Saturday, November 15, 2014

The Gruber Wakeup Call on American Economic Knowledge

by Jerry Collette, Guest Contributor

Jonathan Gruber made headlines recently with his statement that Obamacare passed because of "the stupidity of the American voter."

Is he correct? Is the American voter really stupid? If you take him literally, he's incorrect. The American voter is not stupid.

However, that's probably not what he really meant. Most likely, what he meant was that many American voters lack a basic knowledge of economics. If that's the case he's, unfortunately, absolutely right, and what he says is especially true for liberal, socialist, and progressive voters who usually vote for Democratic Party candidates.

Stupidity or Lack of Knowledge
What's the difference between being stupid and lacking knowledge? Let's take two Nobel Prize winners as an example, one in physics and the other in medicine. Obviously, neither of them is stupid. However, in each other's field, they would, most likely, lack significant knowledge.

Lack of Knowledge of Economics
Why do so many Americans know so little about basic economics? Most liberal, socialist, or progressive ideas that relate to economics would fail to stand up to a basic economic analysis. So, liberals, socialists, and progressives, who have been dominating the American education system, have been misleading us on economics for many generations. Jonathan Gruber is just the one who got caught, red handed, admitting it on tape.

Fortunately, very few liberals, socialists, or progressives are as deceptive as Jonathan Gruber. Most of them are simply innocent victims of people like Jonathan Gruber, deceived about economics and educated with falsehoods. However, while they may have good hearts and really want the best, not only for their fellow humans, but for nature as a whole, they have been passing on their terrible misunderstandings of economics for many generations and compounding the problem. It's time to turn this around.

Basic Economics is Easy
Many economists claim economics is very complicated and hard to understand. Don't believe that for a moment. Basic economics is quite simple. Most people use it quite well their our daily lives without even realizing it.

Let's examine some basic economic principles. First, we'll start without using any numbers, except zero. Later, when we use other numbers, we'll use very simple ones, like $1.

Supply, Demand, Price, and Quantity
The laws of supply and demand are not complicated. As prices go up, more sellers will sell, but fewer buyers will buy. As prices go down, more buyers will buy, but fewer sellers will sell.

In a free market, there is an equilibrium point where the market naturally finds the price where the supply quantity and demand quantity equal each other. This is often graphed like the image below.

  • The vertical scale on the left represents price.
    • Zero is at the bottom.
    • Higher prices are above that.
  • The horizontal scale on the bottom represents quantity.
    • Zero is at the left.
    • Higher quantities are to the right of that.
  • The blue line is the supply curve.
    • At a price of zero, the quantity supplied is the lowest.
    • As price goes up, supply goes up.
  • The red line is the demand curve.
    • At a price of zero, the quantity demanded is the highest.
    • As price goes up, demand goes down.
  • The point where the supply and demand curves cross is the price where the supply quantity and demand quantity equal each other.
    • This is often called the market equilibrium point.
    • The dotted lines lead to the price and quantity where supply and demand are equal.
The Price of a Cup of Coffee
Here's a little story to demonstrate the laws of supply and demand using just a few simple numbers. A nonprofit organization was giving away free coffee at its general meetings. At a typical meeting, members and guests would consume about fifty cups of coffee.

The organization was facing a budget crunch. At a board meeting, the subject of the free coffee provided at the general meetings came up. Some board members wanted to stop serving it, altogether. One of the board members proposed that, instead of giving coffee away for free, they'd charge $1 per cup. They agreed.

At the next general meeting, a large sign went up and an announcement was made stating that coffee was now $1 per cup. However, instead of fifty cups of coffee, they sold only ten. How did that happen?

Let's look at the very bottom of the graph where the price is zero, the old price. At that price, the demand quantity for coffee was at its highest, fifty cups. However, the supply quantity at this price is zero; the organization was unwilling to provide coffee at this price anymore, and nobody else stepped forward to provide it for free, either.

The new price of $1 would be somewhere up the graph from the bottom. As the price went up, the supply quantity went up; the organization was now more willing to supply coffee at the general meeting. However, at the higher price, the demand quantity went down from fifty cups of coffee to ten.

That wasn't hard, was it? Did it make sense?

Don't believe it when people tell you that economics is difficult. The laws of supply and demand are basic common sense.

Surpluses exist when supply exceeds demand. In a pure free market, surpluses do not last very long. Some sellers, but not all, will lower their prices. Buyers will tend to buy from the lower priced sellers. At lower prices, some sellers will leave the market and decrease supply, but more buyers will enter the market and increase demand. The free market will find the price where the supply quantity matches the demand quantity.

Shortages exist when demand exceeds supply. In a pure free market, shortages do not last very long. Some sellers will raise their prices. Some buyers, but not all, will buy the higher price. At the higher price, more sellers will enter the market and increase supply, but more buyers will leave the market and decrease demand. The free market will find the price where the demand quantity matches the supply quantity.

Government Interference
When governments interfere with the free market, distortions occur. These distortions create inefficiencies in markets.

Government interference in the free market can take many forms. Let's cover some simple examples.

Restrictions on Supply
By restricting supply, prices go up. Restrictions on supply can take many forms. Two common forms are regulation and licensing. Suppliers who can meet the regulations and licensing rules tend to lobby for even stricter laws to keep competitors, usually smaller businesses, out of the market. 

These are forms of crony capitalism that are typically sold to the voters as consumer protection. However, the net effect to consumers is higher prices for standards that many consumers may not even want.

Price Supports
As discussed above, the free market will tend to find the price where the supply and demand quantities are equal. However, sometimes, suppliers who want to sell at prices higher than the market price will lobby for price supports.

At artificially higher prices, more sellers will supply, but fewer buyers will buy. Then, the government usually buys the surplus with tax money. Consumers pay for this in two ways: first with higher prices, and second with higher taxes.

This is another form of crony capitalism. It is usually sold to the voters as a way to protect a vital industry. Small family businesses in the favored industries are featured in the press to appeal on the voters' heartstrings, but the biggest beneficiaries of these programs are usually big businesses.

Price Ceilings
As discussed above, the free market will tend to find the price where the supply and demand quantities are equal. However, sometimes, the government will limit prices on certain things.

At artificially lower prices, more buyers will buy, but fewer sellers will sell. This creates shortages. Rent control is a great example of this. In city after city where there is rent control, the stricter the rent control, the harder it is to find rental units.

Subsidized Purchasing
When the government provides funding for buyers to make purchases, buyers are not paying for their purchases out of their own pockets. So, buyer demand goes up, and buyers are willing to pay more. With added demand from buyers at higher prices, sellers tend to raise their prices.

Subsidized purchasing is really a price support in disguise. Subsidized student loans are an example of this. The rise in the cost of higher education has been far closer to the rising rate of government student loan subsidies than it has been to the rate of inflation.

The student loan program is another form of crony capitalism sold to voters as a consumer benefit. While some students have benefited from government subsidized student loan programs, the biggest beneficiaries have been banks and educational institutions.

On the flip side, many students have either been priced out of getting a higher education or priced out of schools they would have otherwise been able to afford. Many, many more students have been saddled with unbearable student loan debt.

Subsidized purchasing also encourages unsustainable waste. Often, buyers who would, otherwise, not be in a market, end up demanding, then wasting, valuable supply. 

An example of this is emergency room use. Because many people can visit emergency rooms for free, they use them instead of going to doctor's offices. This puts a higher demand on emergency rooms, unnecessarily wastes valuable emergency room resources and, sometimes, in the process, wastes the lives of people who really need the emergency room services.

Subsidized Purchasing Combined
With Restrictions on Supply
When the government subsides purchasing but restricts supply, demand goes up, but supply stays the same, so shortages occur. Barack Obama and the Democrats promised that this would not happen with Obamacare, but anyone who understands economics knows that it's inevitable.

Obamacare gives millions of people subsidized access to medical care. This creates a huge new demand for medical services.

In a free market, new supply can come forward to meet the added demand. However, the field of medical care is not, in any way, a free market. Almost every part of it is highly regulated. It takes about a dozen years to make a new licensed doctor. Furthermore, Obamacare restricts prices, which will restrict supply from providers who are already licensed.

Health care rationing under Obamacare will be inevitable, just like it is in Canada and the United Kingdom.

Suppose the government decides to tax buyers of coffee at $1 per cup. The tax is an increase in the price. Demand for coffee will go down, but, because the price increase does not go to the sellers, supply will not go up.

Suppose, that, because taxing business is easier to do politically, the government decides, instead, to tax the sellers of coffee at $1 per cup. What will happen? Most sellers will only be willing to supply coffee at $1 per cup more. At that price, demand will go down. 

Who really pays the $1 per cup tax?

Taxes on Business Are
Taxes on Consumers
There is no such thing as a tax on business. In order to stay in business, sellers have to pass added taxes on to buyers. Whenever politicians tell you that they're going to tax businesses, recognize that as a lie.

They're taxing consumers. They're just doing it deceptively, just like Jonathan Gruber, Barack Obama, and the Democrats did with Obamacare.

Application to Obamacare
In designing Obamacare, Jonathan Gruber, Barack Obama, and the Democrats discussed taxing insurance policies. They knew that the American people would object to that. So, instead, they decided to tax insurance companies, believing that the American voters would be too stupid to know the difference.

American voters aren't stupid. They just lacked knowledge of basic economics.

Jonathan Gruber admitted on tape that the net result of taxing insurance companies was the same as taxing individual insurance policies. Now, with a basic understanding of economics, you know it, too.

You didn't need a PhD in economics from Harvard to figure it out, either, did you? It's just common sense.

Pass This On
American voters need more knowledge of basic economics. Democrats, liberals, socialists, and progressives have been misleading us about economics for far too long. It's time to turn this around.

Jonathan Gruber has given the American voters a huge wakeup call.

Will the American voters answer that call and wake up?

Will you?

Help answer the wakeup call. Pass this article on to your friends and loved ones. Post it on social media. Link to it.

Further Reading
Here's an article on supply and demand as it applies to the minimum wage. To some people, it's clear that raising the minimum wage to $10 or $15 an hour will reduce the demand for labor. The idea of raising it to $100 an hour makes it obvious that a rise in the cost of labor will reduce its demand. Extreme examples sometimes make concepts crystal clear.

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