15 Feb 2014

Yet More Clarification on ObamaCare and Work Incentives

Health Legislation, Shameless Self-Promotion 21 Comments

Now I understand why Krugman feels driven to use examples like alien invasions; it’s the only way to shake everyone and say, “This is my point!!!”

And with that, I offer you my lastest salvo in the ObamaCare work incentive debate:

There is a feeling that giving low-income workers means-tested subsidies is harmful because the resulting drop in labor output is “involuntary” or a “mandate.”

But no, that’s not what those words mean. In standard economic analysis, the government is only giving more options to someone when it says, “We will give you this bonus money under such-and-such conditions.” After all, the worst-case scenario is for the possible recipient to reject the offer. For an extreme example, if the government says to people, “We will give you $50,000 a year if you punch yourself in the face every morning,” that actually provides more utility to the people who choose to collect the money; if it didn’t, they would simply refuse to punch themselves in the face, and would be right where they were in the absence of the offer.

21 Responses to “Yet More Clarification on ObamaCare and Work Incentives”

  1. andrew' says:

    Single-sided analysis.

    • andrew' says:

      Even aside from employer considerations(does the money come from lump of employment compensation resources?) What about economics and psychology? Incentives incentivize.

      More fundamentally, the same money could have been for anything else. Remember even straight cash transfers? One choice is an opportunity cost of every other option. The other side’s analysis is shocking in its single-minded shallowness.

      What about when, to use Bob’s analogy, the cost of surgery goes up as doctors are diverted to reconstructive surgeries? I could make a much better and obvious analogy but I’m trying to work with the face punching.

      I’ve noticed their strategy is complicate an issue until it is easier to tout second order effects and obfuscate first order effects as well as using or neglecting assumptions based on expedience.

      • Major_Freedom says:

        That’s because they’re trying to think of a value free method of settling their disputes.

  2. Daniel Kuehn says:

    I’ve been confused by a lot of this discussion, but I strongly agree with the last sentence of this post. And not even just “red herrings” – I don’t think Yglesias is even using the terms correctly.

    • Daniel Kuehn says:

      Sorry – “this post” being the Mises Canada post.

    • Bob Murphy says:

      Daniel I know what you mean; it’s not really the case that there is an exogenous price change and then we ask ourselves how this affects a given worker.

      But, in Yglesias and Douthat’s defense, that’s how a lot of people are discussing this. For example Tyler Cowen recently wrote something like, “And a lot of these are substitution effects, people!” (Not an exact quote.)

  3. Transformer says:

    I think the issue makes more sense if you think of it in terms of “avoidable” v “unavoidable” effects.

    Lets say you want to give everyone $50,000 a year and still have the amount if labor as close to what it would have been without it.

    Your advisers give you 2 options

    1. Make the $50,000 unconditional. If peoploe still choose to work they keep the $50,000 and their wages
    2. The moment they work they loose the $50,000

    Its pretty clear that the labor supply will be higher under option 2 than option 1. So if you believe that giving everyone $50,000 is a good idea then whether there are “strings attached’ is very relevant to the discussion as far as the overall impact on the labor supply. In both cases above though the lost work appears to be voluntary.

    I’m not sure why giving people more options is a good thing in itself. My utility will be higher if I get an unconditional $50,000 than if get $50,000 with 20 different options each of which leave me with less overall income from combined gift+wages..

    Am I missing something here ? If so, what ?

    • Transformer says:

      CORRECTION: “Its pretty clear that the labor supply will be LOWER under option 2 than option 1.

  4. Daniel Kuehn says:

    I think there’s a good case that this is not as bad as a change from, say, a demand shock. But Bob is exactly right that income/substitution and voluntary/involuntary are not the point. I consider four options:

    Voluntary/”not bad” (I won’t say “good” necessarily): giving poor people cheaper health insurance.
    Voluntary/”bad”: Demand shock and you choose not to halve your reservation wage.
    Involuntary/”not bad”: Evil government says nine year olds can’t work in mines.
    Involuntary/”bad”: Evil government says blacks can’t hold professional jobs.

    But my judgements there more have to do with my ethical judgements of what is and is not a good imposition on somebody, not that all voluntary impositions are good and all involuntary bad.

    All three of these seem like “income effects” at least how I think Yglesias is using the term (actually the closest thing to a “substitution effect” ironically is the first one, because it’s tied to the level of income!).

    I don’t know how this necessarily fits into this post. I understood why supply shocks were less-bad than demand shocks, but everything after that in this discussion from anyone has honestly just confused me.

    • Daniel Kuehn says:

      **all four of these seem like “income effects”

      As I said on the last post, I take him to be using “income effect” as something like a lump sum payment effect or an endowment effect.

  5. Major_Freedom says:


    “But actually the CBO did not project lost jobs at all. Job leaving is not the same as job losing. Many Americans who may eventually leave jobs or reduce their work hours will do so by choice to make themselves and their families better off. Voluntary reductions are not a cost of the healthcare reform law, they are a benefit. . . .”

    What is it with these interventionist do gooders who believe that pointing guns at people for various reasons of their own, whereby the second order effects are some people choosing to not work as opposed to work, or work less as opposed to the same as before, that these resulting choices in the second order environment are “voluntary” and a “benefit”?

    What if the government stole everything except one dollar from every employer, and then offered to pay every worker $50,000 a year to do nothing, or $0 if the workers and employers instead agreed to new contracts (where the total wages would be a one time payment of $1?

    If 99.9999% of the workforce chose to leave their existing jobs that would have paid $1, and instead take on the $50,000 free money offer from mommy and daddy government, are we to understand all this as “voluntary” and a “benefit”? Millions of people have voluntarily stopped working, so we’re supposed to believe that it is a good thing?

  6. Transformer says:


    You say:
    “There is a feeling that giving low-income workers means-tested subsidies is harmful because the resulting drop in labor output is “involuntary” or a “mandate.””

    I agree that this is an incorrect view.

    If you change it a bit to say:

    ‘There is a feeling that giving low-income workers means-tested subsidies is harmful because it causes the recipients to supply less labor than if the subsidies were not means-tested”

    Would that be correct ? If not, why not ?

  7. Silas Barta says:

    This is something I find myself having to point out a lot: The problem with raising Tom Cruise’s taxes is not (just) the loss in utility to Tom Cruise, but in the average persons inability to see the additional Tom Cruise movies that he decided not to make because of the ever-lower returns.

    • Transformer says:

      So there is at least one good argument for high marginal taxation.

      • skylien says:


        Though I think he was great in Tropic Thunder.

    • Benjamin Cole says:

      Mr Bartas: You have done the impossible. You have converted me into a fire-breathing “Tax the rich until they cry” radical.

      • Tel says:

        They won’t cry, they will just lobby harder. At least some of them will, and those are the ones we call “successful”.

  8. andrew' says:

    Where you get the money from, even in a depression, maybe espesially in a depression, loses all choice for the money. Who you are subsidizing gets one choice-MAYBE. Take free or leave it is not really a choice in econ is it? Thus, net loss of choice. Narrowly construed benefit is speculative. Remember they had to fine people for not participating.

  9. Transformer says:

    I just read the Gruber article.

    He thinks that any choice to work less as a result of ACA is good “Voluntary reductions are not a cost of the healthcare reform law, they are a benefit”.. He does not seem to see that any loss in output as a result of the dis-incentives of a transfer payment has a cost (less output) as well as a benefit (better general health, and well-being presumably). The cost is paid by those who fund the ACA transfers.

    His second argument is that there will be additional losses to labor supplied as people are dis-incentified to work by the fact that the transfer-payment taper as earned incomes increases. (For ACS he thinks this cost will be small). He think the costs of avoiding this (making healthcare universal) would be too high to be viable.

    The economics of the second bit are quite interesting. The less means-testing there is the greater will total output be (given a certain level of benefits available at zero income) but at any given level of income the level of transfer payments will be less under means-testing than without. So from the POV of those bearing the costs there be a level of means-testing that minimizes these costs.

    If you want to view this from a utilitarian perspective then you need to decide 1) Do the transfers payments needed for ACS add to overall utility ? and 2) If they do then what is the optimum level of means testing that gets the balance right between maximizing output and distributing the costs of ACA fairly.

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