Home > Health Care Policy, Obamacare > An Analysis of Obamacare Part V: Obamacare and U.S. Economic Structure

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

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.

The U.S. health care industry is not an industry that meets an economist’s definition of a private market system, or an example of socialism, either before or after the passage of Obamacare.  The U.S. health care market has historically been centrally planned by government but at the state level.  For example, states dictate what health insurance policies must cover and must approve the prices charged for health insurance (do a Google search on “state healthcare mandates” to see some of these mandates).  Health insurance companies are really run much like public utilities.  States also impose other restrictions on health insurance. For example, a friend recently told me that New Jersey does not permit health insurance policies to have deductibles.  What Obamacare does is replace one sort of central planning by another.  The nature of the central planning may be different than it was previously and it may also be more widespread.  The government does not own the means of production in either case but it tries to dictate market outcomes with central planning.  But there are other changes in the economy that will occur.

There are already reports that Obamacare has raised health care costs to firms.  If so, we might expect changes in the fringe benefits offered to employees or retirees.  Firms may drop prescription drug coverage to their retirees because of the loss of the tax subsidy that they previously received.  Further, if Obamacare raises the cost of health insurance policies and the prices of health care goods and services, this may cause layoffs by firms to try and raise their profits to offset these price increases.  Benefit packages may also be changed.  One general property of firm behavior is that if one of its productive inputs gets more expensive, it will use less of it.  Obamacare makes labor more expensive and some people may lose their jobs as a result.

The Massachusetts health insurance plan, a template for Obamacare, has turned out to be far more expensive than it was thought to be when the program was started.  If Obamacare does increase the government deficit, it is likely to do so by an enormous amount.  If so, look for new taxes imposed on the public.  These taxes will cause changes in the purchases of households.

Health insurance firms may decline in number or even disappear altogether.  If the penalty for not buying health insurance is substantially lower than the cost of the insurance, this may induce people to wait to buy health insurance until they are sick.  The lower is the penalty relative to the price of the insurance policy, the greater the likelihood that insurance firms will lose money on health insurance policies.  If this goes on to a sufficient degree, insurance firms may leave the industry to ensure their survival or liquidate.  Medicare for all may be the end result.  The current Medicare system has unfunded liabilities that are staggering in size.  One can only imagine the cost of a single payer system of health insurance.

Final Thoughts

The late Milton Friedman lamented that fact that western economies were experiencing what he termed “creeping” or “galloping” socialism.  There is no doubt that Obamacare extends the degree of socialism in the U.S. economy and it extends the degree of central planning that exists in the health care industry.

Obamacare will also cause substantial changes in U.S. economic structure.  Layoffs may occur, fringe benefits will also be changed, and employees may lose health coverage.  But there is one other set of changes that will occur.  These are the ones never anticipated by the central planners in the White House and Congress, the ones that result from the “Law of Unintended Consequences.”


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Economics One

A blog by John B. Taylor

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