hey mama said the way you move,
Gon' make you sweat, gon' make you groove...
- Black Dog by Led Zeppelin
The quote above really has nothing to do with this article — the writer
just loves that song and perhaps the "make you sweat, make you groove"
part may have some tangential pertinence to this health care article!
That said, we wondered if we could find a comparable instance of
legislation from other administrations from which to analyze the current
universal health care bill, and determine the effects on the U.S.
economy and ultimately the USD. The Johnson administration seems to
provide some answers. A caveat: We examine only the macroeconomic effect
and not any particular aspect of the new legislation or the politics of
it - plenty of that is covered in the public domain.
National Health Care Background
The idea of national health insurance emerged around 1915 when the
American Association for Labor Legislation attempted to introduce a
medical insurance bill to some state legislatures. These attempts were
not successful, and as a result, controversy about national insurance
was born. National groups supporting the idea of government health aid
included the AFL-CIO, American Nurses Association, National Association
of Social Workers, Socialist Party USA, American Medical Association,
American Hospital Association, Chamber of Commerce and the Life
Insurance Association of People, common players even today.
In 1935, President Roosevelt signed the Social Security Act, but medical
benefits were left out of the bill. While Roosevelt wished to include
some sort of national health care clause in the bill, he believed the
American population was not ready and the idea unpopular. Harry Truman
took on the idea of national medical care and tried to integrate it into
his Fair Deal program. Truman, too, was unsuccessful; however, during
his presidency the fight for national medical care grew due to its focus
on the aged. That argument did get play in the Eisenhower
administration through the then newly-created Ways and Means Committee,
but did not gain legislative traction.
A couple of preliminary bills paved the way for a national health care
program. In 1960, the Kerr-Mills Act gave states the power to decide
which patients needed financial assistance; at the states' decree, the
federal government would provide individual assistance. Most states did
not participate or abide by the Act. Another preliminary bill, the
King-Anderson Bill, was formed in 1962. Under it, some hospital and
nursing home costs for patients 65 and older would be covered. Although
this bill was defeated in committee, the vote was narrow (12-11),
signaling a shift in attitudes. This was the turning point that enabled
President Johnson to include in his "Great Society" program Medicare and
Medicaid programs as part of the Social Security Act of 1965 granting
19 million Americans health coverage. Not until last week has medical
care received such full and national treatment.
The effects of the Medicare and Medicaid on the U.S. economy is evident
today as overall health care comprises 1/6th of the U.S.
economy, or about 600 billion dollars annually. Granted today's health
care spending is considerably more complicated and extensive than what
is in the '60s, nonetheless, it is huge. When we add the fact that the
new health care bill will cost $940 billion over 10 years, we are
talking about an epic cost to deliver medical care to U.S. citizens.
Economic Conditions during President Johnson's "Great Society"
Unlike FDR's New Deal, which was a response to a severe financial and
economic calamity, the Great Society initiatives came just as the United
States' post-war prosperity was starting to fade, but before the coming
decline was being felt by the middle and upper classes. President
Kennedy proposed a tax cut lowering the top marginal rate by 20 percent,
from 91 percent to 71 percent, which was enacted in February 1964 by
Lyndon Johnson. GNP rose 10 percent in the first year of the tax cut and
economic growth averaged a rate of 4.5 percent from 1961 to 1968.
Disposable personal income rose 15 percent in 1966 alone. Federal
revenues increased dramatically from $94 billion in 1961 to $150 billion
in 1967. As the Baby Boom generation aged, two and a half times more
Americans entered the labor force between 1965 and 1980 than between
1950 and 1965. As a result, the war on poverty seemed to work.
As we fast forward to the early '70s, we see signs of large scale gains
in funding and program scope for many of the Great Society's
initiatives. Funding for these programs grew rapidly in terms of nominal
spending, but the seeds of failure were set through a long series of
poor, though paved with good intentions, implementations (urban housing
projects, social welfare, EPA). Add to it the inflation scourge of the
early '70s and subsequent economic stagnancy for the remainder of that
decade and thus coming to a grinding halt in the early '80s. The USD
(against, say, the German deutschemark), once depegged from the gold
standard in 1971, dropped over 211 percent by the end of the decade.
While we make no claim that it is due to 3x health care spending
increases during the same period, it indeed represents a much smaller
portion of U.S. GDP than other entitlement programs such as Social
Security or spending on the military. So what kind of larger long-term
USD trend might we see as a result of this legislation? Examining the
original 1965 Social Security Act and gauging health care spending from
1965 to the early part of this decade might provide a clue.
Economic Impact of Health Care Then and Now
First and foremost, the 1965 Act DID cover aging citizens who were
indeed in need of health care assistance, despite loud protestations by a
then-diminishing opposition. The economic effect is much trickier to
isolate given the multiplicity of all other GDP-related effects. We have
observed that once government enacts a large, pervasive piece of
legislation, it can never go back.
Looking at the CPI and the Medical Price Index over the past 30 years,
you would actually see the existing roughly $600 billion per annum
overall health care spending shoot to (which from 1971 to 2001 rose 9.16
times) the neighborhood of around $5.5 trillion in the same time frame —
just a wee bit higher than the U.S. GDP today! Of course, this is
merely having fun with a bunch of numbers. All kidding aside, what is
serious is the scale of the capital and correct execution of the
"reforms" introduced in the bill. The point is today health care is
1/6th of GDP. It started out as a non-detectable number (on an economic
scale back in 1965) and should many of its features not work
(particularly the $180 billion in productivity efficiencies through
process automation and technology improvements, let alone the raft of
features in the 5,000 page legislation that took President Obama 22 pens
worth of ink to sign), Congress will have to remain incredibly vigilant
and committed to its fundamental purpose and be wary of tinkering with
this enormous bill.
Health Care and the USD: It's about the deficits
So what in the world does this have to do with the USD? Think of the
health care "leg" of the U.S. GDP stool as now having a new future,
whereas it is unlikely we will see any material changes in military,
education, infrastructure, and Social Security spending or legislation,
given how bruising this effort was despite the huge majority Obama and
Democrats held in the Senate and House. Given this effort and health
care being the fastest growing drag on GDP and the budget deficits, it
becomes a bit clearer that investors should heavily focus their
portfolio beta risk assessments on the new health care bill having more
correlation in affecting the budget deficit. Meaning, that a continued
double digit percentage basis of U.S. debt to GDP will manifest itself
as a long death for the USD and ultimately crash it if the government's
actions are unmodified or worse, unstopped. The U.S. government however,
has had a way of avoiding a pure purgatory as will this or future
administrations. That said, the implication is that it might be easier
for investors to model purchasing power parity in the USD due to a
higher beta correlation of health care spending to the U.S. deficit data
and thus calculate more accurately the effects on the USD. And of
course, any material yearly additions to the deficit will be quite
bearish for the USD. Another +200 percent decline like the '70s, '80s
and '90s? It is to be seen.
For this reason 2011 and 2014 will be critical to this effort. In 2011,
key broad-based tax hikes, a total of 3.2 percent tax hike on upper
middle class families and a tax rider to payroll-based Medicare payments
are added along with tax increases to medical device providers in 2013.
In essence, this is a short gap funding into the next six years. Then
in 2014 we'll feel the "big bang" as the 30-40 million of the currently
uninsured will "come on line" as a result of mandatory insurance
coverage. So, the cornerstone elements of the plan to focus on overall
system cost reduction (covering non-plan emergency care for individuals,
state implemented insurance exchanges, eliminating plan coverage caps,
process and technology improvements, insurance rebates, hospital
insurance tax, annual health insurance fees assessed to those in the
industry, luxury plans getting taxed in 2018) will be scrutinized by the
wisest of investors over the next decade. If the time leading to those
tax increases sees a U.S. budget that is gasping for those revenues, you
must expect the USD to be beleaguered. The fate of the USD is based on
the government executing tactics to insure cost reduction along with
improved service. Not to be a cynic, but renowned economist Dr. Milton
Friedman said, "If the government were put in charge of the Sahara
Desert, within five years they'd have a shortage of sand." Let's
hope he's not right for the USD's sake.
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
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