Some of the most heated controversy but most meager investigation centers on the macroeconomic aspects of Health Care Reform. Simply put, what is the impact of reform on jobs and output? Implicit in the name of the Republican house sponsored Repealing the Job Killing Health Care Act Bill is that Affordable Care Act will result in enormous job losses, an especially unsettling prospect in the kind of jobless economic recovery we have been experiencing these last two years. On the other side of the aisle, House Minority Leader Nancy Pelosi has announced that Health Care Reform will “create 4 million jobs – 400,000 jobs almost immediately.” This figure appears to be loosely (very loosely) based on a Center for American Progress Study that shows 400,000 jobs created in 2014 under a best-case cost reduction scenario.

Somewhere in the middle is the Congressional Budget Office. The CBO Director, Douglas Elmendorf, has issued the terse statement that the “effects of the legislation on overall employment would be small.” However, net job figures are not provided to quell this swirling controversy. So, speculation and hyperbole continue.

One reasonable scenario is offered in a new paper by Juergen Jung and Chung Tran. They find that an Affordable Care Act type policy produces a “7 percent increase in aggregate spending on healthcare,” “steady state output decreases by up to 2 percent,” and the public experiences an “increase in stock of health capital.” They conclude that the “reform is socially beneficial as welfare gains are observed for most generations.” In sum, there are slightly negative macroeconomic outcomes but net social benefits.

Another way of looking at the Affordable Care Act is to focus on its fiscal effects. The Act was scored by the CBO to be deficit reducing at the time it was written. In the spring of 2010, it was estimated to provide $143 billion in savings over the period FY2010-2019 with much of the savings to occur earlier in the period and most of the spending impetus beginning in 2014 when Medicaid is expanded and the subsidized insurance exchanges open. There have been several modifications since that time (such as the repeal of new 1099 reporting requirements) that affect some of the particulars but you get the general gist. In the traditional Keynesian economic modeling world, deficit reduction is contractionary fiscal policy and has a dampening effect on output and employment.

Source: Congressional Budget Office

If these annual budgetary expenditure and revenue estimates are mapped onto the policy variables of a respected commercial economic model called REMI, the employment trajectory closely follows the budget trajectory (see this paper for further methodological details) with one exception. During the budgetary surplus years, employment losses associated with the act peak in 2013 with over 800,000 jobs lost. However, beginning in 2015 when the spending kicks in, jobs are added. This pattern continues even as the federal government continues to accumulate small budget surpluses and ends on 2019 with almost 236,000 more jobs than would have occurred otherwise. This figure is net employment and includes both industry winners and losers. The winners? Health care services industries see a gain of over 470,000 jobs and insurance carriers see over 39,000 additional jobs. There are also employment gains in the pharmaceutical and medical equipment manufacturing industries. But, offsetting losses occur in many other industries, including retail trade, construction, and services.

Why might this happen? Well, Health Care Reform significantly channels spending from general consumer goods and services to health care goods and services. Moreover, health care spending is almost entirely spent in the U.S. and has a strong U.S. supply chain. But, it displaces general consumption spending that has significant import leakages. Think of it as having features of a successful “Buy American” program.

Unfortunately, this analysis is limited in many ways. For one thing, it doesn’t fully account for some perverse labor market effects of the legislation. For instance, the effect of the employer penalty (“Play or Pay”) feature of Health Care Reform is similar to instituting a higher minimum wage. Since employers can’t shift the costs of health insurance to low wage employees (as they tend to do with the costs of benefits), they will employ fewer of them or shift from employing full-time workers to part-time workers. The Lewin Group places the likely magnitude of this reduction in quantity of labor demanded at 157,300 to 366,200. The Act will also have profound effect on labor supply. The Medicaid and insurance exchange subsidies will effectively increase some household incomes and increase effective marginal tax rates. Therefore, some individuals will elect to drop out of the labor market. The CBO estimates that the net labor supply effect will be to reduce employment by approximately 800,000 by 2021.

Health Care Reform has ramifications for many other variables that could affect the macroeconomy, but they are difficult to quantify given the current state of knowledge. Mentioned earlier was the interminable debate about the impact of Health Care Reform on health care costs, an issue unlikely to be resolved anytime soon. There are also questions about the business and state government administrative costs of implementing the tax and regulatory provisions. Lastly, expanded health coverage should make people healthier. Healthier people should be more likely to work, be more productive, and live longer. In the process, they should impose lower disability and workers comp expenses (but raise retirement costs). Unfortunately, little is known about the magnitude of these other effects.

Given the current state of the knowledge, however, a few things seem reasonably clear. Health Care Reform is likely to have a relatively small effect on the macroeconomy. But, it is more likely to be a modest negative than modest positive impact. Which brings us back to the Jung and Tran study. If the effect of Health Care Reform is to effectively “kill” some jobs but make many more people better off, is that necessarily a bad thing?

Source: Bureau of Economic Analysis, Regional Economic Information System

Better yet, when adjustments are made for differences in the cost-of-living using a new regional price parity index, it bests the U.S. by almost 10% and even manages to inch past Virginia with $43,449 compared to $43,406.

Source: Bureau of Economic Analysis, Regional Economic Information System and Aten, Figueroa, and Martin (2011)

At the beginning of the period, this convergence reflected Roanoke’s growth as a manufacturing center and regional transportation hub as well as the same rising tides that have lifted boats throughout the southeast. But, more recently, the causes have been varied.  As the region began to lose some of its industrial luster, the services sector gradually picked up much of the slack and the economy became more diversified.  Another factor is the much slower population growth of the Roanoke metro area compared to the rest of the U.S. and Virginia in the last three decades. 

Source: Bureau of Economic Analysis, Regional Economic Information System

The population growth has been uneven among age groups, with younger adult cohorts more likely to migrate for education, employment, and lifestyle reasons at the same time that the region attracts retirees because of its natural amenities, low cost-of-living and excellent medical services. This continued migration pattern combined with aging-in-place baby boomers has produced a relatively much larger senior and near-retirement population and much smaller young-adult population than Virginia as a whole.

Source: U.S. Census Bureau, 2010 Census

These demographics are reflected in personal income statistics.  Transfer payments as a percentage of total personal income have grown at a faster clip than elsewhere and now constitute almost 20 percent, compared to 18 percent for the U.S. and just 13 percent for Virginia.

Source: Bureau of Economic Analysis, Regional Economic Information System

The key factor in the growth of transfer payments, particularly over the last 10 years, are government medical payments for programs like Medicare and Medicare.  The recent recession has also created a recent spurt in retirement, disability, and public assistance transfers.

Source: Bureau of Economic Analysis, Regional Economic Information System

The enormous growth in medical transfer payments helps to explain some industrial restructuring that is occurring in the Roanoke region. As people retire and age, their disposable income generally decreases with a decline in earnings but their medical spending increases as a result of greater need for medical care and eligibility for public insurance such as Medicare and Medicaid. Therefore, health services has displaced retail trade (which has remained largely flat in terms of employment) as the largest industrial sector in the region.

Source: Virginia Employment Commission, Quarterly Census of Employment and Wages

Whether the continued upward trajectory in per capita income is sustainable is questionable.  Federal entitlements cuts are increasingly eyed as key to federal deficit reduction efforts, and the Affordable Care Act tasks government agencies with finding ways to reduce spiraling health care costs.  Moreover, the continued attrition of young adults from the workforce could erode the economic competitiveness of the region. On the other hand, economic and population growth are not the same as economic development. Indeed, one recent study found that slow-growing counties in non-metropolitan areas tend to prosper more than fast-growing counties.  But, more about that later. 

Source: Health Resources and Services Administration, Area Resource File

A couple of things stand out.  Not surprisingly, dentists like other health professionals are relatively more abundant in more urbanized areas.  The most rural of the continuum categories have fewer than half of the relative number of dentists as the larger metro area categories.  On the other hand, the disparities for dentists in private practice are lower.  These dentists are more responsive to local demand characteristics.

Part of the reason for the lower relative number of private practitioners in more rural areas is the existence of speciality care.  Relatively few dental specialists (e.g., orthodontists, oral surgeons, periodontists, endodontists) operate in rural markets because they must draw from a much wider market diameter to maintain a profitable practice. It makes good business sense for them to locate in more centralized urban locations.  Even after accounting for these specialists, there is still a sizable disparity.  A large reason for the remaining difference is the tendency of dentists like other professionals to locate in commercial areas.  More rural counties have fewer and smaller commercial activity centers.

Source: Health Resources and Services Administration, Area Resource File

Regional dentist disparities have grown over the previous decade for both professionally active and private practice dentists with large metro counties gaining the most dentists on a per capita basis.  Only one rural continuum category (8=”Completely rural or less than 2,500 urban population, adjacent to a metro area”) actually saw a slight decrease in dentists.

 

 

Source: Health Resources and Services Administration, Area Resource File

These disparities are likely to grow worse before they become better.  Non-metro counties, particularly those down the rural-urban continuum, have a much higher percentage of dentists at retirement age (65+ years) and near retirement age (55-64 years) and proportionally few young dentists.

Source: Health Resources and Services Administration, Area Resource File

This pattern may be partly related to changing graduate locational preferences. Recent cohorts of dental school graduates have indicated a strong preference for more urban or suburban practice locations. For instance, only 5.2 percent of recent graduating seniors stated that they intend to practice in areas with fewer than 10,000 residents (Okwuje, Ifie, Eugene Anderson, and Richard W. Valachovic. 2009.  Annual ADEA survey of dental school seniors: 2008 graduating class Journal of Dental Education 73, 8: 1009-1032).  If this trend continues, the price of dental care will need to increase in order to attract more dentists to rural areas absent any policy intervention.

Since the proposed highway would require no local match, one can certainly understand the attraction of a gigantic public works project like this one, especially during these recessionary times. If it ever comes to fruition decades from now (assuming that there aren’t revolutionary technology developments in the transportation industry like travel pods), it would temporarily pump hundreds of millions in construction monies into the area and create hundreds of jobs, though many of the jobs would be filled by non-resident workers for outside contractors. Once the highway opened, it would have a marginal impact on local employment. You’d see some rearranging of the economic geography with retail establishments clustering closer to highway exits. You’d see more residential sprawl. For an investment of $1 billion or so, the affected counties might experience a net impact of a few hundred permanent jobs, mostly in low paying service and retail trade sectors.

Another economic development dead end

Why? New highways and expanded highways have their largest economic impacts where existing capacity bottlenecks and agglomeration economies exist. But, let’s face it: Route 220, which runs in the direction of the proposed corridor is not experiencing any bottlenecks. It’s a lightly traveled thoroughfare. When you get past Rawlings, MD, you can often drive for miles without encountering an oncoming car. Thus, a new highway would have very small total user benefits. That’s why Wilbur Smith Associates found that similar highways built in lightly populated areas as part of the Appalachian Highway System have a negative ROI. We’ve known these things for decades. Former ARC Executive Director, Ralph Widner, who oversaw the planning and construction of much of the ARC highway system acknowledged the mistake years later in a pensive 1990 article in Economic Development Quarterly in which he faulted the ARC for placing too little emphasis on developing human resources.

When the numbers don’t add up, expect the proponents to reach elsewhere for support. They’ll tout the improved highway safety and potential for reduced accidents (without acknowledging the increased pollutants and deleterious effects on, for example, asthmatics). They’ll assert that it will improve national defense, citizen evacuation, and police mobilization (without acknowledging that it improves criminal and terrorist movement and is associated with increased crime as well). They’ll hold aloft a few advocacy studies with poor research designs purporting to show how the areas will thrive economically as a result of the new asphalt. They’ll argue that the Marcellus shale discovery changes the entire economic rationale.

Who are the biggest losers in this economic development equation? First, the local public who fall for yet another economic development whopper, and lose valuable time in developing worthwhile economic development projects created through publicly engaged planning which focuses on the area’s assets, including human and natural resources. Second, everything else. The proposed corridor would cut through another fairly intact forest area, inducing a pattern of fragmentation that will render an entire swath of wilderness reaching several miles in each direction useless as an environmental asset, devastating ecological services, and destroying biodiversity.

A terrible thing to waste

Ezekial 38:20 warned us of what a wrathful god could do:

So that the fishes of the sea, and the fowls of the heaven, and the beasts of the field, and all creeping things that creep upon the earth, and all the men that are upon the face of the earth, shall shake at my presence, and the mountains shall be thrown down, and the steep places shall fall, and every wall shall fall to the ground.

Turns out that we are quite capable of doing ourselves in without any heavenly ire.

That’s gone now. In its stead we have a hyperprocessed Madison Avenue product. It’s still vaguely rural or rather ex-urban but there’s no discernable place. It’s been deracinated. Also, no more drinking and carousing. The forgetable themes seem to be chosen by focus groups and increasingly celebrate different aspects of politically correct consumerism. The melodies are often recycled from older songs and given a pop beat. A procession of perfect blonde twenty-something singer-models strut around in music videos to sexually titillate. In sum, it’s been so thoroughly mainstreamed that it’s practically been absorbed into the global monoculture.

Therefore, it was pleasure to see George Jones in concert last night at the Charlottesville Pavillion. Simple alliterative name. Two syllables. The young waitress at The Nook couldn’t fathom who was performing that evening: “Just some old guy from the 70s.” Seventy-eight years old in September to be precise. He sported a paunch. He missed the high notes.

But, he lived the lyrics that he wrote and the songs are a spontaneous reflection on the challenges and passions of life. Here in the real world.

Or, as he tells it in “The Grand Tour”

Step right up, come on in
If you’d like to take the grand tour
. . .
I have nothing here to sell you.
Just some things that I will tell you.

Ladies and Gentleman, Mr. George Jones.

Unfashionably late and overhyped, again.

Bottom line. Not only is there light at the end of the tunnel, but we’re emerging from the tunnel. However, it’s going to take some time to adapt to the sunlight after nineteen months in the cave.

And, for accuracy’s sake, we should remember that it’s a panel of experts at the National Bureau of Economic Research that calls the troughs and peaks of business cycles, not Newsweek or anybody else. They use a dashboard of economic indicators and gut judgment. So, a few consecutive quarters of robust Gross Domestic Product growth followed by anemic growth and continued job losses do not mean that the recession is over. Consequently, it may be years before any “official” declaration is made, if a declaration is warranted.

The two states have followed two different public policy paths: California based on a higher tax, higher public service, higher land use regulation, and high tech model and Texas on a low-tax, low public service, no land use regulation, and natural resource (energy and agriculture) model. Both states, however, have experienced high rates of immigration, mainly from Latin America. The article predicts that the current California situation, which has cyclical, structural, and demographic roots will spread to Texas and the rest of the nation.

How bad are things in California? Well, so bad that even free-market guru Arthur Laffer has decamped from cosmopolitan Malibu to backwoods Tennessee. He attributed his move not to the usual Tiebout sorting but to some universal truisms revealed from spurious correlations of tax rates and economic welfare evidently computed on the back of a napkin.

All in all, the article reminds me of a recent Pat Buchanan jeremiad, the difference being that The Economist predictably applauds the transformation of America into a facsimile of their wonderworld of a newly amalgamated Houston and LA.

Pat says 'Don't Mex with Texas'

Well they should. The country may become a vast wasteland of people, sprawling asphalt, and hot summer nights. But, from The Economist’s vantage point change and calamity represent opportunity. Yep, thar’s gold in them thar hills.

“The Recovery Act wasn’t designed to restore the economy to full health on its own, but to provide the boost necessary to stop the free fall. It was designed to spur demand and get people spending again and cushion those who had borne the brunt of the crisis. And it was designed to save jobs and create new ones. In a little over one hundred days, this Recovery Act has worked as intended.”

But, former chairman of the Council of Economic Advisers, Edward Lazear, offered a different and, in my opinion, more accurate take on the economic stimulus in an op-ed piece in the Wall Street Journal earlier in the week.

“By June 26, about $56 billion was spent on the stimulus . . . A large proportion of that actually reflects mere transfers from the federal government to state governments, so the amount that has gotten into the economy is significantly lower. . . But even if we call all of the $56 billion spending, it’s still not enough to make a meaningful impact. By this point of the year in 2008, the Bush administration’s tax-rebates got out about $80 billion. The Bush administration’s tax rebates had a positive but hardly dramatic effect on the economy.”

So, to paraphrase Rep. Pete King, “let’s knock out the econobabble.” What honestly has the Obama/Congressional fiscal package achieved? Here’s my take:

(1) It has validated the Principles of Macroeconomics lesson that fiscal policy is notoriously difficult to use as a countercyclical tool because of the large lags in legislative decision-making, execution, and spending of funds.
(2) It has shown that the relief package had serious design flaws from the beginning. The bulk of the impact was never designed to occur when it was most needed. Instead, it would ramp up the economy after most macroeconomic forecasting models forecasted that recovery would already be underway without an economic stimulus. Its long term residual effect will be to crowd out private investment, much as the Congressional Budget Office predicted.
(3) It has demonstrated that personal income or payroll tax cuts are a poor mechanism for stimulating the economy during severe downturns. All of the tax cuts were predictably saved by consumers.
(4) It has illustrated the counterproductive effects of certain incentives and long delays in implementing some aspects of the package. For instance, many renewable energy investment projects that would have occurred in the absence of fiscal stimulus projects are being placed on hold until the economic incentives kick in.
(5) It has confirmed that this administration is not very efficient in executing economic policy. In amount and timeliness of stimulus delivered and actual impact, even the Bush tax cuts worked better. The Obama administration has not delivered the funds appropriated on schedule and according to legislative intent.

Show me the money

There are some other aspects of the fiscal stimulus that deserve scrutiny. As the Wall Street Journal recently reported, regional distribution of fiscal stimulus is uneven, with many economically hard-hit states receiving proportionally less than better off states. And, the well worn paths that federal dollars follow mean that the stimulus funds are disbursed according to a partisan geography.

Moreover, some of the programs funded by the stimulus program are clearly economically wasteful and even directly contradict administration policy in other areas. For instance, Senator Byrd’s environmentally destructive carbon creating economic boondoggle, Corridor H, was initially awarded $21 million from the stimulus package.

So, if Mr. Obama’s claim of credit is not credible and the trickle of fiscal stimulus has done little to boost the economy, who or what should receive accolades for the obvious stabilization of financial markets and the economy? To some extent, the mere changing of administrations and more policy activism has served to boost consumer confidence, even if that has not yet resulted in much additional consumer spending. To some small extent, the fiscal stimulus is having a beneficial impact. For instance, some parts of the funds released so far have softened the blow for states of next fiscal year revenue shortfalls. Moreover, aid to low-income workers and the unemployment has had salutary effects.

But, the real force behind the slow turnaround has been the expenditure of TARP funds and actions of the Federal Reserve to shore up the financial system and inject liquidity in unprecedented ways.

Surely, Mr. Obama must realize that real leadership requires giving credit where credit is due.

“When you consider that the federal government is about $11 trillion in debt, and we’re borrowing more to spend more … it defies any sensible economic policy any of us ever learned through college…It defies economy practices and principles that tell ya ‘you gotta quit digging that hole when you are in that financial hole.’”

Of course, any beer sodden undergraduate could tell you that Keynesian economics, the science behind the ‘fiscal stimulus’, is indeed taught on most public and private college campuses these days. It’s bundled into a course called ‘principles of macroeconomics.’ You’ll usually find it as a core requirement or elective in a business major or a stand-alone economics program. Some dissident schools teach Keynesianism as heterodox thinking (e.g., Hillsdale College, Grove City College), but nobody imagines that the highly influential school of economic thought doesn’t exist.

Math is hard.

So, could the explanation for Governor Palin’s comments be that the colleges she attended never offered this course? According to the newsmedia, she attended three community colleges and a four year university over a five year period: Hawaii Pacific College, North Idaho College, Matanuska-Susitna College, and University of Idaho. A quick check of the first step in her academic odyssey, Hawaii Pacific College, shows that they are teaching 12 sections of the course in Fall 2009. So, it is probably reasonable to assume that they were offering the course way back in the late ‘80s too.

Did Palin ever sit through a macro principles course? Hard to say without those college transcripts, but it seems doubtful. Too much math.