Your Government at Work: Chaos Theory 101

While chaos theory has had a place in science since mathematician and physicist Jules Henri Poincare first coined the term in the 1880s, it made its way into pop culture with the introduction of the so-called butterfly effect by fiction writers Ray Bradbury (“A Sound of Thunder,” 1952) and fictional chaotician-in-chief Ian Malcolm with his widely popular “Jurassic Park” in 1993. The idea, of course, is that activity that impacts one part of a system can have wide-ranging, unforeseen (and in the case of government interfering in a free-market economy) unintended and undesirable consequences elsewhere in that system. While we have had no scarcity over the years of political butterflies in both parties incessantly flapping their wings to, generally, no good purpose, we are currently witnessing a truly historic exercise in chaos theory, Washington style.

As we argued in an earlier column this month, the $2.0 trillion in cash (and growing) that has been accumulating throughout the year in corporate bank accounts is more than enough to jump start the economy out of the doldrums in which it has been languishing for the better part of three years. All of this capital is locked in irons, as our sea-faring friends like to say, chiefly because a muscle-flexing, game-changing government is piling uncertainty on top of uncertainty with largely unwanted new taxes, new programs, new mandates (mostly unfunded), new regulations and new agencies to enforce them. What’s a well-intentioned businessman to do?

Rather than stepping aside and giving the marketplace a chance to regain its footing after the financial debacle (also largely the result of government malfeasance) that defined the transition of government nearly two years ago, the Administration, Congress and the Fed have elbowed their way, at great cost, into the commerce of the country with dubious to negative results thus far and, for many, with absolutely devastating impact.

Interest rates have been maintained at ridiculously low rates quarter after quarter and, now, year after year. The Fed has accomplished its goal and made this a heyday for borrowers. Companies and others who don’t even need the money are borrowing to avoid missing this debtors’ bonanza although in many sectors (notably real estate), banks won’t lend because of marketplace uncertainties.

Unfortunately, many of the borrowers are, for the time being, merely arbitraging the money they have borrowed (having placed it in higher-paying accounts) or using it to retire more expensive debt they have on their books. And the companion consequence…the affect on the elderly on Main Street, and those retirees trying to stay in their own homes or living in retirement communities all over the country? The very people who have labored a lifetime to save enough for their so-called golden years are literally being financially strangled as they try to live on the earnings (interest) from the funds they spent decades of frugality accumulating.

For the first time in over a half-century, according to a recent report in the New York Times, the average returns on interest-bearing deposit accounts have sagged below 1.0 percent. Imagine that. An after-tax nest egg of $500,000 that may have taken a lifetime of hard work to accumulate and which would have produced $26,250 only three years ago, will, today, yield a paltry $7,500 in a 12-month certificate of deposit. Those butterflies flapping their wings over at the Fed in Washington to make borrowing attractive, are forcing millions of Americans who have followed Ben Franklin’s golden rule of a penny saved is a penny earned to take their hard earned money and reallocate it to higher-yielding, riskier investments, something they never intended to do and spent a lifetime avoiding.

The Cash-for-Clunkers program, which according to President Obama, “was successful beyond anybody’s imagination,” produced some pretty interesting unintended consequences too. We won’t dwell on the cost per car to the taxpayers of rebates, paid for cars that would have been purchased anyway without the program. Industry analysts pretty uniformly agree that about 70% of the cars for which rebates were paid ($3,500 to $4,000) would have been purchased anyway. The program also required that all of the cars traded in (the so-called clunkers) be destroyed (couldn’t have these cars competing with new car sales after all). The result, a serious shortage today of used cars available to those citizens who can only afford to buy used cars. Thus, the average cost of a used car is, today, about 10% to 15% higher than would otherwise be the case. Many of the higher-end used cars have increased about 35% as a result of the Cash-for-Clunkers program. It gets worse. Japanese and South Korean companies made eight of the top ten selling vehicles in the Cash-for-Clunkers program. The Toyota Corolla (of subsequent recall fame one year later) wound up as the most popular car in the trade-in program. So much for the advertised benefits for U.S. car manufacturers.

Then there is the unintended consequence of H.R. 3590, the so-called “Patient Protection and Affordable Care Act” (we think there should be an extra ring in Dante’s hell for wordsmiths who think up these absurdly misleading legislative labels…well, then again, fraud does constitute one entire circle). This was the product of 219 Democrats in the House of Representatives and 58 Democratic monarchs in the Senate flapping their collective butterfly wings. We all recall that Obamacare was supposed to sharply reduce costs, improve service and “not add one dime to the deficit.” In fact, the president vowed, with a straight face, to veto any healthcare bill that did add one dime to the deficit. Well, as it turns out these butterflies flapping their wings did, in fact, create some consequences down stream, although we don’t really believe they were unintended.

First, we now learn that insurance companies will soon be raising their rates up to 10%, much of which is attributable to the requirements imposed upon them by the new health care mandates, and we don’t believe for a nanosecond that a 10% raise will begin to cover the costs insurance companies will soon be facing. Worse, the federal Centers for Medicare and Medicaid Services now calculate that healthcare spending in the United States will increase an average of 6.3 % a year over the next decade, an annual 0.2% increase from the increase they calculated barely six months ago. Compounded, this equates to a near doubling of costs in the next ten years.

The new 2700-page law is loaded with something for almost everyone. For example, Obamacare, in effect, changes the definition of a child, for family insurance coverage purposes to age 26, and in so doing adds another $10.2 billion to annual healthcare costs. Because, the vast majority of Americans do not directly pay for their health care costs, these expenses continue to rise considerably more than they would if each individual or family were making direct payments for the health care services they demand. As a consequence, the Feds now estimate that by 2019 one out of every five dollars spent in the United States will go to the provision of health care and it’s probably a safe bet that expenses will probably continue to grow thereafter. This is, unequivocally, unsustainable. In order to avoid drastic reductions in Medicare and Medicaid service, it is a near certainty that fees to healthcare providers will have to be drastically cut. No one likes to talk about it, but it is a given that thousands of doctors will exit Medicare and Medicaid practice. That is a reality, which those 219 House and 58 Senate butterflies hope the voters won’t notice this year because Obamacare is not yet in full throttle.

Instead of removing obstacles to economic growth the President and his congressional allies have decided that they can better plan for economic progress than can a properly regulated free marketplace. That seems to be a widely held view within the capital beltway, but, not surprisingly, almost nowhere else. Virtually all polls show that incumbents are in for a severe shellacking in the forthcoming mid-term elections, consumer confidence has plummeted to its lowest level since pollsters began measuring this factor and, lo and behold the United States has slipped to fourth place in the latest World Economic Forum competitiveness survey, behind Switzerland, Sweden and Singapore. The United States was in first place when President Obama assumed office. Chief among the concerns expressed about the United States are our escalating deficits, a weakened financial system, access to credit and government regulation.

The 2010 fiscal year is sputtering to a close with our government having spent $1.3 trillion more than it collected from taxes and all other sources of revenue. The past two years constitute the greatest shortfall or deficit in the past sixty-five years. Today, our deficit is bumping up against 10% of the nation’s Gross Domestic Product or the value of all goods and services produced in the United States. That is a level many economists consider the point at which nations begin to fail. Our problems do not stem from a government that is not doing enough. Quite the opposite; confidence in America is sinking because people throughout the length and breadth of the land either understand, or feel in their gut, that the effect of decisions being made in Washington are having or will have adverse affects where they live and work. They are experiencing political chaos (or the butterfly effect) up close and personal and they clearly do not like what is happening.

By Hal Gershowitz and Stephen Porter