Remarkable realist stuff from the Wall Street Journal

Editorial pages content are usually to the right of Attila the Hun. Not this time…

Is Socialized Medicine Bad for Your Wealth?
by Brett Arends
Friday, March 19, 2010

To hear some people tell it, the health-care bill will destroy America and your stock portfolio. We will become a “socialist” country. You should sell everything, put your money in gold, cash or foreign stocks, and run to the hills.

It’s hard to get past the hyperbole and partisan hysteria on this topic. But if we take the calm view, what, if anything, would the bill mean for your investments?

Take a deep breath. It probably won’t mean very much. There’s a good chance it won’t mean anything at all.

To start with, we don’t really know what it will do to the deficit. The Congressional Budget Office Thursday projected the bill would cut deficits by $138 billion over 10 years. There will be a lot of detailed debate about these forecasts and the assumptions underlying them. Most of it will be pointless. I have spent too many years watching oil analysts who couldn’t successfully predict the oil price 12 months out, and economists who couldn’t even spot a recession when we’re in one, to have any faith in forecasts and projections. The CBO doesn’t know what this bill will actually do over the next 10 years, let alone after that. Nor does anybody else.

And even if these forecasts miraculously turn out to be correct, they’re only a rounding error. The most recent CBO analysis, published earlier this month, predicted that under President Obama’s latest budget proposals, the total U.S. deficit from 2011 through 2020 will come to nearly $10 trillion. The alleged budget savings from the health-care bill are less than 2% of that.

One usually expects huge deficits to lead to inflation, and that’s a major concern in this environment. You should be very wary indeed of holding most long-term bonds, the investment most at risk from rising inflation. But you should have been wary before this bill. Health-care reform doesn’t change that. And it’s worth noting that even here the picture isn’t clear-cut. The Japanese government has been running massive deficits for two decades, but inflation remains on the floor, and owners of long-term Japanese government bonds have done very well.

Yes, maybe the critics are right, and the current bill doesn’t do anywhere near enough to rein in exploding health-care costs. But, of course, neither did the status quo. It’s hard to argue that the bill will make a good situation bad, or even a bad situation worse. Maybe it will do nothing to fix a disastrous situation. But sooner or later that’s going to have to be fixed anyway. Make of it what you will, but advanced countries with more direct government control over health-care costs have clearly done a much better job of controlling those costs.

Will the bill really “turn America into a socialist country”? It’s easy to laugh at this notion, of course, but let’s look at it from another point of view. Even if that were correct, should you really sell everything and flee?

Socialism, or social democracy, or whatever else you want to call it, doesn’t seem to have hurt stockholders overseas too badly. Over the past 10 years, according to MSCI Barra, stock markets across socialized Europe have produced total returns of about 2% a year in U.S. dollar terms, according to MSCI Barra. The figure for France is just over 2% and for left-wing Britain and Holland nearer to 3%. Pinko Denmark has boomed by 10% a year.

Meanwhile, here in the land of the free, investors have made zero.

Today, you may be better off looking at matters like stock fundamentals and valuations than macro forecasts. It is worth noting that fund manager Jeremy Grantham, who is right more often than most, thinks top-quality U.S. blue-chip stocks are the best investments in world markets right now. And those on his list include a number with big exposure to the U.S. health-care sector, including Johnson & Johnson, Procter & Gamble, Pfizer, Merck and Abbott Laboratories.

Socialized medicine may not be so bad for your wealth after all.

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