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Column: Paying for benefits, getting none

Economists like myself are accustomed to seeing politicians act in ways that don't make economic sense. That being said, the decisions many are making about health care policy are truly dumbfounding. ¶ Florida recently failed to pass a budget that included the expansion of Medicaid that is part of the Affordable Care Act (Obamacare) and will be implemented on Jan. 1, 2014. In so doing, Florida joins 24 other states that are "opting out" of expanding Medicaid. Not surprisingly, most of the South is in that group. The economic consequences of opting out are likely to be large. ¶ A little background: The Affordable Care Act includes an expansion of Medicaid to people aged 19 to 64 with incomes up to 138 percent of the federal poverty line. This expansion potentially covers more than 15 million people without health insurance in the United States. Of the opting-out states in the South, Florida and Texas have the largest populations that would be affected at 1.3 and 1.75 million eligible people respectively.

The Medicaid expansion is one of the largest costs of health care reform (subsidies to buy private insurance are the other). The costs of the reform are paid for by 20 new or higher taxes, which are clearly targeted at the rich and the medical industry.

Health care reform thus is in large part a transfer: Rich households and the medical industry pay higher taxes to cover the cost of insurance for those who lack it. The extra spending on Medicaid might boost the economy, but the higher taxes will weaken it. Most economists thus would not expect a positive impact on economic growth from the expansion — any benefits from the extra spending will likely be offset by the extra taxes. We would view a decision to pursue greater equity at the cost of some efficiency as a value judgment best made by the political system, as has happened.

Many conservative states have thus opted out of the Medicaid expansion on the grounds of refusing to redistribute income and increase entitlement spending. These politicians are certainly entitled to their value judgment of opposing redistribution.

Economically, however, the decision to opt out is astounding because states that opt out of the expansion still pay for it. The new taxes are all federal taxes that will not be lower even if states save money by opting out. Opting out of the expansion just makes sure that the poor in the South don't see any benefits; rather, taxpayers in the South and other "red" states that opt out are kindly paying for the expansion of Medicaid in the states that opt in.

While an income transfer within a state is not likely to impact economic growth, a transfer from the rich in the South to the poor everywhere else will have economic consequences. The states making a stand against redistribution should expect that the higher taxes with little additional spending will slow economic growth and decrease the number of jobs in those states.

The costs of the redistribution cannot be avoided, so opting out is really only avoiding the benefits.

The states that opt in, on the other hand, will see more spending and thus higher aggregate demand and relatively stronger economic performance.

Extra spending on Medicaid does affect the wider economy — it pays the salaries of nurses, doctors and everyone else in the health care industry, who then spend that money throughout the region. Businesses and jobs will head to those states where people have more money to spend.

Starting next January we can thus expect a slump in the South and other red states compared to economic growth everywhere else. Politicians in the opt-out states are choosing slower growth, fewer jobs and greater suffering amongst the poor to go along with the higher taxes on the rich that are already being implemented.

That's a lot to pay for a principled opposition.

Alan Green, an economics professor, will be joining Stetson University's Economics Department in August. He wrote this exclusively for the Tampa Bay Times.

Column: Paying for benefits, getting none 05/19/13 [Last modified: Friday, May 17, 2013 5:57pm]
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