Thursday, January 21, 2010

Political Tremors in DC over Obamacare, Bank Reform, and More - Alpha

What a difference a week makes, as some major events have been taking place in Washington DC this week:

1) The likely failure of the Obama health care reform (the largest economic measure from DC since the 1930s)
2) New bank reform momentum behind the "Volcker Rule"
3) Positioning for a "Debt Reduction" panel
4) The most major and radical "conservative" Supreme Court decision in a decade
5) What Americans want - Attention Mr. President


I point mostly to articles from the Washington Post, which still has the best coverage on DC and the federal government (putting the NY Times and WSJ to shame). For information junkies, other niche publications on American politics that insiders read and that I recommend are Cook's Political Report, the Congressional Quarterly, the National Journal, and ABC's The Note (which I hear Bill Clinton still reads daily).

1) Obamacare Fails:
No way around it, the voters of Massachusetts just killed Obamacare. With only 59 "Democratic" votes in the Senate, it's highly unlikely a revised plan will pass both the House and the Senate (odds went from a close 50/50 with 60 votes to 90/10 against the plan with 59 votes). It's Obama's first big failure. The only way to get around this is to eliminate the anachronistic "cloture" rule (since 1917) of the Senate that forces 60 vote supermajorities. This is an idiotic rule that must eventually go, but I doubt the pusillanimous Democrats have the guts to kill it (maybe a braver, future Republican administration will kill it to "get an up or down vote" on a judge). One a sidenote, kudos to the voters of MA for rejecting the arrogant dominance of the Dems in holding that particular Senate seat - it has basically been a Kennedy throne since JFK took it in 1953. This a 57-year old family seat finally being opened! Pharma and health insurance stocks rallied in delight when the Dems lost this seat.

2) New bank reform momentum behind the "Volcker Rule"
Previously, Larry Summers and Tim Geithner were stalling on any meaningful bank reform. Only Paul Volcker and British regulators were pushing for something substantive. It looks like Obama just pushed back his own bank-friendly economics team for some real reform. As Vega says, we'll wait to see what they actually do, but policy-wise, the President is much closer to real reform now. Now we have to ask for Mr. Geithner to be sacked for a more neutral hand, less beholden to the big banks (note the little banks have gotten nothing from Geithner). For more interesting reform ideas, see what NYU professors and the witty Prof. Buiter wrote.

3) Positioning for a "Debt Reduction" panel

Congress will never enact meaningful reform to lower the deficit by raising taxes and cutting spending. The nature of getting re-elected means you kick the bucket down the road - it's a commitment problem. Germany has solved this with a Constitutional amendment that kicks in at 2016 forcing balanced budgets. The US needs the same amendment. But failing that, the next best policy is an independent panel that comes up with a solution and forces Congress to vote, to be held accountable. The details matter here. President Obama wants a voluntary proposal from a panel created by executive order; Congress could modify this voluntary proposal with pork or not even vote on it. Serious Republicans and Sen. Evan Bayh (D-Ind.) want a law enacting the panel, with a single final recommendation and a forced up-or-down vote in Congress, so it's very clear to voters which representative is against balanced budgets. If the US is to stay fiscally solvent and not go bust through defaults or inflation, the technical details of the panel are crucial. Bond investors should watch this closely.

4) Citizens United: The most major and radical "conservative" Supreme Court decision in a decade

In a display of stunning narrow-mindedness and lack of common sense, the Supreme Court upheld a strong right of free speech for legal entities that are not human beings. While I strongly support free speech for citizens/humans, this specious reasoning continues the "corporation as person" doctrine from the 1886 Santa Clara County case where a corrupt Supreme Court held for the all-powerful Southern Pacific railroad (affectionately known as "the Octopus")that corporations were persons and had rights like human beings. This is the logical end of many years of such silliness - now, your next neighbor, a corporate entity, can't actually vote in an election, but it can outspend you by hundreds of millions of dollars in mass media ads. This is the largest win for corporate interests and the corrupting influence of money on politics since Bellotti in the 1970s. It is also a radical break from legal precedent and an example of "conservative" law-making on the bench from Chief Justice Roberts. Finally, I doubt this decision is good for shareholders as it's entrenched management that is most likely to wield corporate dollars to bribe politicians (though any highly regulated company will win, as it's easier to buy a committee chairman than to follow regulations). I end with something any flesh-and-blood American can agree on: A corporation isn't a person, and money isn't speech.

5) What Americans want - Attention Mr. President

So the irony is that just as Obama bites the biggest hand feeding him (the banking lobby, who were his largest group donor via Goldman, Citi, JPM, UBS), the Supreme Court hands a major legal victory to the corporations. But Obama is a shrewd politician. He knows that the priorities of ordinary Americans are:
i) JOBS! It's unemployment, stupid.
ii) THE DEFICIT. Americans, esp. centrists and independents, are getting angry about government spending where they can't see results but they know they will get a big tax bill down the road. As Vega posted, tax rates are definitely going to go up across the board (the question is who bears the costs).
iii) HEALTH CARE COSTS. Obama's noble attempt to enact universal health care has failed. Now he needs to get to the tougher problem of rationing health care and bringing down costs for something that may be impossible to do (Baumol's cost disease)

In a future post, I will present my modest "sketchy plan" for deficit elimination and an efficient tax system. Stay tuned.

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