Future Unemployment and PPACA

by Reihan Salam

My friend Mike Konczal is pessimistic about U.S. prospects for returning to full employment in the near future:

EPI’s Heidi Shierholz crunches the numbers and shows that, on our current trajectory, we are currently 20 years away from 5 percent unemployment. But that might be a little too fast for Hoenig, who is voting against further monetary policy to keep unemployment at a high level to make sure of … what exactly?

Clearly Mike is making a point about Kansas City Federal Reserve Bank President Thomas Hoenig, but the implications are much broader. 

As I understand it, the CBO used the economic forecast and technical assumptions in its March 2009 baseline to model the impact of PPACA on the federal budget. And the CBO is assuming that the U.S. economy will reach full employment relatively quickly, as you can see in Table 2-1. The assumption is that unemployment will average 9% this year, 7.7% next year, and 5.6% over the years 2012 to 2015 and 4.8% between 2016 and 2019.

But what if unemployment is in fact higher, as Shierholz fears? Tight labor markets as projected by the CBO would presumably contain the cost of the new health entitlement set to kick off in 2014. If labor markets are not tight — if unemployment above 6% or even above 7% persists for a longer period of time — the cost of PPACA will rapidly spiral, and the revenue projections under the CBO’s model will presumably prove overly optimistic. By how much I can’t say, but surely this is something we need to know. 

Remember that if the cost of PPACA does spiral, the federal government will need to raise taxes, and not just on the rich, to meet this new obligation. Remember also that high-deductible coverage will in many cases no longer pass muster as “real insurance.” That is, an approach that centered on catastrophic care might prove far more affordable to taxpayers.