Why Obamacare's job losses are so scary

Commentary:

In a preview of the 2014 midterm battle over the Affordable Care Act, political partisans are locking horns after the Congressional Budget Office released new data showing the economy could lose the equivalent of 2 million full-time workers over the next three years and 2.5 million by 2024 thanks to the new law.

To be clear, the report does not say that the economy will generate many fewer jobs over the next decade because of the new health law. The CBO notes that the drop "stems almost entirely from a net decline in the amount of labor that workers choose to supply, rather than from a net drop in businesses' demand for labor." In short, people will work fewer hours.

Republicans used the findings to claim that Obamacare is making things worse for the middle class. Democrats, for their part, focused on a concept called "job lock" and how Obamacare, in the words of Representative Chris Van Hollen, D-Md., "allows Americans to choose to spend more time with their family or pursue their dreams. And that is not a bad thing; it's a good thing."

The deeper problem, the one that isn't being discussed, is how this threatens to deepen an emerging long-term problem of increased social dependency, a diminished workforce, and a lower potential growth rate for the economy. If it continues, it would lead to higher susceptibility to damaging inflation, higher interest rates and a looming fiscal crunch as the cost to service the nation's debt grows.

CBO Director Doug Elmendorf, in testimony to Congress, said that the law "creates a disincentive for people to work relative to what would have been the case in the absence of the act." At the same time, Elmendorf also told lawmakers this week that Obamacare will reduce unemployment.

Already, based on the work of Gluskin Sheff economist David Rosenberg, there is evidence that much of the recent drop in the labor participation rate down to 1970s-levels is being driven by the availability -- and the potential abuse -- of welfare programs that disincentivize work.

In 2013, the economy created 1.4 million jobs, but 2.9 million people dropped out of the workforce. As a result, 92 million Americans are now outside the confines of the job market. That's more than 37 percent of the population, up from less than 33 percent during the dot-com bubble.

According to Rosenberg's calculations, if the labor participation rate had remained constant the unemployment rate would instead now be near 10 percent.

In his words, "we may have an abundance of separate benefits programs that provide for the disenfranchised in a very piecemeal and inefficient manner that are also perhaps abused or overly relied upon by some, which may lead to a distortion of work incentives." 

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I can't say I blame some people for making this choice. And many are, given the parabolic growth we've seen in the number of people collecting disability and food stamp benefits over the last few years.

According to a presentation by Gary Alexander, Pennsylvania's secretary of public welfare, a single mom is better off earning a gross income of $29,000 and applying for welfare benefits (including children's health insurance, child care and housing subsidies) that would give her a total of $57,327. If she worked hard and earned a gross income of $69,000, her after-tax take home pay will be just $57,045.

Why then, would she take that extra shift at work or apply for a promotion? Especially since these numbers don't account for the additional health care subsidies available under ObamaCare.

If this pattern continues, we're looking at a labor shortage in this country. Already, a rising share of businesses are saying they can't find qualified applicants as the number of job openings nationwide passes the 4 million mark for the first time since March 2008, up 6 percent over last year. At the same time, the available labor force dropped 13 percent in 2013 to 16.5 million -- the lowest in five years.

This all damages the ability of the economy to maintain healthy levels of non-inflationary growth -- levels of growth that we've associated with rising quality of life and broadly shared prosperity. If it continues, supply-side resources in the economy will grow scarce, cost of production will rise, profit margins will be pinched, inflation will rise and interest rates will be pushed higher.

Setting aside the discussion on what this could do to the stock market -- which has grown dependent on the flow of cheap money and record corporate profitability -- it could hit the nation's finances hard. Already, under current projections from the White House, the net interest burden on the U.S. Treasury will grow from $212 billion in 2013 to $822 billion in 2023. That's on par with what we're projected to be paying on Medicare and soak up 20 cents of every tax dollar, versus 8 cents today.

That could could financial turmoil, additional credit rating downgrades and damaging tax hikes.

Long story short, we need to ensure that we're helping those who need help, while not tempting those who don't.

Anthony Mirhaydari is founder of the Edge, an investment advisory newsletter, as well as Mirhaydari Capital Management, a registered investment advisory firm.

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