Pelosian Economics: Medicaid Expansion as Fiscal Stimulus

Supporters of LB577, the bill that would expand Medicaid in Nebraska, argue that expansion will result in an economic boom due to the infusion of approximately $3.5 billion in “free” federal tax dollars. Specifically, they predict at least $700 million annually in new economic activity, which could finance at least 10,000 new jobs annually, from 2014 through 2020.

So, let’s do the math, shall we?

Assuming LB577 is passed and becomes effective in 2014, proponents would have us believe that the infusion of 3.5 billion of those “free” federal dollars would create $4.9 billion in new economic activity in Nebraska by possibly creating 70,000 jobs over the same period.  In other words, for each of those “free” federal dollars, LB577’s supporters expect $1.40 of new economic activity to occur — a “multiplier” effect of 1.4.

Although the argument is not original to Representative and Former House Speaker Nancy Pelosi¹ The concept of job creation through government stimulus spending is actually rooted in Keynesian demand-side economics.  In his General Theory of ...continue  (D-CA), I refer to it as “Pelosian Economics” because she’s been the most visibly outspoken over the past few years in advancing it.  Specifically, Ms. Pelosi insists that government spending stimulates demand and creates jobs, particularly so when federal funds are distributed in the form of food stamps and unemployment benefits.  Here’s how she has explained it:

Shelli and I countered the Pelosian argument as it pertains to food stamps in an article we wrote and posted here back in September of 2010, entitled “NE Think Tank Has a Lot in Common With Pelosi.”  The same counter-arguments apply in the context of Medicaid expansion:

• Each and every one of those 3.5 billion dollars the federal government will contribute to pay for Medicaid expansion in Nebraska must have first been confiscated, through taxation, mostly from Nebraska citizens and, to a lesser extent, from the citizens of other states.
• Clearly, there are administrative costs incurred in the levy and collection of federal taxes and in the divvying up and redistribution of the proceeds back to Nebraska. Consequently, the federal government actually had to collect MORE THAN $3.5 billion from Nebraskans and others in order to spend $3.5 billion on Medicaid expansion in Nebraska.
• If those dollars — the $3.5 billion PLUS the administrative fees incurred by the feds that were skimmed off the top — had been left with the Nebraskans that earned them in the first place, those earners would have engaged in economic activity beneficial to themselves and to the Nebraska economy.
• Such economic activity would have had, at least, an equal impact on the state’s economy. The argument can, in fact, be made that the economic impact would have been greater, because spending and investment choices would have been made by individual Nebraskans in the private sector rather than by the government in the public sector and related welfare state bureaucracy (e.g., non-profit corporations like OneWorld whose very existence depends upon the largess of the welfare state).

Pelosian economics ignores these facts, apparently assuming federal tax dollars are, essentially, “money for nothing,” materializing out of thin air, I guess. If Pelosians understand that the money they advocate spending so freely came from taxpayers in the first place, they apparently assume that, if it hadn’t been confiscated from citizens in the form of taxes, Nebraskans would have stuffed the money in a mattress or had it hermetically sealed in a mayonnaise jar and placed on Funk and Wagnall’s front porch. Anything but spend or invest it in the state’s economy.

But this is contrary to basic economic theory and practice. Spending money or other resources for one thing we want necessarily means that that same money cannot be spent for something else we’d also like to have or to do. That “something else” is forgone. In economic lingo, that thing that’s foregone is called an “opportunity cost” that’s incurred whenever we buy something. In order to assess the effect of any “stimulus” spending by the government, opportunity cost has to be taken into account.

Pelosians fail to account for opportunity costs every time. As a result, we get these ever-so-rosy predictions of the wealth and bounty that will flow from government spending for social welfare programs. The assertion that there’s a multiplier involved (i.e., for every dollar in welfare spending, more than a dollar’s worth of economic activity results) is based, in large part, upon their failure to realize and account for the secondary and long-term costs that flow from such spending.

If welfare spending is such an economic boon, think of how juiced the Nebraska economy would be if we all stopped working, applied for unemployment, got food stamps, and qualified for Medicaid! Wowie-zowie! Happy days are here again!

This article series is about Nebraska’s Medicaid program, legislation introduced in the Unicameral aimed at expanding it, and the many reasons why expansion is an uncommonly bad idea.
This first grouping of articles don’t necessarily have to be read in order as they are research, principle, and policy focused:

• NE Medicaid Expansion: The Race is On
• Let’s See What Condition Our Condition is In
• People Don’t Walk Away From a Fool and His Money
• Sending Granny (and Gramps) to the Home
• Congratulations! She’s Having His Baby . . . And You’re Paying for It!
• Families Need Medicaid Like Fish Need Bicycles
• Money for Nothing and Health Care for Free
• Projections re Cost of Medicaid Expansion: Too Good to Be True
• LB577: Nebraska’s Unaffordable Care Act
• This article

This next grouping of articles report events affecting the progress of legislation in the Unicameral, listed in the order in which they were published:

• Unicameral’s Health Committee to Hear Medicaid Expansion Bill (LB577) Feb. 28th
• It’s Funny? Even If Medicaid Expansion Saved Money, Citizens Wouldn’t See a Penny
• Nebraska Medicaid Expansion: LB577 in Limbo
• Senator Bob Krist Withdraws As Co-Introducer of Medicaid Expansion Bill (LB577)

 Math calculations

Carnac the Magnificent