By Edward Leone Jr. DMD MBA RFC
Contact information: leonee@vzw.blackberry.net
In past blog postings, government debt has been discussed. Our government has three avenues to address this issue: default, inflation and growth. I suspect that as the future unfolds, we will see a little of all three. The seeds for future inflation have been planted. I would not be surprised to see the government default on some promised benefits to citizens and employees. As the business cycle progresses, we will experience some economic growth. The big question on the utility of these three strategies is how much and when? What do you think?
The challenges presented to municipal and state governments in the current economic environment continue to grow since these government entities can not print currency and must balance their budgets. They must reduce services to reduce expenses and try to generate an environment which will promote economic growth within their jurisdictions. Federal Reserve data tells us that state revenues declined by $50 billion in 2008 and 2009. Revenue generation by increasing taxes has not worked very well where tried. Illinois is a good example.
Health care reform is on the front burner right now due to activities at the US Supreme Court. The concept of the mandate that Americans buy health insurance is under judicial consideration. Another element of the legislation which the court will consider is the challenge by 26 states that the expansion of Medicaid which is a joint state-federal program is unconstitutional. The expansion of Medicaid anticipates that up to 15 million people will be added to the Medicaid program. The Federal government will pick up all costs for 5 years. After this period, the burden on state governments increases. HHS is currently dealing with the employer mandate question. How will employers be required to determine their worker’s health insurance status? Beginning in 2014, employers with more than 50 employees will be required to provide health insurance or face fines. It will be necessary to have information from employers, employees and the insurance exchanges to determine the source of coverage for each individual. I wonder if we would not be better off to see that each individual or family unit had an HSA–even if tax dollars needed to be used to subsidize funding for some portion of the population. We would certainly see savings in the number of bureaucrats that will likely be needed to administer the legislation being discussed at the Supreme Court.
A very troubling issue regarding economic growth continues to revolve around fiscal policy. The Executive and the Congress continue to perpetuate an environment of uncertainty on this issue. Future planning by individuals and business is very much on hold due to this uncertainty. Including the tax built into Obama care, the capital-gains tax could go up to 24% from its current level of 15%. Keep in mind that money invested for capital gains has already been taxed once and capital gains are not indexed to inflation. Estate tax issues are significant with the exclusion going back down to $1 million and the estate tax going up to 45%. We have been hearing about the high level of corporate tax in the news. The US rate is the highest in the world. There is a potential for 65 adjustments in the tax code if the Congress does nothing. It may very well be that a lame duck Congress will address these issues after the election.
On the bright side of things, the S&P 500 index has moved up 99% from it low of 673.53 in March of 2009 and is trading at 14.1 times earnings which demonstrates good value and potential for further growth. The low-interest rates and perhaps some change in investors’ sentiment are the driving forces. We are seeing behavior finance theory at work. This journey has been a roller coaster ride. Will it sustain?
For the Record:
DOW 13,212.04
NASDAQ 3,091.57
S&P 500 1,408.47
Suggested Reading: “Irrational Exuberance” by Robert Shiller
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