I’m not trying to be obnoxious about this, but in his latest post Krugman completely vindicates my claim that he had been totally ignoring the liquidity trap–the staple of his analysis the last 6 years–when dealing with the CBO’s report on the Affordable Care Act (ACA, aka “ObamaCare”).
In the comments at my first post, some of you thought I was being absurd, and claimed that Krugman was juggling all the various balls in the air (supply-side incentive effects and demand-side spending effects) with no tension at all between his analysis of unemployment benefits on the one hand, versus the ACA’s impact on work decisions on the other. Well, on this particular battle, you were wrong and I was right: Krugman now incorporates the liquidity trap into his analysis, and his answer totally flips. So clearly I was right when I claimed that Krugman had been focusing on the long run.
To refresh your memory, the CBO came out with a report saying that the ACA would change the incentives workers faced, and end up leading to the equivalent of 2 million full-time jobs worth of lower employment. Krugman didn’t dispute the logic, but instead offered an extremely wonkish (his term) post showing how reduced employment might actually be a good thing. There is nothing in that post about a depressed economy; instead Krugman argues that prior government interventions had led to too much work effort, and so on net the “distortions” of the ACA might not be distortions at all, but might instead be nudging workers back to the correct decision on the tradeoff between leisure and utility. (Call it the Great Vacation sponsored by the ACA.)
But now he has remembered that we’re in a liquidity trap, and in his latest post separates the short-run effects of the ACA from the long-run:
I had some fun (for weird econonerd values of “fun”) yesterday thinking through the interesting possibility that our pre-Obamacare health system created a “reverse notch” that induced some people to work too much. But I think I should step back and talk about the broader issue here.
A somewhat educated guess…is that the net economic losses from the kind of labor supply effect CBO analyzes are on the order of 0.3 percent of GDP.
Oh, and that’s in the long run. In the next few years, with the economy still depressed, it’s all positive: reduced work by some will open up job opportunities for others, and higher incomes for beneficiaries will mean higher overall employment. [Bold added.]
Everyone see how the impact of the ACA totally flips once we embed it in a liquidity trap economy? To repeat, I wasn’t crazy for wondering why Krugman didn’t play this card initially.
Let me try to illustrate it this way. When discussing the issue of Democrats wanting to extend unemployment insurance, to be analogous to his initial reaction to the CBO statement, Krugman would NOT have brought up the fact that his textbook incentive analysis didn’t apply in a liquidity trap. Rather, he would have argued something like this:
HYPOTHETICAL KRUGMAN JUSTIFICATION OF EXTENDING UI, RELYING ON SUPPY-SIDE ARGUMENTS: It’s true, as I lay out in my textbook, that introducing unemployment benefits will distort marginal incentives and lead to longer spells of unemployment. However, in the real world there are pre-existing government distortions that alter the tradeoff between work and leisure. For example, the government offers all sorts of tax credits and other subsidies to businesses that make new hires. If we draw a simple budget curve with the representative worker/taxpayer, we can see how this pre-existing distortion leads unemployed workers to stop their search for a new job too early–they accept the best offer they’ve gotten after, say, 16 weeks, instead of holding out for 17 weeks as they would, in a free market. In the presence of this pre-existing distortion, the fact that unemployment benefits causes them to search longer, is a good thing.
I hope that by this point, at least some of you see what I am saying. The above is not at all how Krugman tackled right-wingers who brought up the incentive effects when criticizing extending unemployment insurance. But something analogous to the above IS how Krugman dealt with right-wingers who brought up incentive effects when criticizing the Affordable Care Act.
Last point: In light of his clarification, Krugman now believes the following about the Affordable Care Act:
==> In the short run, it will boost employment, and that’s definitely a good thing.
==> In the long run, it will reduce employment, and that’s arguably a good thing.
This ACA is one amazing piece of legislation, isn’t it? I bet if you dumped some frozen berries in it, a smoothie would pop out.