(Bloomberg View) — A recent article in Consumer Reports said that the Affordable Care Act, better known as Obamacare, has helped reduce personal bankruptcies, which have fallen by about half since 2009. The article also cites a bankruptcy lawyer who reported a dramatic decline in the number of clients who turn to the courts because they’re unable to pay their medical bills.
It’s important to take conclusions like this with a grain of salt. There were other factors that probably had a lot to do with the fall in personal bankruptcy. Chief among these was the recovery from the Great Recession. Economists who study personal bankruptcy tend to find that recessions are one of the biggest drivers. Also, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, a law intended to make it harder to file for bankruptcy, might be exerting a slow, long-term effect.
Still, it would be a mistake to discount the ACA. Personal bankruptcy filings hovered at about 5 per 1,000 Americans from the mid-1990s through 2010, but Consumer Reports’ numbers imply a current rate of less than 2.5 per 1,000 — a decrease of more than half that probably can’t all be explained by good economic times:
What’s more, economists have found that Medicaid expansion under the ACA reduced unpaid bills and debt-collection balances. So Obamacare really does seem to be reducing economic risk for a large number of Americans.
That’s important, because reducing personal risk is an idea that has been sorely neglected by economists and policy makers alike.
We now know that middle-class incomes have been stagnating during the past few decades. But personal risk means that even that trend is understated. Because most people are risk-averse, economic insecurity represents a real cost that makes people poorer than their wages alone would suggest.
Economists often dismiss the idea that risk represents a real cost to the average family. They draw a distinction between aggregate risk, which affects the whole economy, and so-called idiosyncratic risk, which affects only specific individuals. The latter kind of risk, many economists will tell you, can be eliminated by insurance markets — everyone can agree to pay money into a pool when they’re doing well, and take money out of the pool in bad times. Voila — goodbye personal risk.
But there are two problems with this line of thinking. First, insurance markets aren’t always available. For example, having your pay cut is a real risk, but we don’t see companies offering wage insurance. Nor do people buy unemployment insurance beyond what the government forces companies to provide. Problems such as adverse selection and moral hazard mean that even where insurance markets do exist, such as in health care, those markets will not always be available to all buyers — a problem that the ACA was intended to correct, by forcing insurers to cover those with pre-existing conditions.
The second problem is that even when people do find some way to insure against idiosyncratic risk, it’s costly to do so — insurance companies are huge, and employ lots of people and resources. That cost ends up getting paid by regular folks, reducing their disposable income. In some cases it could be cheaper for society if the government found some way to prevent those risks from existing in the first place.
So individual risk is a much bigger problem than many economic theorists will readily admit. And it seems to have been rising in recent decades. A 2012 study by Karen Dynan, Douglas Elmendorf and Daniel Sichel found that household income volatility in the U.S. has been rising for some time:
The share of households experiencing a 50% plunge in income over a two-year period climbed from about 7% in the early 1970s to more than 12% in the early 2000s before retreating to 10% in the run-up to the Great Recession. Households’ labor earnings and transfer payments have both become more volatile over time.
Even though people manage to cushion themselves against some of these shocks by borrowing in bad times and saving in good times, this comes at a cost, as demonstrated by the steep rise in bankruptcies from the 1980s through the late 2000s, coupled with the decline in savings rates:
Many of the reasons for increasing insecurity were examined by Jacob Hacker in his 2008 book “The Great Risk Shift.” Layoffs and medical bills are two of the biggest culprits, unsurprisingly. Fluctuations in the stock market, which hit retirement accounts, and in the housing market, where most middle-class wealth is stashed, are also important. Another factor is increasing insecurity of work hours — even many people who have jobs don’t know how much they’re going to get paid next month.
All this means that the government should be thinking harder about ways to mitigate the economic risks that working-and middle-class families face. The ACA was a start, and it attacked the biggest problem; therefore, the Republican Party really should abandon its plans to roll back Obamacare. Also, systems of insurance for fluctuations in wages and work hours could help a lot as well. And incentives for companies to retain workers during recessions could make the biggest difference of all.
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