The High Cost of Health Care and Beer

Posted by PITHOCRATES - May 22nd, 2011

The Rising Cost of Beer

Economics can be confusing.  And boring.  A lot of it sounds Greek.  And wonkish.  Worse, there are those who like to sound wonkish.  They like to show charts with curves.  And explain why beer is more expensive these days by moving a curve on their graph.  Yeah, I know.  Yawn.  But they feel smart.  And they think it impresses the ladies.

But beer prices are real.  For some, it’s part of the weekly routine.  Get paid.  Buy a case of beer.  Those who do know this commodity price very well.  And it’s been tracking higher.  Why?  Because of the laws of supply and demand.  You see, the stuff that goes into making beer is getting scarcer.  And, therefore, more costly.  Hence the rise in beer prices (see The economic forces behind the rising cost of beer by Loren Berlin posted 5/22/2011 on msnbc).

Three years ago, Bavaria, the largest state in Germany, suffered a bad hops harvest. These green, pine cone-shaped flowers are the essential ingredient in brewing beer, and because Germany alone provides roughly 35 percent of the world’s supply of hops, the crop shortage created an immediate and significant problem for beermakers who found themselves suddenly scrabbling to locate this key ingredient. And as we all know, when supply decreases and demand doesn’t, prices rise. To cover those new higher costs, brewing companies added a few cents to the price of our beer.

But it’s not just one ingredient.

…a heat wave in the Ukraine can directly add to the cost of beer — and is doing so right now. Global grain production is down, thanks in large part to unusually brutal heat in the former Soviet Union and droughts in China. See the previous discussion of supply and demand, but in this case, the effects are wider, because unlike hops, which is mostly used in beer, we’ve got a few other uses for grains. Between people food, animal food, biofuels and of course, our beer — along with a steadily growing world population that wants to consume them — yes, another few pennies are getting added onto the cost of every beer.

But it’s not just these two ingredients.

Then there’s transportation. All those raw materials have to be shipped to the brewers, and the finished products shipped to the retailers who sell it to us, all of which requires fuel. Fuel, that, until very recently, had been getting steadily more expensive this year. Yet another addition to the price we pay for our beer.

Yes, the cost of fuel, too.  These are all input costs to making beer.  When they go up beer is more costly to make.  And brewers being in the business to make a profit, have to increase the price of beer to cover these higher input costs.  While still being able to make a profit.  For if they couldn’t make a profit, they’d have no incentive to make beer.  And wouldn’t.  And we wouldn’t want that, would we?

Free Health Care is very Expensive

Understanding health care is a little more difficult.  Because we don’t pay health care costs like we pay for beer.  We know the price of beer.  There’s a price tag stuck to the beer so we can see the full price to make an informed purchasing decision.  The vast majority of people, though, don’t pay the full price of their health care costs.  So they haven’t the foggiest clue of what they are.  Other than the cost of co-pays.  So they keep demanding more.  Don’t want to hear anything about reforms to Medicare.  And are all for free health care for everyone.  Problem is, free health care is very expensive (see Republicans suggest deal possible on taxes, health by Andy Sullivan posted 5/22/2011 on Reuters).

On healthcare, the two sides are separated by a gulf of trillions of dollars. The Republican-controlled House has passed a budget, authored by Ryan, that would save $2.2 trillion by scaling back Medicaid and Medicare, the government-run health plans for the poor and elderly, and repeal President Barack Obama’s signature health reform program, the 2010 Affordable Care Act.

Obama, in turn, has proposed saving $480 billion by accelerating reforms in the program — a nonstarter for Republicans who insist it must be repealed.

The nation’s debt is $14.3 trillion dollars.  And President Obama’s 2010 budget added the last $1.4 trillion of that number.  $480 billion in health care reform savings is less than his last deficit.  This will still result in deficits.  And add to the debt.  The problem is the federal government is giving away too much stuff.  And stuff costs.  Medicare and Medicaid are about 40% of the federal budget.  And the baby boomers are just starting to retire.  Which will break Medicare.  Unless it’s reformed.  And it is amidst all of this that they passed Obamacare.  It’s too much.  Something has got to go.  Like it or not.

Democratic Representative Chris Van Hollen, a participant in the Biden talks who is also the top Democrat on the House Budget Committee, said the Democrats had proposed savings in the Obama’s healthcare program and could find more by lowering the price the government pays for prescription drugs, rather than scaling back benefits for patients.

Van Hollen repeated Democrats’ contention that any debt-reduction plan requires higher taxes, saying Republicans’ reluctance to them forced Ryan to push his unpopular cuts to Medicare and Medicaid.

If it’s that simple, why don’t the beer-makers just lower the price they pay for hops?  And get the price of beer down?  Because it’s not that simple.  With less hops to sell, they have to sell what they can at a higher price to cover their costs.  If they sell at lower prices, and with a smaller harvest to sell, they will lose money.  And possibly their farms.

If the government tells a drug company to lower their prices, what will happen?  With less revenue they won’t be able to spend as much.  They may have to cut research and development, that costly process that brought so many of their wonder drugs to market.  Or they may just say the new law makes it impossible to make a profit and shutter the business.  Either way, there will be fewer drugs to go around than before.  Just as the government wants more drugs to pass around.  And, with medications more difficult to find, people will take less.  And perhaps get sicker.  Possibly requiring hospitalization.  Which will increase costs.  Kind of the opposite of what they would hope for by lowering drug prices.

We’ve hit our head on the debt ceiling.  The White House wants to raise the ceiling.  But don’t you think $14.3 trillion dollars should be enough?  It is.  We’re spending too much.  And raising taxes does nothing to rein in spending.  Quite the contrary.  It encourages more spending.  Ronald Reagan agreed to higher taxes in exchange for future spending cuts.  The spending cuts never came.  They never do.  If you can’t cut the spending now because there’s too much opposition, that opposition will still be there in the future.  And they’re not going to let you cut spending then either.  It’s the oldest trick in the book.  Make a promise that you know you can’t keep.  You lose nothing.  And gain everything.

It’s Simple Supply and Demand

It’s simple supply and demand.  If you buy more you pay more.  If supply goes down prices go up.  And if you have no idea of the full price of what you’re buying you can’t make an informed decision.  Which the politicians count on to keep increasing the debt limit.  So they can keep on spending.

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