Tuesday, June 21, 2011

Ron Johnson takes the McKinsey Survey Bait

Ron Johnson made the centerpiece of his run for the U.S. Senate last year his opposition to Obamacare, so it was something of an event when he took to the pages of the Washington Post last week with former CBO director and GOP in-house economist Douglas Holtz-Eakin to foresee doom and gloom on the healthcare horizon:
The other of us [i.e. Sen. Johnson], as a former businessman, knows what it’s like to purchase coverage for employees. There are many employers who would happily get out of the practice of providing health insurance, if they could do it without hurting their workers. Obamacare will encourage them to do so. In the current system, most employers are highly reluctant to drop health coverage for employees because they don’t want their workers to be financially exposed. But under Obamacare, instead of paying $15,000 for family coverage, an employer can choose to pay a $2,000 fine, pay more in cash wages, make his employees eligible for a huge government subsidy and come out ahead. Confident that their employees are also gaining, millions of employers will follow this logic. 
There are at least two enormous problems with this argument. The first is that it's the employer that seems to be saving $13,000 ... and yet still complaining. (The insinuation is that the $13,000+ difference would be picked up by the federal government, thus plunging the country further into debt or necessitating a rise taxes -- I think, it would have been nice of the authors to have explained this point in detail.)

The second is that it might not be necessarily true. Here's Steve Pizer:
Start by asking why employers sponsor health insurance for their employees at all.  The answer is that employer-sponsored health insurance is not taxed, so a dollar contributed to health insurance premiums buys a dollar of insurance while a dollar devoted to wages translates to less than a dollar of take-home pay.  As an employer, if I devote a portion of my compensation budget to health insurance and my competitor doesn’t, the dollar value of total compensation at my company will be greater than at my competitor’s.  I’ll attract the best workers.  So employers sponsor health insurance because the labor market is competitive.  They might wish they could cut these costs or drop health benefits entirely, just like they’d like to cut wages, but they have to consider the realities of the labor market or they won’t be able to hire.


Predicting the effects of the [health care] exchanges is harder, but the fact that access will be limited to those without employer offers simplifies things somewhat.  Most workers will not be eligible for subsidies if they had access to exchanges and the tax benefit is a major factor, especially for higher income workers, so a firm that drops coverage will be cutting compensation significantly for most of its workers.  It’s not likely that many firms will be able to do this unilaterally.
So why does Johnson and Holtz-Eakin think otherwise. Because:
A recent employer survey by McKinsey & Co. found that more than half of all American companies are likely to “dump” their workers into the government-run exchanges. If half of the 180 million workers who enjoy employer-provided care wind up in the exchanges, the annual cost of Obamacare would increase by $400 billion by 2021. If the other half eventually follows suit, and all American employees wind up in the exchanges — which we believe is a goal of Obamacare — then the annual cost of the exchanges would increase by more than $800 billion. Like Medicare in 1965, this would be more than nine times the original cost estimate of $93 billion each year ($893 billion vs. $93 billion).
The survey was really the only piece of empirical evidence cited by Johnson and Holtz-Eakin that backs up the central contention of their op-ed. The problem is that the way in which the authors use the survey is flawed:
McKinsey and Company has finally released the methodology of its study finding that many businesses are likely to drop insurance for employees (typo fixed) as a result of the Affordable Care Act.

There will be a lot to dig through here, but what’s immediately of interest is that in its statement, McKinsey repeatedly concedes that the study should not be seen as a predictor of future behavior. While McKinsey says it stands by the study’s methodology, the statement repeatedly stresses its lack of predictive value.
Why is this a big deal? Because the McKinsey study was being questioned well before Johnson and Holtz-Eakin used it as the centerpiece of their argument against Obamacare. I don't imagine we'll see a retraction any time soon, but it does seem worth while to point out shoddy work when we see it.

And speaking of shoddy work, do please check out Johnson's op-ed at the Daily Caller. To be perfectly honest, I'm not even sure I understand what point he's trying to make. The piece starts off explaining that he's against raising the debt limit and then concludes with a confusing and convoluted graph that raises more questions than provides answers. In between Johnson seems to say "We should just limit our spending to the revenue we take in" -- something that may prevent the deficit from growing, but does nothing to put a dent in it (to do that, you'd need to raise taxes, which is anathema to Johnson).

Left unmentioned in the DailyCaller piece is the fact that the debt limit will be raised regardless of what Johnson says or does. This has less to do with economics than basic political risk assessment: if the U.S. defaults on it's debt and the consequences are truly as bad (or, really, anywhere near) as some economists predict, then any elected official who helped usher in the default will find his proverbial head on a metaphorical spike.

This kind of sloppiness is likely why Johnson's office hired Paddy Mac recently, but it will have to do much better then this to effectively communicate the Senator's agenda, which, to date, has been little more than confused policy arguments punctuated by unending reminders that Johnson was a small business owner.

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