Gruber Responds To Economix Critique Of Health Reform

Massachusetts health reform in general and its advocates in particular were the target of a pretty harsh critique yesterday in The New York Times’ blog, Economix.

The post, by University of Chicago Economics Professor Casey Mulligan, argued, among other things, that the U.S labor market is “in for a shock” when health reform takes full effect despite how “smoothly” things may have appeared when Massachusetts carried out its own health reforms starting in 2006. Mulligan writes:

Beginning next year, millions of Americans will be eligible for generous subsidies in the form of cash assistance to pay for their health insurance premiums and out-of-pocket health expenses pursuant to the Affordable Care Act. The subsidies will sharply reduce the financial reward to working because they will be phased out with household income.

Jonathan Gruber of MIT

Jonathan Gruber of MIT

Mulligan then goes on to trash MIT economics professor Jon Gruber, a key adviser on both state and national health reform, for his defense of the Bay State’s reform efforts:

When it comes to quantifying the new federal law’s penalty on employment, Professor Gruber and Health and Human Services are incorrect to take comfort in the Massachusetts experience since 2006. As I explained last week, the federal law’s employer penalty is more than tenfold the Massachusetts penalty. In other words, if the Massachusetts penalties pushed down workers’ wages by 16 cents an hour, the federal penalties would push them down $1.67.

Professor Gruber is also incorrect that the federal law is introducing less generous subsidies than the Massachusetts law did. Federal subsidies will be available for people laid off from their jobs, but the new Commonwealth Care subsidies in Massachusetts are not, because Commonwealth Care excludes people eligible for the Medical Security Program (a longstanding program providing health benefits to Massachusetts people receiving cash unemployment benefits).

I asked Gruber to respond to Mulligan’s critique. Here, unedited, is what he sent over via email:

Problems with Mulligan argument:

1) He cites as supporting evidence a 1994 article that referred to a completely different policy

2) He ignores the fact that the disincentives to income increase in MA are massively larger than in the federal program. When individuals cross the 300% of poverty threshold in MA they see a huge reduction in subsidies and increase in their out of pocket insurance payments and this dwarfs anything in the federal law.

3) He tries to argue that MA is irrelevant because the unemployed are on the MSP [Medical Security Program].  But the MSP is an income-targeted program as well, which has exactly the same incentives! There is a waiver of costs below 150% of poverty, and eligibility ends at 400% of poverty.  Moreover, only a minority of uninsured are on the MSP since they have to quality for UI.

4) He is correct that the employer penalty is much larger at the federal level.  This will cause a reduction in the wages for those whose employers pay the penalty.  But that is offset by the higher demand for insurance among the mandated population, as argued in the recent paper by Kolstad and Kowalski.  They find that workers, in the face of the mandate, demand insurance from their employers and that employers are able to pay lower wages as a result.  This offsets the employer cost and there is no reduction in employment.

5) Finally, he ignores the large body of economic research which shows that there are not strong responses on the supply side to these kind of incentives.  For example, work on the EITC has repeatedly shown that the high marginal tax rates put in place by that program don’t distort labor supply by low income workers.  Given this research, it seems that we are better guided by the Massachusetts example than by a theoretical presumption of major labor market distortions.

Touche.

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