Streetwise Professor

To return to the CBO Obamacare report.  It is really amazing that the admin spin (but I repeat myself) is that this is no big deal because hey, the job losses are a supply side effect, not a demand side effect.  Amazing, and embarrassing to my profession, because some who have made this claim are economists who should-and I am sure do-know better.

The effect that the CBO points out is related to the fact that the phase-out of subsidies as income increases under Obamacare is effectively a tax on labor income. There is a very basic tenet in economics called Tax Incidence Analysis, which says that the effect of a tax out output (or in this case, input usage) doesn’t depend on whether the tax is imposed on the buyer or the seller.  Impose it on the buyer (in this instance, employers), the demand curve shifts down: In Obamacare Spinworld, that’s BAD!.  Impose it on the seller (in this instance, workers), the supply curve shifts up, crucially by the same amount as the demand curve would shift down if the tax is imposed on the buyer.  End result: both routes lead to the same destination in terms of the amount of employment and the take-home pay of workers.

The tax-and remember, the subsidy phase out is equivalent to a tax-drives a wedge between the price that buyers (employers) pay and sellers (workers) receive.  It is this wedge that distorts decisions.  It is the size of the wedge that determines the size of the distortion, and the size of the wedge is the same whether a given tax is imposed on the buyer, the seller, or split between them in any arbitrary way.

Again, this is the most basic economics.  So how come some economists are saying the CBO report is nothing to worry about because the effect it identifies is due to a shift in the supply curve, rather than the demand curve?

Put differently, the workers who are (according to Admin Spin) going to enjoy freedom from the drudgery of labor as a result of the subsidy phase-out would be the very same workers who would be out of work if an equivalent tax had been imposed on employers.  But I guess those people in the latter scenario (again: the very same people) wouldn’t be enjoying freedom from the drudgery of labor, or something, so that would be bad.  (This brings to mind the scorn  that Keynesian economists heaped on New Classical and RBC economists who suggested that unemployment is voluntary.  What’s good for the goose . . . )  I guess you’re free to enjoy leisure when you decide it isn’t worth working, but you are not free to enjoy leisure if someone decides not to hire you.

Like I say.  Truly embarrassing to the profession that any economist would do anything but call bullshit on the spin.  Instead we see economists picking up their shovels and adding more manure to the pile.

I am not alone in this opinion.  Indeed, I should defer to Casey Mulligan, because he has been the one who has been assiduously documenting the perverse supply side effects of myriad Obama policies.  His painstaking work nudged the CBO to revising its earlier conclusions about employment declines, though he still thinks they underestimate the effect.  And he is also embarrassed and disgusted by the performance of many of our peers:

Mr. Mulligan reserves particular scorn for the economists making this “eliminated from the drudgery of labor market” argument, which he views as a form of trahison des clercs. “I don’t know what their intentions are,” he says, choosing his words carefully, “but it looks like they’re trying to leverage the lack of economic education in their audience by making these sorts of points.”

A job, Mr. Mulligan explains, “is a transaction between buyers and sellers. When a transaction doesn’t happen, it doesn’t happen. We know that it doesn’t matter on which side of the market you put the disincentives, the results are the same. . . . In this case you’re putting an implicit tax on work for households, and employers aren’t willing to compensate the households enough so they’ll still work.” Jobs can be destroyed by sellers (workers) as much as buyers (businesses).

When Mulligan says “we know it doesn’t matter on which side of the market you put the disincentives, the results are the same” he is summarizing the implications of tax incidence analysis.  When he says “when a transaction doesn’t happen, it doesn’t happen” he means that the wedge between what employers pay and what workers receive causes some people not to be employed, and it doesn’t matter whether this is because an employer finds them too expensive to hire, or they find their take home too little to justify giving up leisure (or, enjoying “freedom” if you will).

Basic economics tells you that the Administration spin is wrong.  Is it to much to ask that economists not only not spin along, but actually criticize it?