ObamaCare: Should You Pay the Premium or the Tax?

When it comes to ObamaCare, should you pay the premium for buying health insurance on your state's exchange, or would you be better off skipping it and paying the "penalty" tax instead?

In two weeks time from this writing, you may find yourself having to answer that question, and the answer may not be what you think. In setting up the its system for mandating that all Americans have health insurance, the Patient Protection and Affordable Care Act (PPACA) actually creates some really perverse incentives that may make it more desirable for people to dump their health insurance coverage instead. At least, until they might actually need to have it.

You see, ObamaCare actually mandates that Americans who aren't covered by their employer's health insurance either choose to buy costly policies on their state's newly established health insurance exchanges and perhaps benefit from a tax credit subsidy to do so, or choose to "self-insure" and pay a potentially much less costly tax instead.

Here's how the self-insurance part of that works. Because the PPACA prohibits health insurance providers from denying coverage to people with pre-existing conditions, healthy people can choose to go without any coverage and only buy it if they actually need to during the next enrollment period. If the amount of any penalty tax they have is considerably less than the cost of the health insurance they might otherwise choose to buy, they might have a powerful incentive to do just that.

For healthy Americans, the self-insurance aspect of their choice would mean that they would simply pay out of pocket for the health care they actually consume - just the same as those covered by health insurance will do through the co-pays and deductibles for the coverage they have available to them. And while you might be surprised at how inexpensive medical care can be if health insurance is not involved, even for major surgical procedures, the real challenge would come if they suddenly find themselves faced with health care costs that are considerably higher than what they might be able to pay out of pocket using their income, savings and credit accounts.

In the worst case scenario, they might have to get their health care provider to delay billing them for up to the maximum 90-day limit that the law mandates health insurers to provide coverage after they enroll, or perhaps just pay their health care costs out of pocket during that short period of time. But they will still be able to get insurance coverage, and if the incentive to drop it remains after they no longer need it, they are free to choose to do so, because the law permits it and because they are honest taxpayers who cannot be denied their rights.

Some might say that these Americans are wasting money on taxes that they could be using to buy insurance instead. But then, those people are ignoring that healthy people can go many years without needing any more than basic, low-cost health care, and that in the year where might might first need health insurance coverage, any tax they might have to pay would be pro-rated for the portion of the year they went without any coverage, reducing any potential waste to a minimum.

Our tool below is the first that's designed to help Americans find out which option under the ObamaCare law, paying a premium or the penalty tax, specifically is better for them. Beginning on 1 October 2013, you will be able to start here to find out how much the plans that will be available on your region's health insurance exchange may cost you.

In doing that, we'll need you to identify the monthly premiums associated with three of the plans that will be available to you: the second-lowest cost "Silver" plan, which is used to find out how much of a tax credit subsidy you might receive, the monthly premium of the lowest cost "Bronze" plan, which sets a limit for how much you might have to pay in ObamaCare taxes, and the monthly premium for the plan you would actually consider purchasing.

Until the exchanges officially open for business, you might consider getting the information for your state from the Commonwealth Fund's links to each state's exchange or scanning news reports for your state to find out what these values might be as they become public. The default values we've entered in our tool below apply for a 21-year old who lives in California. There's more to the default values that we've entered, but we'll cover that in a separate post in the future....

Also, if you're accessing this tool on a site that republishes our RSS news feed, you'll want to click here to access a working version of our tool.

Your Household Data
Input Data	Values
Your Total Household Income, or Modified Adjusted Gross Income (If Known)
Number of Household Members
Number of Children in Household
Your State's Health Insurance Exchange Data
Select Your State (Select "United States" If Your Territory Isn't Listed)	United States Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming District of Columbia
Monthly Premium for the Second Lowest-Cost "Silver" Plan Available To You
Monthly Premium for the Lowest-Cost "Bronze" Plan Available To You
Monthly Premium for the Health Insurance Plan You're Considering Purchasing

Your Annual Health Insurance Results
Calculated Results	Values
Annual Premium (Full Price) of the Health Insurance Plan You're Considering Purchasing
Annual Subsidy Tax Credit You'll Receive For Buying This Health Insurance
Your Annual Out-of-Pocket Costs
For Health Insurance (Premium Only, No Co-Pays or Deductibles)
For the Alternative Tax If You Don't Purchase Health Insurance (And Not Provided by Your Employer)
Potential Savings or Costs If You Choose to Pay the Tax Instead of the Premium
Your Potential Savings (or Costs, if Negative)
The Bottom Line

If the checking we've done with other sources is any indication, our tool turns out to be surprisingly accurate. And although it's not designed to do this particular math, we've validated the "loss-of-subsidy" effect on the out-of-pocket cost of health insurance for making one penny more than ObamaCare's subsidy eligibility level that CNBC described here.

In running the numbers from CNBC's example, we see our hypothetical household would get a subsidy of $5,362.56, which would lower their out of pocket cost for their annual premium from $12,783.96 to $7,421.40.

We then ran the numbers again, this time increasing the total household income by one penny to $78120.01. We find that this hypothetical household would lose out on that $5,362.56 subsidy and have to pay the full cost of $12,783.96. That's one heck of an out-of-pocket cost jump for the mistake of earning just one penny more....

But what CNBC missed in its analysis is that in both cases, if the potential health insurance buyers don't expect to have any significant health care expenses in the near term, it makes far more sense for them to choose to self-insure themselves and pay the ObamaCare income tax than it does for them to pay their state's ObamaCare exchange's health care insurance premiums!

After all, for healthy people, having an extra $7,421.40 or $12,783.96 can buy an awful lot of health care if and when they actually might need it, not to mention whatever else they would rather do with that kind of money if they don't.

Elsewhere on the Interwebs

We suggest that you take advantage of the Manhattan Institute's "Know Your Rates" site so you can compare how your state's average insurance premiums compare to what identical health insurance plans would have cost before the implementation of the Patient Protection and Affordable Care Act's provisions, paying close attention to the rates that apply for the age nearest your own.

Meanwhile, Chris Conover demonstrates that ObamaCare is a deal that never gets better as you get older!...

About This Tool

In building this tool, we've made a handful of assumptions. Here they are, along with links to our references for data:

• The federal government's poverty income thresholds for 2013 will initially apply in 2014.


• The Kaiser Family Foundation's description of how ObamaCare's subsides will be calculated is accurate.


• The map of states we used to identify which are expanding their eligibility for their Medicaid programs up to 138% of the federal poverty income threshold and which are not is largely accurate. For states that had not made their determination as 1 September 2013, we've assumed that they are not expanding their Medicaid program's eligibility. We will update this periodically as new information becomes available.


• CNNMoney's description of how the penalty tax will work is accurate. Update 20 September 2013: Our thanks to Sean Parnell of The Self-Pay Patient blog, who identifies an exemption from the tax that we originally missed - it turns out that people who live in regions where the lowest-cost Bronze plan is more than 8% of their household income even after the subsidy will be fully exempt from the tax! (Of course, you realize that means that skipping out on not paying health insurance too until they might actually need it just became an even more attractive option for those who will be fully exempt from the tax!)


• The default values associated with selecting the "United States" are those that will apply for a majority of the nation's population.


• People will mostly act rationally where their financial incentives and the assessment of their health care needs are involved.

Beyond this, we've assumed that for some people there may be a "gray area", who would only have a small incentive to not purchase health insurance, where any benefit in doing so is not very large with respect to their household income, and where the decision to buy or not buy should instead be based upon an assessment of what the buyer's actual health care needs for their household will be in the near term, rather than purely upon its cost with respect to the ObamaCare income tax.

Mathematically, we've defined that gray area as being equal to the difference between the penalty tax they might choose to pay or an amount equal to 3.1% of their income before taxes, which closely corresponds to the average expenditure of U.S. households for health insurance, according to the just-released Consumer Expenditure Survey report for 2012.

As it happens, that percentage is close to the maximum tax penalty of 2.5% of income that will be fully phased in for 2016, so our tool will indirectly communicate that potential future tax exposure.

Updates

Here at Political Calculations, our policy is for our tools to always improve over time. This section of this indicates all the significant changes we have made to the text of this article and the code for this tool.

• 20 September 2013: Modified programming to consider the tax exemption that might apply if the out-of-pocket cost of the least-expensive "Bronze" plan, even after the subsidy tax credit is considered, is still greater than 8% of their household income. Modified text in Assumptions section to indicate change was incorporated.


• 25 September 2013: Modified text in fourth paragraph to better clarify when an individual opting to pay the tax instead of a premium could acquire insurance if they determine they will need it. Added the Updates section to communicate all significant changes in this post and tool.

Legal Disclaimer

Materials on this website are published by Political Calculations to provide visitors with free information and insights regarding the incentives created by the laws and policies described. However, this website is not designed for the purpose of providing legal, medical or financial advice to individuals. Visitors should not rely upon information on this website as a substitute for personal legal, medical or financial advice. While we make every effort to provide accurate website information, laws can change and inaccuracies happen despite our best efforts. If you have an individual problem, you should seek advice from a licensed professional in your state, i.e., by a competent authority with specialized knowledge who can apply it to the particular circumstances of your case.

Dividends: U.S. Economy Now Out of Recession

According to the number of publicly-traded U.S. companies announcing cuts to their dividends, as of August 2013, the private sector of the U.S. economy has now fully exited the period of microrecession that it first entered in July 2012.

This new data confirms our call last month that the U.S. economy was exiting the recessionary conditions that had bogged it down since the third quarter of 2012.

Not uncoincidentally, this period of time also coincides with the Fed's latest quantitative easing programs. If not for the Fed's QE efforts, the U.S. economy would have experienced a full-fledged recession, rather than the more limited microrecession that it did.

Now that the U.S. economy is leaving those recessionary conditions behind, is it any wonder that the Federal Reserve is ready to begin trimming back the acquisitions of mortgage-backed securities and U.S. Treasuries that make up its current quantitative easing programs?

If you're looking for something fun to consider, try answering this question: If the Federal Reserve had not intervened to avoid the effects of a full-fledged recession in the U.S. economy in 2012, would President Obama ever have been re-elected?

References

Standard and Poor. Dividend Action Report. [Excel spreadsheet]. Accessed 10 September 2013.

Counterfactual QE

Today, we're presenting a story in a single picture: what would nominal GDP in the U.S. have turned out to be in the face of minor government spending cuts and major tax hikes in the absence of the Federal Reserve's quantitative easing programs of the past year?

The difference between the nominal GDP that was and the counterfactual of the nominal GDP that otherwise would have been is all due to the Fed's quantitative easing programs, as measured by the cumulative change in total assets held by the Federal Reserve since the end of 2012-Q3. How we measured the relative impact of government spending cuts and tax hikes is explained here and their applicability is explained here.

The Rise of the American Fascista State

Have you ever heard of the 70-year cycle in history? Here's an excerpt from an essay by Eric A. that introduces the concept:

Many of you may be familiar with the Foundation series by Issac Asimov. In it, mathematician "Hari Seldon spent his life developing a branch of mathematics known as psychohistory. Using the laws of mass action, it can predict the future, but only on a large scale; it is error-prone on a small scale."

In practice, we can see that this would be theoretically correct: we study history precisely because human nature is relatively the same and the same events recur with the same predictable responses. If history really were chaos--a muddle of events appearing randomly and being resolved in unpredictable ways--there would be no point in studying it.

So what of 70 years? It seems that American politics goes through a roughly 70 year long cycles where it swings from one side of the political pendulum to the other. For example, if we start in 1789, which marks the real beginning of the United States as a single nation with the inauguration of George Washington as the nation's first president under the Constitution, the passage of 70 years suddenly puts us on the cusp of the U.S. Civil War in 1859 as the nation was getting set to try to tear itself apart.

From then, Random Jottings' David Weidel notes a general 70-year cycle in American politics:

The theory says that America became a Republican country starting about the year 2000. (From 1860 Republicans were dominant, and then the Dems starting about 1930.) Each cycle is about two political generations. The 70 years before 1860 don't have today's parties, but they fit otherwise, with the Revolutionary generation and then a follow-on generation stuck in old habits of thought. And then a problem that needed a new political alignment to solve.

But what if it's not just American politics? What if it's really a cycle that's driven by opposing ideologies in conflict?

For example, in 1896, the U.S. Supreme Court made it legal to institutionalize racial segregation in the United States. Almost 70 years later, the U.S. Congress was undoing the damage in the landmark Civil Rights Act of 1964.

This is 2013. What sort of conflict was the U.S. engaged in 70 years ago?

Well, that would put us in 1943. And in 1943, the United States fought and succeeded in forcing fascist Italy to surrender and switch sides in World War 2.

The Concise Encyclopedia of Economics explains what fascism in Italy was all about, emphasis ours:

As an economic system, fascism is socialism with a capitalist veneer. The word derives from fasces, the Roman symbol of collectivism and power: a tied bundle of rods with a protruding ax. In its day (the 1920s and 1930s), fascism was seen as the happy medium between boom-and-bust-prone liberal capitalism, with its alleged class conflict, wasteful competition, and profit-oriented egoism, and revolutionary Marxism, with its violent and socially divisive persecution of the bourgeoisie. Fascism substituted the particularity of nationalism and racialism—“blood and soil”—for the internationalism of both classical liberalism and Marxism.

Where socialism sought totalitarian control of a society’s economic processes through direct state operation of the means of production, fascism sought that control indirectly, through domination of nominally private owners. Where socialism nationalized property explicitly, fascism did so implicitly, by requiring owners to use their property in the “national interest”—that is, as the autocratic authority conceived it. (Nevertheless, a few industries were operated by the state.) Where socialism abolished all market relations outright, fascism left the appearance of market relations while planning all economic activities. Where socialism abolished money and prices, fascism controlled the monetary system and set all prices and wages politically. In doing all this, fascism denatured the marketplace. Entrepreneurship was abolished. State ministries, rather than consumers, determined what was produced and under what conditions.

Now that you've read what fascism entails, consider the following excerpt from an article yesterday at The Huffington Post, noting how nearly 40% of U.S. CEOs have come to have a very large portion of their income paid for by U.S. taxpayers:

WASHINGTON -- More than one-third of the nation's highest-paid CEOs from the past two decades led companies that were subsidized by American taxpayers, according to a report released Wednesday by the Institute for Policy Studies, a liberal think tank.

"Financial bailouts offer just one example of how a significant number of America's CEO pay leaders owe much of their good fortune to America's taxpayers," reads the report. "Government contracts offer another."

IPS has been publishing annual reports on executive compensation since 1993, tracking the 25 highest-paid CEOs each year and analyzing trends in payouts. Of the 500 total company listings, 103 were banks that received government bailouts under the Troubled Asset Relief Program, while another 62 were among the nation's most prolific government contractors.

Meanwhile, that all would be occurring as American entrepreneurs would appear to be harder and harder to find:

The US entrepreneurial spirit may be faltering. Check out these data points from The Wall Street Journal: a) In 1982, new companies made up roughly half of all US businesses, according to census data. By 2011, they accounted for just over a third; b) from 1982 through 2011, the share of the labor force working at new companies fell to 11% from more than 20%; c) Total venture capital invested in the US fell nearly 10% last year and is still below its prerecession peak, according to PricewaterhouseCoopers.

The United States would appear to be well on its way to adopting fascist Italy's political-economic system, favoring the politically-connected while starving entrepreneurs out of the economy. Although today in America, we call it "crony capitalism". And the people who practice it "progressives".

Do you think we should start calling it what it really is?

Recommended Reading

• Foundation (Foundation Novels)

Elsewhere on the Web

• IPS' report Executive Excess 2013: Bailed Out, Booted, Busted (full PDF version available), plus an Excel spreadsheet with the compensation data for the top 25 highest paid CEOs for each year from 1994 through 2013.


• Barry Ritholtz weighs in on the transfer of wealth from taxpayer to CEOs documented in IPS' report.

Previously on Political Calculations

• Barack Obama: Crony Capitalist in Chief? Part 1


• Barack Obama: Crony Capitalist in Chief? Part 2


• The Twenty Percent President


• Stranded in the Food Desert


• Has the U.S. Become a Banana Republic?


• How GE Became a Basket Case


• GE CEO Stuck Inside Wet Paper Bag


• Top 10 Corporate Welfare Recipients by "ObamaCare"

The Relative Productivity of Private vs Public Sector Employees

"How does the compensation of federal civilian employees compare with that of employees in the private sector?" is a question that the Congressional Budget Office once asked and answered, finding that the combined cash income and benefits that Uncle Sam's employees are paid is a lot more generous than what their peers in the private sector earn, even after controlling for factors like education, years of experience and job descriptions.

But we wondered how does the productivity of federal civilian employees compare with that of employees in the private sector? After all, if a civilian employee of the U.S. federal government is more productive than their similarly educated and experienced peer doing the same or similar job in the private sector, that difference could well justify their more generous compensation. If everything else is equal, it makes sense that a person who is more economically productive in doing a job would be compensated more than a less productive person doing the same work.

Thanks to a natural experiment, we're about to find out just how productive federal bureaucrats really are with respect to their direct peers in the private sector!

This summer, as part of the cost-cutting measures related to the budget sequester required by the Budget Control Act of 2011, President Obama acted to discontinue the operations of the Department of Labor's International Labor Comparisons (ILC) program, which converts the economic statistics produced by other nations' governments to adhere to U.S. standards and definitions, which allows for direct apples-to-apples comparisons to be made between the nations' economic data. Here's the announcement of the program's elimination that appeared in the Federal Register on 25 June 2013:

The International Labor Comparisons (ILC) program adjusted foreign data to a common framework of concepts, definitions, and classifications to facilitate data comparisons between the United States and other countries. ILC data were used to assess United States economic performance relative to other countries, as well as to evaluate the competitive position of the United States in international markets.

On March 1, 2013, President Obama ordered into effect the across-the-board spending cuts (commonly referred to as sequestration) required by the Balanced Budget and Emergency Deficit Control Act, as amended. In order to achieve these budget cuts and protect core programs, The Bureau of Labor Statistics is eliminating the International Labor Comparisons program. Subject to BLS policies and procedures, the underlying data and the methodology used to produce the data will be available upon request.

Shutting down the ILC program had been one of the President's budget objectives for some time. The Washington Post described the ILC's operations and President Obama's desire to cut the program back on 3 March 2010:

President Obama's budget would eliminate the International Labor Comparisons office and transfer its 16 economists to expand the bureau's work tracking inflation and occupational trends. The White House says the cut, estimated to save $2 million, is one of many difficult decisions the president was forced to make to control spending.

On 27 June 2013, the non-profit Conference Board announced that it would take over reporting the international labor comparisons. (The Conference Board is the same outfit that conducts the Consumer Confidence Survey and that reports the Index of Leading Economic Indicators, both of which are frequently cited in the media.)

The Conference Board announced today that it will continue a statistical program on international labor statistics that is to be eliminated by the federal government due to across-the-board spending cuts. The Bureau of Labor Statistics, a unit of the United States Department of Labor, has announced that it will shut down the International Labor Comparison (ILC) program on July 1.

The program provides businesses, government agencies, academics, and the public with high-quality data on manufacturing productivity, unit labor costs, consumer price, wage rates, and employment and unemployment for up to 34 countries. It adjusts data to a common framework of concepts, definitions, and classifications to facilitate data comparisons across countries. ILC data are used to assess United States economic performance relative to other countries, as well as to evaluate the competitive position of the United States in international markets. The Conference Board will continue the program on its current basis and make the data available to the public at no cost. The Conference Board will implement the transition of the program over the summer.

"Every large company needs access to this data, and it can only be gathered effectively by leveraging non-commercial relationships between various government and statistical agencies around the world," said Jon Spector, President and CEO of The Conference Board. "If a government agency cannot continue to maintain this information, it requires an independent institution to take over the task."

Clearly, the Conference Board believes that there is value in sustaining the output of the International Labor Comparisons program. But the question we wanted to answer is "how many people will they seek to hire to do the work?"

Since the private sector Conference Board wasn't doing the work previously, to take on the new work, it would very likely have to both retask its current employees to add to their current job responsibilities while also creating new jobs specifically to do the additional work.

The number of dedicated new hires would be especially revealing because that would provide a direct indication of the relative productivity of people doing the exact same jobs in both the public and private sector. If the number of new hires in the private sector required to do the work turns out to be greater than the number of dedicated federal employees who were previously doing it, that would be a clear indication that the federal bureaucrats are more productive than their private sector peers, and thus are deserving of a higher level of compensation.

As best as we can tell from its job postings since its announcement, the private sector Conference Board will hire at least two and possibly three people to do the work that would appear to have required 16 dedicated bureaucrats when the same work was done by the U.S. federal government. Here are the job descriptions for the positions that the Conference Board is seeking to fill related to this work:

• Senior Economist International Labor Comparison


• Research Analyst, Economics International Labor Comparisons Program


• Research Assistant, Economics

The last Research Assistant position doesn't reference the International Labor Comparisons program, which means that it isn't the primary purpose of the position, but it's clear from the job description that the person hired to fill the opening could very well be tasked with work related to the ILC program. We should also recognize that it is possible that the job posting for the Research Analyst position that does specifically reference the ILC work may represent more than one opening with the same job description, but there is no indication that is the case in the description for the position, so we tend to think that is not the case.

Those things noted, these job postings suggest that the private sector Conference Board believes it will take the addition of no more than 3 people to do the same work that 16 bureaucrats were dedicated to doing as employees of the U.S. federal government. That would mean that the federal government employees who were previously doing the work would appear to be less than one-fifth as productive as their private sector peers in working to produce the same output.

We therefore find that the higher level of compensation for civilian federal government employees is not justifiable on the basis of their relative productivity with respect to similarly skilled and experienced workers in the private sector.

In fact, the lower apparent productivity of federal bureaucrats would also be a big reason why cuts to government spending reduces the nation's GDP by considerably less than the actual amount of the spending reduction.

Speaking of those 16 displaced federal government employees, since it appears that they have been reassigned to other areas within the Bureau of Labor Statistics, whose remaining workload is unchanged following the elimination of the International Labor Comparisons program, that means that the collective productivity of the federal government's employees at the BLS has decreased.

Of course, that is exactly what we should expect to happen when more people become involved in generating an unchanged level of output. But at least, in doing less work per person than before, but for the same pay, that means that their total compensation per person has become just ever so much greater than their private sector peers.

It's all just another perk of working for Uncle Sam!

References

Conference Board. The Conference Board Takes Over International Labor Statistics Program from the U.S. Government. [Online Article]. 27 June 2013.

Labor Statistics Bureau. International Labor Comparisons. [Online Article]. Federal Register. 25 June 2013.

MacGillis, Alec. Obama Administration Plans to Close International Labor Comparisons Office. [Online Article]. Washington Post. 3 March 2010.

The Power of Quantitative Easing

Now that the BEA has released its massive revision of the United States' Gross Domestic Product, we're going to put our Keynesian-style GDP multiplier tool to the test. Will it still be able to accurately predict what a future quarter's nominal GDP will be for the current U.S. economy based only based only on a previous quarter's GDP and a handful of fiscal and monetary policy GDP input shocks? Or will it fold up like the cheap suits worn by Keynesian-style economists?

To do this analysis, we'll be projecting the future value for nominal GDP from the starting point of the fourth quarter of 2012. This is the final quarter preceding major changes in the U.S. government's policies for taxes and spending, which makes it an ideal zero point in time from which to consider the impact of these shocks to the economy. The table below presents the values we'll be using in this analysis.

Changes in Fiscal or Monetary Policy Drivers Since 2012-Q4
Fiscal or Monetary Policy Driver	Total Through 2013-Q1	Total Through 2013-Q2
Change in Expected Tax Collections	+$56.3 billion	+$112.6 billion
Change in Government Spending	-$26.6 billion	-$29.1 billion
Amount of Quantitative Easing	+$295.0 billion	+$572.0 billion

Now it's time to do the math! We've entered the data that applies through the first quarter of 2013 into the tool below, which you'll need to change to the values that apply for 2013-Q2 to project the value of GDP for that quarter.

But before you go any farther, if you're reading this article on a site that republishes our RSS news feed, please click here to access a working version of this tool at our site, where it will also be properly formatted (we're looking at you, feedly - we speak CSS, you should too!...)

GDP and "Input Shocks"
Input Data	Values
Nominal GDP for the Previous Period [billions]
Change in Expected Federal Government Tax Collections [billions]
Change in Federal, State & Local Government Spending [billions]
Federal Reserve Net Quantitative Easing [billions]
Fiscal Policy Multipliers (Estimated Range)
Government Spending (0.6-0.7)*
Government Taxes (-3.0)
Quantitative Easing (0.8-1.0)

* If unemployment rate ≥ 7.5%. Multiplier is 0.5 if unemployment rate < 7.5% (may apply after 2013-Q2).

Individual Effects of Fiscal and Monetary Policies Upon GDP
Calculated Results	Values
Effect of Change in Government Spending on GDP [billions]
Effect of Change in Government Taxes on GDP [billions]
Effect of Change in Monetary Policy on GDP [billions]
Combined Effects of Fiscal and Monetary Policies Upon GDP
Combined Effects on GDP [billions]
Estimated GDP for Next Period [billions]

What we find is that with the data for 2013-Q1, for the Keynesian-style GDP multipliers that apply for fiscal and monetary policy, our tool would predict that nominal GDP would be $16,530.4 billion. That compares with the $16,535.3 billion actually recorded by the BEA for the nation's GDP in the first quarter of 2013, which means that our tool would appear to have underpredicted GDP in 2013-Q1 by $4.9 billion, an error of 0.03%.

After substituting in the data for 2013-Q2, with the exact same GDP multipliers, our tool predicts that nominal GDP would be $16,637.0 billion. The BEA's first estimate of GDP for the second quarter of 2013 is actually $16,633.4 billion, as our tool appears to have overpredicted GDP in 2013-Q2 by $4.4 billion, also an error that rounds to 0.03%.

The BEA will not finalize its estimate of GDP for 2013-Q2 until September 2013, so the actual difference between our tool's projection and the official figure will be subject to change until then. Regardless, from the data we do have, it appears that our tool can predict future nominal GDP levels for the current economy with a surprising degree of accuracy.

Update 14 September 2013: It occurs to us that a picture might be worth 1000 words here. Here's a chart illustrating how the puzzle pieces fit together, based upon the BEA's second estimate of GDP for 2013-Q2 (the third estimate will come out near the end of September 2013):

It is pretty clear from these results that if not for the Fed's quantitative easing programs, the U.S. economy would have contracted in recession during these quarters. You can consider the impact to what the U.S.' GDP would be by zeroing out this value in our tool above.

These results also demonstrate that monetary policy can remain highly effective even if basic interest rates are at or near the zero level. We'll discuss the mechanisms by which we think the Fed's quantitative easing programs affect the nation's economy in an upcoming post.

In the meantime, you can take advantage of our tool to get a sense of the extent to which the federal government's tax hikes and spending cuts in 2013 are actually affecting the nation's GDP by alternately zeroing out these figures. One thing that you'll find is that over 90% of the negative drag on GDP may be attributed to the tax hikes that took effect in 2013. Less than 10% may be attributed to reductions in government spending at all levels in the U.S.

Finally, if you really want to play the "what if" game, try combining government spending cuts with modest tax cuts in our tool above. One may wonder why today's politicians aren't discussing implementing this particular combination of fiscal policies.

About the Numbers in the Tool

GDP and Government Spending: The GDP ($16,420.3 billion) for our starting quarter (2012-Q4) was taken from the BEA's massive revision of GDP from 1929 through the first quarter of 2013, as were the numbers we've indicated for the total change in government spending from that starting quarter (-$26.6 billion for 2013-Q1 and -$29.1 billion for 2013-Q2). Most of the reduction in government spending occurred at the federal government level, with the balance being recorded for state and local governments.

We should also note that total government spending appears to have only fallen by $2.5 billion from 2013-Q1 to 2013-Q2 in the BEA's initial estimate for the more recent quarter, all of which occurred at the federal government level. We anticipate that this number will change as the BEA updates its estimate of government spending for 2013-Q2.

2013's Tax Hikes

The total for the change in the amount of taxes in the U.S. is based on the fiscal cliff tax deal of 3 January 2013, which increased the Social Security payroll tax by 2%, as well as increased the tax rates paid by high income earners and also the tax rates for investments.

Social Security Payroll Tax Hike: Here, we estimated the additional amount that President Obama expects to collect through Social Security's combined employer-employee payroll tax of 12.4% in 2013 (as indicated by Table 2.4 of President Obama's FY2014 budget proposal) compared to what would have been collected under 2012's combined tax rate of 10.4%, arriving at a figure of $108.6 billion for the year, for which we assumed that one-fourth ($27.16 billion) would be collected in the first quarter of 2013.

Obamacare Taxes: We also took into account the tax increases that went into effect on investment income and upon high income earners as part of the Patient Protection and Affordable Care Act, which are expected to total $36 billion in 2013, one-fourth ($9 billion) of which we assumed was incurred in the first quarter.

Fiscal Cliff Income and Investment Tax Hikes: The remaining portion of tax increases taking effect were a direct outcome of the increases in the top income tax rates and upon investment income mandated as part of the fiscal cliff tax deal at the beginning of 2013, where a static analysis indicates that the $80.6 billion more in taxes will be collected in 2013, one-fourth ($20.15 billion) of which might be applied to the first quarter of the year.

Combined, these values total up to a tax bill for Americans that's $225.2 billion higher for Americans in 2013 than in 2012, which works out to be approximately $56.3 billion higher for just 2013-Q1. To come up with the cumulative total of expected changes in tax collections from 2012-Q4 through 2013-Q2, we simply multiplied this quarterly change by a factor of 2.

About the Multipliers

We featured a discussion of the fiscal multipliers for government spending and tax policies in our previous discussion of Spain's disastrous economic choices of 2012. At present, we're simply assuming that the fiscal multiplier for the Fed's quantitative easing programs is 1.0, in the absence of data that might contradict that figure. As yet, there really isn't any data to contradict this estimate.

Quantitative Easing

Our estimates of the cumulative amount of quantitative easing being provided by the Federal Reserve through the first and second quarters of 2013 were determined by finding the change in the total assets held by the Fed with respect to their holdings at the end of 2012. That worked out to be $295.0 billion through 2013-Q1 and $572.0 billion through 2013-Q2.

Data Sources

Board of Governors of the Federal Reserve System. All Federal Reserve Banks - Total Assets, Eliminations from Consolidation. [Text Document]. Accessed 11 August 2013.

Cloyne, James. What Are the Effects of Tax Changes in the United Kingdom? New Evidence from a Narrative Evaluation. [PDF Document]. CESIFO Working Paper No. 3433. April 2011.

Owyang, Michael T., Ramey, Valerie A. and Zubairy, Sarah. Are Government Spending Multipliers Greater During Periods of Slack? Evidence from 20th Century Historical Data. [PDF Document]. Federal Reserve Bank of St. Louis. Economic Research Division. Working Paper 2013-004A. January 2013.

Romer, Christina D. and Romer, David H. The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks. [PDF Document]. March 2007.

U.S. Bureau of Economic Analysis. National Income and Product Accounts, Gross Domestic Product: Second Quarter 2013 (Advance Estimate), Comprehensive Revision: 1929 through First Quarter 2013. [Text Document]. 31 July 2013.

How Much Is Your Time in Traffic Worth?

Suppose, for a moment, that the people who run your local government really cared enough about you and your fellow citizens to do something that might actually benefit you, by funding a fancy transportation project that could shave 13 minutes off your time while commuting once it's done.

Is it worth it?

The answer, at this point, is "it depends". And honestly, what it depends upon is what your and your fellow commuters' time is really worth.

That's why we've created the tool below, so you can see how much you're saying your time in traffic is worth if the project goes forward! Just enter the indicated data in the tool below, and we'll do the math....

If you're reading this article on a site that republishes our RSS news feed, click here to access a working version of this tool!

Project Cost and Time Data
Input Data	Values
Cost of the Transportation Project
Number of People Who Would Benefit in a Year
Amount of Time Each Would Save Daily [minutes]
Opportunity Cost/Discount Rate [%]

How Much Are You Saying Your Time While Traveling is Worth?
Calculated Results	Values
Value of Travel Time [$ per hour]

All the default numbers in the tool above are taken from a federally-funded transportation project in North Carolina, which promised to spend $461 million to reduce the travel time of some 100,000 train commuters between Charlotte and Raleigh by 13 minutes a trip, which would bring their one-way transit time down to just under three hours. We then adapted the math developed by John Whitehead for determining the benefit-cost ratio for the project to estimate what value per hour saved per individual that the state's politicians were assigning to the primary declared benefit of the project.

If that value is equal to or less than what you actually earn per hour, then the project is probably worthwhile for you. Keep in mind though that the median wage that Americans earn is about $13 per hour (see 2011's data here), while most Americans value their time while traveling at roughly 70% of the hourly wage they earn. That makes the real break-even travel time value for this benefit cost analysis come out to be about $9 per hour for the majority of Americans.

So if you're a member of the politician-developer industrial complex, that's the number you need to aim for in the projects you pursue. That is, if you really care about pursuing genuinely worthwhile projects for the people who live in your communities.

But then, we know you have other priorities....

The GDP Multiplier for QE

After adding an update to our original post for predicting GDP for the U.S. in the first quarter of 2013 that was based on earlier estimates of the amounts of government spending, tax hikes and quantitative easing taking place in the quarter, we thought the results based upon more final estimates of these quantities deserved a post in their own right.

Here are the values that need to be entered into the tool below to coincide with the actual levels of government spending cuts, expected tax increases and the Fed's quantitative easing that took place in the first quarter of 2013, per the BEA's third estimate for GDP for the quarter and the change in the Fed's total asset holdings over the quarter (as measured by the change in the Fed's total assets from 26 December 2012 to 27 March 2013) and our earlier estimate of the expected increase in tax collections for the quarter:

• Government Spending Cuts (Federal, State, Local): -$24.2 billion


• Expected Tax Collections from Tax Hikes: +$56.3 billion


• Total Federal Reserve Quantitative Easing: +$295.0 billion

We've updated our tool in this post with these values:

GDP and "Input Shocks"
Input Data	Values
Nominal GDP for the Previous Period [billions]
Change in Expected Federal Government Tax Collections [billions]
Change in Federal, State & Local Government Spending [billions]
Federal Reserve Net Quantitative Easing [billions]
Fiscal Policy Multipliers (Estimated Range)
Government Spending (0.6-0.7)*
Government Taxes (-3.0)
Quantitative Easing (0.8-1.0)

* If unemployment rate ≥ 7.5%. Multiplier is 0.5 if unemployment rate < 7.5%.

Individual Effects of Fiscal and Monetary Policies Upon GDP
Calculated Results	Values
Effect of Change in Government Spending on GDP [billions]
Effect of Change in Government Taxes on GDP [billions]
Effect of Change in Monetary Policy on GDP [billions]
Combined Effects of Fiscal and Monetary Policies Upon GDP
Combined Effects on GDP [billions]
Estimated GDP for Next Period [billions]

If you're reading this article on a site that republishes our RSS news feed, click here to access a working version of this tool!

You shouldn't be surprised to find that we come very close to the BEA's third estimate for GDP in 2013-Q1 of $15,984.1 billion in the tool above with these values, as our tool's results are nearly within 0.05% of it. If the amount of the Fed's quantitative easing in 2013-Q1 totaled up to $303.4 billion, our estimated GDP multiplier of 1.0 for QE would be dead on target.

What that means is that there isn't much of a multiplier effect for the economy from quantitative easing - it basically boosts the economy by $1 for every $1 worth of quantitative easing the Fed does. It does however make a positive contribution to GDP and it can clearly offset the impact of expected fiscal policy shocks.

In fact, as our tool demonstrates, if not for the effect of the Fed's amped up QE program in the first quarter of 2013, we would be discussing the United States' new recession instead.

Image Credit: North Dakota (ND.gov) Youth