A government-centered stock market


On November 28, 2008, Charles Krauthammer wrote the following:

In the old days — from the Venetian Republic to, oh, the Bear Stearns rescue — if you wanted to get rich, you did it the Warren Buffett way: You learned to read balance sheets. Today you learn to read political tea leaves. You don’t anticipate Intel’s third-quarter earnings; instead, you guess what side of the bed Henry Paulson will wake up on tomorrow.

Today’s extreme stock market volatility is not just a symptom of fear — fear cannot account for days of wild market swings upward — but a reaction to meta-economic events: political decisions that have vast economic effects.

As economist Irwin Stelzer argues, we have gone from a market economy to a political economy.

Krauthammer cites a number of decisions made at the time regarding bank bailouts that sent stocks up and down in drastic fashion. Yet his comments could have just as easily have been made today. From a Wall Street Journal online discussion on Monday:

Nursing-home operators lost as much as much as half their market value Monday after Medicare said it would reduce reimbursement rates to those facilities by 11.1% over the next fiscal year.

This reaction happened because the Centers for Medicare and Medicaid Services (CMS) announced on Friday (remember, the government often hides bad or controversial news by releasing it on a Friday) it would reduce reimbursement rates in order to save Medicare money.

The Nasdaq link has a short video that explains the full situation, and is worth watching in full.

Meanwhile, however, also on Monday, “major health insurers” saw their stock prices increase after trading hours ended because of another decision by CMS, according to Nasdaq:

The impetus for this after hours rally, according to Reuters, was an announcement by CMS that it will increase Medicare Advantage reimbursement rates 3.3 percent in 2014. In February, the CMS had said it would decrease rates by 2.3 percent.

The proposed decrease was due to efforts by the Obama administration to reduce how much money it pays private insurers.

Monday’s reversal follows weeks of intense lobbying of the government from both the health insurance industry and members of Congress.

Some insurers even hinted they would discontinue their Medicare Advantage plans for 2014 if the government continued to insist on the reimbursement decrease.

In March, a bipartisan group of senators expressed concerns about insurers dropping out of the Medicare Advantage market and “The Coalition for Medicare Choice” launched a media attack against the cuts through television and social media.

In announcing its change of heart, CMS said the decision came “after careful consideration of public comments.”

When you have a government running out of money in charge of a program that has overpromised its financial benefits, this is an expected result. When you increase the size and cost of the government’s influence in health care it is harmful to the nation writ large.

It’s not just health care. The auto industry, banks, and energy sector (oil, natural gas, and “green” energy industries alike), among other swaths of the American economy, are increasingly reliant on government decisions instead of decisions by consumers in their respective markets. Rather than compete against each other for the privilege of your dollar, they compete for the best lobbyist to convince a Congressman, Senator or bureaucrat to bestow his or her magic wand of government.

Meanwhile, America’s economy continues to suffer, Washington grows ever more powerful, and Medicare continues to go bankrupt. Where are the real solutions? They aren’t found in Washington.