What went wrong with Obamacare and jobs

There are good reasons why many government programs and Obamacare went sour.

2007, Washington State passed a law that employers couldn’t ask about a hiree’s credit scores. Oh, the pols congratulated themselves! This would stimulate more jobs for people with ugly pasts, the young, and blacks.  In fact, it did just the opposite. They made less. The reason is what economists call “information asymmetry”.

Let me explain. Suppose a good used car sells for $2000 and a lemon clunker for $1000. And a good market exists for both types of cars.  But what if dealers try hard to disguise the faults and do it successfully so that buyers can’t tell a lemon from a cream puff?  Then buyers will only offer  $1200-1300 to cover the possibility of buying a lemon.  Suppose you’re mechanically handy and don’t want to pay over $1000?  Then you offer $1000 maximum for everything on the lot, and the dealer will sell you something he’s willing to part with for that price.  But with those kinds of offers--$1000 and $1500—the good cars will sit on the lot. Likewise the job offers to the less employable in Washington State were less because employers often couldn’t tell good from bad.  They found the risk great that they’d accidentally hire a poor employee.  And fear caused them to have fewer jobs to offer. 

So the lemon problem can be circumvented if the better workers have ways to prove they are worth it—more education, experience and great references. That’s like the car dealer offering a big guarantee on a few cars. Hint, hint!  This is a good one!  Of course it is not a happy situation when you have to invest in education just to prove by credentialization that you are a good employee.  America was once built by dreamers who came here, didn’t  have much, got an opportunity, and worked their tail off to do something great.

Another way the sellers can guard against bad risks is to “screen” people.  Airlines offer first class and economy seating.  They make the economy seating purposefully cramped so that the people who can afford first class opt to do it at  a higher price.

Obamacare?  Let’s say, you offer health insurance for sale. And let’s say the government doesn’t allow you to “discriminate” against the sickly.  How do you screen for good risks?  If you get swamped by sickly patients, you lose your shirt in the insuring business.  Well, you offer two types of policies.  One has a cheap price but has a very high deductible.  The other has lots of benefits at a very high cost.  The guy who is sick all the time knows he is going to turn in lots of claims and dreads high deductibles.  He has to have the max benefits and high premium cost.  The customers with few health risks will opt for the high deductible policy at lower cost. Thus the Obamacare policies that the insurers offered had either big deductibles or much higher costs than in the past.  Saving $2500 per year, as Obama promised, turned out to be an average $3500 increase. Nobody can get a policy with low deductible and good benefits like in the past.  And because the insurers had foggy and less certain information about clients, everybody got less insurance for the money. Of course in the government’s world (Obama’s world) everybody’s behavior was supposed to be absolutely static and not affect the outcome and insurers weren’t supposed to do this.

Asymmetric information theory predicts something government economists couldn’t figure out about the labor market. Why is it that when a recession gets mature, why don’t  wages just fall until somebody starts hiring people at the new low rate?   Say you are an employer and want to retain a few very vital workers during tough times.  You might actually issue wages above the market rate.  When that happens employees (who look around;many friends have lost jobs) value their jobs because they could never get the same wage elsewhere.  They work hard and don’t quit, don’t slack lest they lose their good job.  Hence the employers were keeping their wages artificially high as a carrot and didn’t easily lower wages to reflect the labor market.  This happened far more 2009-2014 than ever before because other things (Obamacare mandates, extreme regulation growth, terrible foreign markets) scared employers.   For the 3^rd time in US history of 37 recessions, we had a jobless recovery where employment didn’t recover nearly as fast as it had collapsed. 

Economist George Akerlof won a Nobel Prize for this asymmetric information theory with his paper in 1970, and so much of it was so ‘common sense’ to business, that he had trouble getting it published!  Sometimes the stuff that businessmen know by heart is mystifying to ivory tower economists.  But it’s old news now.  So if Obama, Hillary, and company haven’t read it, I guess they must be a little behind on their reading. Or never had a job in business.