Why Medicare must change
Romney has some ideas here too: using the power of competition and the free market to force things like price transparency and cost-benefit analyses into an industry that's been sheltered by government largesse and the public's reluctance to address issues of morality and mortality. It will require patients to do more legwork, shopping for insurance and subjecting their health care providers to more scrutiny. And they will bear the burden of fighting the relentless rise in health care costs. But it must be done.
Medicare costs are expected to double, to $1 trillion, over the next eight years. Yet according to the Urban Institute, the average couple turning 65 in 2010 had paid $109,000 in Medicare taxes but would receive $343,000 in benefits. Simply raising taxes on the wealthy to close the funding gap -- combined with the Affordable Care Act's bureaucratic and limp-wristed attempt at cost control -- is a terrible idea.
Not only will that make the short-term, cyclical portion of the deficit worse by impeding growth, it will also further damage the economy's long-term vitality by additionally weighing on capital investments and productivity gains. This will lower the economy's potential rate of growth and its ability to create prosperity.
I'll say it like this: I don't want more tax dollars forced from the hands of society's most productive members to be reallocated, by the rule of law and penalty of imprisonment, into one of the economy's most inefficient sectors to pay for benefits that were overpromised and underfunded. Instead, let's allow entrepreneurs and innovators to spend that money on ways to lower the cost of care and increase the quality of life for everyone via things like new DNA sequencers and research-and-development spending, while consumers demand better services at lower costs.
That's because the only way to create U.S. jobs is to increase the demand for American labor. And the only way to do that is to make small and midsize enterprises feel comfortable investing and hiring again and to give them a source of financing -- via retained earnings from lower taxes -- to fund that investment in lieu of limited bank lending. (Large enterprises, for their part, are sitting on a ton of cash and can borrow at extremely low rates in the corporate bond market.)
This is what's needed if America is going to take advantage of jobs coming back from China.
Obama's focus on more onerous regulatory burdens, tax hikes and wealth redistribution toward the middle class isn't working: Growth of the gross domestic product has been slowing steadily since 2010, industrial production has stalled, durable goods orders are falling hard (shown below), and CEO confidence has crashed as corporate profits come under pressure. Companies have cut capital expenditures so deeply that the country's industrial capacity is roughly where it was a decade ago. And hiring and capital investment plans, based on a recent Business Roundtable survey, have fallen back to levels seen when the jobs recession was raging in late 2009.
This is a problem I've talked about in past columns. In the context of Romney's gaffe about the 47%, I noted that the Organisation for Economic Co-Operation and Development warned that "taxing more and spending more" won't solve our problems. Back in August, I wrote that our economy won't roar back to life unless we persuade CEOs to open their wallets and start taking risks.
We've been here before
Don't think our current predicament is unique. Barry Knapp at Barclays Capital sees eerie similarities between the current situation and President Harry Truman's 1948 re-election. Truman's Fair Deal campaign has much in common with Obama's platform. Indeed, in his closing statement in last week's debate, Obama reiterated his desire to see that "everybody's getting a fair shot" and that "everybody's getting a fair share." Both have emphasized things like universal health care, increased education spending and pro-union legislation.
Economic conditions were also similar -- with the government deeply indebted, the Federal Reserve capping the Treasury's borrowing costs and housing recovering from a national decline.
And then, like now, capital spending started to fall ahead of the election before dropping sharply in the early part of 1949 after Truman won a surprising upset over Republican challenger Thomas Dewey, thanks to his attacks against a "do-nothing" Congress and Dewey's lack of policy specifics. What followed was an 11-month recession and a 19% drop in the stock market between November 1948 and June 1949.
(To be fair, stocks are up nearly 120% from their March 2009 low under Obama. But it's hard to know how much of this was driven by Federal Reserve policies rather than those of the president.)
The late market historian Robert Sobel wrote of the Truman period in his work "The Big Board: A History of the New York Stock Market":
"Wall Street prepared for the year-end rally in late October, as volume and prices both rose. Then came the shock of the Truman victory, shattering dreams of a pro-business administration in Washington. The next day opened with a rush of sell orders, and trading was held up as specialists tried to establish an orderly market."
It's possible that the reverse of this could play out in the weeks to come as Romney's chances rise. But so far, I'm not seeing signs of optimism from Wall Street. Maybe there needs to be another strong debate performance before Wall Street reacts.
I'm recommending my newsletter subscribers and money management clients maintain a defensive posture, including a short position against industrial engine manufacturer Cummins (CMI).
Cummins was hit with selling pressure earlier this week after the company downgraded its forward guidance. It is now looking for third-quarter revenues of $4.1 billion, compared with a consensus estimate of $4.42 billion, and 2012 fiscal year revenue of $17 billion, compared with a $18.1 billion consensus. Management cited heightened uncertainty, delayed capital expenditures, lower demand and weak conditions in China for the move.
In response, Cummins is taking actions including planned workweek reductions, manufacturing facility shutdowns and layoffs of as much as 1,500 people by year end. This is a perfect example of the negative ramifications of a drop in corporate investment.
At the time of publication, Anthony Mirhaydari did not own or control shares of any company mentioned in this column. He has recommended a short position in Cummins to his newsletter subscribers and money management clients.
Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
