Joseph Rago of the Wall Street Journal is telling the story
of Casey Mulligan who is the economist that apparently compelled the
Congressional Budget Office (CBO) to change its mind with regard to the effect
that ObamaCare will have on the employment situation. The story is told in the
Journal in an article that came under the title: “The Economist Who Exposed
ObamaCare” and the subtitle: “The Chicago professor examined the law's
incentives for the poor not to get a job or work harder, and this week Beltway
budgeteers agreed.” It was published on February 8, 2014.
When you see something like that, you tend to believe that
nothing is sacred anymore; not even in economics. Everything is put in doubt,
and liable to be amended. The joke used to be that it would be nice to find an
economist with only one hand to avoid getting caught in the notorious “on the
one hand … but on the other hand” hesitation that economists exhibit most of
the time. But things were different with the CBO as it was considered the gold
standard of economic analysis. To paraphrase an old saying: When the CBO spoke,
people listened. But look at it now, it first revealed one hand as to what the
effect of ObamaCare will be on employment, then reversed itself and revealed
the other when pressured by the work of a little known economist.
Let us not despair, however, but take a closer look at the
world of knowledge, and try to make sense of the “concept of certainty” in
evaluating a situation, and forecasting its future development. I call it
concept of certainty to put a distance between it and the Uncertainty Principle
of Heisenberg. In my view, the world of knowledge may be divided into three
levels of certainty. There is at the highest level, the near absolute certainty
of the hard sciences such as chemistry and physics. Below it, there is the
lesser certainty of the disciplines which are said to be close to the sciences
such as psychology and economics. Below that, there are the almost uncertain
fields of just about everything else in the arts and the humanities.
The discipline of Economics is not much different from the
weather because it is affected by many factors, most of which are random and
made more so by the fact that they have a tendency to act on each other and be
altered in the process. Thus, it is possible to forecast a number of things
about an economy, especially in the short run; but you cannot always be certain
about other things, especially in the long run. And when an economist says that
on the one hand there could be this, but on the other hand there could be that,
he basically says that he doesn't know which factors will dominate the conduct
of the economy, and how those factors will be altered when they start acting on
each other.
And so, you can imagine that an employee who used to work
overtime to make enough money to pay the premium for a healthcare policy will
be tempted to cut down on the overtime if ObamaCare will make the premium
smaller or bring it down to zero. You would be making a short term forecast
which, on the surface, will have a somewhat high degree of certainty. Like
Casey Mulligan put it: “A job is a transaction between buyers and sellers. When
a transaction doesn't happen, it doesn't happen. We know that it doesn't matter
on which side of the market you put the disincentives, the results are the
same.” And so you conclude that ObamaCare will shrink the employment situation.
That would be the effect of ObamaCare, a forecast you can
make with a level of certainty that compares to the forecast a weatherperson
makes for tomorrow's weather. But what people like Mulligan neglect to do after
that is ask a number of important questions. For example: Will the employee
continue to work and use the extra money to have a higher standard of living?
Will he save the money to start a business at a later date? Will he start
planning for a better retirement? As to the employer, will he ask another
employee to work overtime? Will he hire a part-timer to do the job? And there can
be many more such questions.
It is obvious that these will be random effects that cannot
be predicted right away. But they will be effects that materially alter the
economy and the employment situation as time passes. They will be secondary
effects which in turn, will generate tertiary effects and so on – all of which
will have consequences that cannot be predicted for the medium term, much less
for the long term.