Alright, I admit it. I didn’t expect healthcare reform to pass. Right up to the point where the last back room deals were cut, I expected that the bill would come up short of the needed votes. While I suspect more than a few of the politicians who voted for the bill will ultimately regret it - and have to look for a new job - for now Democrats are taking a well deserved victory lap. They said they would pass healthcare reform and by golly, they did. That it barely resembles what they set out to achieve and won’t reduce health care inflation is irrelevant to those for whom expanded access -regardless of cost - was the primary goal. I would have preferred expanded access and reduced costs (which is achievable) but simple, common sense reform isn’t possible when you have so many lobbyists to reward. There are winners from the bill and the uninsured are among them, but the biggest winners will be the healthcare companies that shaped the legislation. President Obama may have bashed them in public but Congress took care of their friends in the insurance and pharmaceutical industries in private.
There are losers from this legislation too. The biggest losers are of course the taxpayers who will have to pay for this masterpiece of logrolling. I am not speaking here of the ones who were publicly tasked with paying for it - the so called wealthy. Taxes will be raised on them for sure (and there will be macro economic consequences), but there is no chance - zero - that the program will come in on budget. The only program that has cost less than projected to my knowledge is Medicare part D and then only if you ignore the Bush administration’s original estimates. And oh by the way, one of the reasons it came in under budget was due to Medicare Advantage and the tax break provided to companies to continue covering drugs for retirees, both of which were gutted in the attempt to pay for the new reforms. Caterpillar, AT&T and several other companies announced major charges to earnings due to the end of the tax break that allowed them write off even the subsidy of drug costs for retirees. No matter whether you believe the deduction should have been allowed or not, the fact remains that companies now have a very large incentive to push their retirees’ drug costs off onto Medicare and it will likely cost us more than the tax break.
The point is that if the cost is greater than forecast, other ways to pay for the bill will have to be found or deficits will be even larger than the gigantic ones already forecast. Either way, all Americans will pay the bill. If taxes aren’t raised more broadly, then we will pay in higher interest costs because the bond market is already nervous about deficits. Medicare and Social Security already ensure a future fiscal train wreck absent major changes; if I’m right and this costs more than expected it just brings us closer to the day of reckoning.
The market reaction to the passage is interesting. Stocks took it in stride I think because the implementation is phased in and there is no way to know what changes might happen between now and 2014. And while the write-offs announced by CAT, T and others are large, they are non cash and represent future costs, not present. It is entirely possible that these companies dump their retiree drug costs into Medicare and take a write up to account for their reduced future costs. Politicians who accused these companies of playing politics by announcing these charges so quickly were at least partly right. The companies had no choice but to announce the charges as soon as they were aware of the new costs; the implied political statements were just a bonus.
The reaction in the bond market was much more interesting and potentially more damaging. It is impossible to separate the multiple influences in the bond market but the timing of the bond market selloff is at least curious. The yield on the Ten Year Treasury Note rose roughly 25 basis points last week in the wake of the passage of healthcare reform. While there are other things that might explain the rise in yields - such as a recovering economy - the only new information of note last week was the passage of healthcare reform. On the other hand, bond yields were already on the rise and there is no way to know why three Treasury auctions turned sour last week. Frankly, given what’s been going on budget wise, a better question is why yields weren’t already quite a bit higher.
Bond yields matter because they will effect stock market valuations and also because higher interest rates on Treasuries will mean higher interest rates for mortgages and a variety of other loans. Corporate profits have recovered in remarkably quick fashion and low rates have fostered an equally quick recovery in stock prices. Higher interest rates though could change all that. Not only will higher rates mean a lower multiple on corporate earnings for stocks but also potentially lower growth for the economy as a whole. There isn’t a lot of lending or borrowing going on right now, but as the economy recovers, credit availability and affordability will be an important part of economic expansion. Normally, as recovery proceeds we would start to see purchases financed with longer term financing recover as well. Real estate is an obvious example but it also extends to autos and other durable purchases. If credit is not available or is more expensive those purchases would seem likely to be less than they would be absent the rise in rates.
The recovery in corporate profits is nothing short of amazing and largely explains higher stock prices. Higher interest rates could derail the bull market - in profits and stock prices.
It seems possible to me that one result of the passage of health care reform will be higher interest rates and slower economic growth. Slower economic growth would mean higher unemployment and more people in need of government provided health insurance. That would be an ironic - and tragic - outcome for something with such noble intentions.
A quick note about last week’s commentary. I received a number of emails from readers who made what I believe were uncharitable assumptions about my character. To wit:
“[A]n undervalued Yuan neither increases nor decreases aggregate demand in the United States. Rather, it leads to a compositional shift in U.S. production, away from U.S. exporters and import-competing firms toward the firms that benefit from Chinese capital flows. Thus, it is expected to have no medium or long run effect on aggregate U.S. employment or unemployment. As evidence, one can consider that the U.S. had a historically large and growing trade deficit throughout the 1990s at a time when unemployment reached a three-decade low. However, the gains and losses in employment and production caused by the trade deficit will not be dispersed evenly across regions and sectors of the economy: on balance, some areas will gain while others will lose. And by shifting the composition of U.S. output to a higher capital base, the size of the economy would be larger in the long run as a result of the capital inflow/trade deficit.”
That’s from the Congressional Research Service in December 2009. That would be the service that Schumer and Graham tasked with looking into the Yuan issue. Since the research didn’t yield the results they wanted, they are apparently ignoring the findings. In other words, the facts don’t matter to these politicians. Imagine that. Shocked, I am. Shocked.
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In response to your responses to incoming email, I find it odd that people who read this report can be such uninformed idiots.
I am sorry you got some unhappy e-mails. To counterbalance I think your comments are very helpful and thoughtful.
A wide readership, thanks to some much appreciated links, is a double edged sword. I certainly agree that the subscribers to the weekly commentary are smarter than the average bear.
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