Sunday, March 2, 2014

One More Bit About Obamacare Being Forecast to Cause a Drop In Employment

It took me a while to digest these ideas too. There’s a very big picture here, so bear with me.

Scott Sumner, writing at EconLog, asks why expansions feel good and contractions don’t?

Your first instinct, and mine, is to say “Duh”.

Like I said, it took me a while to digest.

First off, Keynesians argue that both expansions and contractions are less than optimal. Why is that so? In both, we have a tradeoff of labor for leisure. In expansions, we use too much labor and consume too little leisure. The end result, if left unchecked, is inflation. In contractions we use too little labor, and consume too much leisure. The end result, if left unchecked, is persistent and involuntary unemployment. Keynesians, in arguing for demand management policies, target just the right amount of employment, typically known as the natural rate.

Fair enough. Then why do expansions feel better? One explanation might be that we get more utility out of the consumption we buy with our labor, than the leisure we might consume instead. Decisions in most peoples’ personal lives tend to confirm this. Turning this around, it means that booms make us happier because most of the time we can’t work as much as we’d like to. I know that sounds weird, but when was the last time you stopped to smell the flowers?

Why might that be so? Now we switch over to micro, to think about the distortions from taxes. One of the important points of micro is that a tax on either suppliers or demanders will lead to a deadweight loss. One way to theoretically justify the empirical observation that expansions feel better is to argue that we have deadweight losses everywhere, and expansions go some way towards replacing the stuff we might have gotten otherwise.*

Next up, note that a tax that falls on someone else will create a deadweight loss in their market, but to you in your market this will feel like a negative externality. Can that negative externality affect your decision-making? Yes, of course. And can you respond optimally to that externally? Again, yes, of course.

But, do you have some inalienable right as a human to not be inconvenienced by externalities? Again, I think the answer is yes. I’m not claiming that you can realistically avoid those externalities, or that you shouldn’t behave optimally in response to them, but it’s the role of society to make sure they’re minimized.

I said it’s a long way round to the big picture, and here it is. Liberals/Progressives/Democrats are claiming that the forecast job losses from Obamacare are an optimal response to changing circumstances. That is a microeconomic argument that you’ll respond optimally to an externality. It ignores the macroeconomic argument that society has a responsibility towards the individual to reduce externalities.

Instead, the Liberal/Progressive/Democratic argument that the forecast job losses are OK ignores the macroeconomic distortions that lead to the microeconomics externalities. This is nonsense.

I’m still willing to countenance the argument I made in an earlier post that Obamacare is shifting us from one distorted labor market to another. But I think Sumner has made the strongest argument I’ve seen yet: it is incumbent upon Liberals/Progressives/Democrats to prove that the forecast job losses result from distortions in the earlier healthcare system that led to too much work being done … say, something like at least half of the forecast lost jobs.

And quite simply, I don’t think anyone can make the argument that the earlier healthcare system was creating deadweight gains leading to something on the scale of like 1.5 million or more extra jobs. My heck ;) even the Republicans never made a claim that outlandish.

Folks, it was the ninth inning of the seventh game of the World Series, the bases were loaded with two outs, and Sumner just threw a strike. And Liberals/Progressives/Democrats are arguing that it doesn’t count because they didn’t swing at the pitch.

* Do note that we could also say that subsidies lead to deadweight gains. But this can’t be a big effect: no one is really worried that subsidies outweigh taxes. 

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