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Income And Spending Are Up — Thanks, Obamacare

Personal income rose 0.3 percent in February, the Bureau of Economic Analysis said Friday. Consumer spending rose 0.3 percent too (0.2 percent after adjusting for inflation). That’s fairly healthy growth, especially given a harsh winter that dinged other economic indicators.

But there may be a little less to the gains than meets the eye. President Obama’s signature health law, the Affordable Care Act, accounted for nearly a quarter of the increase in income and nearly two thirds of the increase in spending. (The BEA has a helpful FAQ about how the health law affects its numbers.)

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Here’s what’s going on: The government’s definition of income includes not just salaries and other cash payments but also non-cash benefits such as employer-paid health insurance premiums and government programs such as Medicare and Medicaid. The health law has a particularly big impact on that last category because it made millions more people eligible for Medicaid. As a result, Medicaid payments increased $11.4 billion in February, representing 24 percent of the total increase in income. In January, Medicaid benefits represented an even bigger 47 percent of the increase in income.

The story is similar on the spending side. When people think about consumer spending, they tend to think about people buying groceries, shopping online or getting a haircut. But government economists use a broader definition that counts health care spending even when the patients themselves aren’t the ones writing the checks. Since the Affordable Care Act has extended health insurance to millions of people who didn’t have it before, health spending is likely to rise, at least in the short-term. (In the long-term, the law’s backers hope it will help bring down spending by making the medical system more efficient, but that effect, if it occurs, will be seen over years, not months.)

Government economists estimate the health law boosted medical spending by $13 billion in February, accounting for 64 percent of the total inflation-adjusted increase in consumer spending for the month. In January, consumer spending actually would have fallen if it weren’t for the boost from the Affordable Care Act.

A couple caveats: First, these are best guesses, not hard-and-fast figures; data the government usually uses to estimate medical spending doesn’t reflect the health law’s impact, so economists had to adjust their estimates based on other sources. Second, the government’s estimates don’t account for so-called substitution effects; many people may offset their increased health care spending by spending less in other areas. (We also aren’t factoring in broader macroeconomic effects that, depending on who you talk to, could be a big plus or a big minus to the economy.)

The deadline to sign up for insurance under the health law isn’t until Monday, which means the boost to spending and income should continue in March, and possibly beyond that. But the effect will fade over time. That doesn’t mean we should dismiss Friday’s figures altogether, but it does mean they provide a somewhat distorted view of the underlying growth rate of the consumer economy.

Ben Casselman is a senior editor and the chief economics writer for FiveThirtyEight.

Filed under Health Care 207 posts, Obamacare 27, Affordable Care Act 23, Consumer Spending 10, Bureau Of Economic Analysis 5, Personal Income 1

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