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.