Bewitched, Bothered, Bewildered, Broke
Four words to describe the economy.
12:00 AM, Aug 28, 2010 • By IRWIN M. STELZER
There is worse. Large swathes of the economy are now subject to political rather than market forces. Health insurers are allowed to charge premiums that include only 20 percent for administration and profit, the balance to be spent on reimbursing medical costs of their policy holders. But no one yet knows for sure whether regulators will cram into the 20 percent lots of cost items so as to reduce the profits component. It is rumored, for example, that the cost of preventive care will be classified as “administrative” and come out of the insurance companies’ hide. And medical device manufacturers can only guess at the effect of the new tax -- $20 billion over 10 years -- on sales of and profits from everything from bed pans to surgical instruments. They do seem certain about one thing: the tax will cut into export sales.
Then there is the financial services sector. Earlier this summer New York’s banks and related financial-service providers began hiring. But now Wall Streeters fear they will once again be forced to trek from their office buildings, wilted potted plants in one hand, personal effects in the other, heading for the unemployment insurance line. Little wonder: regulators are busy drawing up the estimated 10,000 regulations needed to implement the 2,319-page financial reform bill. Just which businesses the major banks will be permitted to retain, what fees they will be allowed to charge, and what compensation they will be permitted to offer remain unknown. Not a recipe for investing in expansion.
The housing sector is also hostage to government policy. Potential buyers do not know what their after-tax incomes will be in the future because congress hasn’t decided whether to allow the Bush tax cuts to expire. They do not know whether they can count on continued low mortgage rates because they do not know whether Freddie Mac and Fannie Mae, the two taxpayer-owned agencies that account for almost all new mortgages, will survive the current policy review. These are enough unknowns to paralyze even the bravest potential buyer.
Finally, we come to the energy sector. Utilities have no idea what penalties will be imposed if they construct new fossil-fuel plants, mining companies don’t know what market there will be for coal if congress enacts an energy bill, and oil companies haven’t been told what regulations will be imposed on off-shore drilling. The only things that are known are that taxpayers will pay for subsidies to wind, sun and other forms of power generation that are not economically competitive, and consumers will pay more for electricity as their utility suppliers are forced to construct transmission lines to remote windy and sunny places.
Data from the Commerce Department’s Bureau of Economic Analysis, provided by my Hudson Institute colleague Diana Furchtgott-Roth, show that the health care, housing, financial services, and energy sectors account for well over one-third of U.S. GDP. That’s a lot of firms hesitating to invest.
Meanwhile, the president and Congress initiate still more spending, despite a soaring deficit and the fact that the trillion-dollar stimulus seems not to have lowered the unemployment rate by very much, if at all. One can’t help but be reminded of the thought attributed to Albert Einstein: “Insanity is doing the same thing over and over again expecting different results.” Or, as Rogers and Hart put it, “Burned a lot … and now you’re broke … [and] bewitched, bothered and bewildered.”
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