Obamacare could create a stock market bubble because it will restrain job growth and prompt the Fed to maintain super-easy monetary conditions despite an improving global economy.
The law was conceived in deception. Never just a way to procure health insurance for 37 million uninsured Americans, it is a convoluted scheme to lay the foundation for universal health insurance by forcing everyone (except DC VIP’s) to get—usually via their employer—standardized, one-size-fits-all coverage. No thought was given to how the ACA would inflate healthcare costs and hurt job creation. The Obamanites always knew the law would be unpopular, which is why A) They delayed implementation until after the 2012 election, B) Obama repeatedly and knowingly lied that if you like your plan and your doctor, you can keep them. Anyone who studied the bill could ascertain that was false, but the mainstream media was too biased and lazy to wade through complex legislation and report the truth.
Enough Shoes for a Centipede . . .
However, reality has finally struck. The first shoe to drop was the “Employer Mandate,” requiring firms with at least 50 “full-time” (over 30 hours per week) employees to provide coverage. It was set to happen on Jan. 1, 2014, with the “number of full-time workers” based on the monthly average in 2013. Naturally firms cut the hours of worker to less than 30 in the first half of 2013; a former head of the Bureau of Labor Statistics called this shift to part-time workers unprecedented. Fearing that this trend would hurt Democrats in the 2014 election, Obama delayed the Mandate until 2015.
The second shoe to drop was the failure of the healthcare.gov website—Senator Baucus’ “train wreck” happened right on schedule. This shoe will likely keep dropping well past the new deadline of Nov. 30, which was set by apparatchiks not engineers. Other surprises may occur. I would not be shocked if hackers steal thousands of Social Security numbers, as Rep. Mike Rogers (an expert on the NSA) recently warned.
The third shoe: people in the “individual market” getting letters saying, “No, you can’t keep your healthcare. Go buy a policy on the exchange via Healthcare.gov (if it ever functions properly).” Obama’s lie was starkly exposed. Women afflicted by cancer, who have suddenly lost their insurance coverage and their doctors, are asking CNN’s Erin Burnett, “What do I do now?” The arrogant answer of the White House: Well, there are only five million of you. And as Stalin observed, you can’t make an omelet without breaking a few eggs. These folks in the “individual market” will experience “sticker shock,” despite high deductibles and less choice of doctors. The plans are costly because they cover stuff people don’t need (think fertility treatment for grandfathers). There is method in this madness. By charging for unused features insurance companies generate income to cover the costs of the newly insured. This is a “silent subsidy” paid for by the middle class.
Back to the “Employer Mandate.” The next shoe is that many smaller companies whose health coverage does not meet Obamacare standards will simply drop coverage, pay a $2,000 fine for each worker after the first 30 workers, and send the employees to healthcare.gov. This could hit tens of millions of workers; no one knows how many. (See Appendix for quantification of this issue.)
The next shoe to drop—I think we are up to five now—will be in April 2015 when individuals who do not have insurance are supposed to pay a fine to the IRS. In the first year it is $95 or 2% of income, whichever is higher, but it rises in subsequent years. If they don’t pay the fine, it will be deducted from their tax refund—unless they take enough deductions so they do not have a refund. As I highlighted last year, lots of healthy young people who are burdened by college loans and a terrible job market will be hit by Obamacare.
The final shoe: insurance companies providing coverage via the healthcare.gov exchanges will tell HHS: lots of sick folks signed up but not many healthy ones, so costs exceed revenues and we have to raise rates. But if we do that the healthy ones will drop coverage, and the situation will get worse. The polite term is “adverse selection,” but I prefer the more poetic “death spiral.”
. . . All Kicking Job Growth
Let us count the ways this crazy law hurts hiring:
- Small businesses will try to stay under the limit of 50 workers and restrict workers to less than 30 hours. Investors Business Daily has shown that this is hurting low-wage workers.
- People in the “individual market” who are now losing coverage are rattled by the unexpected news they must pay more to get less. The Wall Street Journal says nearly half of them are “self-employed or small business owners.” As they scramble to get coverage these folks will be in no mood to hire another worker or buy that new computer. The extra money spent on insurance can’t be spent at the mall.
- Small businesses hit by the employer mandate next year will be similarly loath to hire new workers or make new investments, as they huddle with lawyers and accountants to figure out how to minimize the damage.
- In early 2015 people hit by the individual mandate will be similarly rattled.
- Congress must decide how to bail out insurance companies caught in the “death spiral” without blowing a hole in the Federal budget. A bloated, inefficient healthcare system will further squeeze legitimate government investment in areas like infrastructure and basic research.
Bubble Trouble?
We have an economy that by many measures – the ISM Manufacturing, ISM Services, auto sales, housing, corporate profits, stock prices – is doing fairly well. Third quarter profits show signs of improvement, driven partly by stronger demand in Europe and China. There’s just one problem; employment sucks. Consider this. Back in May of this year Bernanke told Congress that “the job market remains weak overall,” and since then employment has weakened markedly—the six month moving average of monthly job gains has dropped from 200,000 to 174,000. The likely reason is Obamacare: firms aren’t hiring because as this fraudulent law and Obama’s lies come into sharper focus it seems ever more costly and risky to hire. Of course, this process has just started.
The Fed has a dual mandate to keep prices stable and unemployment low, and it has explicitly tied “tapering” of “quantitative easing”—or buying fewer bonds each month—to an improving labor market. If the job market remains weak because of Obamacare the Fed may remain looser for longer, juicing up asset markets with more and more liquidity. Like most other economists, Fed officials rarely single out over-regulation as a hindrance to hiring—which is weird because “structural reform” is all the rage in Europe and Japan. So the Fed seems unlikely to tell the White House and Congress, “Sorry guys and gals. We’ve done all we can. It’s up to you to create a more job- friendly regulatory environment.”
Consequently bubble trouble could be just over the horizon—for the third economic recovery in a row. I have argued that this bull market so far was not just driven by “liquidity;” it was well justified by rising profits and a rebound in PE ratios to appropriate levels for the current environment of low inflation, low interest rates, and share-holder friendly corporate managements. But the market has become frothy and rather complacent in recent weeks; yesterday’s sell-off was healthy. If investors sense that the Fed will remain on hold for months and months, prompting speculators to leverage up their portfolios, we could get a stock market bubble that would justify some meaningful reallocation toward cash.
Appendix
On Fox News Sunday, Karl Rove said there are 150 million people who get insurance through an employer and 15 million who get it as “individuals.” However, large firms that self-insure, and that collectively employ about 90 million people, are not covered by Obamacare; they are covered by ERISA. (So, in the finest tradition of crony capitalism, corporate America worked out a sweet deal with Obama while small business was hit full force by the ACA.) Americans impacted by Obamacare are in two buckets, the 15 million people in the “individual market”– many of whom just received notices their policies were canceled–and around 60 people working for small firms that do not self-insure, but rather get insurance from big firms such as Aetna, United Health, etc. (Note that many large firms that do self-insure nevertheless use these insurance companies to administer their plans). It is people in the individual market and those working for smaller firms that are at risk of losing their coverage. Next year we’ll learn how many of the 60 million working for smaller firms will lose coverage.
Copyright Thomas Doerflinger 2013. All Rights Reserved.
