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The AHCA would break a lot of conservative promises on the economy

Yes, the bill cuts taxes. It also punts on the debt.

HUD Secretary Julian Castro Testifies To House Financial Services Committee On Department's Accountability Photo by Alex Wong/Getty Images

The American Health Care Act cuts a lot of taxes, a lot of government spending, and a few federal regulations. These are the best arguments for it, from a conservative policy standpoint. Here is the best argument against it: The bill violates other core conservative beliefs about what is holding back growth and prosperity in the US economy.

Republicans have long said federal budget deficits and debt are crushing growth — but the AHCA would effectively kill any hope for large deficit reduction under President Trump. That’s because it soaks up every conceivable cut in Medicaid, the party’s one big pool of potential deficit reduction in the Trump era, but spends most of the savings on insurance subsidies and tax cuts.

GOP leaders have long said regulatory uncertainty is dampening investment — but their bill would create all sorts of new uncertainties for business, particularly in the insurance industry.

They’ve said high premium costs are hurting middle-class families — but there’s not much evidence the bill as designed will create the market competition conservatives believe would bring those costs down.

The Republican Party has a theory for what’s wrong with the economy, but the health care bill doesn’t solve most of the problems they’ve identified. And it makes one of their biggest worries even harder to address in the future.

The GOP thinks deficits are holding back the economy — but the AHCA barely reduces the deficit

It’s important to think about the AHCA in economic terms, because the GOP has spent years telling voters that the law it would replace, the Affordable Care Act, was suffocating the economy. “Obamacare is the biggest job killer in the country,” Sen. Ted Cruz (R-TX) said way back in 2013. Trump said on the campaign trail last summer that repealing and replacing the law would save “two million jobs.”

That view is part of a broad and consistent diagnosis that most Republicans — including Trump, sometimes, but not all the time — have offered for why the economy has struggled to sustain even 2 percent real GDP growth in the years following the Great Recession. The full diagnosis blames budget deficits (which peaked at 10 percent of GDP in 2010 and fell below 3 percent the past several years) and mounting federal debt for “crowding out” private investment; high uncertainty over federal policy for deterring corporate hiring; and high taxes and regulations for weighing down job creators.

For an alternate view of what’s slowed down growth — long-term trends in productivity and labor force participation — check out this paper that a team of economists presented at the Brookings Papers on Economic Activity conference this week. But whatever you think of the Republican diagnosis, the AHCA clearly runs afoul of it in several ways. The most important is deficit reduction.

For all their concerns over debt levels, leading Republicans have not embraced a plan to balance the federal budget immediately. Instead, they’ve tended to promise to do so over the course of a decade, as is the case with Speaker Paul Ryan’s “A Better Way” budget blueprint. That blueprint is instructive here: It relies heavily on cuts to Medicaid and the health insurance subsidies of Obamacare — cuts that it projects would total nearly $3 trillion over 10 years.

The comparable spending cuts in the AHCA net out to just above $1 trillion over 10 years, according to the latest Congressional Budget Office estimates. That total is a) only about a third of the size of the Better Way cuts, b) apparently too large, at least in terms of Medicaid, for many House and Senate Republicans to agree to, and c) largely offset, for budgetary purposes, by tax cuts. CBO estimates the bill would reduce the deficit on average by $15 billion a year for the next decade.

For perspective, CBO projects the deficit will be $559 billion in 2017, or 2.9 percent of GDP. The AHCA savings would bring that all the way down to 2.8 percent.

Health policy is Republicans’ best bet to cut the deficit

The problem, from the perspective of conservatives’ economic diagnosis, isn’t just that the AHCA barely moves the needle on the deficit. It’s that they’re throwing away their main chance to do so, because it’s really hard to see where else Trump and congressional Republicans are going to find big savings.

Trump has ruled out cuts to Medicare or Social Security. True, he also once ruled out Medicaid cuts, but preserving Medicare and Social Security are fundamental to his populist appeal to blue-collar retirees.

His budget includes steep cuts to domestic discretionary spending -- many of which even Senate Republicans have said won’t clear Congress — but they are entirely offset by increased military spending. His campaign tax plan was projected to add trillions of dollars of new debt over a decade, even under “dynamic scoring” models that estimate increased economic growth from tax cuts.

As for tax reform, Congress’s next priority, at their most optimistic, Republican leaders aren’t promising to reduce deficits with their tax plans. “Deficits matter,” Kevin Brady (R-TX), the House Ways and Means chair, told me last month. “And so we designed the tax reform in the House to be deficit-neutral, counting on economic growth.”

If Republicans pass the AHCA, they’ll have punted their only politically foreseeable opportunity to reduce what they see as growth-killing deficits via spending cuts. They certainly don’t appear likely to raise taxes. If anything, the AHCA experience suggests any tax reform bill is likely to trade away deficit reduction more and more with each iteration; that’s what’s happened during health care negotiations.

It also seems likely that they won’t have reduced regulatory uncertainty. They well could add to it, by shifting regulations for so-called “essential health benefits” in certain insurance plans from the federal government to the states. As Peter Suderman writes at Reason today, that provision “would likely cause confusion and quickly throw insurance markets into chaos.”

What conservatives are left with is a classic supply-side argument: that the tax cuts in the bill will spur massive economic growth. This is indeed the case that some prominent conservatives are making to support the AHCA, most notably the economist Arthur Laffer and several of his associates at the Committee to Unleash Prosperity. They write:

Just think of what will happen to the economy, jobs, output and productivity by eliminating the taxes embedded in ObamaCare. The economy will be jump started. Why just eliminating the 3.8% tax add-on to income will add some 1000 to 1500 points on the Dow Jones Industrial Average and thereby reduce the unfunded liabilities of virtually every pension fund in the United States.

Eliminating the other taxes in ObamaCare and the anti-growth regulations will have equally as great an impact on growth. What’s not to love?

In a sense, this is a question of priorities in conservatives’ economic thinking. If they agree that taxes are the big thing holding back growth, the Laffer argument makes sense. If they’re more worried about deficits — and opportunity costs — then there may be a lot less to love.

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