American Account: Trouble ahead as politics replaces market forces

Irwin Stelzer: American Account

Three inter-related forces are pressing down on the economy: cyclical, secular and presidential. Dispensing with economic jargon: the recession, longer-term trends, and Barack Obama. Here are some guesses as to the shape of some of the industries that will emerge from the interplay of these forces.

The housing industry will recover as a rising population and more reasonable pricing whittle down the unsold inventory. The 22,000 sq ft house that sold in Aspen, Colorado, recently for $43m might not be a harbinger of things to come, but the national pick-up in sales and buyer traffic certainly are.

Government will impose some changes, most notably the use of energy-saving but dangerous and dim bulbs that will replace incandescent lighting, and a bit more insulation here and there, but a few years from now this industry will be largely indistinguishable from pre-recession days, with the important exception of more stringent conditions on mortgages.

Not so the investment-banking industry, which will probably be changed for ever. Bear Stearns and Lehman Brothers are no more. Citigroup, if it does survive, will emerge with its name intact, but otherwise unrecognisable from the unmanageable behemoth cobbled together in a series of mergers. All in all, the banking industry will both consolidate and fragment.

The highly successful Goldman Sachs (trading), and JP Morgan Chase (investment banking) will mop up a larger share of the businesses at which they excel while, at the other end, small boutique advisory firms will thrive, manned by refugees from the big banks and the scrutiny of regulators. Opaque markets will be more transparent, there will be new jobs for regulators, and my guess is that we will still be discussing compensation for years to come.

Other industries are in the middle of change, some of which would have occurred even without the downturn. The most obvious is the media industry, where newspapers are trying to figure out how to charge for the content that readers have come to expect without charge, publishers are trying to figure out what to do about Kindle and other electronic publishing devices, and film makers are trying to figure out what to do about pirates.

It seems safe to guess that what will emerge from this maelstrom is something like this. Newspapers will survive, with the last man standing in each market quite profitable. Books will survive, in part because new electronic distribution will permit price cutting that makes them accessible to a larger audience. Film producers will prosper as the price of “talent” continues to fall, the world gets richer (even in a recession, box-office receipts are up 12%) and devotes a larger portion of its incremental income to entertainment, especially in the environment of theatres that provide what the industry calls “a collective experience”.

This takes care of a few industries that will be changed by recession and longer-term forces. Then there are those whose future is in Obama’s hands, such as the car industry. General Motors will produce cars that please the politicians rather than consumers, and remain on life support until the government sets in place regulations that more or less force buyers to take the sort of product GM will have on offer.

The electricity supply industry will be changed, although not in a way envisioned by the president. There will be some solar and wind power, enriching equipment manufacturers in China and Germany. There will be some nuclear power, but far less than its advocates predict, mainly because political opposition and rising costs will restrain the industry’s growth. There will be lots more coal plants, most of them in India and China, and very few in America, where overt and covert rationing of electricity will replace the good old days of adequate and cheap supply, something that will hurt the competitiveness of American industry.

The Obama factor will also affect the healthcare industry. Insurance companies will initially prosper because the deal they cut will increase earnings. They have promised to insure people with pre-existing conditions in return for a government mandate forcing healthy, young citizens to carry insurance. Give the industry 20m young people who will pay premiums but not need care, and it willingly takes on a few who are already sick. But then will come downward pressure on rates, and a migration from the private to subsidised public-sector insurance.

One last industry — pharmaceuticals. The big drug companies have promised to reduce prices of drugs to pensioners by $80 billion over the next decade. In return, the president has promised to remove from any bill consumers’ rights to re-import drugs from Canada (American patients can now buy them at low, government-set prices, and import them to the US). And Congress has agreed to extend by seven years the current five-year exclusivity period during which branded drugs are protected from generic competition. But lurking in the fine print is a government board that will establish rules for reimbursing patients for their prescription drugs, something close to the British system of rationing drug availability. America, meet Nice, the UK agency that decides which drugs warrant purchase by the NHS.

There’s more: some hospitals will close as Medicaid reimbursements decline, the construction industry will grow as more money is channelled into infrastructure projects, the lobbying industry will flourish as the government claims a larger portion of the nation’s economy and politics replaces the market as the determinant of which companies prosper, and the number of small business start-ups will drop as the taxes on those enterprises reduce the possibility of financial success.

Just a few thoughts from an economist who is definitely not an investment adviser, for those of you thinking about re-entering the stock market as you head for the beach. (Irwin Stelzer, The Sunday Times)

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