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.

   

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.

Roberts Left Obamacare Broken. It is Obama Who Must Now Fix It.

Conservatives are criticizing Chief Justice John Roberts for not voting with the conservative branch of the Supreme Court and declaring the entire Affordable Care Act unconstitutional.  Now that a day has passed on the decision conservatives should evaluate what really happened in the Roberts’ decision.

First, the Court reframed the mandate to participate in Obamacare as a tax.  If you don’t have medical coverage, the IRS will impose a tax.  John Hennessey has some interesting facts about how the tax will work.   There will 21 million uninsured Americans, and of this number, 3.9 million will be subject to the tax.  This includes 400,000 people who make less than $11,800.  The tax will be $750 per adult and $375 per child each year.   This will raise between $2 to $ 3 Billion per year, which will not cover the health care cost of 3.9 million people.  Further, as Hennessey points out, since the mandate is now a tax, there is no longer a moral stigma not to buy a health care policy from a carrier.   The exercise of determining whether to buy one or not will become a simple cost-benefit analysis for most people, and since the costs of the penalty tax are far less than the cost of most policies, then it is fair to say that the number of people electing to pay the penalty will rise much higher than the current projected number of 3.9 million.  The result will be that the costs of health care for this group that exceed the corresponding tax revenues that the government will now pick up will be seriously high.

Second, the Court enabled the States to opt out of the plan when it comes to Medicaid.  There were 26 States who objected to the Obamacare provisions that required them to increase their participation in Medicaid or suffer penalties.  If the States did not invest additional dollars in Medicaid, they would loose the ability to participate in the Medicaid altogether.  The Court stuck down the penalties and States can continue their participation in Medicaid at current levels.   This will apply to most of the 50 States.  Even those who did not join the 26 States who petitioned the Court will see that the advantages of not raising support levels to balance their budgets.   The higher support levels will transfer to the Federal Government.  This increases the cost of Obamacare considerably.

These two facts by themselves mean that Obamacare is broken.  It will run huge deficits.  Yesterday, Senator Lindsey Graham from South Carolina said he wanted the Congressional Budget Office (CBO) to re-evaluate the cost of Obamacare under the new financial conditions that the Court imposed yesterday.  When the program passed the Senate the CBO said that the program would be revenue neutral, meaning the costs and the revenues would be equal and the Obamacare would not run a deficit.  That can no longer be said and we need a new cost analysis.

Since Obamacare is broken, it is up to President Obama to fix it.  It is his singular accomplishment and he sold it on the condition that it would not contribute to the national debt.   Since it will contribute to the debt, he must propose changes that will fix it.

Now for the politics of this.  Governor Romney, the presumed Republican Presidential candidate said that he wants to “Repeal and Replace” Obamacare.  The press is starting to question him as on what he will use as a replacement for Obamacare.    Fair Question.   But it is also a fair question to ask President Obama how he will fix his own Obamacare to bring it back to being deficit neutral.  This is the way he sold it, and he should fix it.

This is no small task for the President.  Republicans are angry at the President for his remarks from March 2009 when he said the mandate was not a tax and then he defended the mandate before the Court on the basis that it was a tax.   Senator Graham said that if he defended it before the Senate as a tax it would have received only 10 votes and would not have passed.  Clearly, the President has a credibility problem.  Add to this that he has not been serious about restraining the growth in the national debt, and his refusal to recognize that Obamacare has been a deterrent to job growth, and one can conclude that he has a major re-selling problem.

It was Queen Victoria’s favorite Prime Minister Benjamin Disraeli who said that inside every success lie the seeds of tomorrow’s problems.  Apparently, tomorrow has come for Obamacare.

On a related topic, I recommend George Will’s column on how the Court restricted the use of the interstate commerce clause for the mandate.  It is available at this link.

Obama Claim About Romney is False

In the current week’s issues of Automotive News, Joseph Lichterman writes about how a claim that the Obama campaign has launched against Mitt Romney regarding Bain Capital and Cambridge Industries is false.  Automotive News is the most trusted and independent newspaper in the auto industry.

Romney was not part of Bain Capital when the Bain decision was made to put Cambridge into bankruptcy.   Romney left Bain Capital in February 1999 to save the Olympics.  The Bain decision not to inject more cash into Cambridge came in November 1999 with the decision to enter into bankruptcy in 2000.  According to the Cambridge CFO at the time, “Mitt Romney wasn’t even there.”

By law, at the end of every political advertisement, the candidate says, “I approved this message”.  It appears that this specific charge is false

For those who need some context, the Obama campaign has a commercial running in some key battleground states that charges Romney with seeking profit over jobs during his time at Bain.  As part of this commercial, the case at Cambridge is used to say that Bain withdrew substantial cash from Cambridge before it entered bankruptcy.  This eventually led to Cambridge loosing about a thousand jobs once it was in bankruptcy.  The rhetoric is that Bain was a vampire capitalist.  All of this happened when Romney was not there. 

The Volt And Fox News

Every once in a while the press pursues an agenda that facts just don’t support.  This time Fox News is being irrational.  They have engaged in an extended campaign against the Chevrolet Volt believing the car has been an instrument of the Obama administration’s green agenda.   Fox’s intention is to persuade the public against the DOE’s loan subsidy program.   

The campaign has taken the form of pouncing on every story that can impact the public’s perception of the Volt.  Any negative Volt news has been given prime spots on Fox News shows without presenting known facts that would balance the stories.  There was a Volt fire that the NHTSA eventually cleared that was a major source of Fox negative comments.  Despite the fact that recalls are not uncommon for newly released models, Fox covered a recall of the electrical cords that connect the car to the owners‘ outlets.  Fox News claimed that it cost GM $81,000 of subsidy per copy to produce it without presenting the math.  A one month production halt begun in late March due to oversupply has received more attention from Fox than other news outlets despite the fact that such suspensions are not uncommon.  Suspensions are a result of poor management planning that has nothing to do with the integrity of the car.

The Volt is a great car.  It has excellent handling and acceleration.  Its fit, finish, and materials are better than a Cadillac.  Its MPG surpasses any other regular hybrid by far.  If people would drive it, they would be impressed.  Fox’s Neil Cavuto drove it and did not even understand that the Volt was electric-gas plug-in hybrid.

But the real story of the Volt is in its development.  Before GM’s bankruptcy, Bob Lutz, then GM Executive Vice Chairman, was impressed that a little startup called Tesla could develop its electric roadster.  He asked why GM could not do the same or even better.  With that, he began development of the Volt.  When bankruptcy came, the project was well on its way towards production.  It was based on the same platform as the Cruze, a very necessary car to GM’s successful post-bankruptcy performance.   The idea that the Volt was a government-developed product does not match the facts.

Bob Lutz agrees as well as journalists, Volt owners, and perhaps even Fox News itself.  When it comes to Fox News and the Volt, fair and balanced was missing.

The Task Ahead for Chief Justice Roberts

The Supreme Court issued a landmark decision known as Brown v. the Board of Education in 1954.  It overturned the 1896 Plessey v. Ferguson decision, which permitted the practice of providing separate but equal facilities in education.  The decision was a unanimous 9-0 decision. 

The decision was the most important decision of its era.  Chief Justice Warren knew that.  He had discussions with several Associate Justices who were initially opposed to the decision.  He was able to win over the opposition in order to deliver a unanimous verdict that positioned the Court squarely behind the change it made. 

Today, we have the most important issue before the Court since Gore v. Bush, and even perhaps since Brown.  The nation has been torn apart for three years over Obamacare.  The issue is now before the Court and it has witnessed the Court providing three days of oral argument on the issue.  Clearly, the Court is aware of the importance of its actions in the eyes of the nation.

The parallels to Plessey v. Ferguson will be drawn in future history books.  But I am curious about one potential parallel, and that is the role of Chief Justice Roberts. 

Late this week the Court will take its initial votes on the case it just heard.  Assuming that the mandate is struck down, as many commentators predict it will do, will the Court separate the issue from the overall bill, or will it declare the entire health care bill unconstitutional?  Within this question are several more subtle questions about Chief Justice Roberts.  How will he manage these questions behind closed doors within the Court?

Chief Justice Warren was able to persuade those fellow justices who were initially opposed to Brown to support the majority.  I presume that Chief Justice Roberts will do the same.  Democrats are poised to campaign against the Court in this year’s election if the decision comes down 5-4.   The nation will be better off if the decision to strike down the mandate comes down 6-3, 7-2, or even 9-0.   Where do the additional votes come from?  Sotomayor?  Breyer? 

Even if additional votes are available, will there be a cost?  Will the effort to sever the mandate from the overall bill be strengthened?  The Court does not do trade-offs, but there are ways to persuade.  I assume that Roberts will construct the questions that the Justices vote on in such a way to achieve maximum consensus on the core issues.  He will assign opinions in such a way to allow the maximum number of Justices to coalesce around the Court’s central positions.  What additional actions and arguments will Roberts make to his colleagues to persuade the Justices toward unanimity? 

On the other hand, can Roberts even attempt unanimity?  Are the members so entrenched in their positions that any attempt by Roberts to bring them together will fail?  Has the partisan nature of our politics reduced the role of Chief Justice? 

I do not know the answer to any of these questions.  We may not know for decades.  I just wish I were a fly on the wall in those chambers to observe all their conversations.