Wisconsin Rep. Paul Ryan’s fiscal 2013 budget (U.S. House Budget Committee 2012) proposes massive cuts to the non-retirement social safety net in the next decade. While there are many reasons why these cuts are ill-advised, one stands out in today’s current economic context: job losses. A new EPI analysis finds that Ryan’s proposed Medicaid cuts, which total $544 billion over the next five years, would cost the economy about 10,600 jobs in the first year—a figure that would rise to nearly 1.5 million jobs lost in 2017. These job losses—overwhelmingly in the private sector—would affect every state.

A breakdown of Ryan’s proposed cuts

Ryan proposes cutting $1.742 trillion from Medicaid, $134 billion from the Supplemental Nutrition Assistance Program, roughly $650 billion from other health programs, more than $463 billion from other safety net programs (likely significantly more), and at least $291 billion from low-income discretionary programs over a decade (relative to spending under current policies). Totaling $3.3 trillion, these cuts to programs for lower-income households represent roughly 62 percent of Ryan’s total budget cuts over the next 10 years (Merrick and Horney 2012).

Hurting the disadvantaged and increasing household risk

There are three problems with Ryan’s cuts to the safety net, two obvious and one less so. First, these cuts would overwhelmingly fall on the most vulnerable members of our society, who are unable to bear the brunt of deficit reduction (or, more accurately in Ryan’s case, the financing of upper-income tax cuts). For example, more than 85 percent of Medicaid benefits currently go to poor seniors, blind and disabled people, and children (Congressional Budget Office 2012a). Yet many of these vulnerable citizens cannot work full-time. And fewer and fewer jobs are providing health insurance (Gould 2012). Most insurance companies in the individual market would charge elderly or disabled policyholders prohibitively expensive premiums because of their risk. For many vulnerable populations, public assistance programs are the only answer.

Second, cuts weakening the social safety net would weaken the economy. This is because the safety net helps promote a strong economy by establishing a base level of economic security that frees people to take risks, such as starting a business or going back to school (Bordoff, Deich, and Orszag 2006). And by promoting equal opportunity, the safety net helps ensure that individuals with exceptional abilities are able to realize their potential, no matter what their station in life at birth.

Cutting jobs and impeding the recovery

Third and perhaps most important in the current economic context, Ryan’s safety net cuts would immediately reduce employment and impede recovery. Consider Ryan’s proposed Medicaid cuts, which total $544 billion over the next five years (a period in which the economy is expected to remain below potential). Using standard macroeconomic modeling consistent with private- and public-sector projections, we estimate that these cuts would cost the economy roughly 862,000 jobs in 2014 and that annual job loss would rise to nearly 1.5 million in 2017 (Table 1).

Furthermore, these job losses would overwhelmingly come from private-sector employment. Medicaid has very low overhead—CBO (2012a) reports that about 96 percent of the program’s funds go toward benefits (including the “disproportionate share hospital” payments and vaccines for children), which are spent in the private sector (CBO 2012a). Accordingly, Medicaid cuts of this magnitude would result in the loss of more than 823,000 private-sector jobs in 2014, and annual job losses would rise to above 1.4 million private-sector jobs in 2017.

No state would be spared the economic pain. As Table 2 shows, every state loses: In 2014 these cuts would cost Michigan between about 24,700 and 25,800 jobs, Arizona between about 15,800 and 21,000 jobs, and California between approximately 82,600 and 92,300 jobs.  Even Wyoming, with the smallest labor market in the country, would still lose between about 1,300 and 1,900 jobs.

Methodology

Data on annual Medicaid cuts proposed by the Ryan budget were taken from a Center on Budget and Policy Priorities analysis (Park and Broaddus 2012) of the potential impact of turning the program into a block grant, and a Congressional Budget Office report on the potential impact of repealing the Affordable Care Act (CBO 2012b). The state distributions applied to these cuts at the federal level were from Families USA (2012).

Both national job loss estimates (Table 1) and state job loss estimates (Table 2) were calculated using a fiscal multiplier of 1.4, which is Moody’s Analytics chief economist Mark Zandi’s most recent estimate of the near-term economic activity generated by a dollar of government spending (Zandi 2011). The state job loss estimates are presented as a range, with two scenarios modeled. Scenario 1 assumes job loss is proportional to state-level cuts. This would be true, for example, if the dollar cut in each state directly translates into a loss of demand for goods and services produced exclusively in that state and nowhere else in the country. This is certainly not always the case, as supply chains are rarely located solely in one state.

Scenario 2, on the other hand, assumes that job loss is proportional to each state’s share of national employment. This would be the case if a state’s job loss is determined by overall national spending. As the truth is somewhere between the assumptions behind scenarios 1 and 2, these estimates provide a plausible range of job losses for each state.

The job impact estimates in this analysis are conservative for two reasons. Because Medicaid is a program generally benefiting low-income households—which, out of necessity, are much more likely to consume rather than save an additional dollar of disposable income—the cuts to Medicaid would likely have an even larger impact on the economy than we estimate here. For example, Reich et al. (2011) suggests a job impact three times greater than what our model assumes. Additionally, it is likely that an even larger share of the job loss would fall on the private sector because overhead includes not only labor but equipment and supplies, which are provided by private companies.

References

Bordoff, Jason, Michael Deich, and Peter R. Orszag. 2006. A Growth-Enhancing Approach to Economic Security. A Hamilton Project Strategy Paper. http://www.hamiltonproject.org/files/downloads_and_links/a_growth_enhancing_approach_to_economic_security.pdf

Congressional Budget Office. 2012a. “Medicaid Spending and Enrollment Detail for CBO’s March 2012 Baseline.” http://cbo.gov/sites/default/files/cbofiles/attachments/43059_Medicaid.pdf

Congressional Budget Office. 2012b. “Updated Estimates for the Insurance Coverage Provisions of the Affordable Care Act.” March. http://cbo.gov/sites/default/files/cbofiles/attachments/03-13-Coverage%20Estimates.pdf

Families USA. 2012. Republicans Again Propose Slashing Funding for Medicaid, Medicare, and Other Health Programs.

Gould, Elise. 2012. A Decade of Declines in Employer-sponsored Health Insurance Coverage. Economic Policy Institute Briefing Paper No. 337. http://www.epi.org/publication/bp337-employer-sponsored-health-insurance/

Merrick, Kelsey and Jim Horney. 2012. Chairman Ryan Gets 62 Percent of His Huge Budget Cuts from Programs for Lower-Income Americans. Center on Budget and Policy Priorities report. http://www.cbpp.org/cms/index.cfm?fa=view&id=3723

Park, Edwin and Matt Broaddus. 2012. Ryan Medicaid Block Grant Would Cut Medicaid by One-Third by 2022 and More After That. Center on Budget and Policy Priorities report. http://www.cbpp.org/cms/index.cfm?fa=view&id=3727

Reich, Gabriel Chodorow, Laura Feiveson, Zachary Liscow, and William Woolston. 2011. “Does State Fiscal Relief During Recessions Increase Employment? Evidence from the American Recovery and Reinvestment Act.” Social Science Research Network Accepted Paper Series. November 20. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1960632

U.S. House of Representatives Budget Committee. 2012. The Path to Prosperity: A Blueprint for American Renewal. http://budget.house.gov/UploadedFiles/Pathtoprosperity2013.pdf

Zandi, Mark. 2011. “At Last, the U.S. Begins a Serious Fiscal Debate.” Moody’s Analytics Dismal Scientist [online publication], April 14. http://www.economy.com/dismal/article_free.asp?cid=198972&src=msnbc