Obamacare and the Laws of Supply and Demand

Posted by PITHOCRATES - September 30th, 2013

Economics 101

A Scarce Thing has a Higher Price because Everyone that Wants One can’t Have One

Economics is the study of the use of scarce resources.  Scarce resources that have alternative uses.  For example, we can use corn for human food.  Animal feed.  We can make bourbon from it.  And we can even use it for fuel to power our cars.  So there are alternative uses for corn.

And corn is scarce.  There is not an unlimited supply of it.  During the drought the United States suffered in 2012 farmers brought in a greatly reduced corn harvest.  Which caused corn prices to rise.  Per the laws of supply and demand.  If demand remains relatively constant while the supply falls the price of corn rises.  Why?

Scarce things always have a higher price.  A painting by Vincent van Gogh has a very high price because each painting is a one of a kind.  And only one person can own it.  So those who want to own it bid against each other.  And the person who places the greatest value on the painting will get the painting.  Because they will pay more for it than anyone else.  Whereas no one would pay for a cartoon in a newspaper.  Because they are not scarce.  As they appear in every newspaper.  Newspapers we throw away or put in the recycling tub every week.  Something that would never happen with a Vincent van Gogh painting.

Price Controls fail because People won’t Change their Purchasing Habits when Buying Scarce Resources

Government spending exploded during the late Sixties and early Seventies.  Paid for with printed money.  A lot of it.  Igniting inflation.  Causing a great outflow of gold from the country.  And with inflation spiking prices soared.  Rising prices reduced the purchasing power of American paychecks.  Add in an oil shock and the people were reeling.  Demanding relief from the government.

With the price of gasoline going through the stratosphere President Nixon stepped in to fix that problem.  Or so he thought.  First he decoupled the dollar from gold.  So they could print more dollars.  Causing even more inflation.  And even higher prices.  Then to solve the high prices Nixon implemented price controls.  Setting a maximum price for gasoline.  Among other things.  Sounds nice.  Wouldn’t you like to see gas prices held down to a maximum price so it consumed less of your paycheck?  But there is only one problem when you do this.    People won’t change their purchasing habits when it comes to buying scarce resources.

Why is this a problem?  Because the oil shock caused a reduction in supply.  With the same amount of gas purchasing with a reduced supply the supply will run out.  Which is what happened.  Gas stations ran out of gas.  Which they addressed with gas rationing.  Which led to long gas lines at gas stations.  With people pushing their cars to the pump as they ran out of gas in line.

Obamacare will Fail because no matter how Good the Intentions you cannot Change the Laws of Supply and Demand

Obamacare is increasing the demand for health care.  By providing health care for millions who didn’t have health insurance before.  So demand is increasing while supply remains the same.  There is only one problem with this.  With more people consuming the supply of health care resources those health care resources will run out.  Leading to rationing.  And longer wait-times for health care resources.  Just like gasoline in the Seventies.

One of the stated goals of Obamacare was to lower health care costs.  But what happens when you increase demand while supply remains relatively constant?  Prices rise.  Because more people are bidding up the price of those scarce resources.  Obamacare may try to limit what doctors and hospitals can charge like they do in Medicare, but everything feeding into the health care industry will feel that demand.  And raise their prices.  Which will trickle down to the doctors and hospitals.  And if they can’t pass on those higher prices to whoever pays their bills they will have to cut costs.  Which means fewer doctors, fewer nurses, fewer technicians and fewer tests and procedures.  Which means rationing.  And longer wait-times for scarce health care resources.

President Obama may say he’s going to provide health care to more people while cutting health care costs but the laws of supply and demand say otherwise.  In fact the laws of supply and demand say Obamacare will do the exact opposite.  So whatever rosy picture they paint no one will be linking arms and singing Kumbaya.  Unless they like paying higher taxes, waiting longer and traveling farther to see a doctor.  Which is what is happening in the United Kingdom.  And in Canada.  Which is why Obamacare will fail. Because no matter how good the intentions you cannot change the laws of supply and demand.



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