Entitlement Reform Less Politically Viable After Affordable Care Act Missteps

In its latest Budget and Economic Outlook, the CBO says “deficits are projected to decline through 2015 but rise thereafter, further boosting federal debt” to, over the long-term, “unsustainable” levels.

The main sources of continued government spending are entitlements—Social Security, Medicare, and other major healthcare programs—as “the pressures of aging and the rising costs of health care…intensify during the next few decades,” writes the CBO.

In a recent in-depth interview, Kim Wallace, Executive Managing Director at Renaissance Macro Research, explained the wide-ranging impacts government policy will have on the markets and economy in the years ahead.

With regards to health care, he commented:

“Right now federal health care comprises roughly 3% of GDP. By 2020, if we have the same programs in place that number will almost double. There aren’t many people who think that is sustainable given all of the other demands on government and the clear shrinking of appetite to continue to afford what most analysts view as a highly inefficient system.”

Ironically, the only hope for addressing this problem—comprehensive entitlement reform—has now been pushed out many years or more due to the complications, political or otherwise, imposed by the introduction of Obamacare.

Wallace, who previously served on the Treasury Department until 2011, noted:

“[T]he politics over the Affordable Care Act…are going to complicate and push out the time frame by which we see entitlement reform. It’s going to be a long time before we see a corpus of leaders in either party [willing] to look at the last two or three years and say entitlement reform is a political winner. That’s just unfortunate, but true.”
“I don’t see [entitlement or tax reform] happening until we have a President in office that has both the capacity—that is, the political support, at least in terms of approval rating—and the willingness to lose that approval rating on pushing fiscal realignment. And by my estimate, the soonest you could see that is 2017….again, I may be too optimistic.”

For those who think that the Affordable Care Act will eventually be overturned, Wallace said, “Washington is going to be in the healthcare reform business for at least another decade and it doesn’t matter which president or which party that seems to have power.”

Depending on how you view things, there may be some good news for investors however. With his focus at Ren Mac on how policy affects capital markets, Wallace believes we are entering a period where policy "is beginning to recede as the number one factor influencing investment decisions” and that “fundamentals and technicals are beginning to restate their proper place.”

That could be a problem, of course, if things start to roll over without further support. However, Wallace cites reasons for optimism and says that Ren Mac has a “reasonably bullish outlook for the economy,” and projects that the U.S. will start to see an improvement in the next month or two.

After covering Ren Mac’s view on a wide-range of topics—near-term budget trends, economic data, defense spending, health care, and projected energy policy—Wallace summarized by telling Financial Sense Newshour listeners, “For the immediate future in the eyes of most investors…certainly the U.S. seems a favorable place for investment.”

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