Health Care Summit and Housing: Blather and Gloom

Not just a big snow storm provided gloom at the end of the week. The report on existing home sales was miserable, and even the revision upward to fourth quarter GDP failed to lift the mood; it simply confirmed that growth still depends on one time efforts and is not yet strongly sustainable.

The National association of realtors reported today that sales of existing homes dropped 7.2% in January to an annual rate of 5.05 million. this is the lowest level for seven months and means we have given up all the gains of last summer and fall. there is not too much to say with regard to this, other than we can take it as yet another supporting datapoint confirming the sideways drift we now find ourselves in. One by one, most of the major economic indicators are shifting from positive to neutral. The gains of late last year are evaporating and we are being exposed to the distinct possibility of a halt to our current growth path.

That growth path is best described by the fourth quarter GDP figures that were revised in a report issued today.

The first estimate of fourth quarter growth had GDP rising at a 5.7% annual rate. This second report, based on more detailed information, alters that slightly and has growth at 5.9%.

Be careful with is number. looking into the details reveals that most of this growth came from sources unlikely to be repeated any time soon. In particular, a big chunk of it came from the inventory adjustment we were all talking about late last year. From the looks of the orders data earlier this week that adjustment has run its course and will not provide as substantial a boost in the next few quarters. Other strong points were an increase in non-residential investment – that the durable goods orders report on monday suggests is now weakening – and a better trade position produced by both a decrease in imports and an increase in exports. The problem with that trade improvement is that if, and when, the economy kicks into a higher gear imports will increase sharply, if for no other reason than oil consumption is highly sensitive to economic activity. With the dollar picking up value against the Euro, it is tough to see exports gaining speed too. So the bright spots in the fourth quarter provide little comfort for 2010.

In particular the drop in personal consumption expenditure is a worrisome trend. If that decline is repeated we would be left relying on those other factors to keep GDP growing. Given this week’s drop in consumer confidence it is very hard to argue that consumption is going to gather sufficient strength to offset the flattening out I expect in inventory adjustments.

So we remain firmly attached to life support. The good news is that there is plenty of stimulus impact coming on stream this year – probably enough to offset declines elsewhere. That buys us time to get consumption going.

Nonetheless this has been a very gloomy week.

And that gloom was not exactly lifted by the health care summit yesterday.

There is not much to be said for a multi-hour ideological stand-off. Nothing happened to elicit hope that a grand coalition would emerge and push reform through to the finishing line. Of course there is no surprise in what happened. The lines have been drawn months ago and are not about to be crossed. The issue of health care reform is such a divisive one for the political parties that I doubt compromise was possible even had the GOP made an effort to come around and support it.

The plain fact is that the Republicans, in their current ideological frame of mind, are dead set against reform for two reasons: one, they see it as a major political points gainer to resist what they characterize as yet another unaffordable government program; and, two, they are still mired in their Reagan inspired de-regulatory mindset.

The first of these requires the GOP to frame all reform as an expensive and bureaucratic waste of taxpayer money. In this they appear to have succeeded in part. This is despite the fact that the CBO has clearly said that the reform as it now stands is a major cost saver to the Federal budget.

The second line of attack is more important to them since it springs from their belief system: government is bad, markets are good. This requires them to defend the insurance companies and stop the government pooling resources in order to use its bargaining power to lower costs.

By combining opportunistic political posturing with a strongly market driven ideological sentiment the GOP has defined itself very clearly. Its ongoing problem will be squaring this with the general attitude of the voting public who remain supportive of reform. Were the GOP to articulate their true value system, which inevitably has to include the abolition of the New Deal safety net, they would face huge voter resistance, and the loss of any chance of regaining power in the near future. So they have come up with a different approach: obfuscation and obstruction in order to create a war of attrition. This is intended to buy enough time and to create enough confusion that the populace gets tired of the bickering and lashes out against Congress for its inaction. Such a backlash would hurt the Democrats more and would, possibly, return Congress to Republican hands.

The virtue of yesterday’s farce was that it called the bluff and ended any opportunity for the GOP to claim it had been ignored. As it stands the Senate bill – which has been passed – includes Democrats are balking at voting for the combined bill. This erosion of support within the Democratic ranks makes a complete mockery of the Republican claims that they had no influence or that they were ignored.

So what happens next?

Reconciliation, and an ‘up and down’ vote. The Republicans hate this prospect because it means, inevitably, that reform will pass. Their objection, repeated in the media, that such an important piece of legislation should not be subject to a simple partisan vote is arrant nonsense. Nor is it without precedent. A reconciliation vote has occurred twenty-one times in the last three decades, and most of them have been for highly contentious legislation. The Bush tax cuts were passed on a 50 – 50 vote with Cheney breaking the deadlock. Those tax cuts had a far greater impact on our budget than the proposed health care reform will ever have, and they were just as ideologically divisive. As the White House has pointed out: every single GOP Senator attending the summit yesterday and objecting to the ‘unfairness’ of reconciliation, has voted more than once along partisan lines in previous GOP inspired reconciliation votes.

So the only bump remaining in the road is that Democratic unease with passing the watered down and Republican influenced legislation.

So as the week ends we seem to be back in familiar territory: all blather in Washington; and all gloom in the economy.

Let’s hope spring gets here quickly. We all need some fresh air.