Commentary | Budget, Taxes, and Public Investment

Ryan plan to slash Medicaid will cost the economy nearly two million private sector jobs

Currently, Medicaid provides comprehensive health coverage to the elderly, disabled, children, and low-income adults.[1]  The cost of providing health care coverage is split between the federal government and the states.  House Budget Committee Chairman Paul Ryan (R.-Wisc.) released a budget resolution this week that would “block grant” Medicaid, meaning that it would give states a fixed amount of money rather than provide a fixed share of the total costs.  Because these grants would grow more slowly than the expected inflation rate for health care costs, this proposal would have the federal government shift an increasing amount of the coverage costs onto states, who will be in turn forced to cut health benefits and other services, cut public investments such as education and transportation, or raise taxes.

Assuming states responded by cutting Medicaid benefits, this plan would certainly inflict enormous hardship on the most vulnerable populations in society by depriving them of access to basic health care.[2]  But it would also have a significant jobs impact.

Over the next five years (during which time CBO projects that the economy will still be below potential), Chairman Ryan’s Medicaid proposal would cut the program by $207 billion, which includes both eliminating the Medicaid expansion under the Affordable Care Act and even deeper cuts to the Medicaid program.  Using a standard macroeconomic model that is consistent with private- and public-sector forecasters, we find that a $207 billion cut would result in a loss of 2.1 million jobs over the next five years, or 2.9 million full-time equivalent jobs.[3]  These figures are in job-years, which refer to a job held for a single year, meaning that five jobs lost in a single year is the equivalent to one job lost over five years.

Furthermore, the job loss would overwhelmingly be in the private economy.  Medicaid has very low overhead, as about 96% of the program’s funds go toward benefits which are spent in the private sector.  Assuming the 96% ratio is relatively constant across states (or at least not systematically biased in one direction), Medicaid cuts of this magnitude would result in the loss of just under 2 million private-sector jobs, or 2.8 million full-time equivalent jobs.

This estimate is conservative for two reasons.  First, because Medicaid is a program that generally benefits low-income households—who out of necessity are much more likely to consume rather than save—a larger-than-normal share of these cuts will undermine demand in the private sector.  This suggests that the cut to Medicaid would have an even larger impact on the economy than we estimate here.  Second, it is likely that an even larger share of the job loss would fall on the private sector because overhead includes not only labor but equipment and supplies as well, which are provided by private companies.

The economy still reels from the largest recession since the Great Depression.  Over 24 million workers are either unemployed or underemployed—nearly double the 2007 level. In terms of simple joblessness, we are 11.1 million jobs short of pre-recession unemployment levels after factoring in population growth.  Getting back to those levels in three years would require that the economy add 400,000 each month—almost twice the amount added last month—for the next 36 months straight. Congress should act now to create jobs, not drive the economy even further into a ditch by slashing basic health care access to children, the elderly, and the disabled.

(The Kaiser Family Foundation recently released state-level data that allows us to further refine our job loss estimates by adding this state-level analysis.)

These state jobs numbers were calculated by taking the Center on Budget and Policy Priorities’ estimate of the annual cut to Medicaid under the Ryan resolution (which does not include estimates of the annual cuts to the Medicaid expansion under the Affordable Care Act) and applying it  to state-by-state data from a recent Kaiser Family Foundation report (which only presents a single estimate of the entire 10-year cut).  We use these data to calculate the cuts for the 2012-15 period.  Our analysis only examines up through 2015 because the specific multipliers used are only applicable during periods where the economy is below potential.

The state job loss estimates were calculated using the same methodology as the national job numbers in the above analysis.  The accompanying Table presents two scenarios. Scenario 1 assumes that the job loss is proportional to the state-level cuts.  This would be true, for example, if the dollar cut in each state directly translates into a loss of demand for goods and services produced exclusively in that state and nowhere else in the country.  This is certainly not always the case, as supply chains are rarely located solely in one state.  So the table below also contains Scenario 2, which assumes that the job loss is proportional to the state’s share of national employment.  This would be the case if a state’s job loss is determined by overall national spending.  As it is the case that the truth is somewhere between these two assumptions, these estimates provide a plausible range of job loss for each state.

[1]  In order to be consistent with Chairman Ryan’s budget resolution, this analysis considers SCHIP to be part of Medicaid.

[2] This is not an altogether unreasonable assumption—after all, if national Republicans have found that the politically easiest savings are by cutting health care for the poor, elderly, and disabled, it is quite possible that state Republicans (who control a disproportionate amount of state houses) might come to the same conclusion.

[3] In this analysis, we employ CBO’s assumptions of a 1.5 fiscal multiplier for direct government spending and that a 1% drop in GDP corresponds to a 1.2 million job loss.

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