Is Obamacare the New Gasoline Price Tax?

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.

Comments (7)

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  1. Asher says:

    “Health insurance is also a necessity, creating an inelastic demand for it, which logically will depress other spending as costs rise.”

    High insurance premium may shrink the amount of full-time employees leading to higher job competition and potential higher unemployment rate.

  2. Benjamin Cole says:

    Obamacare, even discounting for right-wing hysteria, seems too complicated. I would be okay with simple payment to hospitals for providing uncompensated emergency room care, and let it go at that.

    That said, Bob McTeer’s friend could be anybody a couple of years ago, even before Obamacare, who suddenly faced an explosion in insurance costs. It especially happens as you pass into your 50s, and then gets worse and worse. They are aching to drop you, if you cost more than your premiums paid.

    The real solution to health care costs is one the public and GOP refuse to face: euthanasia, especially for those aged and terminally ill. The GOP staked out a position on the Terri Schiavo case that preludes euthanasia, even in the most dire circumstances.

    Obama’s “death panels” are probably a good idea, they just need to be empowered to bring sense to health care.

    • will says:

      scary. There are many sensible things that can be done to improve outcomes, lower costs, and increase access.

      Death panels are not one of these. Command and control is not the answer.

  3. will says:

    We are fortunate to have health insurance through a relatively large employer. Hopefully, this means our contributions will not increase by thousands of dollars per year. I feel for those who will suffer or get squeezed by Obamacare.

    All the mandates in Obamacare make approved policies more costly. For individuals and people in smaller businesses, higher premiums and larger deductibles pose a real threat. If those higher expenses hit a large number of people, it will impact spending on other items.

    Obamacare is likely to reduce spending and employment growth. The slow motion train wreck is happening.

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  6. Randall Burns says:

    I think it will take a while for all of the impact of Obamacare to be fully understood. I am generally supportive of covering more American citizens. I think that we also can in the long term work out ways to make US health care more efficient than it is now. The pre-Obamacare system also had a lot of oddities and hidden costs. The costs of uninsured people were being passed onto the rest of us via taxes, higher premiums-and public health issues. My own guess is that the longer term system will evolve into something a lot more like Medicare than Obamacare. Medicare has had a public/private partnership aspect to it–folks would purchase relatively inexpensive medigap policies with big portions of premiums coming from payroll taxation. One big problem with that model is that payrolls have not necessarily been the most appropriate means of funding health care because of assets concentration where the folks really advancing their financial position have relatively small payroll/asset ratios.