Mamas, don't let your babies grow up to be politicians.
With apologies to Willie Nelson and his great song, whether you are Democrat, Republican or somewhere in between, this would be a tough time to be in Washington.
If taxes are raised (and how can they not be, given two wars and bailouts and a kind of national health insurance on the way?), a politician runs a real risk of being run out of office, or maybe even tarred and feathered. Why? If he or she raises taxes, people will have less money and the economy will suffer. Wait -- the economy is already suffering; if taxes are increased, it will suffer more. Isn't that the new Catch-22?
If taxes are decreased, the economy could recover faster, but the current administration and Congressional majority will take it on the chin for caving in to the fat cats (even though the cats are not quite as fat as before 2008).
The economist Gene Epstein, in the Dec. 7 edition of Barron's, offered his suggestions for improving unemployment: 1) Eliminate the minimum wage, which he opines is not doing anyone any good and is contributing sizably to the higher youth unemployment rate; and 2) Eliminate payroll taxes for employee and employer for the first $10,000 of earnings. I thought these to be terrific ideas; however, I have doubt as to their implementation. Although I think both would work nicely, no politician alive probably has the courage to take credit for voting to abolish the minimum wage.
Since I mentioned national health care, I suppose I should throw my oar in the water again: Is it possible that many Americans are against mandatory health insurance because Americans don't like to be told that they have to do things? I know that seems simplistic, but we seem to be a people who like the freedom to choose, which would include choosing not having health insurance.
I'll happily leave the gymnastics of the new political health care discussions to my worthy companion columnist, David Saltzman. I'm looking at how additional government (actually taxpayer) expenses could harm my beloved stock market. In an economic/investing sense, I cannot see how mandating that people who cannot afford premiums be forced to pay them will help: 1) The people who don't have medical coverage because they can't afford the cost (when these folks pay the new required premium, will they have to give up feeding their kids?); or 2) The economy, which by creating new health insurance premiums out of thin air, might be essentially creating a new regressive tax on the poor that could serve to dampen the economy.
Until now, I didn't mention the third thing -- if the rich or super-rich have to pay instead of the uninsured folks, won't that dampen the economy? Since the government will suck up more income that otherwise might have been used for net capital formation, it strikes me that it might. There's not much about additional taxation that suggests a green light for helping our sagging economy.
Another thing to consider is this: Some of the people who don't have health insurance are not poor; they may be lawyers, engineers and accountants who gave up insurance at age 54 because of high costs in order to gamble that they and their spouses will make it to Medicare at age 65 without anything serious happening along the way. I don't know the number of these uninsured gamblers, but I doubt that the super-rich will want to subsidize them.
Having written this between Thanksgiving and Christmas, two traditional holidays for sharing, I admit to a bias in favor of everyone having access to health care. I'm befuddled, though, about how the government wants it delivered. It would be fairly simple to extend Medicaid-like benefits to the poor through the states and subsidize such benefits by taxes.
It would also seem logical to regulate insurance companies to the extent that they could not deny coverage based on health conditions. However, that's not such an easy task in practice, since people who don't have health problems now would likely wait until trouble hit before ponying-up premiums to obtain protection, something that threatens any pool of insureds. And this behavior could apply to both the poor and to the uninsured gamblers, too. (A reason to force uninsured gamblers to buy health insurance is that they tend to cost the rest of us taxpayers considerably -- since they aren't turned away from hospitals when they have a heart attack or cancer, the taxpayers pay for their illnesses, and the gamblers don't contribute.)
All of this is based on the notion that some Americans will now not be required to have health insurance, and/or the penalties for going uninsured will be far slighter than actual health insurance premiums. If the penalty for not having coverage is $25 a month and the health insurance -- whether from government or commercial provider -- costs $350 a month, it's easy to see that people will pay the penalty and not buy insurance. And the folks who feel like they are coming down with something serious will buy-in; so, in total, most everyone who joins will have a claim. In that case, multiply whatever the CBO says the plan will cost by 10, or even 20.
AARP is for universal care, too, but it has a big oar in the water with its Medicare supplement, which is getting expensive to manage; even so, it has to be a cash cow. Many of AARP's own members seem to be against universal care, even if they themselves have Medicare. This gets back to the argument that Americans don't like to be told what to do.
Clearly, if there is to be universal coverage, the only thing that will work is that everyone be required to have insurance. Comparing our coverage to other countries (some have excellent plans and lower costs), suggests that doctors take it on the financial chin with universal coverage -- medicos in universal care countries make far less than here. All of this leads us back to the fact that some individuals and families may not want to have coverage at all. It's a vicious cycle, right?
It seems strange to embark on national health care (or mandated health care, or whatever) during so many economic crises of the moment. And there does not seem to be enough healthy debate about it. My fears are about the economy and the market. While I have every faith in the American spirit and our peoples' profound ingenuity, I'm worried about spiraling government outlays, higher taxes and, as result, a depressed long-term economic cycle with a profound resemblance to a dog chasing its tail. State and local governments are laying off workers and furloughing others at a rapid rate. Everyone in federal, state and local government talks about raising taxes, but the fear is there: If taxes go up, the economy is again quite likely to reverse, as may the stock market.
For the government, there's no hiding place -- even new hidden tax increases will show on the weighing scale of the U.S. economy; talk about trickle-down indeed! And there is always the political "throw the bums out" fear -- folks in Congress, if they get too creative, may be unelected. The milk in Washington must be much sweeter than everywhere else, since no one ever wants to leave.
Mamas, don't let your babies grow up to be politicians. At least not now.
Broker's Bookcase
This information is intended for financial professionals only, not the general public. This is not a solicitation to buy or sell any specific security. Mr. Hoe may have positions in the securities or other investments discussed.
Billion Dollar Mistake -- Learning the Art of Investing Through the Missteps of Legendary Investors, by Stephen L. Weiss (John Wiley & Sons, 2010).
Man, can this guy write! And the subject matter is fascinating. Want to know how Kirk Kerkorian fumbled Ford Motor? It's in here.
Aubrey McClendon is an Oklahoma businessman whose name is synonymous with Chesapeake Petroleum. Billion Dollar Mistake will tell you how he lost tons of money in margin calls. Bill Ackman of Pershing Square is in these pages, too. He took a billion-dollar bath with booksellers, particularly Borders.
Bernie Madoff takes his licks from Mr. Weiss, and even the famous Volkswagen-Porsche feud is offered up. One nice thing is that end of each chapter, the reader is given a "what not to do" object lesson.
In the intro, Mr. Weiss offers an Eleanor Roosevelt quote I love: "Learn from the mistakes of others. You can't possibly make them all yourself."
Order this book from your bookseller at once. If you were worried about a slip or two in your own personal investing strategies, this is the billion-dollar cure. Like us, most of these guys are still in the game.
Richard Hoe, ChFC, CLU, AEP, has been an investment professional for 40 years, and is a registered representative and investment advisor representative. He is a member of the adjunct faculty at the California Institute of Finance, a graduate school at California Lutheran University. Readers may e-mail Richard Hoe at richardhoe@richardhoe.com.
