Will Obamacare stimulate entrepreneurs?

Those familiar with Betteridge's law of headlines already know the answer to this question. Nevertheless, there are those who are convinced that making health insurance near-universal will stimulate entrepreneurial talent. Indeed, some envision a boom in entrepreneurship as would-be business owners quit their soul-crushing corporate jobs to go to work for themselves.

Chalk it up to my skeptical gene, but there's plenty of reasons to question the likelihood of this rosy scenario.[1] First, even enthusiasts for Obamacare's entrepreneur-unleashing potential concede that the Massachusetts experience offers some sobering lessons. It expanded coverage, but also increased the cost of that coverage for small businesses in the process.

Why? Because the Bay State's law prioritized expanding access over controlling costs. Additionally, the pool of previously uninsured people were in worse health than planners had assumed. When insurers added them to their rolls, it increased premiums across the board. The results for the federal law are likely to be even worse. Not only did it also prioritize access over costs; it offers much weaker incentives (read: smaller penalties) for not obtaining coverage under the individual mandate.

Second, the experience from abroad does little to lend support to the enthusiasts' hypothesis. Edward Prescott, co-winner of the 2004 Nobel Prize in Economics, has observed that "entrepreneurship is much lower in Europe." Certainly in health care, the U.S. currently is a world leader in medical innovation, producing in recent decades more leading diagnostic, therapeutic and pharmaceutical innovations than the EU and Switzerland combined. Likewise, more than 60 percent of Nobel Prizes in medicine and physiology awarded since 1948 have gone to Americans. New pharmaceuticals, as a rough approximation, are introduced one to two years earlier in the U.S. than elsewhere. If universal health coverage truly had a demonstrable impact on the willingness to take risks, one would not expect the U.S. to outpace its OECD competitors (all of which have had national health systems for decades).

Admittedly, this American advantage in entrepreneurship and medical care innovation cannot be laid solely at the feet of our competitors having adopted national health systems. High taxes rates and poorly designed regulations overall are to blame. Indeed, Prescott calculates that much of the 30 percent decline in work hours experienced since the 1950's in Western European countries such as France and Germany can be attributed to high tax rates on labor income and consumption. In contrast, the average hours of work for American and Japanese workers is nearly identical due to comparable tax rates on earnings and consumption.

But the U.S. is not that far behind its European counterparts in terms of the share of its economy devoted to government spending in general or health spending in particular. Obamacare will do much to eradicate any residual gap.

In fact, Boston University economist Laurence Kotlikoff estimates that over the next half century, the increase in tax-financed health spending as a percent of GDP will be 2-3 times higher in the U.S. compared to its G-7 peers.[2]  This will entirely eradicate the lower-tax margin of advantage that the U.S. currently enjoys over countries such as Germany and the UK. And at the risk of sounding like a broken record, let me repeat a factoid that anyone worrying about America's future should know: according to the CBO's latest long-term projections, the size of the federal government is expected to grow by 48 percent over the next 75 years. Every penny of that increase can be attributed to growth in spending on tax-financed health entitlements.[3]

Which leads to the third reason entrepreneurial activity is unlikely to be stimulated by Obamacare: the law's hundreds of billions in new revenues will disproportionately result from taxing the successful. Intuitively, it seems clear that the gains to entrepreneurs from creating affordable health coverage for individuals and small firms will pale in comparison to the gargantuan additional tax burdens they will be asked to bear under Obamacare.

The 0.9 percent additional payroll tax for Medicare and unprecedented new 3.8 percent Medicare tax on investment income will have disproportionately large effects on the very entrepreneurs whose talents we should be rewarding rather than punishing. Similarly, there is a very real risk that the penalty structure to enforce the employer mandate under Obamacare may have very perverse incentives for firms below 30 workers and 50 workers to stay below these thresholds.

My goal isn't to argue to Obamacare will guarantee soul-crushing dependency on those who benefit from it. But we ought to be very mindful of the enormous risk the nation is taking as it steadily chips away at incentives to work. Historically, the U.S. margin of advantage in earnings per worker has been so large that it has allowed us to finance higher amounts of per capita spending on health care than our peers even while retaining an advantage over them in terms of the amount of residual non-health spending per capita we have left to spend on everything else.

That margin of advantage will shrink in direction proportion to the disincentives to work that will result if the president attains his aspiration for us to become more like other European social welfare states. Entrepreneurs themselves appear to have very mixed feelings about whether Obamacare will be a net positive to the ability of their businesses to grow and thrive. Even for the poor, there is a risk of creating poverty traps for those who rely on government-provided assistance for virtually all their necessities of life.

If we're truly interested in assisting entrepreneurs, we would be moving in the opposite direction of Obamacare. An "entrepreneurs" health policy freed of the many mandates imposed by various states-a problem that surely will grow worse under the law since its rules give states the authority to tweak Obamacare's required minimum benefits package-and that could be sold across state lines would be far more helpful to the average entrepreneur. But such a solution would require Uncle Sam to keep his mitts off the health care sector rather than getting further entangled in it. From where I sit, the odds of that happening seem no better than my chances of winning the next Powerball jack-pot.

Update 1

Here's some hard empirical evidence consistent with my claims about the potential adverse effects of Obamacare: "At the federal level, high taxes and higher uncertainty about taxes are undoubtedly inhibiting entrepreneurship, but to what degree is unknown. The dominant factor may be new regulations on labor. The passage of the Affordable Care Act is creating a sweeping alteration of the regulatory environment that directly changes how employers engage their workforces, and it will be some time until those changes are understood by employers or scholars."

Update 2

I ran across an interesting dissertation done on this very topic, making use of data from Massachusetts: "The author examines the impact of the Massachusetts' health reform law of 2006, Chapter 58 of the Acts of 2006: An Act Providing Access to Affordable, Quality, Accountable Health Care , which uses both individual and employer insurance-mandates on Entrepreneurship in the formation of new organizations. Previous studies have employed policy analysis and simulation modeling to the impact of theoretical mandatory health insurance regimes on small business, but the contributions of this study are that it is the first to explore the impact of a real world health insurance system or policy change on the entrepreneur and to do so empirically, in real time and within the most natural economic geography, a single MSA or Labor Market Area. It therefore tests whether a given social policy facilitates or impedes the formation of new organizations, and therefore, encourages or discourages employment growth via new organization formation. The author finds significant and persistent suppression of new organization formation when controlling for organization size, sector and owner gender, and limited evidence of geographic displacement of firms across the New Hampshire border. While theory suggests mandatory insurance should reduce insurance costs and improve worker productivity, the author finds that the regulation has no significant impact on worker productivity and limited evidence of increases in insurance costs, and estimates the expected cost in terms of lost employment, sales to the local economy and tax revenue to in the majority of cases exceed the benefit.

Author: M. S. Jackson; Year: 2008; Title: Mulling over Massachusetts: Health insurance mandates and entrepreneurs; University: George Mason University

Footnotes

[1] Truth in advertising: many decades ago I worked for David Stockman, but it was before he began creating rosy scenarios at OMB.

[2] Kotlikoff's estimates were made in late 2005 before Obamacare was even on the horizon. Obamacare hypothetically will produce deep savings in Medicare, but because of the devastating effects these cuts are likely to have on access to care, both the Medicare actuary and CBO have developed an alternative fiscal scenario that assumes Congress will find some way to avert these cuts (just as it has repeatedly for more than a decade with massive cuts in Medicare physician fees that were technically required under the Balanced Budget Act of 1997).  The alternative fiscal scenario shows no appreciable change in the long-term spending path for Medicare; thus there is no reason to expect that comparative U.S. performance will be appreciably different than originally laid out in 2005.

[3] These entitlements include Medicare, Medicaid and the new exchange subsidies that are supposed to be implemented under Obamacare starting in 2014.

 

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