The Affordable Care Act and the Economy

While our focus here at the PAGE program is on areas such as innovation, education, manufacturing, immigration, and other areas that help America compete in an increasingly globalized economy, health care spending accounts for 18% of this country’s economic output and we would be remiss if we did not briefly examine the Affordable Care Act’s effect on the economy, now that the Supreme Court has ruled on the law and declared that it can be implemented essentially in its entirety.
It terms of the overall economic effect, the ACA will expand coverage to tens of millions of people (the White House estimates 32 million) which will naturally increase demand for health-services and boost health expenditures like hospital visits and medications. This increased spending should fuel growth, at least in the near-term. The legislation is financed partly by additional taxes, especially on higher-earners and their investment income. The tax hit could stifle consumer spending, offsetting the jump in health expenditures. Then again, Americans with higher incomes tend to save more cash, so it’s also reasonable to think taxing them could divert money from savings accounts to spending — boosting the economy. The overall macroeconomic effect will most likely not be discerned as positive, negative or neutral for some time.
Regarding the economic topic of the day, job creation, the effect of the legislation again, is hard to read. As noted above, spending in the health sector is likely to increase if for no other reason than tens of millions more consumers in the market so it is not unreasonable to assume jobs will be created in the health sector. On the other hand, there is much anecdotal evidence (though little empirical, since the Act’s main provisions are not yet in effect) of businesses downsizing or putting off hiring because of the new employer-provided insurance regulations. The incentive and regulation structure for businesses is complex though, with varying rules and subsidies depending on the size and nature of the business so it is hard to forecast how hiring in the private sector at-large will change if at all.
The mostly hotly debated economic factor is how the ACA will affect the deficit. As President Obama reminds anyone who will listen, the Congressional Budget Office scored the legislation as a net deficit reducer (to the tune of $140 billion) over the next ten years although conservatives have quibbled with how the bill was scored. The Court ruled on June 28th that the Federal government cannot force the states to expand Medicaid as the bill had originally intended (specifically, the Federal government could revoke a state’s entire allocation of Medicaid funding if it did not expand Medicaid coverage) so it is possible that conservative governors will not move ahead with expanding Medicaid since they are no longer compelled to. This, no doubt, would be a huge factor in both Federal and state budgets.
Of course, Mitt Romney, Paul Ryan, and the Republicans in Congress have vowed to repeal the Act as soon as they have the chance and should President Obama stay in office, the law will not be fully in effect until 2014 at least. As a result, at this point, the only thing the American people can be sure of is that they and their economy will be affected in some way, simply due to the sweeping nature of the law and the outsized role health spending plays in our economy.
Posted by: Sean Norris

Sources: The New York Times, The Wall Street Journal, The Congressional Budget Office,

Photo Credit: Protect the Law courtesy of flickr user Brett Davis


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