James Pethokoukis

ISH Global Insight is looking for a U-shaped recovery: 2 percent growth in 3Q, 2.4 percent in 4Q and then 1.8 percent next year. This would be typical following a banking crisis/recession.  I think this will make for a very unhappy electorate.

The main driver of growth in the second half of the year remains the turn in the inventory cycle. Firms will at first cut their inventories less rapidly, and then by the fourth quarter begin to add to them. The success of the “Cash for Clunkers” program is accentuating the cycle in the autos sector, as the surge in demand is depleting supplies of popular vehicles and manufacturers are raising their production plans in response. There is some growth payback in the first half of 2010, since we think that some of the Cash for Clunkers demand is pulling sales forward. In addition, compared with our July forecast, the turn in residential investment, business equipment spending, and exports begins earlier, helping the third and fourth quarters. But the forecast profile remains a U-shaped one, since it takes a long time (not until 2011 and 2012) to move into higher gear.

This is a great analysis of healthcare polling by Humphrey Taylor, head of The Harris Poll (via The Health Care Blog):

However, if you study all the polls, as opposed to cherry picking them as many politicians do, a  clear picture of public opinion emerges:

1. Most people are unhappy with the current health care system and favor reform.  They want to have a system that gives them affordable access to quality care for the rest of their lives.  International surveys show that Americans are more dissatisfied with the U.S. health care system than are people in all, or almost all, other developed countries.
2. Most people think that some kind of government intervention is needed to fix the system, to expand coverage, and to contain costs.  However, support for government intervention does not, in most case, translate into support for a “government-run” system.  (Though what people understand by that phrase is far from clear.)
3. While most people believe that fundamental changes are needed in our health care system, only a minority wants to completely rebuild it.  Most people favor building on the present system and the bits of it that seem to work well.
4. There is substantial support for health care reform not only among the public but from large majorities of almost all major interest groups.  Only small minorities of doctors, employers or insurers think that the system works pretty well now.  However, they also have different interests and tend to see very different problems and support or oppose different proposals.
5. Most people are at least reasonably satisfied with their own health insurance (if they have it) and with the quality of care that they receive.  However, that does not mean that they like the system.  Most people believe that the costs are too high and that everyone should be covered.
6. More people think that both the total cost and the out-of-pocket costs of care are too high, but their perceptions of why this is so are different from those of most health economists.  They often blame greedy insurers and pharmaceutical companies and think there is a lot of fraud and abuse.  But they are less likely to focus on over-utilization, the impact of fee-for-service incentives and the relatively (compared to other countries) high price of medical services.
7. Few people seem to worry much about the unfunded liability for Medicare that economists tell us is a huge problem.
8. Proposals that people believe will take away the health insurance they have now, or force them to change doctors, that “ration” care, or prevent them from getting the treatments they think they need are deeply unpopular.
9. There is no consensus on the appropriate roles of the government, employers and individuals.  Half of the population thinks that health insurance and health care should be “an entitlement paid for by taxes,” while a third believes that it should be like other products and services, where you get what you can pay for.
10. Republicans and Democrats are highly polarized on many aspects of reform.  Most Democrats think that this is a very important issue and focus on expanding coverage and limiting out-of-pocket costs.  They tend to favor an expanded role for government.  Most Republicans focus on cost containment and oppose a bigger role for government.  Democrats are much more likely than Republicans to think that health care is a “right.”
11. There are many things that many people do not want.  They do not want to pay much higher taxes and out-of-pocket costs.  They don’t want to damage the economy or increase unemployment.  They dislike the idea of rationing and oppose anything that they think might reduce the quality of their care or limit their choices.
12. Most people do not think or talk about the issues that are the focus of much debate among policy wonks, think-tanks, and legislators.  They rarely mention health information technology, comparative effectiveness reviews, a health information exchange, reimbursement reform, pay-for-performance, quality measures, or outcomes research.  When asked about these issues, the public’s replies vary dramatically, depending on whether the language used is that of the proponents or opponents of proposals.  For example, a new agency to provide information on which treatments work better or worse sounds pretty good – but not if it is used to deny care that a doctor or patient wants.
13. Most people do not seem to see a conflict between giving patients every test and treatment they and their doctors  want, however expensive, and containing costs.

Not that “W’ (as in the 43rd president), but a W-shaped economy.  I was on CNBC today talking healthcare with Howard Dean, and he said he thought the economy would improve and then worsen again. Would that be good or bad for the Obama agenda? Certainly it was a weak economy that got Obama elected and helped him push through the $800 billion American Reinvestment and Recovery Act. But high unemployment has been sapping his popularity. And that has been bad for his agenda, especially healthcare reform. If Dean’s forecast is correct, the Dems better pass healthcare while they can. There might be a lot fewer of them in Congress after 2010.

Thinker extraordinaire Joel Kotkin gives an outline:

Given this sad political picture, the best hope now is to build an alternative perspective that focuses on the basic economic issues. This would not be the media celebrated movement of moderates–Democrats-lite and Republicans-lite–who seek kumbaya through compromise. It would, instead, require a radical third tendency–neither strictly left or right–that would draw on long-term American priorities and values.

These new radicals would focus on basic issues like improving infrastructure, and primary education and bolstering the nation’s productive economy. Their inspiration would come from a long tradition of federal successes–from the Homestead Act and the WPA to the Interstate Highway and the space program. They would view the financial crisis not as an imperative for protecting the well-connected but for financial reform, decentralization and innovation.

Such an approach would address what the British author Austin Williams calls our ”poverty of ambition.” Americans historically have rejected a future constrained by entrenched hierarchies. Most, I believe, would support spending money and paying taxes, if it was spent to achieve big things that would lead to a greater, more widespread prosperity and opportunity.

Just imagine if the upward of $1 trillion spent guaranteeing Goldman Sachs and Citigroup executives giant paydays had instead gone into roads, bridges, subways, buses, port development, skills training, energy transmission lines and basic scientific research. And imagine if instead of protecting Citigroup and Bank of America, we encouraged stronger local banks and solvent financial entrepreneurs to fill the breach left behind by gross failures.

Me: I think this sort of approach would have tremendous appeal. The $800 billion stimulus plan will go down as a tremendous missed opportunity. The most important thing here is the focus on the “productive economy.” If America doesn’t have that, nothing else works.

President Barack Obama has told Americans to be skeptical of reports of an end to the recession, saying the downturn has “many more months” to run. Given the recent retail sales data, Americans seem to be listening to their economist-in-chief.

Obama may well be right in his dour forecast. Whatever the next quarter or two of GDP numbers say, continuing high unemployment and depleted personal wealth should keep the vibe more recessionary than expansionary. It’s tough to be cheerleader-in-chief, after all, when people’s pocketbooks are telling them a starkly different story.

But another issue is exacerbating Americans’ sour attitudes and raising doubts about the president’s competence: healthcare reform. Indeed, a recent Gallup poll shows identical pluralities of 49 percent disapproving of both Obama’s handling of the overall economy and his handling of healthcare policy.

Healthcare reform poses three problems for Obama. First, it seems to cost way too much in an era of trillion-dollar budget deficits. Americans are now as obsessed with budget deficits as they were in 1992, when fiscal concerns helped make Ross Perot a presidential contender. Second, many Americans are skittish about increased government involvement in the sector. Third, an inability to push healthcare reform through a Democrat-dominated Congress makes both the president and his Congressional allies appear ineffectual (as does the dithering over whether a public option needs to be part of any reform plan).

Now, political historians will note that a healthcare reform fiasco helped sink Democrats in the 1994 midterm elections — despite a fairly strong economy — and forced President Bill Clinton to shift to the right and work with congressional Republicans. Together, Clinton and the Republicans balanced budgets, cut taxes and reformed welfare.

But why wait for a political disaster to change course? If Obama wants to deliver meaningful change to the nation’s healthcare system, why not a grand compromise with Republicans that would also bring along centrist Democrats.

Call it the Purple Plan, one that brings red and blue together. Make health insurance mandatory and subsidize those who can’t afford it. (That’s the blue part.) But at the same time dismantle employer-based health plans, which prevent consumers from understanding the true costs of their healthcare decisions. In any case, employer plans are just an accident of history. (That’s the red part.)

The simplest way of dismantling them, according to an analysis by McKinsey, would be to make the money spent on health insurance by employers available as cash, tax free, to employees. “Insurers would then compete for customers with policies that offer better value for the money,” according to McKinsey. “The combination of invigorated supply and demand is the only healthcare reform plan that will avert the economic disaster that otherwise awaits us.”

A Purple Plan for the centrist – or purple — president many Americans thought they were voting for. It would bolster the president’s popularity, lift American spirits and help restore the economy.

There was a Saturday Night Live skit after the 1988 election called “Dukakis after Dark.” In it, failed veep candidate Lloyd Bentsen asks failed presidential candidate Michael Dukakis, “You were going to raise taxes, weren’t you?” Dukakis, wearing a Hugh Hefneresque smoking jacket, shiftily replies: “Through the roof.”

Lots of Washington politicians could give the same response today. This blog post from TaxVox sums up the common wisdom around here:

Politically feasible tax increases alone won’t solve the problem. Neither will cutting spending. In fact, if history is any guide, we’re unlikely to do much of anything on the outlay side. We will certainly have to slash the growth of healthcare to keep the budget from spiraling totally out of control. But that’s likely to take the form of “bending the cost curve” to get gradual savings over many years. In the near term, I suspect taxes will do the heavy lifting. And that will require either major tax reform or tapping new revenue sources.

What might stand in the way of a robust economic turnaround. Gary Becker outlines the following factors:

The federal government is creating many programs, such as reducing student loan repayments and mortgage payments for persons with low incomes, which discourage the unemployed from finding jobs, and encourage the employed to become unemployed. The proposed caps of various kinds on executive pay, especially in the financial sector, the large government debt being created due to huge fiscal deficits that will put upward pressure on interest rates, the European style reorientation of anti-trust policies toward protecting competitors rather than consumers, the enormous excess reserves that have a considerable inflation potential, the federal government’s likely incompetent management of two of the three American auto companies and a major insurance company, and the planned creation of a consumer czar that will interfere with the goods and services offered consumers are examples of policies that are likely to discourage business investment and risk taking.

Me: It is not about aggregate demand, gang, it’s about confidence.

The great Jason Trennert of the Strategas Group recalls the beginning of the Reagan bull market (in the WSJ) in August 1982 and points out some key differences between then and now:

The only good news at the time was that America’s economic leadership, in the form of President Ronald Reagan and Fed Chairman Paul Volcker, were deeply committed to fiscal, monetary and regulatory reform. Put simply: business regulation, the tax code, inflation and interest rates were all at such dizzyingly high levels that they had room to improve in 1982. Today, interest rates and inflation are so low that they are unlikely to do anything but go higher.

Current headline inflation is near zero. Ten-year Treasurys are at a historically low level of 3.7%. Taxes on income and capital are low and are poised to go higher, while common valuation metrics for the market are hardly cheap. No investor should blame the current administration for what are likely to be lackluster market returns in the next few years. But it does seem fair to worry about the future of equities in an environment where government spending is poised to comprise a greater portion of the economic pie.

Dude, you’re bringing me down! Or so says economist Robert Brusca:

Obama has been saying bad things about the economy ever since he got in office. As economic data improved he focused on how bad things were, not on the improvement or the trend. When the Q2 GDP figure fell by only 1% in the quarter he said there would be many more months of recession to come. … His administration was talking about deficits and about raising taxes before the recession was even over; that was reckless.  Japan got into its lost decade of growth by fearing the size of its own fiscal debt and hiking taxes on consumers before the economy was strong enough to take it. Is that the model Obama is pursuing?

The drop in sentiment in current conditions and in expectations is a depressing end to a week of mixed numbers. The consumer sentiment and consumer spending figures are on the same page. But job market improvement usually boosts these two series.. … If June was the end of the recession we are not seeing some very bad economic sentiment for early in the recovery period. It is the first ‘in recovery’ or ‘end recession’ variable that looks uncharacteristically weak.

How could sentiment be so bad with the impact of nearly $1trillion in spending on the horizon? I think it comes back to the president’s constant smashing of sentiment every time an economic statistic improved. If the President won’t cheer for this economy who will? I think that is the lesson of this report. Confidence should be leading the improvement in the cycle not trialing it. With all the positive news someone must take ownership of the failure in confidence.

(Lightly microblogging this week from The Great White North)

Ed Yardeni makes the case that the job market may bounce back strongly, kind of (bold is mine):

Of course, the consensus view is that the recovery in the US labor market will be labored. There are a few contrarians who believe that there was a firing panic during the last four months of last year and the first half of this one. They expect a V-shaped snapback in headcounts as employers scramble to rehire. Debbie and I have been tracking the drop in payroll employment among 19 major industries during the recession. With only a couple of exceptions, they’ve all been slashing their staffs. It’s hard to imagine which industries might produce positive net hiring surprises. Auto Manufacturing? Construction? Banking? Retailing? Health Care? State and Local Governments? We doubt it. Maybe, we will all wind up working for the Federal Government. E Pluribus Unum.