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Wednesday, July 07, 2010

There Is No Doubt That Policy Uncertainty Is An Employment Drag

I am not sure what we can do to fix that with the current combination of Congress and Executive. A somewhat wacked-out ideology is driving a lot of decisions.

Two examples:

The first is the housing tax credit. The bottom line on the housing tax credit is that it pulled forward a lot of sales, but doesn't seem to have generated much in the way of sales that wouldn't have happened. The vicious reality is that mortgage delinquencies are now climbing once more, and quite a few new defaults will arise from the tax credit loans. Why on earth anyone would think that advancing a downpayment would work differently when done by a governmental act than by a private entity? But still we did it.

The worst of it is that mortgage interest rates are now so low that many of those who used the housing tax credit to buy would have been far better off if they had waited, so some of those buyers have been turned from good loans to bad loans by nothing more than market interference. Unfortunately, there will be further hangover as FHA insurance rates have to go higher, thus preventing new buyers from getting the real benefit of the low rates. In short, the long term effect of the housing tax credit will be to suppress overall demand over years.

Current policy makers seem stuck on the idea that if the government does a thing that is highly destructive when a private entity does it, the activity will somehow become economically functional due to the government interference. That defines "Stuck on Stupid".

The second example entails the recent attempt to interfere with medical insurance rates out of political purposes. Recently I discussed this in an oddly-named post. I am not going to revisit that post, which has primary resources and some discussion of the issues and figures, but the reality is that Massachusetts was completely wrong. As predicted, the risk-based capital levels of several of the (non-profit) companies involved have dropped so low that they are now under state supervision:
In the first good news in months, a state appeals board has reversed some of the price controls on the insurance industry that Gov. Deval Patrick imposed earlier this year. Late last month, the panel ruled that the action had no legal basis and ignored "economic realties."
...
In an April message to his staff, Robert Dynan, a career insurance commissioner responsible for ensuring the solvency of state carriers, wrote that his superiors "implemented artificial price caps on HMO rates. The rates, by design, have no actuarial support. This action was taken against my objections and without including me in the conversation."

Mr. Dynan added that "The current course . . . has the potential for catastrophic consequences including irreversible damage to our non-profit health care system" and that "there most likely will be a train wreck (or perhaps several train wrecks)."

Sure enough, the five major state insurers have so far collectively lost $116 million due to the rate cap. Three of them are now under administrative oversight because of concerns about their financial viability.
What happened is that the companies pulled from their reserves dropping their risk-based capital ratios (RBC) enough to trigger control levels. See the prior post for more info. This put handed the initiative to the state insurance regulators, who now must deal with the problem. Needless to say, there is only one solution - raise premiums.

This sort of thing is causing many businesses to operate with great caution and possibly to defer investments where feasible. In some respects, any economic projections from this point on must deal with the issues of government. When the government takes over economic niches, it becomes an economic player. And when the government is a stupid economic player, the only option for other players is to short.

So don't expect stock prices to soar until the market perceives that something has changed about the government.

Money and pricing is a giant informational system that tells participants in the system how to plan for future production. When any entity (government or private) lies or subverts the informational exchange, uncertainty rises about true pricing. This may produce unexpected losses, or when the subversion is obvious it adds an uncertainty component to pricing. An uncertainty tax on pricing is a tax on future production and will show up in GDP as a negative. I am now tossing around various ideas about how to assess the impact of that certainty, but I doubt there are any good ways.

Comments:
Almost all of your posts are oddly named. Part of the fun is figuring out the puns and the sly references. I mean, I wouldn't have figured you for a Star Trek geek otherwise.
 
Another oddly named post. Policy uncertainty? Yes, there is uncertainty about what the HCR bill will cost businesses. The one certainty there is that their costs are going up.

Here's some policy certainty that acts as an employment drag.
1. The tax rates for individuals who earn over $100,000 (or is it $125,000? Ah, a bit of uncertainty.) & couples over $250,000 are going up.
2. This administration are anti-free trade.
3. This administration wants to tax carbon/energy and drive up utility costs.
4. This administration is against exploring for and producing domestic oil reserves.
5. This administration is creating Federal deficits unseen since WWII in the guise that they are stimulating the economy when it is obvious they are redistributing money to favored groups.

IMHO, there is quite a bit of certainty about why businesses aren't hiring.

Changing the Congress from liberal to fiscally conservative would, hopefully, change some of those policies that are a drag on employment.
 
Personally, I'm expecting uncertainty to increase if fiscal conservatives (of whatever party) are a majority of Congress after November.

Look at it this way--we have some tremendous problems facing us, and no consensus on how to handle them. I've heard the theory that a Republican Congress would turn President Obama into the second coming of Bill Clinton, but I doubt that's the case. I think the result would be 100% gridlock. Absolutely nothing would get done for two years, at a minimum. At the extreme case, perhaps the Federal Government would go without a budget for a solid two fiscal years.

Think about what that means--a massive tax increase (as of January 2011), EPA-mandated CO2 limits, massive interference in the health care industry, and all manner of mischief that has been passed into law already, but not thus far enforced.
 
Absolutely nothing would get done for two years, at a minimum.

Sounds good to me. We have all the laws and agencies we need already, and then some. All Congress really needs to do is appropriations bills, and some agency head approvals/denials. The idea that we need to DO SOMETHING is antiquated; what we need is a lot of UN-doing. If we can't get that, gridlock is the next best thing.
 
Neil - well, we have a VERY strong Dem majority now controlling Congress and the Presidency, and we still don't have a budget.

I think we have gridlock already.

There is gridlock because everyone's having trouble facing the truth. I am not sure that much will change if Congress switches.

If Congress doesn't switch, I think the current lot at the reins will double down and go for broke (that last both metaphorically and in actuality).
 
Charles - the problem is, they've already done quite a bit, and the laws are written quite vaguely in order to provide extreme--shall we say, flexibility, for the executive branch to implement whatever they think they can get away with.

Just changing control of Congress won't stop much from happening, as they've already got most of the power they need.

M_O_M, good points. I agree that if control doesn't change, it will be another orgy.
 
"Neil - well, we have a VERY strong Dem majority now controlling Congress and the Presidency, and we still don't have a budget.

I think we have gridlock already."
===============

I read that our little Dem Darlings had "deemed" a budget of $1.12 trillion as "passed".

http://wwwwakeupamericans-spree.blogspot.com/2010/07/democrats-budget-enforcement-resolution.html

The article, dated Sun 7/4/10, says

" Last night, as part of a procedural vote on the emergency war supplemental bill, House Democrats attached a document that "deemed as passed" a non-existent $1.12 trillion budget. The execution of the "deeming" document allows Democrats to start spending money for Fiscal Year 2011 without the pesky constraints of a budget.

The procedural vote passed 215-210 with no Republicans voting in favor and 38 Democrats crossing the aisle to vote against deeming the faux budget resolution passed.

Never before -- since the creation of the Congressional budget process -- has the House failed to pass a budget, failed to propose a budget, then deemed the non-existent budget as passed as a means to avoid a direct, recorded vote on a budget, but still allow Congress to spend taxpayer money."

******

We've got real scum wandering the halls of Congress, IMHO. We need to detoxify the building in November.
 
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