Expanding Medicaid Will Hurt North Carolina’s Families, Lower Income, and Reduce Jobs
By J. Scott Moody, Chief Executive Officer and Chief Economist
Some of North Carolina’s policymakers have taken up interest in accepting Medicaid expansion under the provisions of the Affordable Care Act, commonly referred to as “Obamacare.” This might look like free money, at first glance, since the federal government has promised to pick up the tab for the first three years.
But we know that nothing is free. North Carolina, 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 North Carolina’s private sector having already been reduced by 28.2 percent to 66.1 percent in 2013 from 92 percent in 1929. North Carolina’s private sector is now only the 40th largest in the country (see Table 1).
In this report, the fourth in this series, we will consider how Medicaid expansion will permanently reverse the recent post-recession growth in North Carolina’s private sector, which will directly affect the pocketbooks of North Carolina’s families via lower income and fewer jobs. Specifically, the economic cost will range from $1,638 less personal income for all households or the loss of 120,395 private sector jobs.
The Economic Principles In Play
More public sector spending, as prescribed by Medicaid expansion, will ultimately make North Carolina 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).
Only the private sector can generate new income and wealth in an economy. This runs contrary to the so-called Keynesian multiplier analysis that ignores this basic economic principle. Government spending is the redistribution of 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]
Though the exact numbers may vary, there is a cost to Obamacare’s expansion of Medicaid that will have to be covered by someone. This will likely come in the form of higher taxes and/or borrowing at the federal level. This will leave less money in the pockets of North Carolina’s residents and businesses, and therefore reduce their ability to invest for the future.
This is even more concerning coupled with the projected growth of the federal budget deficit over the next decade: an expected 114 percent increase —from $486 billion in 2015 to $1,038 billion in 2025. This growing deficit is unsustainable given that in 2025 the interest payment on the national debt ($808 billion) is projected to equal three-fourths of the budget deficit ($1.038 trillion). Simply put, this means that the federal government is essentially borrowing just to pay the interest on the debt!
This unsustainable federal situation could have been delayed by at least a couple of years if the 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. Of course, since this money is, on the margin, all borrowed, this study estimates that Uncle Sam will pay an additional $75 billion in interest payments (at an interest rate of 2.8 percent).
What This Means for North Carolina
Medicaid expansion will have a large, negative economic impact on North Carolina. According to estimates from the Kaiser Family Foundation, the expansion of Medicaid will increase enrollment by 357,000 people. This will boost transfer spending,
|North Carolina’s Private Sector Ranking Falls 2 Spots Due to Obamacare’s Medicaid Expansion
|Private Sector Share of Personal Income by State and Rank
||North Carolina (Current)
||North Carolina (with Expansion)
|Source: U.S. Department of Commerce: Bureau of Economic Analysis and Federalism in Action
mostly from Uncle Sam, by an estimated $1.9 billion. If this occurred in 2013, that additional public spending would crowd out and permanently reduce the private sector by up to 0.5 percentage point.
|Estimated Economic Loss Due to Obamacare’s Medicaid Expansion
||Personal Income Loss per Household
||Job Loss Equivalent
|Source: U.S. Department of Commerce: Bureau of Economic Analysis, Census Bureau and Federalism in Action
Chart 1 shows this crowd-out over time with North Carolina’s private sector having already been reduced by 28.2 percent to 66.1 percent in 2013 from 92 percent in 1929. North Carolina’s private sector is now only the 40th largest in the country (see Table 1). More troubling, Medicaid expansion will reverse the growth in the private sector following the “Great Recession” and put it back on a downward trajectory.
North Carolina’s 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, North Carolina’s taxpayers will pay a steep economic price.
Table 2 shows the negative economic impact of Obamacare’s expansion of Medicaid on the average North Carolina household. Overall, North Carolina’s long-run economic growth will suffer; the result is a downshifting in personal income growth of $6.4 billion. This downshifting will manifest itself in two ways—lower household income for everyone and/or fewer jobs, though reality will lie somewhere in between. The economic cost can be calculated in as follows:
- $1,638 less personal income for all households with no private sector job loss; or,
- No change in personal income but the loss of 120,395 private sector jobs.
Table 1 and Chart 2 show how North Carolina’s private sector would lose ground relative to the other states. The Tar Heel State’s ranking would fall from having the 40th largest private sector in the country to the 42nd largest—all else being equal.
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 North Carolina’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 North Carolina families is not increased federal funding under Obamacare. Instead, North Carolina should look to reduce government programs, especially federal dependency when Uncle Sam is already flat-broke. In fact, the future of North Carolina’s citizens and economy depends on it.
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 $3,208.
Expanding Medicaid in North Carolina by $1.9 billion would change the composition of North Carolina’s personal income toward public sector spending and permanently shrink the private sector by up to 0.5 percentage point. That means in the next few years, the average household in North Carolina would see their income drop by up to $1,638, or the number of jobs in the state will be reduced by 120,395. The overall loss in personal income would be up to $6.4 billion ($1,638 multiplied by 3,929,102 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.
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.
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 percent to 65.3 percent from 92 percent 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 percent to 76.9 percent from 90.4 percent and is now the largest private sector in the country.
Overall, New Hampshire’s private sector in 2013 is 17.8 percent larger than Maine’s—76.9 percent and 65.3 percent respectively. Consequently, New Hampshire’s per household income is now 33 percent higher than Maine’s—$126,865 and $95,537, respectively. By taking the bait in Obamacare’s Medicaid expansion scheme, North Carolina will be following Maine’s downshifted economic path rather than New Hampshire’s—all North Carolinians will be poorer as a result.
This negative economic impact due to Obamacare’s Medicaid expansion is not unique to North Carolina. This analysis has also examined expansion in Tennessee (defeated), Utah (defeated), Indiana (enacted), and Maine (defeated).
Tennessee’s long-run economic growth will suffer a drop in personal income of $3.6 billion. The economic costs range from:
- $1,148 reduction in personal income for all households with no private sector job loss
- The loss of 67,433 private sector jobs but no change in personal income.
Utah’s long-run economic growth will suffer a drop in personal income of $749 million. 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. 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.
Maine’s long-run economic growth would suffer a drop in personal income of $1.5 billion. 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.
 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
 Congressional Budget Office, “Updated Budget Projections: 2015 to 2025,” March, 2015. http://www.cbo.gov/sites/default/files/cbofiles/attachments/49973-UpdatedBudgetProjections.pdf
 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
 Damico, Anthony, Garfield, Rachel, Rouhani, Saman, and Stephens, Jessica, “The Coverage Gap: Uninsured Poor Adults States that Do Not Expand Medicaid—An Update,” The Henry J. Kaiser Family Foundation, November 12, 2014: http://kff.org/health-reform/issue-brief/the-coverage-gap-uninsured-poor-adults-in-states-that-do-not-expand-medicaid-an-update/
 Total spending based on multiplying 357,000 new enrollees by the average spent on full-benefit Medicaid enrollees in FY 2011 (the latest year of available data) of $5,450 found here: http://kff.org/medicaid/state-indicator/medicaid-spending-per-full-benefit-enrollee/
 Alaska and Hawaii are excluded, as is common practice in state analysis, due to their unique economic characteristics.
 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/
 Moody, J. Scott, “Expanding Medicaid will Hurt Tennessee Families, Lower Income, and Reduce Jobs,” Federalism In Action, No. 4, November 13, 2014. http://www.federalisminaction.com/resources/studies/study-2
 Moody, J. Scott, “Negative Impact of Medicaid Expansion on Utah’s Families and Private Sector,” Federalism In Action, No. 3, September 10, 2014. http://www.federalisminaction.com/resources/studies/study-2
 Moody, J. Scott, “Expanding Medicaid Will Hurt Indiana’s Families, Lower Income and Reduce Jobs,” Federalism In Action, No. 2,August 5, 2014. http://www.federalisminaction.com/resources/studies/study-2
 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/