Fact And Comment - Forbes.com

Fact And Comment - Forbes.com

The Obama Administration is making noises about the need for a second stimulus package. This is nuts. Hyped-up government spending is useless, if not damaging, for providing sustained economic growth. Our own experiences, as well as those of other countries, particularly Japan in the 1990s and the early part of this decade, have demonstrated that repeatedly.

Obama's economic pooh-bahs should instead focus on making the dollar strong and stable. Treasury Secretary Tim Geithner and Fed head Ben Bernanke should both publicly vow that the Fed will not monetize future government debts and that they will restore the integrity of the U.S. dollar by measuring how it's doing against other currencies and commodities, particularly gold. Alas, an elastic dollar is seen by these officials as an essential policy tool instead of a weapon that destroys market confidence, thereby retarding investment and risk-taking.



Thus, we're getting the worst of all worlds. Incredibly, the Fed--contrary to its reputation--has been tightening since December. Its balance sheets have shrunk by several hundred billion dollars since its year-end highs. This is deflationary. Its non-Treasury assets are maturing faster than the Fed is purchasing Treasury securities. And buying Treasurys does no good. Banks are loaded with cash. Adding to that cash hoard--which is what the purchase of Uncle Sam's paper effectively does--is useless. Indeed, it feeds fears that the Fed will monetize Obama's ballooning budget deficits, which would mean future inflation. The Fed refuses to take rifle-shot steps to help revive the credit markets for mortgages and for small business and consumer loans. Bernanke keeps promising to do this via purchasing mortgage-backed securities and pools of credit card debt and car loans. But, as they say in Texas, he has been all hat, no cattle. Hence, the economic recovery during the second half of this year will not be as robust as it could have been.

In addition to the unstable dollar, markets are fearful of the consequences of the Administration's excessive spending. After all, all this check writing--the greatest binge in U.S. history, with the exception of the Civil War and World War II--is unfolding before the wave of baby-boomer-generated entitlement spending that will crush Medicare and Social Security. If President Obama still wants Keynesian-style stimulus for ideological reasons, he should do it the right way--cut the FICA tax in half for 18 months. The virtue of this would be two-fold: The money would quickly get into consumers' hands, and the cost of hiring and employing people would be lower.

The Administration would set off another stock market surge if it swore off tax increases, particularly since the 2003 cuts are set to expire at the end of 2010; abandoned its attempts to nationalize health care; gave up cap-and-trade, which will dampen future growth through big increases in energy costs; allowed its forced unionization legislation to die a quiet death; and quickly disgorged itself of banks, insurers and auto companies. But these things won't happen.

While the White House is currently incorrigible on taxes--in fact, it is broaching the idea of a European-style value-added tax, which will substantially increase the price of everything--there is no reason that it can't reverse its course on the volatile dollar. There is ample Democratic precedence here. Bill Clinton was a strong-dollar President, and John Kennedy proclaimed that the dollar should be as good as gold.

...And Undermining Health Care

While the odds of an immediate government takeover of health care are receding, Congress will likely feel it necessary to do ''something,'' and that something will mean more government involvement, paving the way for a future de facto nationalization.

To avoid this deadly fate, we need to grasp that today's hybrid system is not truly a capitalist one. President Obama's worthy aims of universal and affordable medical care are achievable by bringing genuine free enterprise to the system, not more government.

Today there is a disconnect between providers and consumers. Almost all health insurance is covered by third parties--either insurance companies or governments--so patients rarely know what most health care services cost. If you go to a hospital and ask about prices, the staff's immediate reaction is that you must be uninsured. Why else would you want to know what something costs? Yet in just about every other aspect of our commercial lives the price of things is known.

No wonder health care doesn't experience the kind of productivity gains found elsewhere. For example, the cost of food as a proportion of one's income is a mere fraction of what it was decades ago. Twenty years ago cell phones were bulky and expensive; today they have become cheap virtual computers with easy access to the Internet. They even take pictures and videos. There are 4 billion cell phones in use around the world.

In 1900 the automobile was a toy for the rich and cost the equivalent of about $100,000 today. Henry Ford's moving assembly line turned autos into something that any working person could afford.

We could attain similar and ongoing miracles in health care. We are already seeing some in a few areas. Conventional Lasik eye surgery costs a third of what it did ten years ago. And there has been virtually no inflation in the prices of cosmetic surgery, even though there have been enormous technological advances, and the demand for these procedures has increased sixfold since the early 1990s.

Special hospital facilities in India, Thailand, Singapore and elsewhere that engage in medical ''tourism'' have infection rates a fraction of those found in most U.S. hospitals. These positive results are driven by the fact that patients write the checks and are thus fully conscious of the costs, as well as by the fact that providers are under pressure to make their offerings more enticing and affordable.

Here are some helpful and constructive measures that can move us to a more genuinely free-enterprise health care system.

--Equalize the tax treatment of individuals and businesses. If the company you work for doesn't provide insurance or you don't like the plan offered, you are forced to try to buy a policy with aftertax dollars. If an individual wishes or needs to buy health insurance on his own, why shouldn't he get a refund tax credit of, say, $4,000--and a family, $8,000?

--Allow consumers to shop for health insurance across state lines. Today it's illegal for someone in Chicago to buy a health insurance policy that someone living in New York City can buy.

--Encourage the use of Health Savings Accounts. That way consumers--not government bureaucrats or employers--would control the purse strings, or at least a portion of them.

--Permit small businesses to form pools so they can increase their pricing leverage with insurers.

--Remove state-imposed obstacles to allowing routine medical care to be offered in, say, Wal-Mart stores.

--Remove the obstacles that prevent entrepreneurs from setting up new clinics or hospitals. A number of states make this extremely difficult by demanding that such entrepreneurs obtain a certificate of need. In fact, in some jurisdictions hospitals must get permission to make major capital purchases.

Genuine free-market reforms in health care will slash the number of the uninsured and lead to the same kinds of innovations and efficiencies that are experienced in most of the rest of the economy.

King Fisher

This summer marks Ken Fisher's 25th anniversary as a columnist for FORBES. Only three other individuals in our 92-year history have written more columns than Ken has. The reason for Ken's longevity is not only his excellent record of individual stock recommendations but also his insightful general observations and his creation of principles for investors to follow.

Ken's record is impressive. Between 1997 and 2006 his picks easily outpaced the S&P 500, achieving an average annual return of 11.7% versus the S&P's 6.8%. In 2007--a tough year that saw the beginning of the financial crisis--Ken still had a slight gain when the S&P turned negative. Last year was brutal, but at least Ken's column picks tracked the S&P. As he pointed out earlier this year, if not for two clunkers in his January 2008 column, he would have handily beaten the S&P bogey. Even so, he said, ''I was dead wrong with a bullish stance in 2008.'' Normally, election years are good for stocks.


Though Ken has a low opinion of politicians, quipping last month that he is ''an equal opportunity politician-hater,'' he underestimated their capacity to do harm last year. However, Ken's approach to politicians does not blind him to opportunities. He recently made the argument for why President Obama will be good for stocks.

It's Ken's unique perspective on the world that makes him such an asset. FORBES discovered him back in early 1984 when we ran a major piece on him entitled, ''The Case Against Price/Earnings Ratios.'' The metric he put much more stock in then and now over P/Es is a company's price/sales ratio. Ken's seemingly simple but profound insight is that ''unusual profitability can rarely be sustained,'' because it attracts competitors like honey draws bears. Ken, of course, looks at other metrics, such as book value and R&D spending. He also recognizes that a company's marketing ability is usually far more important than its ability to invent something. As he noted in his first FORBES column: ''It's not the hot gadget that puts small companies over the top but hot marketing … if a troubled company is strong on marketing, it is a good bet to solve its problems. … So I like companies run by a top-notch marketing person or companies with one close to the boss' elbow and ear.''

Before it was common to do so, Ken urged investors to take a global approach: ''Foreign holdings give you more opportunities and better diversification.'' His recommendations truly range the world.

Thankfully for us--and you--Ken's next 25 years promise to be even more fruitful than his first 25 at FORBES.