Monday, July 16, 2012

President Obama, Capital and Property Rights

If you’ve got a business -- you didn’t build that.  Somebody else made that happen. 
President Obama, July 15, 2012

Having a business requires capital, and having capital empowers an employer to hire employees.  Capital comes in the form of assets, and owners of assets have property rights with respect to those assets.  The owner can sell them or loan them out for a fee or use them to create a product or service.  In other words, assets have productive uses and owners can expect a return on them.  These rights are guaranteed in law.

An expected return on assets is a function of the prevailing competitive rate of return on similar assets adjusted for the risk incurred on the investment in the asset.  Again, the decision to use that asset for a particular reason is the right of the owner.  If the asset is usurped by the government to use on a purpose other than that the owner intended drives up the risk attached to the asset.  Correspondingly, the expected rate or return on the asset goes up significantly to compensate for the increased risk.

The Obama administration has demonstrated that it does not respect property rights.  The most notable example is the auto bailout in which the Obama administration forced General Motors and Chrysler Corporation bondholders to accept stock in place of cash payment for their bonds.   In a bankruptcy, bondholders usually get a first or secondary call to liquidation proceeds.  This did not happen.  The result is that it sent a signal to the investment community that their assets were at a higher risk than they originally planned, and it was one of several factors that persuaded many investors to withhold money from the markets.  There is a high amount of business cash waiting on the sidelines.  One of the reasons why the economy did not grow during the first three years of the Obama administration is because the process of investing private capital in projects was frozen, and one of the contributing factors was the Obama administration attitude on capital.  

President Obama is campaigning for re-election with an 8.2% employment rate.  The President wants hiring to increase.  Now we see his quote from yesterday and it appears the Obama administration attitude on capital has not changed.

The lesson is very clear.  Capital employs people.  If you want hiring to increase, respect capital and the property rights that go with it.  It would be a win-win for President Obama and investors, unlike todays loose-loose.


Tuesday, July 3, 2012

It’s A Tax!!!

President Obama, Nancy Pelosi, and even one of Mitt Romney’s campaign advisors have expressed the opinion that the mandate to participate in the national health care program, which is also referred to as Obamacare, is not a tax but a penalty.  This is not correct.

The Congress levies a tax.  The Congress does not levy a mandate.  We, the taxpayers, can receive relief from paying the tax by participating in an activity that reduces or even eliminates the tax in our individual cases.  In this case, Congress levied a tax on healthcare that we can avoid by buying health insurance.  This is the way tax levies have been interpreted since The Constitution was written, and this is the interpretation of the Roberts Court.

So, to President Obama, Nancy Pelosi, and Mr. Romney’s advisors, it's a tax.

More on Obamacare – The President Must Defend His Base

Last week I posted a blog about how the Roberts Court broke Obamacare.  By redefining the mandate as a tax and by striking down the penalties for States who do not increase their participation in Medicaid, the program is no longer deficit neutral, which was a major selling point of the President when the program passed.  Romney wants to repeal and replace Obamacare with the press pressuring him to identify what he will replace it with.  My blog suggested that the press should also ask President Obama how he would fix the program to bring it back to deficit neutral.     

There was some interesting politic theater on Sunday in the morning news programs.  Jack Lew, the White House Chief of Staff, was interviewed and insisted that the tax was not a tax, but a penalty.  Mitch McConnell, the Senate Minority Leader could not articulate the program the Republicans will propose as a replacement for Obamacare, or what is formally the Affordable Care Act.  Though the Republican leader can wait for Romney to define the replacement program, Jack Lew is in a more precarious situation.  He is redefining the term used by the Chief Justice in settling the issue of the mandate.  It will be easy for Republicans to criticize this, and the credibility of President Obama and his White House Staff will decrease as a result.

There is a more interesting political effect from the decision.  It has put President Obama on the defensive to a point that he must protect his base.  Let’s go back to Keith Hennessey’s article on the mandate and who will pay it.  Keep in mind that the health care tax, a regressive tax, is a single amount of $750 per adult and $375 per child regardless of income.  This means that as income remains low, the portion of income paid to support this tax will be high.  There are 400,000 people made up of singles making $11,800 or less per year and families of four making $24,000 or less.  For the single person, that is 6% or more of income.  For the family of four, that is 9% or more of annual income.  There are 600,000 people made up of singles making between $11,800 and $23,600, and families of four making between $24,000 and $48,000.  This means that singles in this group will be subject to a tax representing 3% or more of their income, and families of four will be subject to a tax representing 4% or more of their income.

Keep in mind that the median income in the United States is about $45,000, and that the group making the median income and below generally favor the re-election of President Obama.   It is part of his base.  Though the tax will impact only about 1 million earners in this group, not everyone in the group will know by Election Day if they will be subject to the tax.  It is very clear that Republicans could communicate directly with this group that Romney will repeal this tax via direct mailers and targeted radio and television ads.

In addition, seniors have been upset since the passage of the Affordable Care Act over the fact that it cuts $500 billion from Medicare.  Republicans could target them with a message to restore that funding. 

Using a football analogy, President Obama has weakness in his defensive line and the fullback is coming through.  However, the Republicans need to keep one point in mind.  Though about 52% of the American electorate want Obamacare repealed, about a fourth of these want it repealed because they want a stronger government program, not less.  Republican arguments will only get them down the field.  They will not score a touchdown on that play alone.