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August 5, 2014

Expanding Medicaid will hurt Indiana’s families, lower income and reduce jobs

By J. Scott Moody, Chief Executive Officer and Chief Economist

Introduction

Many of Indiana’s policymakers have fallen for the siren call of Medicaid expansion because it goes by another name—“Healthy Indiana Plan 2.0.” But a renamed Medicaid expansion is just as bad as Medicaid expansion under the provisions of the Affordable Care Act, commonly referred to as “Obamacare.” At first glance, expanding Indiana’s Medicaid program looks like free money since the federal government has promised to pick up the tab for the first three years. This could not be further from the truth.

In reality, nothing is free. Indiana, like many of its neighboring states, will become increasingly dependent on Medicaid and pay a steep economic price as public sector spending, via transfers (Social Security, Medicare, and Medicaid) and government compensation, crowds out the private sector (see Appendix for details). Chart 1 shows this crowd-out over time with Indiana’s private sector having already been reduced by 23.8 percent to 70.6 percent in 2013 from 92.7 percent in 1929. Indiana’s private sector is now only the 20th largest in the county (see Table 1).

In this report, the first in a series, we will consider how Medicaid expansion will reverse the recent post-recession growth in Indiana’s private sector, which will directly affect the pocketbooks of Indiana families via lower income and fewer jobs.

Chart 1 Indiana's Projected Private Sector Shrinks under Obamacare's Medicaid Expansion 1929 to 2013

Impact of Obamacare’s Expansion of Medicaid

Indiana, like many of its neighboring states, will become increasingly dependent on Medicaid and pay a steep economic price as public sector spending, via transfers (Social Security, Medicare, and Medicaid) and government compensation, crowds out the private sector (see Appendix for details). Since only the private sector can create new income and wealth in an economy, Obamacare’s expansion of Medicaid will come at the expense of long-run economic growth.

Chart 1 shows this crowd-out over time with Indiana’s private sector having already been reduced by 23.8 percent to 70.6 percent in 2013 from 92.7 percent in 1929. Indiana’s private sector is now only the 20th largest in the county (see Table 1).

Table 1 Indiana's Private Sector Ranking Falls 7 Spots Due to Obamacare's Medicaid Expansion 2013

For instance, while cost estimates vary, there is a cost to Obamacare’s expansion of Medicaid that will have to be paid for by someone. This will likely come in the form of higher taxes and/or borrowing at the federal level for the time being, leaving less money in the pockets of Indiana residents and businesses, and reducing their ability to invest for the future.

Consider that over the next ten years the federal budget deficit is projected to grow 49 percent to $793 billion in 2024, from $531 billion in 2014. This chronic deficit is unsustainable given that in 2024 the interest payment on the national debt ($876 billion) is projected to exceed the budget deficit ($793 billion)—meaning Uncle Sam will be borrowing just to pay the interest on the debt! [1]

According to estimates from Indiana Governor Mike Pence, the expansion of Medicaid will boost transfer spending, mostly from Uncle Sam, by $2.9 billion in fiscal year (FY) 2016 (its first full year). [2] If this occurred in 2013, that additional public spending will crowd out and reduce the private sector by up to 1.14 percentage points. More troubling, as shown in Chart 1, Medicaid expansion will reverse the growth in the private sector following the “Great Recession” and put it back on a downward trajectory.

Indiana’s policymakers should be very concerned about this crowding out of the private sector by government spending. As Chart 2 reveals, there is a significant correlation between the size of the private sector and household income. As a consequence of Obamacare’s expansion of Medicaid, Indiana’s taxpayers will pay a steep economic price with lower incomes and fewer jobs.

Table 2

Table 2 shows the negative economic impact of Obamacare’s expansion of Medicaid on the average Indiana household. Overall, Indiana’s long-run economic growth will suffer; the result is a downshifting in personal income growth of $9.5 billion. This downshifting will manifest itself in one of two ways—lower household income for everyone or fewer jobs, though reality will lie somewhere in between. The economic cost can be calculated in two ways:

• $3,721 less personal income for all households with no private sector job loss; or,

• No change in personal income but the loss of 176,928 private sector jobs.

Table 1 and Chart 2 show how Indiana’s private sector would lose ground relative to the other states. The Hoosier State’s ranking would fall from having the 20th largest private sector in the country to the 27th largest—all else being equal.

Conclusion

In conclusion, Obamacare’s expansion of Medicaid is not “free” at all, as there will be serious economic repercussions to the long-term health of Indiana’s economy, and all Hoosiers will be poorer as a result. Policymakers should carefully reconsider expanding Medicaid. As our research shows, the answer to helping more Indiana families is not for the state to receive increased federal funding under Obamacare. Instead, Indiana should look to reduce government programs, especially federal dependency when Uncle Sam is already flat-broke. In fact, the future of Indiana’s citizens and economy depends on it.

Appendix

Personal income comes from two sources: the private sector and the public sector. The distinction between the two sectors is important because only the private sector creates new income. The public sector, in contrast, can only redistribute income through taxes and spending. More specifically, public sector spending consists of personal current transfer
receipts (Medicare, Medicaid, Social Security, etc.) and government employee compensation (federal, state, and local).

The economic loss estimates in this study are derived from the significant positive correlation between per household personal income with the private sector share of personal income for 2013 as shown in Chart 2. Put simply, the bigger the private sector, the greater per household personal income. When examining the lower 48 states, the analysis finds that, on average, a 1 percentage point decrease in the size of the private sector yields a decrease in per household income of approximately $3,273. [3]

Chart 2 Larger Private Sector Leads to Higher Income 2013

Expanding Medicaid in Indiana by $2.9 billion would change the composition of Indiana’s personal income toward public sector spending and shrink the private sector by up to 1.14 percentage points. That means in the next few years, the average household in Indiana would see their income drop by up to $3,721, or the number of jobs in the state will be reduced by 176,928. The overall loss in personal income would be up to $9.5 billion ($3,721 multiplied by 2,552,000 households).

This analysis estimates a reduction in the long-term growth in the economy and does not necessarily mean the elimination of existing household income or jobs. It does mean that future income increases and job creation will be lower than they would be in the absence of higher taxes and spending. Also, the analysis underestimates the long-term decline in the private sector that will occur because of a slower private sector growth rate.

Of course, correlation does not equal causation. Fortunately, there are two states that allow for a very strong natural experiment to better show causation—New Hampshire versus Maine. These two states are alike in many ways—geography, climatically, demographics, and culture. Yet, there is one area where the two states diverge greatly—public policy.

As shown in Chart 3, between 1929 and 1950, Maine and New Hampshire had similar per household incomes (adjusted for inflation) and private sectors (as a percent of personal income). In 1951 Maine enacted the sales tax, which led to increased public sector spending and crowded-out the private sector. Consequently, New Hampshire’s per household income began to steadily pull away from Maine.

Chart 3 New Hampshire's Larger Private Sector Leads to Higher Income versus Maine 1929 to 2013

This trend accelerated in 1969 when Maine enacted their income tax—a few years after the federal government enacted Medicaid. With this new source of revenue, Maine was able to dramatically expand its welfare system, especially Medicaid. In fact, as of FY 2010, Maine had the third highest percentage of population on Medicaid at 31 percent. [4]

This difference in public policy has resulted in dramatic differences in the size of each state’s private sector. Between 1929 and 2013, Maine’s private sector shrunk by 21.8 percent to 65.9 percent from 92.4 percent and is now only the 41st largest private sector in the country. New Hampshire, on the other hand, has seen its private sector shrink by a much smaller 15.7 percent to 76.6 percent from 90.8 percent and is now the third largest private sector in the country.

Overall, New Hampshire’s private sector in 2013 is 16.2 percent larger than Maine’s—76.6 percent and 65.9 percent respectively. Consequently, New Hampshire’s per household income is now 30 percent higher than Maine’s—$124,734 and $95,747, respectively. By taking the bait in Obamacare’s Medicaid expansion scheme, Indiana will be following Maine’s downshifted economic path rather than New Hampshire’s—and all Hoosiers will be poorer as a result.

This negative economic impact due to Obamacare’s Medicaid expansion is not unique to Indiana. This analysis has also examined expansion in New Hampshire (enacted) and in Maine (defeated).

New Hampshire’s long-run economic growth will suffer a drop in personal income of $593 million under Medicaid expansion. [5] The economic cost ranges from:
• $1,123 less personal income for all households with no private sector job loss; or,
• No change in personal income but the loss of 10,180 private sector jobs.

Maine’s long-run economic growth would suffer a drop in personal income of $1.5 billion. [6] The economic costs range from:

• $2,638 less personal income for all households with no private sector job loss; or,
• No change in personal income but the loss of 30,988 private sector jobs.

Footnotes:

[1] Congressional Budget Office, “Updated Budget Projections: 2014 to 2024,” April, 2014. http://cbo.gov/sites/default/files/cbofiles/attachments/45069-2014-04-BudgetProjections2.xlsx

[2] LoBianco, Tom, “State Budget Leaders Examine Financing for Healthy Indiana,” Post-Tribune, June 20, 2014. http://posttrib.suntimes.com/news/28208259-418/state-budget-leaders-examine-financing-for-healthy-indiana.html#.U7OGk_ldXmf

[3] Alaska and Hawaii are excluded, as is common practice in state analysis, due to their unique economic characteristics.

[4] The Henry J Kaiser Family Foundation, “State Health Facts,” Medicaid Enrollment as a Percent of Total Population. http://kff.org/medicaid/state-indicator/medicaid-enrollment-as-a-of-pop/

[5] Warcholik, Wendy, “Expanding Medicaid Will Hurt New Hampshire’s Families with Lower Income and Fewer Jobs,” New Hampshire Center for Economic Policy, February 17, 2014. http://nheconomics.org/publications/volume-2-issue-1/

[6] Moody, J. Scott, “Expanding Medicaid Will Hurt Maine’s Families with Lower Income and Fewer Jobs,” The Maine Heritage Policy Center, February 20, 2014. http://www.mainepolicy.org/2014/02/expanding-medicaid-will-hurt-maines-families-with-lower-incomes-and-fewer-jobs/

State Budget Solutions

J. Scott Moody is the Chief Executive Officer and Chief Economist at State Budget Solutions. He may be reached at jsmoody@statebudgetsolutions.org

Scott has over 17 years as a public policy economist. He is the author, co-author and editor of over 170 studies and books. He has testified twice before the House Ways and Means Committee of the U.S. Congress as well as various state legislatures. His work has appeared in Bloomberg, Forbes, CNN Money, State Tax Notes, The New York Post, Portland Press Herald, Bangor Daily News and others.

His professional experience includes positions as CEO of The Maine Heritage Policy Center, Senior Economist at The Tax Foundation and Senior Economist at The Heritage Foundation. Scott received his Bachelor of Arts in Economics from Wingate University (Wingate, N.C.). He received his Master of Arts in Economics from George Mason University (Fairfax, VA).

State Budget Solutions (SBS) is a non-partisan, non-profit, national public policy organization with the mission to change the way state and local governments do business.

SBS produces studies, articles, reports and compelling narratives about the critical issues that affect state and local budgets, including pension reform, health care and education. SBS engages state leaders, journalists and others on positive reforms aimed at improving the functionality of government.

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One Response to Study No. 2

  1. […] “The numbers in this report are truly sobering and should serve as a wakeup call to everyone in the Hoosier state,” said State Budget Solutions (SBS) CEO J. Scott Moody.   “In the last 85 years, Indiana has seen its private sector shrink considerably,” Moody continued.  “Since 1929, the private sector has shrunk from nearly 94 percent of the economy to just over 70 percent. Medicaid expansion will increase the Hoosier State’s costs and only exacerbate this troubling trend.”   But the problems with Medicaid expansion go beyond the macroeconomics of a shrinking private sector statewide. In order to keep private sector job levels stable, every household would have to take a personal income loss of over $3,700.00 per year in order to keep Indiana from shedding nearly 177,000 jobs.   “Governor Pence is letting good politics trump good policy,” said Moody. “And unfortunately, his constituents – the hardworking folks of Indiana – will be the ones to pay the price.”   To read the entire study, CLICK HERE. […]

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