The following article is written by Tom Mallon, CEO of Regent Surgical Health.
The question posted in the title of this article is the one all the politicians and pundits are asking this week. Legislators, both republicans and democrats, are now "investigating" S&P for its role in the housing collapse in 2008 and its "undue" influence in the public securities market. They are seeking to learn how the corporate parent, McGraw Hill, might benefit from the downgrade decision. The legislators are forgetting that the government itself created the debt rating franchise for S&P, Fitch and Moody's. The Securities and Exchange Commission appoints all three organizations to rate public debt. Investors can rely on no other organizations to opine on the creditworthiness of corporate and sovereign borrowers.
The question that I believe we need to ask is, "Why did it take so long for S&P to downgrade the United States?" When Congress passed healthcare reform last year, the patchwork of financing $1 trillion in expenses over six years with 10 years of revenue relied on fundamentally flawed assumptions with respect to the Medicare cost savings and the new long-term care program. $500 billion in Medicare savings using techniques such as accountable care organizations seems, one year later, drastically unrealistic. Few major providers have signed up to start ACOs next year as was envisioned. Most of the 10 pilot project organizations are not receiving bonuses and have not covered their costs after five years. Even Nancy Pelosi admits that the new "optional" long-term care program (Social Security was optional when it first appeared) that will contribute $70 billion in revenue starting in 2016 is not feasible. The legislators assumed citizens would sign up and contribute for five years with no benefit payments. But during that time, the contributions are applied to fund the healthcare legislation costs with no reserves set aside for the program's future liabilities. If an insurance executive ran a regulated insurance company this way, he would be jailed for "diversion" and "co-mingling funds." This is not far from the "Madoff-esque" Ponzi schemes that receive so much publicity. The new Medicare tax on all income is the only piece of the legislation that is relatively stable as long as national incomes do not drop due to a soft economy, which is a major assumption.
So why did it take so long for the downgrade decision? The day in March 2010 that healthcare reform passed represents the day that the United States accelerated our insolvency. Prior to that date, our unfunded Medicare liabilities exceeded $35 trillion and Social Security's liabilities modestly hovered at $9 trillion. I have not seen any estimates yet for our true unfunded liability after the legislation. Our total annual gross domestic product is less than $15 trillion per year. To fund just these two programs prior to March 2010, we required three times our country's total economic output in the bank.
What is a citizen to do? First of all, we need to thank S&P for their courage. The company may ultimately lose its ability to rate government debt over this decision, but for the rating agency to shout that "the emperor has no clothes" is a bellwether event. The downgraded status will continue to put pressure on our political leaders to fix the imbalance of income and expenses. Hopefully our leaders will make the tough decisions this year that will restore our solvency. If not, the country will go to the polls in Nov. 2012 much more educated about the state of our nation's finances.
The only answer to our long-term situation is a return to a growing economy. We have seen the business community criticized and castigated for not hiring. However, the uncertainty of the new legislation, onerous regulations and an anti-business tone forces companies to look abroad for growth. Consequently, our multinationals are achieving record earnings which until recently helped elevate our stock market. Now with foreign growth in question and continued economic doldrums in the United States a virtual certainty, even great earnings will not hold up the stock prices. Given that our corporations have the highest domestic tax rates in the developed world, they have parked $1.5 trillion in corporate cash overseas. Our tax structure needs an overhaul this year as part of the special debt commission the debt-ceiling compromise created. With 45 percent of our citizens not paying federal income tax, and our system riddled with loopholes for the affluent and politically connected, we need to address both problems as part of the answer.
Get involved, stay involved. One cannot underestimate what citizens can accomplish though their legislators, if they will only communicate and hold them accountable. Let's all do the same, no matter what our political leaning might be, and we will get to the right answers over time.
Learn more about Regent Surgical Health.
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