The Independent Market Observer

7/15/13 – A Day at the Beach and Obamacare

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jul 15, 2013 8:31:58 AM

and tagged Politics and the Economy

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I woke up in Maine this morning with the sun shining and Jackson running into my room as I read the papers. We spent yesterday at the beach, with quite a bit of the time devoted to searching around a large tide pool. We found lots of crabs, small lobsters, starfish, eels, hermit crabs, and, of course, tons of snails, all hiding in and around rocks and seaweed.

This is a living ocean, and the contrast with other waters I have seen is stark. For example, tributaries of the Chesapeake Bay, where I grew up, had lots of grass, minnows, and crabs when I was young; now they’re just mud. My father has commented that he sees an even more dramatic difference. I hope the Maine coast remains living so that Jackson’s children can enjoy the same kinds of tide pools that he does now.

What makes this relevant is the bottom-up nature of the ecosystem. Snails eat seaweed or detritus in the sand; then they’re eaten by larger predators (hermit crabs, which we saw), which are eaten by still larger predators (crabs, which we also saw). It all depends on the seaweed, first, then the smaller predators. Take those away and you have mud.

Which brings us to the economy. Seaweed, in this context, is jobs and the businesses that create them. The harder we make it for smaller businesses to start and grow, the less seaweed we will have to feed consumers and larger businesses.

The Affordable Care Act, a.k.a. the ACA or Obamacare, is moving back into the news for a couple of reasons. First, the administration’s decision to defer implementation for businesses until 2015 is being decried by both the left and the right. The left wants implementation on schedule, while the right, of course, sees politics in the decision—specifically, avoiding implementation of an unpopular bill in the face of midterm elections.

The second big story about Obamacare is the apparent move by many businesses to limit employees to fewer hours, thus making them ineligible for the required health insurance. There appears to be evidence to support the trend, both at the anecdotal and statistical levels, a point I mentioned in a previous post. There’s a good article in today’s Wall Street Journal that points out some additional statistical support for this idea.

Regardless of whether you think the ACA is a good plan, there’s no denying that it puts additional costs on business, directing funds that otherwise might have been spent on expanding the business into consumption. Given limited resources, something every business owner knows about, this isn’t politics—it’s a simple fact, one that will negatively affect business and job growth in the future.

At the same time, as business implementation of the ACA is delayed, the individual mandate is still scheduled to proceed—an inconsistency that might well lead to legal action by people forced to buy policies before the system as a whole is in operation. Per another article in today’s WSJ, that might prompt a valid challenge of the delay for businesses in court, which could set off a nasty political battle among Obamacare supporters.

Insurers that have been test-marketing different plans have found that price is the principal determinant of which plans people select, as many uninsured are in the lower-income cohorts. Many people who don’t currently have insurance will face a new monthly bill that could significantly cut their take-home income—another factor that may impact the midterm elections. Cutting disposable income for a large part of the consumer population will also negatively affect economic growth.

In the next couple of months, we will get a much better understanding of the economic and political effects of the Affordable Care Act. To a large extent, both the benefits and the costs are certain; what remains to be seen is how they balance each other in a political context. The White House’s decision to delay business implementation suggests the administration is concerned about how that will turn out.

As I’ve said before, I believe the evidence shows that the U.S. economy is recovering, but the implementation of the ACA will certainly add more mud to the ecosystem. Putting another political hot potato in the mix—during the same time frame as the pending federal budget and debt ceiling debates—will make it even more difficult to resolve any of these issues.

Right now, the economy looks like seaweed and fish, but our future may well be muddier.

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