Source: Political Calculations
I spent a fair amount of time yesterday watching the inaugural festivities. My interest was personal, political and even professional.
My personal interest is pretty straightforward. Two of my children and their spouses leave in the area. They attended the Inauguration Ceremony (as shown by the picture below, which my daughter took) and the Inaugural Parade.
Even better, the next picture shows my son-in-law marching with the United States Air Force Band in the Inaugural Parade. It was also taken by my daughter. Later, he was at the Commander in Chief’s Inaugural Ball, where he performed along with some lesser lights like Jennifer Hudson, Alicia Keys, Brad Paisley and Stevie Wonder.
Although I generally try to keep politics out of this blog, some of the President’s choices about what to include in his Second Inaugural Address have implications which should directly impact economic and tax policy and thus the markets. Examples include his focus on climate change, his lack of focus on debt and deficits and his suggestion that entitlements can and should be maintained at current levels without the middle class (however defined) having to pay any more for them. Sadly, it seems clear that we have consensus among virtually all of Washington (including both major parties) that entitlements should be generous and that government should be big and should continue to grow but that we the people should not have to pay for such things.
My professional interest relates primarily to the week-end’s talking head discussion on pretty much all the news shows about the President’s alleged first-term failings and the prospects of his being able to avoid the “second term jinx.”
In his terrific book, Thinking, Fast and Slow, Nobel laureate Dan Kahneman outlines what he calls the “planning fallacy.” Initially, the planning fallacy was seen as the tendency for people and organizations to underestimate how long they would need to complete a task, even when they have lots of experience. The concept was first proposed in a 1979 paper by Kahneman and his long-time collaborator, the late Amos Tversky. As with bias blindness generally, the planning fallacy only affects predictions about one’s own tasks. When uninvolved observers predict task completion times, they show a pessimistic bias, overestimating the time taken.
The planning fallacy is a corollary to optimism bias (think Lake Wobegon – where all the children are above average) and self-serving bias (where the good stuff is my doing and the bad stuff is always someone else’s fault). It’s the key reason why every building project tends to have cost overruns and why my week-end chores take at least twice as long as I expect and require three trips to Home Depot.
In 2003, Dan Lovallo and Kahneman proposed a broadened definition of the planning fallacy so as to include the tendency to underestimate the time, costs, and risks of future actions and at the same time overestimate the benefits of those same actions. It’s a kind of hubris. We thus overrate our own capacities and exaggerate our ability to shape the future. It’s largely why the results we achieve aren’t often as good as we expect and why we so routinely underestimate bad results.
Even though American presidents may well have more power than anyone else on earth, it should be no surprise that they are susceptible to behavioral biases like the planning fallacy too. Neither are any of the rest of us.
When I was a student at Duke more than 30 years ago, basketball games were much rowdier than they are now, largely because we had lost a lot for a pretty long time (Coach K arrived in 1980 and changed that, obviously). The crowd — not yet known as “Cameron Crazies” — was loud, aggressive, funny and often “over the line.” At one home game against North Carolina State (before my time), a male student came out to sing the national anthem dressed in drag to mock State coach Norm Sloan’s wife, who often sang the anthem before State home games. As you might expect, Norm didn’t take kindly to the display and famously alleged that Duke students spent the days before basketball games doing nothing but tanking up. Thereafter, Duke students (I will neither confirm nor deny any personal involvement) greeted his every appearance at Cameron Indoor Stadium with the chant, “Have a drink, Norm Sloan, have a drink!”
That’s a fun story for me to recall and it has at least tangential relevance to my subject today. Our ability to have a drink in the future — of water rather than alcohol — is a serious concern on account of population growth, development, a lack of infrastructure and climate change (Jeremy Grantham deals with the problem in connection with the related food crisis here).
The world’s population is growing, and developing areas are demanding more clean water. The investment world has noticed and, although it’s in its infancy as a market sector, the water sector is a hot topic. Moreover, since 2001, the sector (depending upon how it’s defined) has beaten the S&P 500 by more than 10 percent annually.
Unlike many issues relating to commodities, it is a major American problem too. The Upper Colorado River Basin (Colorado River water is used by about 40 million people in the states of Arizona, California, Colorado, New Mexico, Nevada, Utah, and Wyoming and supplies water to my home area in southern California) could see deficits in its compact obligation to deliver water downstream as often as once every five years by 2040, according to a massive new Bureau of Reclamation study released this week. The study includes a 50-year Colorado River water supply and demand outlook and that outlook isn’t great. By that model, the river could be short by at least 3.2 million acre feet by 2060, and perhaps by as much as 8 million acre feet, according to the Colorado River Water Users Association.
Water — it’s a sector to pay attention to for 2013 and beyond. We’d all like to be able to have a drink now and then.
The National Intelligence Council is composed of the 17 U.S. government intelligence agencies. The Council’s Global Trends Report has, since 1997, worked with a variety of experts both in and out of government service to examine factors such as globalization, demography and the environment to produce a forward-looking document to aid policymakers in their long-term planning on key issues of worldwide importance.
“We are at a critical juncture in human history, which could lead to widely contrasting futures,” wrote Christopher Kojm, the Council’s Chair, in his introduction to the current Report, published just this week.
The Report is intended to stimulate thinking about the rapid and vast geopolitical changes characterizing the world today and possible global trajectories over the next 15 years. Significantly, it does not seek to predict the future – we have a dreadful track record in the regard – but instead it seeks to provide a framework for thinking about possible futures and their implications.
The Report argues that the breadth of global change we are facing today is comparable to that during and surrounding the French Revolution and the rise of the Industrial Age in the late 18th century, but it is being realized at a much faster rate. While it took Britain more than 150 years to double its per capita income, India and China are set to undergo the same level of growth in a tenth of the time, with 100 times more people.
I encourage all investors to read it carefully. Despite the vital importance of the “long cycle,” it isn’t likely to change your current portfolio outlook, but it will provide a helpful backdrop to your overall thinking and to your longer-term outlook and analysis.
Among the Report’s conclusions is that there are certain “megatrends” that are relative certainties and that we should prepare to deal with them. These include the following (and note that all have investment implications, some of them potentially enormous).
- For the first time in history, a majority of the world’s population will no longer live in poverty by 2030, leading to a healthier global population and a major expansion of the middle classes in most countries.
- Life expectancies will continue to expand rapidly. “Aging” countries (such as those in the West – particularly Europe – and Japan) face the possibility of a significant decline in economic growth.
- Asia is set to surpass North America and Europe in global economic power, but there will not be any hegemonic power.
- Demand for resources will increase owing to global population growth from 7.1 billion people today to about 8 billion by 2030.
- Demand for food is likely to rise by 35 percent and energy by 50 percent over the next 15-20 years.
- Nearly half of the world’s population will live in areas with severe water stress by 2030. Fragile states are most at risk, but China and India are vulnerable to volatility of key resources.
These megatrends will inevitably lead to a variety of vexing and potentially “game-changing” questions. Each has profound political, economic, market and human implications.
- Will divergences and increased economic volatility result in more global breakdown or will the development of multiple growth centers lead to increased resiliency? For much of the West, the challenges involve sustaining growth in the face of rapidly aging populations. For China and India, the main challenge will be to avoid “middle income traps.” In general, the global economy will be increasingly crisis-prone and won’t return to pre-2008 growth levels for “at least” the next decade.
- Will current governments and international institutions be able to adapt fast enough to harness and channel change instead of being overwhelmed by it? While this sounds generally like the investment challenge we face daily, there are a variety of major global issues in this regard. Potentially (more) serious government deficits driven by rapid political and social changes are likely to exist. Countries moving from autocracy to democracy are often unstable and about 50 emerging market countries fall into this major risk group. All of them could – at least potentially – grow out of their governance incongruities by 2030 if economic advances continue.
- Will rapid changes and shifts in power lead to conflicts? The general answer is surely duh, with uncertainty only as to the number, extent and nature of the conflicts. Limited natural resources—such as water and arable land—in many of the same countries that will have disproportionate levels of young men—particularly in Sub-Saharan Africa, South Asia, and parts of the Middle East—increase the risk of intrastate conflict. It is particularly troubling to note that any future wars in (at least) Asia and the Middle East may well include a nuclear element. Many of these conflicts, once begun, would not be easily containable and would (obviously) have global impacts.
- Will regional instability, especially in the Middle East and South Asia, spill over and create global insecurity? See the commentary re #3 above. Wash; rinse; repeat.
- Will technological breakthroughs occur in time to solve the problems caused by rapid urbanization, strains on natural resources, and climate change? The report identifies 16 key “disruptive” technologies with potential global significance out to 2030. They are generally grouped around potential energy breakthroughs, food- and water-related innovations, big data and the forecasting of human behavior, and the enhancement of human mental and physical capabilities, including anti-aging.
- Will the United States, as the leading actor on the world stage today, be able to reinvent the international system, carving out potential new roles in an expanded world order? The Report anticipates that the U.S. will likely remain primus inter pares (first among equals) among the other great powers in 2030 because of the multifaceted nature of its power and legacies of its leadership. But it also expects that the “unipolar moment” is over. Overall, power will likely shift to networks and coalitions in a multipolar world. The United States’ (and the West’s) relative decline is seen as inevitable but its future role in the international system is much harder to project. China is deemed unlikely to replace the U.S. as international leader by 2030. Non-state actors and even individuals, empowered by new media and technology, will be an increasing threat. A reinvigorated U.S. economy – spurred perhaps by U.S. energy independence – could increase the prospects that the growing global and regional challenges would be addressed. However, if the U.S. fails to rebound, a dangerous global power vacuum would be created.
From these building blocks and issues, the Report posits potential futures including a best-case scenario of increased cooperation between the U.S., China and Europe as economic and security interests increasingly align, a worst case scenario of conflict and fragmentation in a stalled global economy where political, social and economic inequalities work against integration and stability, and a scenario involving a “nonstate world,” where the nation-state does not disappear, but countries increasingly organize and orchestrate “hybrid” coalitions of state and nonstate actors which shift depending on the issue.
There is no earth-shaking news here. But it is helpful to take a step back and look at the bigger picture once in a while. Because change is so often incremental, it is easy to underestimate how quickly it can happen and how much impact it can have in the aggregate. In the markets as in life, caveat emptor.
As reported by The New York Times, film critic Pauline Kael expressed shock at Richard Nixon’s landslide victory over George McGovern in 1972. “I live in a rather special world. I only know one person who voted for Nixon. Where they are I don’t know. They’re outside my ken. But sometimes when I’m in a theater I can feel them.” Even after the votes were in and counted, Kael wanted to believe her lyin’ eyes. This year, it’s Republicans who have fallen prey to confirmation bias and rejected the data in favor of preconceived ideological commitments and intuition.
Stats wizard Nate Silver has been at the center of a controversy this election season as his data-driven presidential election analysis, outlined at his FiveThirtyEight blog, contradicted the desires of Republicans and pundits who did not want a clear victory for President Obama (albeit for different reasons). Silver created a forecasting model that was uncannily accurate in 2008 (49 of 50 states) and which consistently predicted that President Obama was a clear favorite over Mitt Romney, angering conservatives in the process. When the President won a clear victory last night (the extent of which is still being determined as I write this), Silver’s method and approach were vindicated.
Silver critics such as Politico’s Dylan Byers (“Nate Silver could be a one-term celebrity”), David Brooks of The New York Times (“The pollsters tell us what’s happening now. When they start projecting, they’re getting into silly land”), Morning Joe‘s Joe Scarborough (“Nate Silver says this is a 73.6 percent chance that the president is going to win? Nobody in that campaign thinks they have a 73 percent chance — they think they have a 50.1 percent chance of winning”), The Washington Post’s Michael Gerson (“Silver’s prediction is not an innovation; it is trend taken to its absurd extreme”) and Politico’s Josh Gerstein (“Isn’t the basic problem with the Nate Silver prediction in question, and the critique, that it puts a percentage on a one-off event?”) have all demonstrated that, consistent with my warnings, we simply do not deal with probability very well. More fundamentally, their data-deficient “analysis” has been weighed and found wanting.
With respect to probability, as Silver warned Byers, one shouldn’t confuse prediction with prophecy. As Zeynep Tufekci proclaimed at Wired in his careful defense of Silver, this “isn’t wizardry,” but “the sound science of complex systems.” Accordingly, ”[u]ncertainty is an integral part of it. But that uncertainty shouldn’t suggest that we don’t know anything, that we’re completely in the dark, that everything’s a toss-up.” Here’s the key:
What his model says is that currently, given what we know, if we run a gabazillion modeled elections, Obama wins 80 percent of the time…Since we’ll only have one election on Nov. 6, it’s possible that Obama can lose. But Nate Silver’s (and others’) statistical models remain robust and worth keeping and expanding — regardless of the outcome this Tuesday.
Wa-Bam. The probabilities were clear. Governor Romney could have won, but it was unlikely.
With respect to data, Ezra Klein ‘s Wonkblog at the Washington Post offers a detailed defense of quantitative analysis as well as Silver (more here). Had Silver’s model been wrong, it would have been because the underlying polls — lots of them — were wrong. Silver’s model is a sophisticated form of poll valuation and aggregation together with demographic and voting trend analysis.
As my Above the Market masthead proclaims, I believe in and strive to focus on “data-driven analysis.” Because Silver’s work is quintessentially that, it was easy for me to rely upon it in making my prediction of 303 electoral votes for the President (Silver predicted 313). The pundits, however, were all over the map. Data must override ideology, punditry and feelings whether we’re talking about elections, markets or anything else. Data wins. If you want to oppose what the data suggests, it can only be done via better data or better analysis of the data.
To be clear, my prediction (like Silver’s) could have been dramatically wrong. Again, it was based upon data and probabilities rather than certainties. The electorate could have defied the odds (in much the same way that a longshot can win the Super Bowl). Silver, in his fine new book The Signal and the Noise, urges us to “stop and smell the data — slow down, and consider the imperfections in your thinking.” Those of us who work in the markets should do exactly as he suggests.
There is no denying the Republicans have the passion now, the enthusiasm. The Democrats do not. Independents are breaking for Romney. And there’s the thing about the yard signs. In Florida a few weeks ago I saw Romney signs, not Obama ones. From Ohio I hear the same. From tony Northwest Washington, D.C., I hear the same.
Is it possible this whole thing is playing out before our eyes and we’re not really noticing because we’re too busy looking at data on paper instead of what’s in front of us? Maybe that’s the real distortion of the polls this year: They left us discounting the world around us.
Her writing is still lovely but her lyin’ eyes were wrong and that form of punditry (and market analysis) is d-e-a-d.
As regular readers already know, I am deeply concerned about the deep polarization and dysfunctionality of our political process (see here, for example). I also expect that, irrespective of which candidate wins tomorrow, it will be extremely hard for him to govern. Moreover, the depth of our problems do not portend easy solutions anyway, even if the president really had as much power over things (and especially the economy) as people generally think and even if Congress cooperates. All that said, I strongly encourage you to vote. I generally resist writing about politics and I assume that you are as sick of people everywhere trying to tell you how to vote as I am. I won’t try to tell you how to vote but I will beg you to vote.
I also encourage you to pick-up some investing insights from the current political landscape.
The Project for Excellence in Journalism studied the slant of media coverage of the current presidential election and found that with “horse-race” stories removed (which would skew the results toward the candidate the polls show to be winning at any given moment), media news coverage of the presidential election was generally balanced. With respect to President Obama, 15 percent of campaign stories were positive, 32 percent were negative and 53 percent were mixed. With respect to Governor Romney it was 14 percent positive, 32 percent negative and 55 percent mixed (these numbers have been rounded).
The study also reveals the degree to which the advocacy media — predominantly MSNBC and Fox – stand out from other mainstream media outlets even when the so-called “opinion shows” (such is O’Reilly and Maddow) are not considered. On MSNBC, 71 percent of the “news” segments about Romney were negative in nature, compared with just 3 percent that were positive. That’s a ratio of roughly 23-to-1 negative. On Fox, 46 percent of the “news” segments about Obama were negative, compared with 6 percent that were positive. That’s a ratio of about 8-to-1 negative. These results make MSNBC and Fox unusual among outlets that identified themselves as news organizations. For example, CNN’s coverage was roughly balanced (after “horse race” stories were removed).
The obvious take-away is that MSNBC and Fox News are dreadfully biased organizations such that any use of “news” in connection with them probably requires scare quotes. But that’s hardly a surprise to anyone who has watched them. I’m struck, instead, by the extent to which the public at large is intentionally seeking out “news” sources that actively cater to their biases. All the evidence points to the idea that we want to stay within our chosen echo chambers where we won’t have to hear anything that threatens our preferred ideology. Fox is the clear leader in cable news ratings, but MSNBC crushes CNN (and all others) too. In the aggregate, the public rejects cable news coverage that purports (or even tries) to be impartial. I suspect that consumers of finance news and information, both professional and amateur alike, are prone to the same problem.
Our behavioral biases make it difficult for us to discover anything approaching objective reality even when we are consciously aware of them and are actively on the look-out for information that might question our preconceived notions. If we are going to succeed at investing, which necessarily focuses on what works rather than on an overarching ideology, aggressively seeking out data and viewpoints that conflict and contrast with our own is vital. The current environment provides a glut of media and investment outlets and sources. It’s easy to read/watch/interact only with those that agree with us and are on ”our side.” However, to reiterate a point I make often, information is cheap but meaning is expensive. Staying within one’s bubble of comfort when it comes to understanding the markets — no matter how strongly we feel like doing so — is a recipe for disaster.
Finally, I am struck by how few people actually vote. Despite some controversy about how to measure who can vote, there is no dispute that roughly 40 percent or more of potential voters don’t bother to go to the polls in presidential election years. There is no reason to expect tomorrow to be significantly better. Far fewer people vote in “off-year” elections. That’s a national disgrace. Yet, if anything, we in the investment world are even worse when it comes to using our ownership clout to impact the governance and management of the businesses in which we have ownership interests.
American businesses do a number of stupid and even evil things to the detriment of their shareholders’ interests. To pick an easy example, take a look at executive pay. It has increased wildly over the past few decades with no evidence that the current obscene pay levels impact corporate performance positively. Yet the mutual funds, money managers and pension funds that are the primary holders of stocks (beyond a few notable exceptions) are complicit with this theft of shareholder value by refusing to be active contributors and voters at shareholder meetings and otherwise. Corporations and their executives have a fiduciary obligation to maximize shareholder value. Over-paying executives directly damages the company’s bottom line. Much of that money could be better used for investment in a new product line (for example) or simply by paying dividends to shareholders. That we don’t actively work to protect our interests in this regard is both dreadful and inexcusable.
As Jack Bogle points out, the move from ownership capitalism to management capitalism has had dramatic and deleterious effects on shareholders. Even so, Vanguard (Jack’s baby and a huge owner of corporate shares) has failed to institute positive corporate governance policies that could really help in this regard too. We need to vote and to take a more active interest in the process both with respect to politics and to corporate governance alike. Our future success (or simply our future) depends upon it.
Despite the seemingly constant claims of the political rhetoric, I don’t expect the economy to improve dramatically after the election no matter which presidential candidate wins. The inherent problems are real and the risks are high. Moreover, presidents have far less control over the economy than is commonly assumed. There are no silver bullet solutions available.
If we are to expect real political progress on economic issues going forward, the current political dysfunction needs to be altered. I propose three starting points for fixing things.
1. Assume good faith unless and until the lack of it is clearly demonstrated. We live in a politically polarized time. The divisiveness is both pervasive and corrosive. Partisans are convinced that their positions aren’t really debatable. Indeed, they think (assume even) that their opinions are objectively and obviously true. After all, if we didn’t think our positions were true, we wouldn’t hold them. As Jeffrey Friedman has reminded me, Walter Lippmann made this case almost a century ago:
Where two factions see vividly each its own aspect, and contrive their own explanations of what they see, it is almost impossible for them to credit each other with honesty. If the pattern fits their experience at a crucial point, they no longer look upon it as an interpretation. They look upon it as ‘reality.’
In other words, we think our opponents are suppressing or denying the obvious truth.
Because the base-case assumption — steeped in bias blindness — is that those on the “other side” are not generally acting in good faith, the necessary conclusion is that they must be stupid, delusional or dishonest (for example, see here, here and here – and note the comments). I don’t mean to suggest that politics is not fraught with deception and fraud. But these should not be our default assumptions. We should never underestimate the power of confirmation bias or bias blindness.
We increasingly couch political and policy arguments in moral terms. As cognitive psychologist Robert Siegler has argued, we now tend to see elections as more crusade than choice. But if we are to have any hope of seeing leaders with different viewpoints working together to solve problems, it ought to start with the idea that those who disagree are generally people of goodwill acting in good faith for what they see as the good of the country. In other words, they may be wrong, but they aren’t necessarily (or even likely to be) stupid, delusional or evil. Recognition of the reality and the power of our behavioral biases would provide a good start toward making some progress toward a political process that actually works.
2. Commit to the idea that data trumps ideology. We all like to think that we act like impartial judges, making decisions only after a careful weighing of all the evidence. But that is rarely what happens, as the behavioral research establishes beyond doubt. We are much more like lawyers, scavenging for whatever arguments we can find that might help, irrespective of relevance or accuracy.
Our overriding tendency is to concoct belief systems based upon incomplete evidence or even out of whole cloth and then to set out looking for evidence to confirm what we have already decided. Moreover, we are not anything like objective. We interpret the evidence we do examine in ways that tend to support our prior commitments. We are ideologues through and through.
Per Friedman, when properly conceived, political and policy questions most often resolve into questions of fact or factual interpretation. That is not to say that politics does not involve clashes of values. But they are far less frequent than we assume. And factual claims are much more conducive to discourse, debate and compromise than moral assertions.
Because we are such ideologues, it can be exceedingly difficult for us to come to the realization generally and (especially) in specific cases that careful factual analysis can answer most questions. But if we are to succeed as individuals and as a nation, especially with respect to difficult and contentious issues, we must commit to a data-driven process that requires that our political actions and decisions be based upon what can be demonstrated factually rather than upon our ideological presumptions (of whatever stripe).
3. Demand that partisans explain why they hold their views and why we should expect them to work. As Steven Sloman, a professor of cognitive, linguistic and psychological sciences at Brown University recently pointed out in The New York Times, the “illusion of explanatory depth” (an idea developed by the Yale psychologist Frank Keil and his students) means that we typically believe that we understand how complex systems work even (perhaps especially) when we don’t. It is not until we are asked to explain how such a system works that we come to realize how little we actually know.
Significantly, it is not good enough merely to ask people to justify their positions. Indeed, discussion and argument generally harden positions and make people less likely to alter their views. To have an impact on their understanding and thus their behavior, we must ask them to explain the mechanisms by which a policy could and would work. When we do, those with limited understanding tend to moderate their views. In other words, by demanding a data-driven explanatory process, we increase the likelihood of compromise and perhaps even consensus. As the expression goes, we’re all entitled to our own opinions, but not to our own facts.
I hasten to add that these three approaches won’t help much if the political factions and the political actors that represent them continue to refuse to engage in substantive dialogue, to resist even the idea of compromise and to see recalcitrance as being in their best political interest. Even so, no matter how naïve I may be for saying so, these three ideas would offer – like the old joke about 100 dead lawyers at the bottom of the ocean – a really good start.
This post is a follow-up to last week’s Bias Blindness and Political Polarization.
As ever, I was frustrated in that the best approach to the fiscal and economic problems we face seems pretty obvious to me but nearly impossible to implement. It has three component parts.
- The top priority is a healthy and growing economy. All sides agree that economic growth is absolutely necessary to escape the morass we’re in. There will be lots of political arguing about this, but the unfortunate reality is that the government can’t do a lot to rescue the economy except at the margins and around the edges.
- We also desperately need fiscal responsibility which includes a comprehensive plan to deal with government spending and deficits. Our current path is simply unsustainable.
- That said, now is not the time to be cutting programs designed to help people in trouble and survive what is still a very lousy economic environment. Moreover, firing government workers when there are few job prospects for them in the private sector doesn’t strike me as a good plan for fixing things.
All of this suggests a pretty straightforward (if difficult to execute) solution — use governmental resources to keep things from getting worse in the near-term and go about doing those things that only governments can do (like fixing our collapsing infrastructure). Even though it is a monumental longer-term problem, we can borrow money today at extremely cheap rates to do so. When economics conditions improve, we can then attack the fiscal problems head-on.
But here’s the problem. There is not a whit of evidence that our bloated and entitled government will ever have the discipline to impose austerity by curbing its spending habits without being forced into it by political mandate. Even worse, it is least likely to do so when times are good, revenues are high and political largesse is easy to bestow.
Sadly, that means I have no clue what is the best way forward. The approach most likely to succeed in the long-run is probably to impose austerity now since there seems to be some real support for it, election results allowing. But if we follow that approach we need to recognize that doing so will force some dreadful near-term impacts, many of them forced upon those least able to manage them successfully.
The better solution (assuming a more perfect world) risks longer-term financial ruin without responsible government and leadership (how often have we seen that recently?) and has potentially nightmarish consequences for our children, who already assume that they will never have Social Security and Medicare benefits even as we Boomers are whining about any potential cuts to that which we are “entitled” (in a social compact we made with ourselves without the consent of our children, who we expect to pay for it).
If anybody has a plausible solution, I’d love to hear it.
I was in Washington, D.C. and stood in front of the Supreme Court Building for a while on Monday watching the spectacle as the world (or at least the country) awaited the Court’s historic decision on healthcare (“Obamacare”). Unfortunately for me, the decision was delayed until Thursday, by which time I was in Phoenix. When it came down, the experts were surprised that the law was upheld, albeit not based upon the Commerce Clause (the Administration’s stated grounds), but rather upon the taxing authority of the Congress (a basis that the President had specifically denied). Predictably, the stock market reacted negatively that day, but that reaction was only so much noise and has little relation to the value of the market longer term. However, there are at least three respects in which the decision and the legislation it upheld are relevant to the markets over the longer-term.
- More Deficits; More Gridlock; More Uncertainty. Irrespective of one’s policy preferences, the President’s healthcare initiative is an expensive one. Therefore, it will add to an already problematic situation about which all the major players are fundamentally dishonest. Foolishly (if not surprisingly), the public at large wants a full complement of services without having to pay for them. The Republicans would have us believe that the budget can be balanced without addition revenue — via spending cuts and perhaps even tax cuts. The Democrats would have us believe that no major spending cuts are necessary. All are wrong and obviously so. We need more revenue and everyone will have to contribute — “the rich” (however defined) simply don’t have enough money to solve the problem alone. We also need spending cuts and not just to discretionary programs (defense and entitlements must be cut too). The “fiscal cliff” is a serious problem. The country is deeply divided. Expect even more dysfunctionality over the debt limit this time. That’s not good.
- Perhaps More Activist Taxation. That the Court upheld Obamacare as a tax may provide an impetus for the government to be more aggressive in implementing policy via the tax code. For example, a bill providing a 10 percent corporate income tax on companies that don’t export jobs and a 35 percent tax on those that do would have a lot of populist appeal. But it would have a dreadful impact upon the economy and the markets. That’s something to be concerned about.
- A Victory for the Rule of Law. I was struck on Thursday that everyone right up to and including the President was waiting for the Supreme Court to announce its decision without any idea of what that decision would be or the grounds upon which it would be decided. Unlike most places in the world, there was no major fear that “the fix was in.” This confidence in the American rule of law goes a long ways toward explaining why the dollar is the world’s default crisis currency and why U.S. Treasury bills, notes and bonds are the world’s default investment in the face of almost any sort of trouble. Thursday was a pleasant reminder of at least that comfort.
We are long ways from seeing what Obamacare will ultimately look like and how it will work out (even though many of us have strongly held views in that regard). In the meantime, we can be sure that it is a big enough issue that the impact it will have on the markets and the country as a whole will be a major one.