A Further Perspective

The Coming Obamacare Recession

Actually, we already saw it last quarter and there'll be no escaping it this year.

By 2.6.13

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To the shock of many, U.S. GDP shrank in the fourth quarter of 2012 by 0.1%. Immediately, however, economists and commentators flooded the media with reassuring explanations. Super Storm Sandy reduced economic activity in the areas it ravaged; worries about the fiscal cliff and sequestration dampened business spending and government defense spending; businesses let inventory levels dwindle. Even the Federal Reserve commented that the GDP drop was the result of “weather-related disruptions and other transitory factors.” All this is true, to some extent. But none of the reporting I saw even mentioned the elephant in the room that not only depressed economic activity in the fourth quarter of 2012, but will continue to depress economic activity through 2013 and beyond. That elephant is the “Affordable Care Act,” aka “Obamacare.”

Some of the negatives from the fourth quarter will reverse in the first quarter of 2013. Sandy reconstruction will kick in, and the big drop in defense outlays was probably an anomaly. But business inventories fell in the fourth quarter not because businesses were too pessimistic about demand and let inventories fall too much, but because they had been too optimistic earlier in the year and allowed them to get too high. The idea that business will have to start increasing inventory levels in the first quarter of 2013 in order to meet increasing demand is purely theoretical, and right now, there is precious little evidence to support that theory. On the contrary, lackluster holiday sales do not augur well for consumer spending, and the Conference Board’s index of consumer sentiment fell from a reading of 66.7 in December to 58.6 in January, its lowest reading since November 2011.

The January employment report, which cheered Wall Street due to the upward revision in November and December employment, showed only an increase of 157,000 jobs, which was slightly below expectations and not even high enough to keep up with population growth. Surely, many optimists have argued, the stronger fourth quarter employment numbers show that there must be something wrong with the fourth quarter GDP report and it will surely be revised upwards. Initial GDP reports often do get revised, and it would be no surprise if the fourth quarter is revised upwards, but the employment numbers are not a harbinger of that outcome. An equally valid interpretation of the data is that employers were hiring in the fourth quarter in anticipation of greater economic growth that did not materialize, and if it doesn’t materialize soon, much of those employment gains may be reversed out in 2013.

The American economy is resilient, full of entrepreneurial spirit, despite the best efforts of the Obama administration. The American economy wants to grow, and after four years of recession and faint recovery, a release of pent up demand has resulted in higher spending on autos and on business software and computer systems. But will that continue and will it be sufficient to counter the roadblocks the Obama administration has set up that have proved so effective in retarding economic growth?

Consumer and business spending, which have been rising modestly, will continue to rise if consumers and businesses have confidence in the future. The new year, however, brought with it higher taxes, and not just the increases on income over $400,000 recently won by the Obama forces. Many Obamacare taxes became effective January 1, 2013, including a 0.9% increase in Medicare Taxes and an extra 3.8% tax on investment income, including dividends, interest, capital gains, and rent income, for households earning more than $250,000.

Some of the ugly details of Obamacare, the most far-reaching piece of legislation to be passed without a single member of Congress having actually read it—indeed not even having been allowed a serious chance to read it—have only been gaining attention in recent months. Looking forward to 2014, employers are now looking at an additional $63 per insured employee fee to compensate insurance companies for the added costs of covering previously uninsured people with pre-existing conditions. That’s supposed to phase out by 2017, but if you believe that you probably also bought the line that Obama is in favor of a “balanced” approach to deficit reduction.

Better known is the $2,000 per employee charge that any business with more than 50 full-time employees will have to pay for every full-time employee to whom that business does not provide an Obama-approved health package (though the first 30 such employees are exempted). With all the concern expressed in the media about how the uncertainty posed by the fiscal cliff negotiations negatively affects business, it is odd that so little attention has been focused on the certainty of Obamacare costs that businesses now have to face. Many companies, large and small, have pointed to these provisions, explaining that this is why they won’t be hiring, or won’t be hiring nearly as much in 2013 as they would otherwise. Abbott Labs, Boston Scientific, Welch Allyn, and many other companies have even reported they will be laying off workers directly as a result of Obamacare.

I’m in the commercial real estate business, and have managed commercial properties for more than 20 years. A friend of mine has been in the real estate services business, providing everything from janitorial services to window washing to parking lot repairs for about as long. In fact, the company I work for was his first account. In the last 20 years, he has expanded from a handful of full-time employees to 150 full-time employees. I recently discussed with him his concerns about the effect of Obamacare on his business. Most of his employees are in lower-skill occupations and so only earn $10 - $15 per hour. He cannot afford to tack on health care benefits equal to another $3.50 to $5.50 per hour without going broke. His more affordable alternative would be to pay the $2,000 per employee fee, which would effectively erase his entire 2012 profit from his business. In essence, this one provision is the equivalent of a 90% - 100% tax on his typical net business income. Worse yet, since the law does not allow the $2,000 per employee charge as a deductible business expense, he’ll have to pay federal income tax on approximately $240,000 of business income he didn’t get. Implicit in the law (or perhaps it is explicit) is the notion that it is the responsibility of employers to provide health insurance to their employees, and if they don’t they are bad people, greedy capitalists exploiting the working class, and deserve to be punished.

What is my friend to do? He can raise his prices and risk losing business from people like me who will then need to cut back on his services, or who will go to his smaller competitors with fewer than 50 employees who are not (yet) subject to the fee. Or he can cut back the hours of his employees until he has fewer than 50 working full-time. Or he can fire most of his employees and tell them they are on their own as independent contractors, and he may be able to subcontract with them from time-to-time for specific jobs. None of these alternatives are good for the business owner, his customers, his employees, or the economy in general.

This is what you get when people sheltered all their lives in government and community organizing, with little knowledge of how businesses actually operate, are put in charge of crafting far-reaching economic policies. This is what you get from people who don’t recognize businesses as the drivers of employment, economic growth, and higher standards of living, but see them as entities that need to be regulated, managed, and controlled by government for the “public good.” This is what you get from people who deride the idea that successful businesses are created by their owners working long hours, developing good ideas, and putting capital at risk, but instead are the creations of government and the community at large.

The iniquity of the law, in that it places a much higher burden, as a percentage of payroll costs, on companies in lower-skilled/lower-wage industries versus companies in relatively higher-skilled/higher-wage industries, is one argument against Obamacare. But there is no question that the law delivers pain to almost everyone. Unions, for instance, are now complaining that the requirement to eliminate annual and lifetime benefit caps, a feature in many policies, including many administered by unions, by itself will, by the estimate of one Atlanta area Sheet Metal Workers Union representative interviewed by the Wall Street Journal, push the price of union labor up by $0.50 to $1.00 per hour to cover the extra costs associated with eliminating those caps. Perhaps unions, being friends and supporters of the Obama administration, will be successful in obtaining federal subsidies or further waivers from the law (equality under the law has not been a hallmark of this administration), but the cost will just be shifted somewhere else, such as on to employers or taxpayers, with the same depressing effect on economic activity.

How the economy performs will be determined by more than just Obamacare. There will be other negative factors, such as Europe, which will continue to have bouts of economic turmoil. But there will be positives, as well. The U.S. economy is fundamentally sound and dynamic. It is poised to grow, and has been for years. American corporations, on the whole, are sitting on large cash reserves, looking for opportunities to put that cash to productive use. It will be Obamacare, however, that I fear will be the weight that will matter most. The consensus among economists is that GDP will rebound in the first quarter of 2013 and that GDP growth for the year will be about 2.0%. Unfortunately, I believe that even that dreary prediction will prove too optimistic, and 2013 is more likely to be the year of the Obamacare recession.

Photo: UPI

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About the Author
Brandon Crocker is the chief financial officer of a commercial real estate development and management company in San Diego.