Chicago economist Casey Mulligan gives us some economic derp in the form of a prediction (prederption?) of a recession in 2014: "Don't be surprised if the second redistribution wave coincides with a recessionary double-dip." Yes, he used the qualifier of "don't be surprised if," but as far as econospeak is concerned, this is the English idiomatic equivalent of "bank on it." What's the cause of the recession? Obamacare, of course.
In his op-ed piece, Mulligan writes a lot of very strange sentences that I just don't get. I don't want to use this post to nit-pick the article, but here are a couple of selected head-scratchers: 1) "The president's health-insurance plan forces those who hire, work and produce to pay full price for health care, while creating generous discounts for practically everyone else;" 2) "This second redistributionist wave of the Obama era will follow a first wave of tax hikes, additional unemployment benefits, food-stamp expansions, waived work requirements for welfare benefits, etc. These measures were supposed to be temporary, intended to help people cope with the recession. The recession officially ended in mid-2009, but many of the administration's measures continue."
1) Apparently, Mulligan is unaware that: 1) it is possible to both have a job and not have health insurance; and 2) health insurance benefits are actually discounted due to the fact that they're nontaxable (in fact, those without health insurance are actually paying for the nontaxable discount that those with health insurance receive [I'm also assuming that by health care, Mulligan really means health insurance]).
2) Either Mulligan is applauding the administration's economic efforts, or he's being very disingenuous. I'm going to go with the latter. More could be said, but this is an old line that has been refuted a bunch of times and just won't die.
But let's move away from the nitpicking and get to the real substance of the article. Why is Mulligan predicting a recession? Because the increase in the marginal tax rate caused by the Affordable Care Act will discourage working to such a degree that the labor supply will shrink to the point where US economic output will decline for at least two successive quarters. The marginal tax rate is calculated by combining both taxes and forgone benefits (such as a subsidy to help you buy health insurance).
Unfortunately, I was unable to access Mulligan's academic paper on this subject, so I don't know exactly how he calculated the marginal tax rate. However, I would imagine that since he uses a population-weighted average for his calculation, that this has the effect of creating an illusion of forgone government benefits for an individual. For example, one does not just choose to get unemployment benefits for 99 weeks. A fairly specific set of circumstances has to arise for that to happen.
But let's assume that Mulligan's calculations are correct. What does economic theory say will happen? Well, given that this is economics, we just don't know. Two effects could take hold: the income effect or the substitution effect. If the income effect takes hold, then workers will respond to their drop in income by working more (resulting in an increase in the labor supply). If the substitution effect takes hold, then workers will respond by substituting labor for leisure (resulting in a decrease in the labor supply). Mulligan seems to be banking on the latter. And he's not entirely wrong.
When the CBO studies the effects from changes in after-tax income on labor supply, they generally assume that the substitution effect is greater than the income effect. See here for a truly awesome explanation on their assumptions. Unfortunately, in their examples, they only look at the effects that explicit taxes have on labor supply; not implicit taxes in the form of forgone subsidies. Fortunately, they estimated the effects of the ACA on the supply of labor. Their conclusion? The amount of labor used in the economy will be reduced by 0.5 percent - primarily through the means of workers choosing to reduce their supply of labor. And that's not necessarily a bad thing. A lot of the decrease in the labor supply will be explained by people whom have the means to live without working but are forced to work because that is the only way that they can obtain health insurance. And it's a safe bet that population growth and labor productivity growth will more than make up for this decrease in labor supply, offsetting any possibility of a recession.
Near the end of his piece, Mulligan states that "advocates for the recent program expansions have failed to acknowledge that redistribution necessarily increases marginal tax rates and contracts the labor market." I don't think that this is the case. I think that advocates have acknowledged this fact. In fact, here's a paper where advocates do acknowledge that fact. We just put that fact in the context of other facts and conclude that it's really not that big of a deal - let alone recessionary.
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