Could Gates Controversy Hinder Health Care Reform?

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Includes: DIA, IYH, QQQ, SPY
by: Right Blend Investing, LLC

Key Points

  • Obama's support is waning as budget deficits rise, and as concerns grow about the cost of health-care reform.
  • Republicans are using the racial controversy over Henry Louis Gates Jr. as a wedge issue.
  • Thus, we have the bizarre prospect that the arrest of a Harvard scholar could inadvertently block health-care reform.

Deficits Energize Fiscal Conservatives

Members of both the Republican and Democratic parties have recently become more critical about unprecedented U.S. budget deficits. Deficits have energized fiscal conservatives of all stripes, and have weakened political support for President Obama. The erosion in support coincides with the President's proposal for sweeping reform of the U.S. health-care system, since this will add untold billions to already swollen deficits.

What does this have to do with the controversy over the arrest of Henry Louis Gates Jr.? The Wall Street Journal summed it up nicely on Friday:

Clear to all sides are the political ramifications of the flap. Both the National Republican Senatorial Committee and the National Republican Congressional Committee have used it to try to drive a wedge between the president and conservative Democrats in Congress, and to cast him as hostile to law-enforcement officers -- a politically damaging label Democrats have long been tarred with.

And Mr. Obama said the controversy is swamping his efforts to drum up support for his health-care overhaul.

Reform Stalled by Racial Controversy?

Thus, we have the bizarre prospect that the arrest of a Harvard scholar could hinder health-care reform, either accidentally or on purpose. Republicans are already using the issue to divide Democrats who are sympathetic to law enforcement, and the issue is already distracting President Obama. Politics makes for strange bedfellows, so we have the creepy possibility that people who oppose health-care reform now have a vested interest in racial controversy. Bizarre.

But what about the deficits? What about the long-term impact?

Inflation Lurks Ahead

Mushrooming budget deficits are one reason why I believe that inflation relief won't last. Right now, the recession is temporarily depressing wages, income, housing activity, and energy prices. In addition, there is massive deleveraging underway as banks rebuild their balance sheets. This is why monetary and fiscal stimuli aren't boosting prices.

But after the economy recovers, fiscal stimulus will be difficult to reverse, leaving the U.S. with huge deficits for years to come. As I said in June:

Politics aside, [there is] a key difference between monetary and fiscal stimulus. The Fed has centralized decision making, and can withdraw liquidity relatively easily. But it is notoriously difficult to unwind fiscal stimulus. Voters and politicians hate tax hikes and budget cuts, so they usually pass the buck to future generations via budget deficits and unfunded obligations (Medicare, Social Security). The solution is inflation, the silent thief. This has made inflation the weapon of choice for irresponsible countries throughout history.

This Is No Time for Partisan Politics

As an investor, I work hard to be non-partisan. And as an associate minister at a historically black church, I work hard to bridge the racial divide. Thus, I find it unsettling to see the issue of race being used as a political distraction from one of the most pressing issues of our time: the spiraling cost of health care, and the spiraling deficits to pay for it. So...

Let's Hope They Settle It Over a Beer

Obama has invited Henry Louis Gates, Jr. and Sgt. James Crowley to join him to discuss the situation. This comes after Sgt. Crowley suggested to President Obama that they all meet for a beer at the White House, according to the Wall Street Journal.

I certainly hope they do. There are pressing national issues that need to be addressed without politically motivated distractions. Equally important, racial issues are rarely resolved by stories in the media, which often generate more heat than light. Since racial progress is vital to this country, I pray that Messrs. Gates and Crowley can settle a hot issue over a cold drink.

Disclosure: No positions