Obamacare, the Supreme Court Decision, and the Increased Likelihood of Low Interest Rates Through the Decade

Obamacare, the Supreme Court Decision, and the Increased Likelihood of Low Interest Rates Through the Decade

The Supreme Court's decision upholding the constitutionality of the health care bill creating the Patient Protection and Affordable Care Act (PPACA) may actually create more uncertainty, leading to caution and lack of spending by companies, causing a sluggish economy and persistently low interest rates through the remainder of the decade.

Markets hate uncertainty, that much is clear, and the uncertainty surrounding Obamacare, officially known as the Patient Protection and Affordable Care Act (PPACA), represented a significant economic headwind that led to many corporations hoarding cash instead of investing in capital projects or expanding their work staff. The Supreme Court’s decision to uphold the constitutionality of the health care bill removed a portion of that uncertainty, but leaves open the question as to whether corporations will now begin spending and hiring.  If companies begin to spend, a much needed stimulus to the economy would occur, which could lead to growth and result in higher interest rates.

If, however, remaining uncertainties in the application of the PPACA lead to a continued cautious approach on the part of firms, such spending will not occur and it is questionable whether the stagnant growth and low job creation numbers of the recent past will improve much.  Such uncertainties include the upcoming Presidential election as the Republican challenger, Mitt Romney, has vowed to make repealing Obamacare his top priority if he is elected.  In addition to Romney being elected President, a repeal of the bill would involve the Senate going through the reconciliation process, which would require 51 votes in favor of such action.  Thus a Republican controlled Senate, or the defection of several Democratic Senators in lieu of such Republican control, would be necessary.  If a reconciliation process were successful the bill would then be sent back to the House to be voted upon where once again a Republican majority would be needed to approve a repeal of the PPACA.  Thus, for the repeal process to be successful, the Republicans would have to control the Presidency and both houses of Congress, which is far from a certainty.  Against the additional backdrop of an ongoing economic crisis in Europe and the economic slowdown being experienced by China, it is unlikely companies will invest large sums in capital improvement and job creation until the November elections.

From this conclusion can be drawn another: domestic interest rates will not change much in the near future either.  Without some form of economic stimulus the economy won’t improve and interest rates will not increase.  Given the already historically low interest rates in place now, even a worsening of the economy is unlikely to lower them much further.  The continuance of the status quo is the most likely outcome through the end of the year and into the next Presidential administration.

In the long term what the costs associated with the PPACA will be, assuming it remains in place, represents a concern to companies.  It will be 2014 before this initiative will begin to be implemented, full implementation will not be complete until 2019 and the amount and effect of associated costs will likely take years to be accurately assessed.  Any attempt to predict the overall impact on the economy and interest rates would represent idle speculation at best given that this is such an enormous piece of legislation that retools such an important industry on a scale more massive than seen since the 1960s.  Unfortunately there is a strong possibility that companies are likely to sit on more cash than they would otherwise through the next decade until the final impact of Obamacare upon their businesses can be assessed.

Reviews

  • Sol

    July 10, 2012

    There is a lot of talk that companies are sitting on cash due to uncertainty but I think it's more or less uncertainty about consumer spending, not Obamacare. By the same token, companies could be uncertain about taxes, or uncertain about Europe. Businesses deal with uncertainty every day and the successful companies learn how to navigate and invest in a prudent manner despite business conditions.

    So, I think the link between Obamacare and companies not deploying their cash is a lot of hot air. I have yet to see an empirical study that actually provides proof of this connection. If anyone can find one, I'll correct myself.

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