The New Health Care Reform Bill and the USD

 
FX Outlook
March 30, 2010 Posted by:

Hey, 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" Initiative

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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