Daily Comment (March 24, 2017)

by Bill O’Grady, Kaisa Stucke, and Thomas Wash

[Posted: 9:30 AM EDT] The focus of attention remains on the AHCA, which is due for a vote this afternoon.  The president has already pivoted on this issue; he has warned that if the vote fails, the GOP is stuck with the ACA for good and he is moving on to tax reform.  It is becoming increasingly apparent that moving on health care so soon in his term was a mistake.  We suspect the White House was expecting a quick win and didn’t fully comprehend the splits that exist within the House GOP.  The Freedom Caucus wants nothing less than full ACA repeal with really no replacement other than interstate insurance.  We note that a few states do allow interstate sales.  Georgia, Maine, Kentucky, Rhode Island and Wyoming passed laws allowing out of state insurers to sell in their states; to date, none have taken up the offer.  It’s hard to crack a local monopoly.  Meanwhile, more moderate Republicans are facing a backlash against losing some of the more popular parts of the ACA, like no lifetime caps and the pre-existing conditions clause.

Twitter is abuzz with talks of backroom deals to bring House members on board.  In the end, it may pass, although if forced to bet we would fade the trade.  However, even if it passes the House, it won’t pass the Senate in its current form.  So, once the Senate gets the bill, it will make changes that the Freedom Caucus won’t accept.  It should also be remembered that when Americans say they want health care reform, it’s different than when economists talk about it.  The latter want to bring some semblance of a market to health care, with insurance only covering catastrophic health events and all other care coming out of pocket.  To lower costs, there is talk of price transparency (imagine websites that list prices and customer feedback on medical procedures, much like what we have with cars, restaurants and credit cards) and maybe loosening the regulations on health care to boost the number of providers.  When the public says health care reform, it mostly means the ability to consume all the health care desired at little to no cost.  Given these parameters, reform that health care economists craft will be disliked by the public; thus, a politician who puts his name on such reform will inevitably face some degree of disappointment.

The White House has correctly assessed this situation and is calling for a vote; if the AHCA goes down, the president will move on to tax reform and hang the loss on Speaker Ryan.  If this is the outcome, we expect the damage to equities will be slight and the financial markets will turn their attention to tax changes.  It should be noted that the reason for working on health care first was to create revenue to allow for tax cuts to be partly funded by health care reform.  The president seems unconcerned about the deficit and so we are setting up for another tussle between the White House and deficit hawks.

However, there is a sleeper to watch; on March 16th, the Treasury reached the debt ceiling borrowing limit.  For the time being, the Treasury has work-arounds that should keep the government running until autumn.  But, at some point, Congress will need to vote to raise the debt ceiling.  Fiscal hawks in the GOP will be loath to support more borrowing and will want Trump’s tax and spending policies to be offset by reductions elsewhere.  Given the tensions witnessed within the GOP on the AHCA, the debt ceiling could be another point of contention.

Senate Minority Leader Schumer (D-NY) is indicating his party will filibuster Judge Gorsuch and essentially force the leadership to either find a new candidate or invoke the so-called “nuclear option,” which would allow Supreme Court candidates to be voted on by a simple majority, ending the filibuster on judge approvals.  Going nuclear would be a further step toward turning the Senate from a moderating influence into simply a second House.  Although this outcome won’t necessarily affect financial markets immediately, as we move toward reducing the Senate’s traditional role, the more volatile policy will become.  In a sense, we could see wholesale shifts in policy every time we have unified government (when a single party controls Congress and the White House).  It would make elections even more critical and create market conditions where the fate of companies and industries rests on who controls the government.

Finally, AFL-CIO President Richard Trumka is rooting for the populists in the White House.  Although unions traditionally support Democrats, Trump won the largest share of the union vote since Reagan, mostly due to his stance on trade.  In a WSJ article,[1] Trumka is worried that the Wall Street wing will moderate the president’s anti-trade stance.  The juxtaposition is a bit jarring, but an interesting read.

View the complete PDF


[1] https://www.wsj.com/articles/trumps-trade-vows-succumbing-to-moderate-advisers-trumka-says-1490283529 (paywall)