Healthcare Legislation and Investing
The recent healthcare vote has generated a level of volatile emotions in our country that has not been witnessed since perhaps the Civil Rights Movement. It is the biggest change to healthcare in the United States since Medicare was enacted in 1965.
Outside of the moral, political and constitutional debates, as investment advisors, we must assess the bill’s impact on the economy and our investment strategy. The growth of an economy is dependant in large part on two factors, (1) the quantity and quality of the labor pool and (2) the amount of available investment capital. Investment capital is primarily a function of the savings of individuals and businesses, both domestic and foreign. We believe this new law will have a negative impact on sustained GDP growth primarily because (1) it increases the cost to employ and (2) it most likely will decrease the available investment capital.
On March 12, 2010 the U.S. Chamber of Commerce sent a letter to the Members of the U.S. House of Representatives opposing H.R. 3590 claiming it will harm the economy by (1) increasing the cost to employ, (2) increasing the federal debt, (3) increasing the cost of insurance and (4) increasing the cost of health care. I will review the first two concerns.
The bill increases the cost to employ by requiring companies to either offer a government-mandated level of coverage, which may be more expensive than what was previously offered, or pay punitive taxes. The bill also removes a tax credit under Medicare Part D which while not a cash expense, will reduce corporate earnings. The resulting increased cost to employ will lower the number of employees companies can afford, which hampers growth and in turn depresses GDP. Additionally, more individuals will continue to be unemployed or underemployed than would have otherwise been the case, which further harms GDP through weak consumer demand, (tough to buy things when you are out of work) and can increase the federal deficit as payroll tax receipts decrease and unemployment claims fail to decline as rapidly as would be the case under a normal recovery.
So how does this affect investment capital? The total amount of domestic savings available for investment as a percent of GDP has fallen sharply over the past decade, as a direct result of twin deficits: government spending and foreign trade. The U.S. government is now consuming 40% of the nation’s savings to finance its deficit spending. Our economy has not yet suffered in full the economic consequence of this drop in personal savings because foreign individuals, businesses and governments have in recent years invested trillions in the U.S., supplementing the domestic supply of savings and allowing the U.S. economy to grow much faster than it otherwise would. If the US economy becomes less attractive to foreign investors, the loss of this supplemental investment capital could have devastating effects.
Prior to the passage of the healthcare bill, the United States’ total of all liabilities were just over 800% of GDP: $101.8 trillion in unfunded liabilities which are primarily Social Security and Medicare, (Source: 2008 Financial Report of the United States from the U.S. Treasury); the current U.S. Debt of $12.6 trillion (Source: U.S. Treasury); and GDP of $14.26 trillion in 2009 (Source: Bureau of Economic Analysis). In the European Union only three countries have ratios worse than this, Greece at 875.2%, Slovakia at 1,149.1% and Poland at 1,550.4%. According to the Congressional Budget Office (CBO), Social Security, Medicare and Medicaid and net interest spending combined are projected to exceed total federal revenue by 2028. On March 24, 2010 the New York Times reported that according to the CBO, Social Security will for the first time in history run a deficit in 2010, a full 6 years earlier than the Social Security Administration projections in 2009.
These numbers mean future increases in annual deficits if federal tax receipts are not increased to compensate. Increased tax receipts OR higher deficits will lower the total amount of domestic savings available for investment as the government uses more of the nation’s savings to finance its spending. There is considerable concern in the market that the full impact of this bill will not only increase costs to private industry, but will also increase the national debt, which means further declines in domestic savings available for investment. Add the impact of the bill on labor costs to the further downward pressure on savings available for investment and the U.S. GDP growth prospects degrade further. Since the long-term impact of the bill is difficult to predict, perception is of vital importance.
If foreign investors question our economy’s growth prospects, they will reduce their investments in our economy. Reduced foreign investments will weaken GDP growth, which in turn will reduce future capital investments. Weaker GDP will depress tax receipts which will increase the deficit which will reduce savings available for investments, which weakens GDP and so on.
We have been pessimistic on domestic GDP growth for some time. This further solidifies our concerns as we look to foreign markets for growth prospects when and where current valuations are attractive.
