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Thursday, July 16, 2009


“Promises, Promises”
The results of Unintended Consequences

Seven months in to a failed economic policy now finds Americans racing for cover. In the 4th quarter of 2008 the outgoing administration decided to bailout (TARP) the failing banks. Maybe wise, maybe dead wrong, yet it was the final mark on the scoreboard. The incoming administration then decided to bet the house on a totally misguided stimulus package. This stimulus was going to magically save the country from a necessary contraction (recession). It’s not as if the US has never faced a recession before and if the government simply follows some basic economic principles, recessions come and go and usually help clear the economy for an oncoming growth spurt. Only the truly misguided would decide that the best solution for a necessary recession would be to deficit spend your way out of it. That is truly the one and ONLY deadly mistake that could be made, the fatal flaw if you will.
So let’s review the promises and the early returns on unintended consequences. The stimulus package had to be passed quickly because it would somehow SAVE the economy. It was pitched as a plan that would provide quick relief to the US economy. It would magically create or “save 600,000 jobs per month. Well the scoreboard now shows the economy bleeding 450,000 jobs per month, promises, and promises. The unintended consequences are that not only has the stimulus package done no good. It has created a huge amount of harm in ballooning the deficit, raising interest rates, creating considerably doubt about the US currency and fanning the flames of inflationary fears. Seems to be a big price to pay for unintended consequences doesn’t it?
The poorly designed and thought out stimulus package took up whatever tiny space was available in deficit spending, yet now the administration wants to pop the bubble by creating another poorly designed and poorly thought out health care reform. Raising taxes during a recession is something a first grader wouldn’t do. How can anyone miss this basic concept? Wasn’t the stimulus package created to kick start the economy? How can you kick start an economy by reckless spending and then increasing taxation on the consumers? Better yet let’s look at the unintended consequences that will come from the so-called health care reform.
The plan designed now has a mandate for businesses to pay an 8% penalty for not providing health insurance. This was part of the “if you’re happy with your existing coverage you can keep your plan” well the truth is you will not get to keep the plan you are happy with. Do the math and follow the motivations of corporations that understand bean counting exceptional well. Most corporations now pay well more than 8% for health insurance plans for their employees; they also have to subsidize COBRA when they cut jobs. Now, if a corporation can save money by paying an 8% penalty then the prudent move would be to drop health insurance coverages for their employees and pay the penalty. This also would allow the corporation to cut jobs with no COBRA liability. In the end, the result will be more loss of jobs. Of course people would have a government health plan, but unfortunately no job, and best of all they would no longer have the health insurance plan they were very pleased with. No one would have a health insurance plan they were pleased with in this scenario.
There was a race to pass a poorly designed and clearly not well thought out stimulus plan. One would think the lesson learned would be that it takes time and consideration to make sweeping changes and that consideration should clearly take into account the law of unintended consequence. Now, there is a race to a pass a poorly designed, non thought out Cap and trade policy, a poorly designed, non thought out Health care reform policy and who knows what other poorly designed and clearly non thought out policies will follow.
The one thing that is clear, we have a group of thinkers in leadership who do not think, they simply react like children at the ice cream parlor. No thought to future consequences and all these decisions are made in a reactionary mode. Once the law of unintended consequences kicks in there is no catching up to it by making reactionary decisions. The only way to recover is to STOP, think through all potential solutions by running all the options out into the future and then backtracking though every potential bump in the road. By doing this you can project the new problems created by the present solutions and then decide if the solutions are worth the unintended consequences. The positive thing is that individual investors can learn what not to do by simply watching the government make every mistake with money possible.