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November 2, 2007

Prices are magic

Today’s Downsizer Dispatch . . .

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Quote of the Day:

“Now let me state the present rules, the lawyer then went on,
These very simple guidelines, you can rely upon:
You’re gouging on your prices if you charge more than the rest,
But it’s unfair competition if you think you can charge less!
A second point that we would make to help avoid confusion…
Don’t try to charge the same amount, that would be Collusion!

“The Incredible Bread Machine” by R.W. Grant

Subject: Prices are magic

How many popular beliefs actually correspond to reality? Consider this one from Iran . . .

“The CIA has overthrown Iranian governments in the past. Therefore, the CIA must have been responsible for the Ayatollah Khomeini’s Islamic Revolution.”

Don’t laugh. The American public is equally susceptible to preposterous beliefs. For instance, many of us believe that oil companies fix prices to gouge us. We hear this theory every time gasoline prices rise.

But what do we hear when prices fall? Silence. No one accuses oil companies of conspiring to gouge themselves.

Here’s another inconvenient fact for the oil company conspiracy theories: Oil company profits are taking a beating right now, even though gasoline prices are high. Why are the oil companies doing such a horrible thing to themselves if they really have the power to fix prices?

The answer is simple. Wholesale oil prices are up because of high international demand, while domestic retail demand is down in response to high pump prices. Result: lower profits for the oil companies.

Price fixing theories ignore reality. No company has the power to set the price for anything. Prices are always dictated to companies by the interplay of supply and demand.

To really control prices you must have the power to interfere with supply and demand. Only monopoly government has that power. The evidence for this is abundant . . .

In the 1970s the federal government controlled the price of existing domestic oil, but not newly discovered oil or foreign oil. OPEC exploited this price control scheme to raise prices by restricting supply. The result was shortages and soaring prices.

Doomsday theorists claimed we were running out of oil, but notice how wrong that prediction has been over the past 40 years. Here’s what happened instead . . .

Congress deregulated domestic oil prices, domestic oil supplies started flowing again, prices fell, and the shortages ended. The return of competitive free market pricing forced OPEC to change its behavior. Cartel members raised production and lowered prices in order to better compete in the U.S. market, and with each other.

Something similar happened in the airline industry. Government removed its price controls. Supply soared and prices plummeted. Now most airlines can barely turn a profit, but millions of Americans who couldn’t afford to fly when the government was protecting them from corporate price gouging, now can. Go figure.

The same thing happened with trucking. Government lifted its controls and once again supply soared and prices plummeted. Here’s another one . . .

Many people believe that American car makers have conspired to deny us access to hybrid cars. But the truth is that hybrid cars cost more than they save when gasoline is $1.50 per gallon. Now that gasoline is approaching $3.00 per gallon hybrids finally make economic sense in the American market. Result: American automakers are about to flood the market with hybrids.

Japanese automakers produced hybrids first not because they were smarter or more environmentally friendly but because Japanese gasoline prices were much higher than U.S. prices. Price theories explain things. Corporate conspiracy theories rarely do.

Competitive free market prices have the power to solve a host of problems. Rising prices encourage innovation. Higher energy prices are already sparking innovations that will save energy, protect the environment, and even bring gasoline prices back down as increasing efficiency moderates demand.

The same thing can happen with health care. Government controls more than half of all health care spending. This gives government the power to set prices. The insurance companies then follow the prices set by Medicare and Medicaid. The result is the same as it was for oil, airlines, shipping, and every other government attempt to set prices.

You have a choice. You can either trust politicians to correctly calculate the correct supply and price of health care, and suffer the inevitable negative consequences, or you can harness the magical power of competitive free market prices to increase supply and lower prices.

Please choose the magical power of competitive free market prices. Please send a message to Congress asking them to stop further federal funding of personal health care expenses. Limit government funding of health care to the most dire safety net cases, and make that happen at the state level, not the federal.

Ask Congress to change its tax polices to enable Americans to fund their own health care without sending the money to Washington first. You can do this by using the personal comments portion of your message to Congress to request the following changes . . .

  • Remove the limits on how much can be contributed to a Health Savings Account (HSA)
  • Make insurance premiums tax deductible and allow them to be paid out of HSAs
  • Remove mandates on what kind of insurance people must have, thereby permitting companies to provide a variety of competing policies at a variety of competing prices

You can send your message here.

Thank you for being a DC Downsizer.

Perry Willis
Communications Director, Inc.

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