(Excerpt from a client folio published by Morgan Stanley)
Energy
This past year, energy issues dominated much of the policy agenda as oil touched $150 per barrel and gas prices soared past $4.00 per gallon across the country. With both oil and gas prices in retreat as the economy hits the brakes, energy policy has lost its urgency. The new Obama administration will have many ideas and proposals in the energy arena, and the issue is sure to generate attention, but not much sweeping action.
We expect the Obama administration and new Congress to push for additional or more favorable incentives for renewable energy. In tandem with this effort will be moves to repeal or lessen incentives for oil companies as a means to shift from an oil based dependency to a renewable-focused economy. This transition is under way with long-term extensions of several tax credits and incentives for renewable energy. Further action could be accomplished through attempts to make these tax incentives permanent (such as a permanent extension of the production tax credit) or an expansion of direct subsidies for renewable energy through the Department of Energy.
Undoubtedly, the biggest issue will be climate change and a debate around enacting a “cap-and-trade” regime to deal with the problem. In 2008, the Senate debated cap-and-trade without passing a final bill. Given the state of the economy, next year will likely yield more talk without action. Under most iterations of a cap and trade regime, the cost of the system will fall on manufacturing and utility companies required to pay for carbon allocations. This cost will be too difficult to bear during a recession or fragile economy, regardless of the environmental benefits. Thus, until the economy recovers, it is unlikely that Congress will be able to enact a cap-and-trade regime.
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Health Care
As polls suggested for months preceding the election, a primary concern on the minds of the American public is health care. This was another issue that painted a deep contrast between Obama and McCain. As a senator, Obama has voted several times to expand funding for health care programs, including the State Children’s Healthcare Insurance Program (SCHIP), which Obama would use to increase health care funding for both children and certain adults, using proceeds from tax increases in other areas. In 2007, he voted in favor of allowing seniors to purchase cheaper prescription drugs from Canada and other developed countries.
Obama has given health care a central position in his domestic agenda for 2009. Seeking to expand coverage to many of the 47 million uninsured Americans, the Obama campaign trumpeted its health care plan that “provides affordable, accessible health care for all Americans, builds on the existing health care system, and uses existing providers, doctors and plans to implement.” Central to the plan is a requirement that all children be covered (coverage would not be mandatory for adults), paid for with aforementioned tax increases on households making over $250,000. He would require employers to pay at least some of employees’ health care costs.
Obama would require insurance companies to cover pre-existing conditions; seek to lower costs for business by creating a small business tax credit to help them provide insurance to employees; prevent insurers from overcharge doctors for malpractice insurance; establish a national insurance exchange that includes a range of private insurance options; and establish a tax credit program to allow low-income families to afford premiums. He continues to support lowering the cost of prescription drugs by allowing importation from other countries and by encouraging the use of generics.
Some of the highlights of Obama’s Healthcare proposals include:
Expanding Access to Coverage
- Require all children, but not adults, to have health insurance
- Require employers to offer health benefits or to pay into a national insurance fund
- Expand Medicare and the State Children’s Health Insurance Program
- Create a national health insurance exchange through which individuals and small companies could buy coverage from private insurance plans or a new government insurance option
- Provide people who are currently uninsured an unspecified tax credit to help buy insurance. Coverage for People With Existing Illnesses
- Require “guaranteed issue,” prohibiting insurance companies from denying coverage or charging higher premiums to people who are sick
Controlling Costs
- Aim to improve prevention and management of chronic diseases
- Devote $50 million to promote health information technology
- Promote the use of generic drugs, instead of more expensive brand-name ones
- Reduce payments to private Medicare health plans
Improving Quality
- Support research into medical effectiveness and promotion of the best practices
- Foster more reporting of quality and price data
- Address health disparities for different racial and ethnic groups
Obama should get a quick and early victory in the health care area by expanding those covered by the SCHIP program. He also will look to bring down the eligible coverage age for Medicare to 55, expanding this program from the top down. The federal government’s swelling balance sheet and focus on the credit crunch, however, will likely exhaust the actual and political capital that Obama will need to pursue his more ambitious health care plans. Although Congress will be generally sympathetic, it may be somewhat constrained by the realities of economic turmoil in the short- to medium-term.
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Analysis
Obama’s domestic agenda is clearly ambitious and will undoubtedly be an aggressive repudiation of the policies of the past eight years. It is an agenda heavily dependent on tax increases from higher-income earners, which should be supported by a like-minded Congress (see taxation discussion above). However, Obama’s aspirations may be constrained by external factors beyond his control. Even with expanded Democratic majorities in Congress, the political reality is that the financial crisis will likely dominate his playing field, hampering to some degree his ability to tackle the other pillars of his domestic agenda.
As the federal government responds to the credit crunch and growing recessionary pressure, Obama will need to dedicate significant federal funding to expedite recovery, thereby siphoning money from other priorities and increasing pressure on the national deficit and debt. The final 100 days of the Bush administration have been a churning cauldron for the President and the markets, and Obama will quickly learn what it is like to go from the frying pan into the fire.
