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Healthcare’s Double-Dip Recession

Economics / Government Spending Mar 26, 2010 - 03:18 AM GMT

By: Andy_Sutton

Economics

Best Financial Markets Analysis ArticleOne of the most interesting terms to come out of the past two years is the ‘double dip recession’. This is Newspeak for depression as far as I am concerned, but it fits with the new nomenclature we have used in an attempt to paint a crisis as not really being one. After all, what fun is it to admit that we’re in a morass that we have no hope of getting out of, or even a cogent, sensible plan for exiting? It is much easier to conjure up new terms in an attempt to move the boundaries into more palatable territory. This week, in the wake of the biggest nation-killing bill to pass out of the halls of Congress to date, I’m going to tell you exactly why we are now guaranteed a second dip (to use the nomenclature du jour), and how this is going to hit small businesses, which are the backbone of the real economy.


In order to accomplish this, I am going to cite exact passages from this bill and give you page references so you can download a copy of the bill and follow along if you so desire. I am also doing this since many people simply cannot believe that our reps would put such provisions into legislation and will no doubt call me a liar and a shill. Before anyone gets any ideas about turning this into the sadly typical political muckraking that passes for debate these days, I want to refer you back to the articles I wrote in 2008 issuing scathing criticism of the banker bailout, the AIG bailout, Fannie/Freddie, and the housing relief bills, which were pushed by the ‘other’ folks in Congress. I couldn’t give a rip about politics. I am interested in the impact these bills will have on our economy and American families.

Piling on Debt

One of the planks that was used to promote this legislation was the fact that it will be a deficit-reducing measure. Let’s consider a few things here. The IRS will need to hire upwards of 16,000 agents and require an additional $10 Billion over the next decade (reported in the MSM) to ‘police’ the provisions of this new law. So the public sector will get even bigger. The late Milton Friedman did some fascinating research and modeling that pointed to the fact that every public sector job created destroys roughly 2 private sector jobs. That is 32,000 more private sector jobs down the tubes just on the IRS’ account using Friedman’s research, which has proven to be pretty accurate.

The bill itself is advertised to cost $940 Billion. Looking back a few years, we have Medicare Part D, which was advertised to cost around $500 billion. To date Medicare Part D has already added nearly $7 TRILLION in contingent unfunded liabilities to our national balance sheet. While it would be irresponsible to do a naked extrapolation here, the point is simple; this bill will, in all likelihood, end up costing an awful lot more than what has been advertised.

Martin Feldstein who, incidentally, concurs with the above assessment estimates debt service on the debt created by this new law to run around $300 billion over the next decade. In the new financial landscape where we talk in terms of trillions, a mere $300 billion doesn’t seem like a lot. However, when you consider that $300 Billion represents the total of yearly earnings of over 6.5 MILLION average US families, it is obvious we’re not talking about chump change here.

For a nation that already has liabilities that outstrip assets by anywhere between $15 and $20 Trillion dollars, it seems foolish to even consider more debt, but we don’t even blink twice anymore. Our government is probably already aware of the fact that the debt cannot be paid, so why not pile it on as long as others are willing to let the game continue? It’ll be ok until it isn’t, then we’ll have to think of something else. How’s that for an exit strategy?

The Provisions

Page 22 Section 113 – The Health Choices Commissioner along with the Dept. of Health/Human Svcs will conduct an audit of the books of any businesses that self-insure. This constitutes an additional regulatory burden on the small business that chooses the self-insurance route.

Page 50 Section 152 – This will allow illegal aliens to get health insurance; presumably at no cost since nowhere does it mention charging them or making them pay any sort of taxes, fees, or levies. The section reads that health care will be provided ‘without regard to personal characteristics extraneous to the provision of quality health care or related services.’ Although, ironically, Section 246 contains language that purports to exclude ‘undocumented aliens’ from Federal payments towards affordability tax credits. This is something of a joke since these people don’t file returns anyway and would not be able to take advantage of such a credit.

Page 149 Section 313 – Any employer who has a payroll greater than $401,000 and doesn’t offer a ‘public’ option for employees will pay an 8% tax on its payroll – payable to the Health Insurance Exchange Trust Fund.

Page 150 Section 313 – The following schedule applies to smaller employers who don’t offer a ‘public option for employees. The percentage represents the additional ‘tax’ they will need to pay to the Trust Fund:

Does not exceed $250,000 – 0 percent
Exceeds $250,000, but does not exceed $300,000 2 percent
Exceeds $300,000, but does not exceed $350,000 4 percent
Exceeds $350,000, but does not exceed $400,000 6 percent

Also of interest is the fact that Section 313 states that an employer hasn’t satisfied the contribution requirement if they simply cut the employee’s salary by the amount of the contribution. This is best illustrated with an example:

Let’s suppose Employer A has an Employee X who makes $10.00/hour and Employer A doesn’t offer a ‘public option’ for his employees. By law, the employer is now required to pay an 8% tax on payroll (let’s assume Employer A is in the highest bracket). If the Employer simply reduces Employee X’s wage by 8% to $9.20/hour, the Employer is in violation of the statute and is deemed to not have made a contribution. While on the surface this appears good since it forces the employer to effectively increase total employee compensation, this will be a job-killer. Employer A might very easily choose to reduce the workforce by 8% to keep costs the same.

It is pretty easy to see that just these four provisions add some serious burdens on what are considered to be small businesses. These are the business that employ somewhere in the neighborhood of 80% of all workers and create roughly 60% of new jobs. The most logical response of these businesses will be to cut staff or reduce non health-related benefits such as retirement contributions. Still mired in a severe recession, small businesses have not been able to grow top line revenues (nor have large ones to any meaningful extent for that matter) and are therefore going to be focused on controlling costs. This is precisely how the firms that have survived have done so over the past 2 years. This law will put many of them under. I wonder if BLS will take this new reality into account when it pulls CESBD (birth/death model) adjustments out of the black hat each month?

This says nothing of the encroachment on civil liberties such as the IRS having direct access to your bank accounts (Page 59 Section 1173A) and the creation of a National Heath Card ID and giving government instant access to your financial information (Page 58 Section 1173A).

All this and we still haven’t considered the overall impact this will have on the macroeconomy. We know that half a trillion dollars will be transferred from consumers to government vis a vis the ‘Shared Responsibility’ doctrine espoused in the law and it will likely be much more than that. That is an additional half trillion dollars that will not be spent efficiently by consumers, but will be squandered by government. Ok, I’ll admit it - I am deeply skeptical of any government ‘Trust’ Fund. For those who want to bicker on this point, I refer you to the status of the Social Security ‘Trust’ Fund as my basis for skepticism.

We also know that $500 Billion worth of Medicare cuts will be made, which essentially means that another half trillion will disappear from the pockets of households in pursuit of paying higher Medicare premiums. The beauty of the shift is that it is essentially GDP neutral since government spending counts in GDP at the same weight as consumer spending. In this new world of socialized everything we clearly need a new way of measuring economic output or at least differentiating legitimate output from the activities of our borrow and spend politicians.

With all the debt being accumulated, the money being pulled from the real economy in favor of the centrally planned utopia sought by so many on Capitol Hill, and the pressures brought to bear on businesses by this ‘reform’, it is hard to contemplate a set of circumstances under which we avoid another steep contraction in the real economy. It will be interesting to see how long it takes to go from recovery to contraction. My guess is about as long as it takes for a Baskin Robbins double dip to melt.

By Andy Sutton
http://www.my2centsonline.com

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. His firm, Sutton & Associates, LLC currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar. For more information visit www.suttonfinance.net

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