A friend of mine recently told me that he knew his insurance premium would rise from about $6,000 now to over $15,000 in 2015. He wondered what such increases would do to consumer spending and the weak economic recovery given the already low saving rate. I think he expected me to minimize the danger and offer up a silver lining. I told him I had no silver lining.
We have heard a lot about the perverse incentives to work embedded in Obamacare, including incentives for employers to limit their full-time work force and incentives for the poor that will be receiving insurance subsidies to avoid losing them through higher incomes. Higher income people will also get an extra tax hit on their investments income. The latest news on that front is OMB’s projection that the new law will shrink the work force by over two million full-time equivalents. Of course all this is disturbing, but it is not what my friend was talking about.
His point was that the higher insurance premiums would shrink income available to spend on other items. It occurred to me that he was describing the same phenomenon we usually associate with higher gasoline prices. Since most people of working age have a highly inelastic demand for gasoline—it’s a necessity after all—higher gasoline prices will reduce the quantities demanded of other items the same way higher taxes would. Health insurance is also a necessity, creating an inelastic demand for it, which logically will depress other spending as costs rise.
There are incentive-based arguments against Obamacare, but this is an old-fashioned Keynesian-type effective-demand argument. It isn’t a substitute argument; it’s an additional argument. Unfortunately. My friend said he doesn’t see how this ends well. Neither do I.