Archive for October, 2011

An Analysis of Obamacare Part V: Obamacare and U.S. Economic Structure

October 27, 2011 1 comment

In previous posts, I have argued that Obamacare will increase health care spending and the government deficit.  In this post I will examine a few of the likely changes in the economic structure of the U.S. caused by Obamacare.


There has been a great deal of discussion in the media about the advancement of socialism in the U.S. economy caused by Obamacare and other policies supported by the President.  By definition, socialism is a system of economic organization where central planners employed by the government choose the prices and the quantities (what and how much gets produced) of goods and services.  In a communist system, central planning occurs but, in addition, the means of production (firms) are owned by the state.  In either system, resource allocation is done by central planners, not in markets driven by the actions of the public.  One aspect of administration policy does meet the strict definition of communism.

The U.S. government now originates student loans made in the economy as a result of Obamacare.  This actually was brought about in part by a policy change in the Bush Administration.  The interest rate that banks could charge was reduced, causing over 100 banks to leave the program (yet another example of the unintended economic consequences of price controls).  By being in the loan business, the government is spending more than it was previously on student loans and it is engaging in socialism (or communism) pure and simple.  Banks that once provided federally-subsidized student loans now are no longer in this business.  This loss of business may have caused banks to lay off the employees who administered these student loans.

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An Analysis of Obamacare Part IV: Obamacare and the Government Deficit

October 27, 2011 3 comments

I previously argued that the newly-passed health care bill, dubbed Obamacare, will likely raise health care expenditures faster than they would have otherwise grown.  Here I discuss the question of the impact of Obamacare on the federal government deficit.

Is Obamacare Deficit-Neutral?

One of the defenses of Obamacare by its advocates is that the program will not raise the government deficit or may even lower the deficit.  This is almost certainly incorrect for the following reasons.

One of the more remarkable aspects of the computation used to gauge the impact upon the deficit is what is left out of the computation.  As observed by Douglas Holz-Eakin, a former director of the Congressional Budget Office (CBO) in a New York Times blog post, the deficit computation does not include the cost of administering the program by the government. Note that this is not a criticism of the CBO.  Their job is to play by the rules created by Congress.  If the rules lead to an exercise in fiction, the CBO carries out an exercise in the writing of fiction.  So from this point of view, a more sensible measure of the effects of Obamacare is that it will raise the federal government’s deficit.  But it is actually worse than this.

One additional source of “funding” for the program is the so-called “doctor fix” that is associated with Medicare.  Medicare has built-in reductions in payments to doctors who treat Medicare patients.  These reductions may cause doctors to refuse to treat Medicare patients so Congress passes legislation to stop the payment reductions.  If the spending reductions are made, that is, if the “doctor fix” does not occur, this frees up resources to be used to pay for the new health bill.  However, it is well understood that the “doctor fix” is likely to be passed again, removing this source of financing for Obamacare.

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An Analysis of Obamacare Part III: Obamacare and Incentives

October 27, 2011 1 comment

In previous essays, I argued that Obamacare will drive up the cost of health insurance policies and it will increase health insurance expenditures.  However, there is an additional route through which Obamacare could slow the growth of health care expenditures.  That would be if Obamacare somehow changes the incentives facing the buyers of health care, causing health care expenditures to rise more slowly than they otherwise would grow.  I will argue here that because Obamacare does not reform the incentive problems in the existing Medicare system and reported changes in incentives related to the Medicare Prescription Drug program, Obamacare is likely to make health care expenditures grow more rapidly than they have in the past.  And taxpayer subsidies may be unexpectedly large if workers lose their health care insurance coverage provided by their employers.


One of the reasons why health care expenditures have risen as rapidly as they have is that buyers perceive no connection between out-of-pocket expenses and the health care that they buy. An example, familiar to many parents, serves to illustrate the problem.

Imagine taking a child to a toy store and saying to him or her “You may have whatever toys you want and I will pay for them.” Obviously the child will want almost everything in the store but now compare that outcome with the outcome from the following statement. “You can have whatever toys you want as long as you pay for half the cost of the toys.” Clearly the child will buy less in the second case compared to the first case. The first of these examples applies to Medicare. Since Medicare recipients experience no change in their Medicare payments in connection with the health care services that they buy, it is hardly surprising that, with incentives like these, health care expenditures have been growing very rapidly. I am not aware of any provision in Obamacare that would change the Medicare incentives faced by the buyers of health care services, causing them to buy less health care than they otherwise would. But there are reported changes in incentives that might cause health care expenditures to rise more rapidly than they have in the past.

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An Analysis of Obamacare Part II: Obamacare and Health Care Costs

October 27, 2011 3 comments

In my previous essay, I argued that Obamacare will drive up the price of health insurance.  Here I will use some simple economics tools to see if we can discern how Obamacare will affect health care expenditures in the U.S.  President Obama has claimed that Obamacare will reduce health care expenditures.  I will argue that Obamacare is likely to raise health care expenditures; both the price and quantity of health care services bought by the public will rise.

The Health Care Market

In the graph below I show the health care market where I have combined, for simplicity, all health care goods (drugs, medical procedures, and doctor visits) into one aggregate commodity called “Health Care.”  Supporters of Obamacare claim that the program will allow more individuals to buy health care services.  Let’s take them to be correct and so Obamacare will increase the demand for health care services at any level of health care prices.  The graph below shows a rightward shift in the demand curve to represent this fact.  The graph also shows what will happen in the health care market: both price and quantity rise comparing the two intersection points of the demand and supply curves.  Therefore health care expenditures, the product of price times quantity, unambiguously increase.  Note that we are using the “ceteris paribus” assumption frequently employed by economists, meaning that we are holding everything else to be constant in the economy.

Price Controls Create Shortages

It is reasonable to ask if we can find any way to change the conclusion that we just reached that might cause the President’s comments about health expenditures to be correct.  One way to answer this question would be to see what happens if the government were to impose price and/or quantity controls.  The graph illustrates the effects of price controls.

Price controls cause shortages.  The dotted line with the arrows at each end shows the size of the shortages that result from price controls after the increase in the demand for health care.  Suppliers will only supply more if the price of health care services rises.  If the government prevents prices from rising, shortages are the result.  Note that Medicare sets the prices which it will pay for health care services and it chooses which procedures will be covered.

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Economics One

A blog by John B. Taylor

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One economist's views on economic policy.

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