Tyler Cowen’s no good, very bad post on Affordable Care Act Subsidies

We are in the middle of a government shutdown, and one point of contention between Democrats and Republicans is the extension of “enhanced” premium subsidies for policies purchased on the exchanges set up under the Affordable Care Act (Obamacare).

Yesterday Tyler Cowen put up a blog post titled “The unraveling of Obamacare?”.  I haven’t followed health care policy closely in recent years, but I did some googling, and his narrative seems a bit fishy to me – full of half-baked claims and topped off with a healthy dose of misdirection.  It tells us more about Cowen and the bankrupt state of libertarianism than it does about Obamacare. 

Here I reprint his entire post with my comments in square brackets [], no indentation.  Cowen:

Paul Krugman has a recent post defending the exchange subsidies and tax credits that the Republicans wish to cut, talking with Jonathan Cohn about the “premium apocalypse” (and here).  Whether or not one agrees with Krugman normatively, the arguments if anything convince me that Obamacare probably is not financially or politically stable.

[EK:  Cowen tells us that his analysis is relevant even to those of us who, like Krugman, believe that poor people and people with pre-existing conditions should have access to affordable insurance.  This turns out not to be true.  Back to Cowen.]

To recap some history briefly:

1. Prior to passage, ACA advocates assured us that all three “legs of the stool” were necessary, most of all the mandate, to prevent adverse selection and skyrocketing premia. That argument made sense and was accepted by most economists, whether or not they favored ACA.

[It is true that most health economists believed that subsidies and mandates were needed to avoid an adverse selection death spiral.  (Remember that a death spiral occurs when insurers charge people the same price regardless of health status.  This risk pooling leads healthy people to drop coverage, premiums rise for those who remain insured, and this leads more healthy people to drop coverage, until only very sick people are covered and premiums are very high.) 

Adverse selection can be stopped by requiring people to buy insurance – that is, by a mandate.  This is the standard textbook solution to adverse selection problems.  However, subsidies can also cure adverse selection.  If subsidies are large enough mandates are not needed to avoid a death spiral; in the limit, if we raise subsidies so that premiums are low enough, almost everyone will buy insurance.  The reason people thought a mandate was necessary under the ACA was that the proposed subsidies were limited in size, and higher income individuals were not eligible for subsidies at all.]

2. Obamacare passes by razor-thin margins, with a mandate.

3. The mandate proves extremely unpopular.  Whether or not it is efficient, it puts a disproportionate share of the cost burden on other policy purchasers through the exchanges.  The Republicans run against ACA and make some big gains.

4. Trump in essence “saves” Obamacare by in essence defusing enforcement of the mandate.  The people who hated paying the very high premia could now back out of the system without getting into real trouble.  As a result, much of the opposition to Obamacare, and the scare stories about expensive policies, dissipates.

[Cowen is blaming controversy over Obamacare on the mandate, and claiming that the elimination of the mandate by Republicans in 2017 (effective in 2019) saved Obamacare.  This is highly doubtful. 

The Republicans did indeed make big gains in the 2010 midterms, but it is not at all obvious that the mandate was responsible.  Partisanship, anti-government attitudes, and general thermostatic reaction to major policy change probably played much more important roles than the mandate.  Notably, opposition to the ACA has been highly concentrated among Republicans and encouraged by Republican politicians and conservative opinion leaders (including, it seems to me, in this blog post by Cowen).  Further, this opposition did not abate following the elimination of the mandate.  If opposition to the ACA was based on the mandate, we would have expected its popularity to rise among Republicans when the mandate was removed.  That didn’t happen.

Cowen also seems to be making the much more modest claim that the mandate was extremely unpopular with people who would have preferred not to buy insurance but felt compelled to do so because of the mandate.  This could be true, but this is a small group that can hardly be responsible for the roaring controversy over the ACA.  Between 2017 when legislation repealing the mandate passed and 2019 when the law went into effect, enrollment declined by about 800k.  Not all of this decline is due to the mandate repeal, however.  Premiums went up rapidly from 2016 to 2018, and as a result coverage was dropping before the mandate was repealed.  Further, some of the drop in coverage was likely due to declining outreach efforts under Trump.  Finally, when the mandate was eliminated in 2019, many people who dropped coverage were probably on the fence about buying insurance, so it seems highly doubtful everyone in the small group that dropped coverage when the mandate ended was strongly opposed to the mandate. 

Cowen’s political analysis centered on the mandate is unpersuasive.]

5. Contrary to the predictions of the economists, Obamacare does not collapse.  Enough people kept on signing up, perhaps because there is often a fair degree of “positive selection” into insurance coverage.  Still, one has to wonder whether this will last.

[Remember, subsidies alone, without a mandate, can be sufficient to sustain a health insurance market without charging people with pre-existing conditions more than healthy people.  So it is not at all clear why we should expect Obamacare to collapse without the mandate.]

6. Under the Biden administration, the Democrats support the continuation of premium support, but not with massive enthusiasm.  It is expensive, though of course the Democrats did understand this is a centerpiece of Obamacare and they cannot give up on it.  If you are calling the current situation a “premium apocalypse,” a lot of money has to be involved.

[Democrats did not just continue premium support under Biden, they expanded it considerably.  I’m not sure how this shows a lack of enthusiasm.  It’s true they did not have the votes to make the higher subsidies permanent.  This is why the subsidies are expiring.  But the Democrats barely had control of Congress.  Every member of their caucus had a veto.  Does the fact that one or two or five Democratic senators opposed making the enhanced subsidies permanent show that “Democrats” lacked enthusiasm? 

We know how much extending the enhanced premium subsidies would cost:  $350 billion over 10 year, or roughly $35 billion per year.  This is less than 2% of the projected increase in government debt over that period.  Cowen chooses not to share this information with his readers.]

7. Putting aside the current Trump plans and the government shutdown and concomitant fight, how stable is this budget allocation over time?  Is it possible that the economists (including Krugman and David Cutler) were right all along, albeit with a long lag, and the exchanges ultimately cannot work without a mandate?  And that the premium support will just get more and more expensive?

[Cowen started off by arguing that the ACA mandate was deeply unpopular, and that eliminating the mandate “saved” Obamacare politically.  Now he seems to be telling us that even the premium subsidies may not be politically sustainable.  He hasn’t argued for this at all, and as anyone who follows politics knows, subsidies tend to be popular!  This is why Democrats decided to center the shut down fight on the ACA subsidies. 

Of course, many Republicans oppose the ACA subsidies for various reasons, including anti-government attitudes and contempt for the poor and sick.  We can all imagine scenarios in which the ACA is subject to a successful political attack.  It is possible that opposition to Obamacare or a serious budget crisis or rising costs or some other political development will undermine support for subsidies.  I don’t know what will happen.  Neither does Cowen.]

It seems to be this scenario, while hardly proven, is really quite possible.  One can blame Trump of course, but maybe the allocation no longer is sustainable over the medium term?

[I have no idea what “scenario” he’s talking about.  But if something happens to gut ACA subsidies, we can be confident that Cowen will trot out this analysis-free post as evidence of his brilliance as a prognosticator.]

During the ACA debates, Megan McArdle frequently made the point that such a big policy passed by such small margins could not so easily last.  A lot of people wanted to look past that observation, but was she so wrong?

[McArdle may have been right to wonder if a policy facing fierce partisan opposition would ultimately prove durable, but why should that make the slightest difference to those of us who care about providing affordable health insurance to people who are poor or have pre-existing conditions?  Should we oppose subsidies today because they may prove unsustainable at some indeterminate time in the future?  Unless we are libertarians who think poor people who get sick can go fuck themselves, why wouldn’t we acknowledge McArdle’s point, support Obamacare, try to pick up some ambivalent voters, and hope for the best?  Cowen tried at the beginning of his post to position himself outside the normative debate over health insurance, but his argument is one that will only appeal to libertarians.]

Addendum: By the way, how are we supposed to pay for all of this?  Repealing the recent Trump tax cuts and raising taxes on the rich doesn’t seem to come close to bringing the budget into balance.  Endorse a VAT if you wish, but then do so!  And let us have that debate.  In the meantime everyone is just playing games with us.

[Now it seems that Cowen’s post is not about adverse selection, or mandates, or even the political sustainability of ACA subsidies.  It’s about balancing the budget.  Surprise!  And on fiscal policy Cowen sounds suspiciously like a shill for the plutocratic wing of the Republican party.  He downplays the extension of the Trump tax cuts, which will probably cost well over 10 times the $350 billion tab for enhanced ACA subsidies.  This seems like important context, but Cowen can’t be bothered to mention it.  He pooh-poohs Democratic proposals to increase taxes on the rich.  He himself doesn’t provide any proposal for funding the ACA or for bringing the federal budget into balance, although his argument seems to implicitly suggest that we should get rid of the subsidies since according to his idle speculation it’s likely the subsidies will prove to be politically unsustainable anyway.  And then he suggests that those of us who support ACA subsidies without making a proposal for restoring balance to the entire federal budget are just playing games.  That’s chutzpah!  Remember, the extending the enhanced ACA subsidies will account for less than 2% of the projected debt increase over the next decade.  The Trump tax cuts that Democrats would be happy to repeal will cost far more. 

To be clear, we do have a fiscal policy problem in the United States.  There are proposals for trimming back the enhanced ACA subsidies.  I think some trimming is in fact justified.  A fair amount of money is going to subsidize people with reasonably high incomes and wealth.  But Cowen doesn’t link to these proposals.  He doesn’t even mention them.  He’s not interested in making a constructive contribution to the debate over subsidies or fiscal policy.  Nor does he care to educate people about how Obamacare works.  His argument is just anti-government vibes, with a bit of adverse selection and mandate mumbo-jumbo thrown in to give his superficial post a veneer of technocratic authority. 

In the middle of a damaging government shut down, with Trump violating both constitutional and statutory law concerning government appropriations and Republicans wantonly attacking safety net spending and blowing up the budget deficit, Cowen can’t think of anything more useful to do than argue that Democrats who are trying to restore ACA subsidies are just playing games because they are not offering a plan to balance the federal budget. 

We need better libertarians.]