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November 13, 2014

Expanding Medicaid Will Hurt Tennessee Families, Lower Income, and Reduce Jobs

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

Introduction

One might believe that expanding Tennessee’s Medicaid program will not cost the state a dime, since the federal government has promised to pay for the expanded program for the first three years. Perhaps that is why some of Tennessee’s policymakers are considering Medicaid expansion under the provisions of the Affordable Care Act, commonly referred to as “Obamacare.” Unfortunately, this could not be further from the truth.

The old adage, “There’s no such thing as a free lunch,” certainly applies here. Tennessee would become increasingly dependent on Medicaid and pay a steep economic price as public sector spending, via transfers and government compensation, crowds out the private sector. Chart 1 reveals this crowd-out over time with Tennessee’s private sector already diminished from 92.1% in 1929 to 68.6% in 2013. That’s an astounding 25.5% drop. Tennessee’s private sector is now only the 33rd largest in the county.

In this report, the third in a series, we will show how Medicaid expansion will reverse the recent post-recession growth in Tennessee’s private sector, and how that will directly affect the pocketbooks of Tennessee’s families via lower income and fewer jobs. The economic cost will range from $1,148 less personal income for all households or the loss of 67,433 private sector jobs.

Tennessee, unlike the majority of its neighboring states, would become increasingly dependent on Medicaid and pay a steep economic price.

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

The Economic Principles In Play

More public sector spending, as prescribed by Medicaid expansion, will ultimately make Tennessee less competitive. This new spending is not really “new” at all. Expansion funding would come via transfers (Social Security, Medicare, and Medicaid) and government compensation and result in crowding out the private sector (see Appendix for details).

Pull Quote 1 on TN Private Sector

Contrary to so-called Keynesian multiplier analysis, only the private sector can generate new income and wealth in an economy. Government spending, on the other, is the redistribution income first extracted by taxes. Yet, the very process of redistribution comes at a very high economic cost. Prominent Harvard economist Martin Feldstein states:

“The appropriate size and role of government depend on the deadweight burden caused by incremental transfers of funds from the private sector. The magnitude of that burden depends on the increases in tax rates required to raise incremental revenue and on the deadweight loss that results from higher tax rates … recent econometric work implies that the deadweight burden caused by incremental taxation (the marginal excess burden) may exceed one dollar per one dollar of revenue raised, making the cost of incremental government spending more than two dollars for each dollar of government spending.” [emphasis added] [1]

Though estimates vary, Obamacare’s expansion of Medicaid costs a significant amount of money. As the bill increases, we can expect to see higher taxes and borrowing at the federal level. This leaves less money in the pockets of Tennesseans and businesses, and reduces their ability to invest for the future.

What is more troubling is the projected growth of the federal budget deficit over the next 10 years: an expected 34% increase —from $537 billion in 2014 to $722 billion in 2024 (Chart 2). This growing deficit is unsustainable. In 2024 the interest payment on the national debt ($799 billion) is projected to exceed the budget deficit ($722 billion). Simply put, this means that the federal government will have to borrow money just to pay the interest on the debt.[2]

Chart 2 Interest Payments Exceed Budget Deficit in 2024 TN

This is an unsustainable federal situation that could have been delayed if more states had the fortitude to resist Obamacare’s Medicaid expansion. If every state expands Medicaid, the federal deficit will be $813 billion larger by 2022, relative to no Medicaid expansion (Chart 3). [3] Of course, since this money is all borrowed, the federal government will also pay an additional $76 billion in interest payments (at an interest rate of 2.8%).

Chart 3 Medicaid Spending Soars under Obamacare's Medicaid Expansion 2013 to 2022 TN

What This Means For Tennessee

Medicaid expansion will have a large, negative economic impact in Tennessee. According to estimates from Governor Haslam, the expansion of Medicaid will boost transfer spending, mostly from the federal government, by $1.4 billion. If this occurred in 2013, that additional public spending would have crowded out and permanently reduced the private sector by up to 0.4 percentage points.

Chart 1 displays the crowd-out over time. First note that Tennessee’s private sector has shrunk by 25.5%, from 92.1% in 1929 to 68.6% in 2013. Because of this, Tennessee’s private sector is now only the 33rd largest in the county (Table 1). More troubling, as shown in Chart 1, Medicaid expansion will reverse the growth in the private sector following the “Great Recession” and put the Volunteer State back on a downward trajectory.

Table 1 Tennessee's Private Sector Ranking Falls 2 Spots Due to Obamacare's Medicaid Expansion 2013

Tennessee’s policymakers should pause for several reasons. First, there are plenty of citizens who can recall the shortcomings of TennCare, a precursor to today’s Medicaid expansion that is part of Obamacare. Those same policymakers should be very concerned about this crowding out of the private sector by government spending. As Chart 4 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, Tennessee’s taxpayers will pay a steep economic price with lower incomes and fewer jobs.

Table 2 displays the negative economic impact of Obamacare’s expansion of Medicaid on the average Tennessee household. Overall, the Volunteer State’s long-run economic growth will suffer. The result is a downshifting in personal income growth of $3.6 billion. This downshifting will manifest itself in one of two ways—lower household income across the state or a reduction in jobs, though reality will lie somewhere in between.

Table 2 Estimated Economic Loss Due to Obamacare's Expansion of Medicaid TN

The economic cost can be calculated in two ways:

• $1,148 less personal income for all households with no private sector job loss; or

• No change in personal income but the loss of 67,433 private sector jobs.

Table 1 and Chart 4 reveal how Tennessee’s private sector would lose ground relative to the other states. The Volunteer State’s ranking would fall from having the 33rd largest private sector in the country to the 35th largest—all else being equal.

Pull Quote 2 on TN Economic Cost

Conclusion

Obamacare’s expansion of Medicaid is not without significant cost to the Volunteer State. It is not “free” at all, as there will be serious economic repercussions to the long-term health of Tennessee’s economy, and all residents will be poorer as a result. Policymakers should carefully reconsider expanding Medicaid.

As our research shows, the answer to helping more Tennessee families is to stay the course, focusing on local solutions to fix healthcare, not on a federal one-size-fits-all approach. Instead of looking for more federal funding, Tennessee should find ways to reduce government programs instead of programs that leave the state more dependent on a federal government that is already broke. In fact, the future of Tennessee’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 4. 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 $3,208.[4]

Chart 4 Larger Private Sector Leads to Higher Income 2013 TN

Expanding Medicaid in Tennessee by $1.4 billion would change the composition of Tennessee’s personal income toward public sector spending and permanently shrink the private sector by up to 0.4 percentage points. That means in the next few years, the average household in Tennessee would see their income drop by up to $1,418, or the number of jobs in the state will be reduced by 67,433. The overall loss in personal income would be up to $3.6 billion ($1,418 multiplied by 2,571,718 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 5, 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 5 New Hampshire's Larger Private Sector Leads to Higher Income vs. Maine 1929 to 2013 TN

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%%.[5]

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 29% to 65.3% from 92% and is now only the 42nd largest private sector in the country. New Hampshire, on the other hand, has seen its private sector shrink by a much smaller 14.9% to 76.9% from 90.4% and is now the largest private sector in the country.

Overall, New Hampshire’s private sector in 2013 is 17.8% larger than Maine’s—76.9% and 65.3% respectively. Consequently, New Hampshire’s per household income is now 33% higher than Maine’s—$126,865 and $95,537, respectively. By taking the bait in Obamacare’s Medicaid expansion scheme, Tennessee will be following Maine’s downshifted economic path rather than New Hampshire’s—and all residents will be poorer as a result.

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

Utah’s long-run economic growth will suffer a drop in personal income of $749 million. [6] The economic costs range from:
• $805 reduction in personal income for all households with no private sector job loss

• The loss of 14,125 private sector jobs but no change in personal income.

Indiana’s long-run economic growth will suffer a drop in personal income of $9.5 billion. [7] The economic costs range from:

• $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.

New Hampshire’s long-run economic growth will suffer a drop in personal income of $593 million under Medicaid expansion. [8] 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. [9] 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] Feldstein, Martin, “How Big Should Government Be?” National Tax Journal, Vol. 50, No. 2 (June 1997), pp. 197-213. http://www.ntanet.org/tax-resources/ntj-full-text-articles.html

[2] Congressional Budget Office, “An Update to the Budget and Economic Outlook: 2014 to 2024,” August, 2014. http://www.cbo.gov/sites/default/files/cbofiles/attachments/45653-OutlookUpdate_2014_Aug.pdf

[3] Centers for Medicare and Medicaid Services, “2013 Actuarial Report on the Financial Outlook for Medicaid,” 2013. http://medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Financing-and-Reimbursement/Downloads/medicaid-actuarial-report-2013.pdf

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

[5] 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/

[6] Moody, J. Scott, “Negative Impact of Medicaid Expansion on Utah’s Families and Private Sector,” Federalism In Action, September 10, 2014. http://www.federalisminaction.com/resources/studies/study-2

[7] Moody, J. Scott, “Expanding Medicaid Will Hurt Indiana’s Families, Lower Income and Reduce Jobs,” Federalism In Action, August 5, 2014. http://www.federalisminaction.com/resources/studies/study-2

[8] 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/

[9] 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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© 2014 State Budget Solutions. Material from this document may be copied and distributed with proper citation.

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One Response to Study No. 4

  1. […] has also found some of the states that accepted the Medicaid expansion — including Utah and Tennessee — are experiencing loses in personal income and a reduction in […]

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