Thursday March 24 , 2016
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The Regulatory Paradox

I had an interesting experience today.  I gave a presentation at one of our local hospitals to a group of doctors and staff about the economics of the healthcare reform bill.  I also received an email from one of my dear friends with an editorial attached that had been written by Howard Fineman of Newsweek.  The reason I mention both in the opening paragraph is that the events provided irrefutable evidence that the American people have been sold a bill of goods by this administration and the Congress when it comes to this legislative abomination.

I am a political economist by education and experience.  One of the things we ask government to do for us to support capitalism is to provide the environment for fair and free markets.  This can be done in a number of ways that do not interfere with market processes.  However, when the central government of the United States decides to regulate something--in the name of fair and free markets--the unintended consequences of those actions are exactly the opposite. 

When the government determines that an industry needs regulation, the intention is most likely to protect the consumers from some nefarious actions on the part of greedy suppliers.  Perhaps this is true in some instances, but for the most part, such actions inevitably lead to decreased, not increased, competition, more highly concentrated markets, more price inelasticity (this is a big deal) and the certainty of ever increasing prices that have to be paid by consumers.  As our old friend Monk would say--here's what happens.

In truly competitive markets we have many suppliers, easy entry and exit into the market and because no single vendor or small group of vendors control major market share, the suppliers must take the price dictated by consumers in the market.  This is called price taking, for obvious reasons.  This situation is best for the consumers and forces suppliers to manage costs internally.  Each supplier is in that particular market because he or she could overcome the opportunity costs of being in the market.  The suppliers make that determination based on where they might have comparative advantage.  They make that determination based on where they give up the least--overcoming less opportunity cost--to enter that market.

When the government decides to regulate an industry, their actions increase the cost of entry into the market.  Likewise, suppliers that are in the market already have increased costs.  They now must make the determination if they can stay in the market.  Typically, only those enterprises that are large enough to survive under more restrictive circumstances are able to stay in the market.  With fewer suppliers in the market, these large enterprises now control a much larger share of the market, thus moving from being price takers to being price searchers--searching out the highest price available in the market.  This concentration of market share in a smaller number of suppliers can actually facilitate collusion that inevitably leads to price fixing.  Further, because  price is now being controlled more heavily by suppliers and not consumers, the demand for the commodity is more than likely inelastic--less sensitive to price.  Such is the case with medical services.  When we need health care or health insurance, we will likely pay about anything to get it.  One does not need to be a Harvard economist to see where this is going.

When the government so heavily regulates the actions of health insurance companies, thus raising the opportunity costs of all 1300 companies now in that business, many of those companies will get out of the health insurance business because they simply cannot make a profit there.  Only the largest companies will survive.  So, rather than increasing competition among insurance companies, the national government actually inhibits competition.  Worse, these large companies, to continue to make profit, will do exactly what the national government says--they become an extension of the government and with the weight of the national government behind them, use the same coercive techniques to make determinations about who gets what when.

I can understand why doctors working nearly around the clock might not be up to speed on this type of legislation, but there is no excuse for a person of Fineman's status to reveal such an incredible lack of economic knowledge.  Unfortunately, Fineman thinks it's a good thing that only a few companies are doing the government bidding for the sake of the people.  He states that big companies will do fine under Obamacare and he is absolutely correct.  Unfortunately, the people are the ones that lose out on every count under these conditions.

Fineman is typical of the power elites and faux-intellectual elites that think they know more than we do.  What is clearest is that Fineman, those of his ilk, most members of Congress, most members of this administration and nearly all progressives have never had a class in economics.  I can say without reservation that the students in my principles of economics class have a firmer grip on the mechanics of supply and demand than any of those mentioned above.

The Regulatory Paradox, then, is when government interferes in market processes, competion is greatly and irreparably damaged and the consumer ultimately pays the "price" for this interference.  This is just one more reason to run all of them off Capitol Hill come next November.  As the bumber sticker states, "If you think education is expensive, try paying for ignorance."  Well, folks, we are going to pay big time.