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Did health law bring economic doldrums?

Posted: August 22, 2011 - 8:10pm

Why did the recovery stall? President Barack Obama recently chalked it up to “bad luck.”

Even in more searching discussions of why the economy remains flat, politicians and economists largely ignore the elephant in the room: the Patient Protection and Affordable Care Act. Private-sector job creation stopped improving almost as soon as Congress passed the act.

This recovery has been anything but normal. Usually the economy accelerates after a deep recession. Entrepreneurs find new ways to employ millions of idled workers, and the economy quickly regains lost ground. The boom following the equally painful recession of the early 1980s enabled President Ronald Reagan to campaign on “Morning in America.”

Not this time. Two years after the recession officially ended, almost a tenth of workers remain unemployed. Both economic growth and job growth remain sluggish.

Few economists expected this. Throughout 2009 and early 2010, the economy appeared to be recovering steadily, though not spectacularly. Monthly reports of job losses got progressively less bad, improving by an average of 67,000 jobs a month. The White House’s mid-2009 economic forecasts — accounting for the depth of the recession and the effects of the stimulus — projected unemployment would fall to 7.5 percent by the 2012 elections.

By the spring of 2010, private sector job growth turned positive. In April job growth increased to 230,000 net private-sector jobs. The economy appeared on track for a normal recovery from an awful recession. The administration began confidently predicting a “Recovery Summer.”

But Recovery Summer fizzled instead of sizzled.

In May private sector job growth dropped sharply to less than 50,000 net jobs. Thereafter, monthly improvement in private job growth averaged just 6,500 jobs.

What else happened in the spring of 2010? Despite obstacles that many believed would kill the bill, Congress passed the Affordable Care Act. Within two months, the trend in job growth dropped sharply. Monthly job creation had been on pace to top out in the hundreds of thousands. Post-Affordable Care Act, it has barely kept pace with population growth.

Correlations do not — of course — prove causation. The fact that job growth slowed after Congress passed the Affordable Care Act does not prove that the legislation is at fault. There are, however, good reasons to believe that the law applied the brakes to hiring.

The act will significantly raise business costs. Any company with more than 50 workers must provide (generally more expensive) government-approved health coverage or pay a financial penalty. And any business with fewer than 50 workers has strong incentive to make sure it does not hire a 50th employee.

The law has also made it very difficult for businesses to plan for the future. What will the large group healthcare market look like in five years? No one really knows. How much will it cost to provide health insurance to employees in five years? Businesses can only guess.

In addition to this economic uncertainty comes administrative uncertainty. Will a business get a waiver or not? The law doesn’t say — that is up to the bureaucrats to decide. Will an entrepreneur who owns multiple small businesses, each with fewer than 50 workers but collectively above the limit, have to pay the penalty? Ask the IRS in a few years for an answer.

The health-care measure raises business costs and makes planning for the future more difficult. It should be expected to slow hiring.

Federal Reserve officials report that the law has had exactly this effect. Dennis Lockhart, president of the Atlanta Fed, reports that “prominent among these (factors businesses explain are impeding hiring) is the lack of clarity about the cost implications of the recent health care legislation. We’ve frequently heard strong comments to the effect of ‘my company won’t hire a single additional worker until we know what health insurance costs are going to be.’”

Surveys bear out these warnings. In a recent poll one-third of small business owners identified the healthcare bill as one of their top two obstacles to hiring.

The data suggest these business owners’ complaints are not idle. Job growth slowed almost as soon as Congress passed the bill. If Congress wants to lift the brakes on hiring, then rolling back the Affordable Care Act would be a good place to start.

• Sherk is a senior policy analyst in labor economics at The Heritage Foundation.

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