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How Healthcare Decentralization Could Complicate Business Cycle Policy

Jul. 09, 2017 9:12 AM ET18 Comments
Ed Dolan profile picture
Ed Dolan


  • Healthcare reforms now pending in Congress could have unintended consequences for business cycle policy.
  • Government spending on healthcare, especially Medicaid, is an important automatic fiscal stabilizer.
  • Such automatic stabilizers help explain faster US recovery from the Great Recession compared with the EU.

All economic policies have unintended consequences, sometimes surprising ones. The effects of proposed healthcare decentralization on business cycle policy are a case in point.

When we think of business cycle policy, what usually comes to mind are active countercyclical measures like tax cuts and spending increases to stimulate the economy during a recession, or tax increases and spending cuts to hold the lid on during a boom. Examples include the Bush administration's tax rebates in the spring of 2008 and the much larger stimulus package under the Obama administration in early 2009. However, the economy’s built-in automatic stabilizers, which work to smooth business cycles even when no active measures are taken, are even more important.

Automatic stabilizers are decreases in personal and business taxes that occur when incomes fall during a recession and increases in spending on social benefits that occur when unemployment rises. Unemployment benefits are the best known of the automatic stabilizers, but in recent years, Medicaid has become increasingly important. For example, early in the global financial crisis, a study from the Kaiser Family Foundation estimated that an increase in the unemployment rate from its 2007 level of 4.6 percent to 10 percent would add more than 5 million people to the roles of Medicare and related children’s health programs.

The Better Care Reconciliation Act now moving through Congress would sharply shift fiscal responsibility for Medicaid and other health programs from the federal to the state level. Doing so would undermine Medicaid’s effectiveness as an automatic stabilizer since state finances are subject to balanced budget rules. Except to the extent they are cushioned by rainy day funds, state expenditures on non-capital items are constrained by tax receipts. During a recession, when tax revenues fall, expenditures must be cut, too - fewer teachers in the schools, fewer rangers in the parks, and fewer home health assistants for the elderly

This article was written by

Ed Dolan profile picture
Edwin G. Dolan is a Senior Fellow at the Niskanen Center. He holds a Ph.D. in economics from Yale University. Early in his career, he was a member of the economics faculty at Dartmouth College, the University of Chicago, and George Mason University. In the 1990s, he taught in Moscow, Russia, where he and his wife founded the American Institute of Business and Economics (AIBEc), an independent, not-for-profit MBA program. After 2001, he taught at several universities in Europe, including Central European University in Budapest, the University of Economics in Prague, and the Stockholm School of Economics in Riga. He is the author of Introduction to Economics from BVTPublishing and numerous academic articles. He makes his home in Northwest Lower Michigan.

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