By: Christine Ries
Real Clear Markets
February 13, 2014
Last week, the Congressional Budget Office (CBO) produced a budget forecast revising its estimate of the effect of Obamacare – as we understood it last week – on the U.S. employment picture over the next ten years. When we are already at a 40-year low point for labor-force participation, the news that Obamacare would cost another 2.3 million jobs over 10 years hit the airwaves with a blast.
Even more striking than the numbers was the explanation that the jobs would be lost because people won’t want them. The CBO estimated that the economy will lose the equivalent of 2.3 million full-time jobs because people will quit work, work less, or postpone getting a job to avoid losing Obamacare subsidies.
What must be stressed is that 2.3 million number is an underestimate. It is an estimate based only on Keynesian modeling. If the CBO had been able to add supply-side factors, a la the economics of Friedrich Hayek, the projection of job losses would have been much higher.
Working at the end of WWII and the Great Depression, Lord Keynes focused on household or public demand as the main driver of economic growth. Today’s progressive media representatives and politicians will say that subsidies put money in people’s pockets, thus they spend more. Or that government spending on ‘shovel ready projects’ will increase growth because it puts money into the economy. That’s Keynesian economics. It’s all about spending – government spending and consumer spending.
Last week a bright young gentleman told me that he had voted for President Obama the second, but not the first time. Why? He could see that the government had ‘created’ 1,000 private sector security jobs right there in Tampa. And those new jobs would create new consumers who would in turn create new consumers and so on. That is Keynesian economics and the Keynesian multiplier.
I gave him back Hayekian or supply-side reality. Each of those jobs required government spending of $1 million which someone, somewhere would pay in higher taxes. Raising taxes on companies translates into higher business costs. That, in turns, means companies either raise prices or reduce production and lay people off. In fact, for each government-created $1 million job, private employers would lay off 2-3 people.
Keynesian economics is the economics of demand. How much will people chose to work and how much will they spend and spend again? Can the government ‘jumpstart’ that process with spending, subsidies and welfare?
Supply-siders, subscribing to Hayek’s economics, trace the impact of government spending through to the effects on producer’s costs and reduction in output (GDP) and jobs. The CBO’s Obamacare analysis of last week presented the Keynesian demand-side only. People would choose to earn less income, then spend less, for a reduction in jobs and the size of the economy. Coming from the CBO, the press and the public seems to see this as reliable statistical confirmation of the Keynesian or demand-side part of the problem.
The CBO wasn’t able to predict the supply-side of the problem, however, but the Obama administration was evidently able to do so – and predicted it large and soon.
Since the CBO cannot rely on the Administration to enforce the law as written, they cannot project the dates at which companies will be hit with the Obamacare mandate and increasing costs. Remember, supply-side economics predicts additional job losses from the impact of regulation and higher taxes. Without specifics on when such taxes and mandates will hit companies, the CBO cannot legally include Hayek’s insights into their analysis.
By reliably extending coverage and subsidies to consumers, the CBO can project the demand-side impact thus giving Keynes a voice at the CBO. By arbitrarily and unpredictably changing the dates and amounts by which mandates, regulations and higher taxes will hit producers, Hayek is effectively silenced…at the CBO.
But, the rules of economics will out. Hayek found his voice in this week’s administration announcement that a large number of medium-sized companies with a large number of employees will be newly exempted from the mandates and costs until after the next election. Whether captured in CBO’s estimates or not, the supply-side made it into the consciousness and political calculations of the Obama administration.
The message is clear. Whether they say it aloud or not, supply-side economics and Friedrich Hayek have made it into the progressives’ calculations. Whether translated by CBO statistics into truth, or not, more solid, less Keynes-biased macroeconomics are playing big in Obamacare politics.
Maybe Hayek’s reality and supply-side economics are about to have their day in court. It’s about time.
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