well. Both the Hoover and FDR administrations ignored incentives as they engaged in policies that exacerbated unemployment-- strong-arming businesses to pay higher wages, prosecuting small business owners for noncompliance (under the NRA), ordering crops to be destroyed (under the AAA) in order to eliminate excess supply (at a time when citizens were starving), and increasing taxes. By 1938, when unemployment was again rising as the U.S. swooned into another recession, FDR's closest supporters were disillusioned and wondering "what went wrong?"

Bernstein, however, doubles down with his statement:
"American history is replete with warnings that employer mandates we now take for granted — about minimum wages and workplace safety, for example — would have large and disruptive impacts." 

Depends on what "large and disruptive" means. Minimum wage laws became constitutional in 1937, in the middle of a deflationary Depression-- on top of a host of labor-friendly bills designed to mandate increases in wages and benefits. While unemployment would eventually drop below 1930 levels, it would never again reach the 3% levels of the 1920s-- meaning hundreds of thousands of people looking for work were still unable to find it.

Bernstein has previously made similar arguments (on his blog) in regards to the minimum wage. Bernstein uses the same argument FDR's economists did in the 1930s in regards to corporate profits--they can afford to pay workers more. In FDR's case, he forced companies to pay dividends rather than see that money reinvested to expand the companies (FDR was hoping to increase consumption). Bernstein wants to reduce business investment by forcing firms to pay higher wages. Both acts give companies an incentive to lay off workers-- which was the result in 1936, same as with the minimum wage hike in our recent recession.

Sure, a higher wage is great if you get to keep your job/hours and see prices stay the same. But that never happens. Ask an African-American teenager in Detroit, an elderly person in Appalachia, or others who got axed after the last minimum wage hike in 2007. Ask American Samoa and other U.S. territories who lobby congress to be exempt from minimum wage legislation so their unemployment problem doesn't become worse. But Bernstein apparently doesn't consider the numbers affected "large" enough to merit thought, even though they are the ones at the bottom of the economic ladder that Progressives say they care about the most(!) Businesses also respond to wage mandates by raising their prices, nullifying the positive effect. Bernstein surely knows this.

In short, the employer mandate disincentive to hire full-time workers is another example of the government forcing aggregate supply to shift leftward. "A little bit here, a little bit there" leads to too much unemployment.

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