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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Used Cars put a Crimp in Venezuela’s Inflationary Policies

Posted by PITHOCRATES - January 27th, 2013

Week in Review

The American Left attacks capitalism for being unfair and evil because it puts profits before people.  Whereas socialism puts people before profits.  Where people give according to ability and take according to need.  Fair, yes?  In the way it makes people want to link arms and sing Kumbaya.  Because everyone has everything they need.  Thanks to that redistribution of wealth.  And exactly how does that work?  Something like this.

An unemployed man with 8 children will get more from the government than a single woman with no children working 12-hour days 6 days a week.  She will have a lot of income the state can tax.  So she has a lot of ability.  While he will get a lot of state benefits.  Because he has a lot of need.  A smart person will look at this and quickly come to the understanding that working hard sucks.  While being a lay-about means you live comfortably on state benefits.  Paid for by people like that woman working 12-hour days 6 days a week.  So in true socialism it’s a contest to show as little ability and as much need as possible.

Sometimes there aren’t enough people to tax.  So to keep the people happy the state spends money it doesn’t have.  By printing more and more money.  Which is what Hugo Chavez did in Venezuela.  Actions which the American Left applaud.  As they applaud Hugo Chavez for putting people before profits.  For unabashedly embracing socialism.  And condemning capitalism.  So Venezuela should be a socialist utopia.  So is it?  Let’s take a look (see Venezuela Ready to Crack Down on Clunker Car Inflation Refuge by Corina Pons & Nathan Crooks posted 1/24/2013 on Bloomberg).

Automobiles purchased in Venezuela, South America’s largest oil exporter, typically gain in value the moment they are driven off the dealership lot. Facing 20.1 percent inflation and capital controls introduced in 2003 that limit the amount of bolivars citizens may take out of the country, Venezuelans invest in durable goods…

Venezuela’s consumer prices last month rose 3.5 percent, the fastest pace in 32 months, the central bank said Jan. 11. Venezuela has the third-highest inflation rate worldwide.

Chavez in 2012 ordered companies to cut prices of shampoo, soap and other personal care products to contain inflationary pressures…

Inflation rose after Chavez restricted dollar supplies in a bid to close a fiscal gap widened by spending before elections in October, in which he defeated challenger Henrique Capriles Radonski by more than 10 percentage points.

The lack of dollars has created shortages of goods that range from toilet paper to detergent and extend to automobiles. Suvinca, a Venezuelan state distributor of Chinese-made cars, posted a notice on its website yesterday that said it had run out of cars and suspended sales…

“The law won’t solve the problem, because it doesn’t resolve the fact that there is still little supply. It won’t reduce demand, either,” Garcia said. “A black market will be created very fast. Instead of solving the problem, it will make it worse…”

“With this law, it will not be permissible to sell a car above the maximum suggested price, and a used car can never cost more than a new one,” Amoroso said. “Notaries will be prohibited from legalizing any transaction that is above the suggested price.”

When you print a lot of money it just makes your money worthless.  Which is why governments frown on people using their computer printers to make money.  If everyone did this money would lose its value.  For it would be as common place as leaves on the ground in autumn.  In countries with high inflation rates people want to spend their money as fast as they get it before it loses too much of its purchasing power.  For the real goods they buy will hold their value.  So it’s a safer place to put your savings.  Instead of in a bank.

The more bolivars (the Venezuelan currency) they print the less each bolivar is worth.  The more they depreciate the bolivar the faster people want to convert them into something that will hold its value.  Like cars.  If the bolivar loses half of its value it will take twice as many of them to buy a car.  So if you own a car its value in bolivars will soar the more of them they print.  Not that people want bolivars.  But they do want dollars.  And getting dollars by selling real goods avoids the inflation problem of the bolivar.  But it also helps to undermine the currency as no one wants to use it.  Or accept it in exchange for valuable goods.

Of course an easy solution to this problem is simply implementing price controls.  If you legally prevent prices from rising in response to runaway inflation problem solved, yes?  No.  Because if prices are held at artificially low levels people will buy so many of these items while the buying is good that these things will disappear from store shelves.  And if the store shelves are empty it doesn’t matter what prices are.  This is why there were gas lines in the Seventies.  Gas sales were so strong that gas stations ran out of gas.  And with prices below real market prices there wasn’t new supply coming on market to meet that excessive demand.  Because having to sell below your costs doesn’t encourage anyone to sell.  Except on the black market.  Where black market prices adjust market supply to market demand.  And everything is available for a price.

This is the socialist utopia that is Venezuela.  Only it’s not a utopia.  It just converts as many people with ability into people with need.  And when there are no longer enough people to tax to provide for those in need societies break down.  And governments collapse.  Unless you have a strong police state.  Which has been the hallmark of all social utopias that put people before profits.  Places like Nazi Germany, the Soviet Union, the People’s Republic of China, North Korea, the communist countries of Eastern Europe, Cuba, etc.  Venezuela, too.



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Price Controls make Scarce things Scarcer

Posted by PITHOCRATES - October 23rd, 2011

Week in Review

If there’s anything that tells us not to take mainstream economists or the United Nations or the International Monetary Fund or other global organizations seriously it’s this (see Economists Call for Crop-Trading Limits to Curb Volatility by Alan Bjerga posted 10/10/2011 on Bloomberg Businessweek).

Hundreds of economists including scholars from Oxford University and the University of California, Berkeley, are asking the Group of 20 nations to impose limits on speculative positions in food commodities to curb volatility in crop prices…

Research sponsored by the United Nations, International Monetary Fund and other global organizations suggest speculation in crop futures by index funds and large banks may cause price spikes that can put grocery costs out of reach for poorer people. Global regulation of speculators has been a goal of French President Nicolas Sarkozy during his term as leader of the G-20 this year.

What’s the common thread in all these organizations?  They’re all Keynesian tax and spend big world government.  And, surprise, surprise, they want more control over the world’s economies.

Have we learned nothing from the Nixon’s price controls of the Seventies?  Price controls make scarce things scarcer.  Did rent control make more low-income housing available?  No.  Did price controls make gasoline more available?  No.  Why?  Because market prices match supply to demand.  And when you mess with the market price mechanism, you mess with supply and demand.  Resulting in shortages.  Such as low-income housing and gasoline during the Seventies.

Messing with prices doesn’t make scarce things less scarce.  So why do it?  Because that’s what Keynesian tax and spend big world government does.  It’s not about the economy.  It’s about power.  Their power.  And they want more.

The 2008 spike in gasoline prices is an example of this pricing mechanism.  The run up that peaked in July 2008 was due to a fall in OPEC production, not speculation (see Federal Reserve Bank of Dallas Clearly Explains Why Speculation Didn’t Drive Oil Prices in 2008 by Kay McDonald posted 10/14/2011 on big agriculture picture).  The high gas prices in 2008 just made sure that a scarce resource was available for those who really needed it.  People drove less over the summer.  Which made a scarce resource available for those who really needed it.  The result?  No gas shortages.  And no gas lines.  Like in the Seventies.




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LESSONS LEARNED #67: “Free health care is very expensive.” -Old Pithy

Posted by PITHOCRATES - May 26th, 2011


In 2007 Romneycare took effect in Massachusetts.  A precursor to Obamacare.  Though not by design.  The new health care requirement included an individual mandate.  You either bought health insurance or they penalized you.  Ditto for employers.  They either provided health care or they penalized them.  It included subsidies to help the less wealthy pay for their mandated insurance.  And added a new and powerful health care regulatory board.  Finally, an example of what compassionate Big Government could do.  And how successful has Massachusetts been in providing free/affordable health care to everyone?  Well, as of 2011, not a single state has followed their example.

It has failed to provide universal coverage.  It has failed to control health care costs.  It has cost more in taxes than originally projected.  Health care has become more bureaucratic.  There is less choice.  Medical bankruptcies went up.  And there’s talk about implementing price controls.  And, of course, rationing.  Everything the critics warned about in a universal health care program.  And everything the proponents poo pooed.  Because those things only happen when everyone else tries universal health care.  But everyone else isn’t them.  They know how to do it right.  And their plan will not only not have those problems.  It will provide universal, quality health care at affordable prices while reining in health care costs without new and higher taxation.  Of course they were wrong.  And the critics were right.

Sound familiar?  The proponents of Obamacare have said the same thing.  In fact, Obamacare is pretty much Romneycare at the national level.  Interestingly, Mitt Romney, the architect of Romneycare, opposes Obamacare.  As a Republican candidate for the 2012 election, he promised to repeal Obamacare.  Probably because if they do at the national level what he did at the state level it would ruin the U.S. economy.  Because nothing went as planned in Massachusetts.  So there is no reason to believe that Obamacare will not be the train wreck Romneycare was.  Even if the ‘right’ people finally take a crack at it.


In the U.S., federal tax revenue (i.e., federal income taxes) averaged about 18% of GDP between 1970 and 2010.  So if the government’s budget was balanced, federal spending would also equal 18% of GDP.  When it’s not balanced and they spend more than this 18% of GDP it results in deficits.  Which the government has to finance either by raising taxes, borrowing money or printing money.

In 1970, Medicare outlays were about 0.7% of GDP.  By 1980, that number increased to 1.2% (a 71.4% increase over the decade).  By 1990, it increased to 1.9% (a 58.3% increase over the decade).  By 2000, it increased to 2.2% (an increase of 15.8% over the decade).  Or a total increase of 214% in only 30 years of the program.  And that’s the good news.  The projections are far worse.  By 2020, it will be 3.6% of GDP (a 414.3% increase from 1970).  By 2030, it will be 4.9% of GDP (a 600% increase from 1970).  By 2050, it will be 6.7% of GDP (an 857.1% increase from 1970).  By 2075, it will be 9.6% of GDP (a 1,271.4% increase from 1970).  At which time it will consume more than half of all tax receipts.  And equal the size of the 2010 federal deficit.  And this is for Medicare alone.  It doesn’t include Social Security.  Defense.  Or interest on the debt.

These numbers are huge.  Growing.  And out of control.  It’s the biggest piece of all entitlement spending.    And it’s the biggest single item of the federal budget.  It is without a doubt some of the worse number crunching the federal government ever did.  Not only did actual costs exceed their estimates, they were three times higher in only 30 years.  One thing is clear.  The federal government doesn’t know the first thing about running a health care system.  And yet here they are.  With Obamacare.  Which will be a lot like Medicare.  Only bigger.  Because Obamacare won’t just be for the seniors.  It’ll be for everyone.


To borrow a medical term, Medicare is circling the drain.  It won’t be around for the kids of today.  Unless they enjoy paying a flat tax of 100% of their earnings to continue to fund it and the rest of government.  Of course, that won’t leave anything for food, utilities, rent or the other necessities of life.  In other words, they will work.  But they won’t get paid.  Reduced to involuntary servitude.  Life will be pretty bleak.  But there will be health care for everyone.  But not in the utopian way the government planners are promising.  It will be more like in Cuba.  Where it’s illegal to criticize the government.  So most don’t.  And they abort babies when it looks like they may not live through infancy.  Thus giving them a low infant mortality rate.  A sign of a first class health care system.  But the hospitals are dirty.  And filled with out of date equipment.  Much of which doesn’t work.  And there is a wholesale lack of medicine.  Because they are just too impoverished to buy any.

We have to fix Medicare.  If we want to keep having Medicare.  It can’t stay as it is.  It’s just too costly.  As all universal/free health care tends to be.  And a declining birthrate compounds the problem.  Baby boomers are retiring.  And making the system top-heavy.  The consumers of health care are growing faster than the payers of health care.  What’s worse is that it borrows from one generation to pay for another.  As they tax the young more for today’s retirees the young will have less to save for their own retirement.  So not only will they not have Medicare when they retire, they will have saved less than today’s retirees.  Making their retirement truly a bleak and impoverished picture.  How bleak?  Cuba bleak.

And continually raising taxes isn’t the answer.  Because there’s a limit to how high you can raise taxes.  Massachusetts has apparently reached that limit.  For they are now considering price controls and rationing.  Which will make things worse.  Not better.  The UK and Canada are in earlier stages of price controls and rationing.  Cuba is in a much later stage.  And you can see the progression of quality.  Of these four countries, which would you choose for your health care needs?  Most probably would choose the United States.  Many, though, no doubt, would choose Canada or the UK.  But one thing for sure.  No one would choose Cuba over the other three.  Sadly, based on the numbers, that’s where Medicare is heading.  Of course, it probably won’t ever be like Cuba.  For it probably will cease to exist long before it gets that bad.

Costs will Continue to Rise

If we learn anything in life it needs to be these two things.  Nothing is free.  And government is horrible at running things.  Providing quality yet affordable health care to everyone are two conflicting goals.  You can provide high quality health care.  But not to everyone.  And you can provide health care to everyone.  But it can’t be high quality.  Universal health care, because of its cost, has to make limited resources cover more people.  That is to say, they will have to ration resources. 

When the government is picking up the tab for health care, there will be no more private rooms in hospitals.  Or semiprivate.  There will be crowded wards.  So doctors and nurses can carry higher patient loads.  To keep costs down.  And to allow fewer resources cover more people.  They will ration high-cost treatments.  Not everyone will get dialysis.  Or chemotherapy.  There will be fewer machines.  And less medicine.  Because of costs.  Only the few meeting the government’s criteria will get these treatments.  Or those with pull.

Even then the costs will continue to rise.  And the more the government takes over, the more health care costs will be transferred to the taxpayers.  Who will pay ever higher taxes.  And get ever less in return.  But they will have universal health care.  It will just be horrible.  As their lives will grow to be.



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LESSONS LEARNED #66: “In socialism you don’t get what you want. You settle for what you get.” -Old Pithy

Posted by PITHOCRATES - May 19th, 2011

Prices, Price Controls and Rationing

People think high prices are just how rich people stick it to the poor.  But prices, high or low, are an automatic mechanism that matches supply to demand.  Things in high demand but low supply have high prices.  This helps discourage some from buying leaving supply available for those who are willing to pay the higher price.  High prices also tell the market where to expand.  Because high prices typically indicate high profit.  So others will rush in to fill that demand to get in on those high profits.  That’s why store shelves are typically full in capitalistic countries.  Because prices are always matching supply to demand.  And shelves are often empty in socialist countries.  Where a distant bureaucrat decides what people should build.  And what people should buy.

When you interfere with this automatic mechanism you get market failures.  As in socialist, command economiesPrice controls, though they sound kind and caring, hurt.  For example, rent controlled apartments in New York reduced the supply of apartments.  Which reduced the supply of affordable housing.  The exact opposite of the goal of price controls.  Why did this happen?  For the same reason you don’t invest your money for a negative return on investment.  Investors build and manage income properties (i.e., apartment buildings) for a profit.  With rent control, apartments became a bad investment.  So investors built condominiums instead.  And did little to maintain their rent-controlled income properties to limit their losses.

Price controls put people before profits.  Or so they thought.  Rent control kept rental prices down.  But only for the few who could find an apartment.  And those who did saw the quality of their housing decline.  Because they couldn’t pass on the cost of any improvements in higher prices, owners made few improvements.  With no profits there are no incentives.  So rent-controlled housing served as little more than a write-off against profits made from other good investments.  Rent control ultimately destroyed low-income housing.  In quantity as well as quality.  And low-income renters had to settle for what there was.

When OPEC cut oil shipments to the West in the Seventies gasoline prices soared.  People demanded that the government do something.  So the Nixon administration did.  Price controls.  They reduced the price of gas to what people were willing to pay.  And what happened?  The price indicated there was a higher supply of gasoline than there was.  So people bought as if there was more gasoline than there was.  Until the gas pumps pumped dry. And cars ran out of gas.  Gas was affordable.  There just wasn’t any to buy.  If the market had set the price, there would have been gas.  It would have been expensive, but it would have been there to buy.  Price controls took a scarce commodity and made it even scarcer.  So instead of gas at any price, people had to settle for life without gas.  And find another way to get places.

The People have Voted, Capitalism is Better than Socialism

After the communist revolution in China, Mao Tse-Tung began to collectivize agriculture.  Taking land from the wealthy and giving it to the poor to work.  For the state.  The People’s Republic of China.  Who cared about the people.  And even more about the grain they grew.  Because that was how they were going to raise the capital to industrialize China.  Buy low (i.e., take from the farmers) and sell high.  And beat anyone who didn’t get on board with the new way.  So there was no price mechanism.  No profit incentive.  In fact, the only incentive was not to get beaten.  They called this great plan the Great Leap Forward.  It was a disaster.  Unless famine was the goal.  And as far as famines go, this was one of the bigger ones.  They call it the Great Chinese Famine.  Some 15 million died.  Or 30 million.  Depending on who crunches the numbers.  No, the people did not fare so well in the People’s Republic of China.

Doing things for the people sounds good.  It sounds like you care about the people.  But the people rarely do well in nations with ‘People’ in their name.  The Chinese suffered and died wholesale.  They’re doing a lot better now.  But that’s only where they let some capitalism loose.  Allowed people to make a profit.  Gave them an incentive.  In the big cities by the sea.  Life was good.  Soon, people left the poverty and famine of the rural country and looked for a job in the city.  For a better life.  A better life provided by capitalism.  Not socialism.  They had had enough of the kind and caring state taking care of them.   They’d rather work for some rich guy who paid decent wages in a factory.  Because they could choose their life.  And not settle for what the state would give them.

You see, there is no such thing as a communist/socialist utopia.  The truth is, life is horrible in communist/socialist countries.  That’s why Cubans risked their lives on rafts to cross the ocean to escape their utopia and go to Florida.  And why Haitians did likewise.  Even though Cuba was far closer and was itself a communist utopia.  They said thanks but no thanks and took the longer and more deadly trip to Florida.  For they knew life was better in the United States than in Cuba.  Because capitalism is better than communism/socialism.  The people have voted.  At least the Cubans and the Haitians.  And everyone else that went to America.  Or any other capitalist country.

Venezuela Rations Food and Electricity

Hugo Chávez of Venezuela is a big fan of socialism.  He’s turned the whole country into a socialist utopia.  He launched a revolution.  The Bolivarian Revolution.  Nationalized industries.  Including the big one.  Oil.  Put people before profits.  Set up price controls.  Expanded education to the people.  And health care.  The kind of things that resonate with the people.  The people love him.  For sticking it to the rich.  And to the United States (who gets a lot of oil from Venezuela).  Oh, they got a kick out of him saying he smelled sulfur following George W. Bush to the UN podium.  Because George W. Bush was the devil.  He even said he smelled sulfur from Barack Obama in Copenhagen.  Where he called capitalism “the road to hell.”  So he sports true socialist bona fides.  So Venezuela must be a socialist utopia.

Well, we’ve seen what can happen when the market doesn’t set prices to match supply to demand.  And so it happened in Venezuela.  The supply of food dwindled to where they had no choice but to ration it.  They even bartered for food.  Traded some of their oil for Argentine meat and dairy products.  Because the price controls so disrupted the economy domestic production of food plummeted.  Food was affordable.  There just wasn’t much food to buy.

But food isn’t the only thing they’re rationing.  They’re also rationing electricity.  Through rolling blackouts.  This in a country rich in energy.  Oil.  If any nation should not have an electricity problem it’s Venezuela.  But the infrastructure is not there.  What they have is falling apart.  Insufficient.  And nationalized.  That is to say, they put people before profits in the electricity business.  And with no profit incentive, there was no incentive to provide more reliable electricity.  Those in government know they need more.  They tried to add more.  But socialist planners are just not good business people.  Or good electrical engineers.  And they’ve failed.  As an energy-rich nation suffers through humiliating rolling blackouts to ration what electricity they have.

Low Prices and Empty Shelves

People may get what they want in socialism.  For awhile.  At least, they feel good for awhile.  Knowing that the rich are finally getting theirs.  But rarely does life change for the better.  For the little guy.  Those in power live well.  But peasants are still peasants.  The hungry are still hungry.  Or, worse, dying from famine. 

With capitalism, you can always count on a grocery shelf full of stuff you want to buy.  Because prices and the profit incentive put the things you want on that grocery shelf.  Or it puts gas in your car.  Or you in housing.  You can’t always get what you want.  But your complaints will be more of the “I’d rather have steak than hamburger” variety than the “I’d rather have food than fair prices and empty shelves.” 



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