Day 1175 – Econ 101 advanced class

Thursday, July 18, 2024

I saw John Stewart interview Bill O’Reilly the other day. O’Reilly was saying the economic wasn’t so great because the price of gas and groceries has gone up under Biden. To which I say, “Duh.”

When asked why were prices going up O’Reilly said he didn’t know. Or maybe it was it the President’s fault. I forget which. 

Okay, time for some Econ 101 with a little nuance.

If you ask an economics professor why are prices going up he or he will say too much money chasing too few goods. I know this because I’ve asked them.

This is a simplified view of the world to be sure. If asked to give more details the Econ professor will say people have more money and they are therefore willing to pay more for the goods and services they want.

Again, this is a simplified view and it assumes a perfect economic world where the only forces working on prices is how much people are willing to pay for something. It ignores another important part of the economic picture and that is how much the suppliers are able to get away with raising prices. 

When does this happen? Well, if you have something and nobody else has it then you can charge whatever you want – as long as people really need what you’ve got. Let’s say it’s a medicine that keeps that person alive.

If you ask an Econ professor what can drive down prices setting they will say, Competition.

Ah ha, so if someone is selling widgets for $10 and everyone body needs one then a person could come in and sell a widget for $9, thus driving down the price. The fellow at $10 will have to lower his price to compete.

It turns out that competitors will check other people’s prices and adjust their prices accordingly. This is sometimes referred to as collusion, or price fixing. (I can hear the cries now, “No it’s not I just saw what the other person was charging.”)

As an example the price of insulin is high, even though the process is well known and free of patent or copyright. Why does the price keep going up? (I’m not talking about government capping, just the price without regulation.) It’s because there are only three makers of insulin in the U.S. I have heard professors of medicine knowledgeable about this topic say you need four to start seeing competition and the price start to come down. I don’t know if that’s the correct number but you need several competitors to get the price to start coming down and you can’t have them colluding.

So let’s return to Bill’s statements about the price of things being high. Why is that? He said he didn’t know what, or if, anything the President can do to change that.

Certainly, after Covid people had access to more money and prices went up. But that isn’t the only reason. If you’ve seen the charts showing that most of what consumers need, like food, meat, etc. is in the hands of a few large corporations. There isn’t enough competition to force these companies to reduce their prices.

What could the President do? What could Congress do? Well, let’s look at history. Teddy Roosevelt was faced with a lack of competition in many industries, notably coal and sugar. The coal workers went on strike. The companies wouldn’t negotiate with the union. Teddy told them to negotiate. They said no. He said negotiate or I’ll bring in the army and run your mines. They negotiated. That’s how this country got the 40 hour work week, and overtime.

In the case of Standard Oil, John Rockefeller would lower the price of gas until others went out of business, then he was the only game in town and could charge whatever he wanted. FDR and Congress forced them to break apart. That’s when Mobil and what became Exxon was born. Years later Republican administrations let Mobile and Exxon merge. Why is gas going up? Not enough competition between oil suppliers. 

What did President Biden do when the price was going up? He released millions of barrels of oil from the government reserves, thus forcing the price of gas to go down, It stabilized. That’s a fancy word for saying y it stopped going up. Otherwise we’d be paying $4.50 a gallon, like we were at one point under the previous President, who did nothing about oil and gas prices. Oh wait, maybe he held a press conference about it? That’s what he did for infrastructure. He held so many pressers about infrastructure that it was a running joke in Washington. He never grasped the idea that to do something in Congress you have to pass a law, called a bill. No one in the Trump White House seemed to work on that.

What could “WE” do now? Well, if Congress would pass some legislation to break up these big corporations   so they had to compete, prices would come down. That’s the side of this problem that the folks who bemoan the fact that prices are gong up seem to not mention.

Enough for now.