In Defense Of Price Gougers

They pop up in almost every crisis. During hurricanes, they sell boards for windows and bottled water at inflated prices. After a flood, they always seem to have a stockpile of bleach to kill mold in water-damaged houses. During the current crisis, these keyboard capitalists have snapped up supplies of antiviral masks and hand sanitizer and are attempting to profit by reselling them online.

A report by USA Today found that prices of about one in six products sold online had spiked to levels that were 50 percent above the 90-day average. This included a 10-pack of N95 medical masks which normally retailed for $18.20 selling at $199.99 and a 12-pack of 8-ounce bottles of Purell hand sanitizer that had increased from $30 to $159.99.

While some state and local governments, as well as online retailers themselves, are attempting to crack down on price gouging, the reality is that price gougers are performing an important service for the public. By allowing prices to rise in tandem with demand, price gougers help to ensure that items remain available to those who need them when panic buying takes hold.

We have seen examples of this mob mentality in recent weeks. About three weeks ago, when the Coronavirus first started to spread in the US, I was one of the people who decided to buy a few masks as a precaution. Unfortunately, I made this decision a few days too late. When I went around town and looked on the internet, buyers had picked stores clean of every N95 mask, with the exception of a couple of $50 respirators that I found at a nearby Home Depot.

Price sensitivity kicked in and I left these on the shelf. I knew enough about the virus to know that my family was not in a high-risk category so I rejected the idea of spending $200 to outfit my family with something that we would probably never use, but, as I walked away, an older lady was putting one of the respirators into her cart.

As it turns out, the CDC now says that masks don’t do much to protect you from COVID-19. Instead, masks should be worn by those who are already infected to prevent them from spreading the virus when they cough or sneeze. An exception to that is people who are caregivers for Coronavirus patients.

The problem is that retailers did not adjust their prices to match the sudden increase in demand for masks. If you didn’t get a mask before they sold out, you probably can’t find one now. As soon as a new shipment comes in, they sell out because the price is not allowed to rise.

That’s where price gougers come in. When they take some of the available supply of masks and raise the price, it discourages people who don’t need them from buying them just in case. These days, if you see a pack of masks for $20, you’ll grab it. If you see a pack of masks for $200, you’ll think twice and not buy unless you really need it.

The run on toilet paper is another case of panic buying that could be averted by raising prices. My wife recently ran into a woman who had an entire shopping cart loaded with toilet paper. She was stocking up because she believed that “the ships were stuck in the middle of the ocean” and couldn’t deliver their cargo of precious booty paper to American stores. Because the TP was available at regular price, the woman took all she could carry, leaving little or nothing for the next customer who may be down to his last roll at home. If the store had increased its price by five or ten times, the hoarder would not have bought a veritable cartload of TP and would have left some for other shoppers who might need it more.

So when well-meaning people crack down on price gougers, they are effectively helping to create shortages. This was the case with Matt and Noah Colvin of Chattanooga, Tenn. The brothers bought $17,000 worth of hand sanitizer and were reselling it on Amazon along with wipes, masks, and other supplies. Amazon delisted their items and now the Colvins are stuck with a garage full of medical supplies that they aren’t allowed to sell. Many people around the country would be willing to pay inflated prices for the items, but instead, they are gathering dust.

While high prices anger people, the reality is that buyers have a choice of whether to enter into the transaction. If you don’t need to pay $70 for the Colvin’s hand sanitizer, then you won’t. If you are willing to accept their price, you probably really need it.

Price gouging is essentially a free market activity. Eliminating price gouging requires price controls, and, as conservatives have pointed out for decades with respect to health care, price controls invariably lead to shortages and rationing in periods of high demand.

While price gougers won’t win many friends, they do form an important part of the balance between supply and demand. If you need a medical mask or hand sanitizer these days, the odds are good that you’ll have to get it from a price gouger who kept people like the hoarder lady from locking it in their own closets.

Originally published on The Resurgent

Bernie And AOC Team Up To Attack Credit Cards

An epidemic of economic illiteracy seems to have inflicted both parties. While Republicans suffer from President Trump’s fixation on taxing imports to make America great again, Democrats, eager to prove that they also fail to understand basic economic principles, have unveiled a proposal for price controls on credit cards.

The proposal is the brainchild of the Democratic Party’s two leading democratic socialists, Sen. Bernie Sanders (D-Vt.) and Rep. Alexandria Ocasio-Cortez (D-N.Y.) and is targeted at what the pair call “exorbitant credit-card interest rates” in a statement. Their “Loan Shark Prevention Act” would a 15-percent federal cap on interest rates and empower individual states to establish lower limits.

Channeling Ron Paul’s references to “banksters,” Sanders said, “The reality is that today’s modern-day loan sharks are no longer lurking on street corners breaking kneecaps to collect their payments. They wear three-piece suits and work on Wall Street, where they make hundreds of millions in total compensation and head financial institutions like JPMorgan Chase, Citigroup, Bank of America and American Express.”

Per the statement, the pair claims that the median credit card interest rate is currently 21 percent and argues that there is no reason for banks to charge such a high interest rate.

“There is no justifiable reason that a person—no matter their background—should be charged an interest rate higher than 15 percent,” Ocasio-Cortez said. “Rates higher than 15 percent are predatory debt traps, designed to keep working families underwater and allow predatory companies to enrich themselves off the misfortune of others.”

Like many bad ideas, this one sounds good on the surface. Bankers make an easy target for populists and everyone hates paying credit card bills.

In reality, however, high interest rates on credit cards do serve important purposes. One of the most important purposes is to discourage consumers from carrying even larger amounts of revolving debt. By March 2018, Americans carried $1.027 trillion in debt on their credit cards. Without high interest rates, the amount of indebtedness would be even higher.

By making revolving credit expensive, banks encourage consumers to only charge to their cards what they can pay off at the end of the month. If you pay off your balance every month, you don’t pay any interest at all.

High interest rates also signal the risky nature of credit card loans. Credit card default rates are down from a high of 6.7 percent during the Great Recession, but credit card payments are often one of the first things to stop when times get hard. With an average balance of $6,354, banks can be left on the hook for many thousands of dollars when credit card holders default.

Even though credit card debt can be hazardous to your financial health, credit cards are a near-necessity of modern life. The availability of high interest rate cards allows many people who are considered credit risks to get a card that would not be available to them otherwise. If the Sanders-Ocasio-Cortez bill becomes law, the effect would be a shortage of credit for many Americans. It is axiomatic that price controls, such as an interest rate cap, lead to market shortages.

In the early days of credit cards, the now-ubiquitous plastic payment devices were used almost exclusively by the wealthy. It has only been in recent decades that credit cards became commonplace among the middle- and lower-income groups. Under the Democratic proposal, it’s likely that the trend of easily available credit for the common man would be reversed.

Some would argue that reducing credit card use would be a good thing. I have sympathy for this argument as a guy who has paid off thousands of dollars in credit balances more than once. Credit cards are a financial tool that can be very destructive if used improperly.

The problem with the Bernie-AOC solution is that government intervention in the markets would inhibit people who need access to credit from getting it. Rather than reducing credit card use overall or capping interest rates, a better solution would be to teach consumers to use credit responsibly.

Until then, I'm sure that Bernie and AOC would give voters the guarantee, "If you like your credit card, you can keep your credit card."

Originally published on The Resurgent

Gun shortage shows future of Obamacare

The news that the threat of new restrictions on the Second Amendment has spurred a sharp increase in the number of Americans seeking to buy guns should not come as a surprise to people who consider the incentives created by the actions of government. In many ways, the run on guns reported last week by Examiner can shed light on what can be expected as the reforms of the Affordable Care Act go into effect.

In economic terms, the run on guns is the result of an artificial increase in demand. This is driven by the threat of interrupting the supply of guns, particularly assault weapons like the AR-15. People who think that they might want to own an assault rifle are buying one now, while they are still legal, rather than waiting.

The effect of this increased demand is two-fold. Some retailers, like the pawn shop in Cartersville, increase the price of their AR-15s to react to the increased demand. As the price of the guns increased, more and more buyers found themselves priced out of the market. Eventually the price and level of demand would find equilibrium, where the number of guns and the number of buyers would be equal.

Other stores, like Atlanta’s Bass Pro Shop and the Barnes Store in Carrollton, that did not increase their prices to reflect the new levels of demand, found that their stock of the guns was quickly depleted, leading to a shortage. The price that they charged was based on the old, lower level of demand so there were too many buyers for the supply of guns.

The lessons on supply and demand learned from the increased demand for guns apply directly to the changes that are forthcoming in the market for healthcare. When the Affordable Care Act goes into full effect next year, the Congressional Budget Office estimates that there will be an additional 14 million Americans who become covered by health insurance. This represents a massive increase in the demand for health care services. This will be a permanent increase in demand rather than a temporary one as with the gun buyers.

The assumption made by the architects of the Affordable Care Act was that most of America’s uninsured were young people who chose not to purchase insurance because they were healthy. It was believed that these young people would purchase health insurance policies to comply with the law, but then not use them. In effect, the young and healthy were being forced to purchase insurance to subsidize the older and sicker people.

The assumption that new insureds will not use their insurance is probably not a good one. The Kaiser Foundation estimates that by 2016 the average annual premium for an individual health insurance policy would be approximately $5,000. For a family, the average premium would be $12,500. The national average salary is $42,979 according to the Social Security Administration. This means that 11 percent of the average individual’s salary will go to pay for health insurance. If the worker is the single breadwinner supporting a family, health insurance costs will eat up nearly 30 percent of his income. (In some cases, these insurance premiums will be paid in part by government subsidies. The Kaiser Foundation offers a calculator to estimate premiums and subsidies here.) It seems likely that if a person is forced to spend thousands of dollars each year for insurance, they will use it as much as possible. They will avail themselves of the preventive care services in their plans and go to the doctor for each sniffle, cough, sneeze and stubbed toe. This will translate into almost immediate shortage of doctors.

The dramatic increase in demand for health care services will disturb the equilibrium in the market. In a free market, the increase in demand would lead to an increase in prices. In the real world, health care is not a free market. Prices are already somewhat controlled by the government, through reimbursements for Medicare, Medicaid and Social Security, and by insurance companies with negotiated rates.

There are several possible responses to the increased demand. The most obvious would be to increase the number of doctors to match the new demand. The problem is that doctors take years to train. Medical school takes four years after obtaining an undergraduate degree. After medical school, new doctors do a one year internship, followed by four to six years of residency, depending on their area of specialization. Essentially, it takes a decade to fully train a doctor, not counting the undergraduate degree. Even if we start training multitudes of new doctors now, they will not fully enter the system for another ten years. To cut the training time short would sacrifice the quality of the education and the depth of experience.

A second possibility would be to allow doctors to raise their prices. As with the AR-15s in the pawn shop, when prices rise, more buyers find that they don’t really need that product after all and demand falls. To some extent, insurance companies are trying to control the cost of health care by using increased cost sharing already. Many health policies are moving away from flat copayments to a model where the insured pays a percentage of the cost of their care. In theory, this means that the insured will shop for better prices and use less care. In reality, few people know how much their care will cost until they have already received it.

The problem with letting prices increase is that one of the stated goals of the Affordable Care Act was to reduce the cost of health care (or to at least slow its rate of increase). Higher prices are certain to be unpopular with voters as well as politicians. Prices are already starting to rise because of new coverage mandates and community rating according to a study by the American Academy of Actuaries detailed in Forbes.

The other alternative is for the government to impose price controls. The effect of price controls can be seen in the gun retailers who maintained the price of their AR-15s below the actual market rate. High demand means that there are not enough guns, or health care, to go around. Doctors will not accept new patients. Existing patients may not be able to get an appointment when they need one. Waiting rooms will overflow and wait times will be long. Patients who are truly sick might not be able to see a doctor when they really need one.

Think this can’t happen? It already has.

Because government reimbursement rates for Medicare patients are below market rates, there is already a shortage of doctors for Medicare patients. The Atlanta Journal reported last year that many Georgia retirees are unable to find a doctor who will accept Medicare. The problem is not limited to Georgia, however. According to the New York Times, many doctors around the country no longer accept Medicare. The Times notes that there are already thousands fewer doctors than needed and that the problem will be compounded by the new health law and retiring Baby Boomers.

Massachusetts, where Romneycare served as the prototype for Obamacare, is also suffering a severe shortage of many types of doctors. The Associated Press reports that seven of 18 medical specialties were in critical or severe shortages in 2012. These include shortages of basic specialties such as family medicine, internal medicine and general surgery. Predictably, this means that patients in Massachusetts have long wait times. According to Boston.com, only half of Massachusetts primary care physicians are accepting new patients. Once a patient finally locates a doctor who will see them, the average wait is 45 days for an appointment. In spite of the subsidies in place under the law, half of the respondents still say that affordability is still the most important health care issue.

The problems with government controlled health care are not limited to Medicare and Romneycare. As Examiner reported last year, shortages of health care are common in countries where health care is run by the government. In Canada, the Montreal Gazette reported in 2012 that wait times for cervical, breast and ovarian cancer surgery is three times longer than government bench marks. This is a death sentence for many cancer patients. In England, the Independent reported in 2011 that the National Health Service is openly rationing many types of health care. In 2008, the Daily Mail described how patients were left in ambulances for up to five hours so that hospitals could meet government targets for timely care. One of the most horrifying examples of government health care run amok comes from the Netherlands where CNN reported in 2004 that health officials were working with doctors to create guidelines to kill people with “no free will” including children, the mentally retarded and people in comas. In 2012, Wesley Smith, senior fellow of the Discovery Institute, estimated in the Daily Caller that as many as six percent of Dutch deaths involving end of life career involved doctors intentionally killing their patients.

Around the world, government control of health care costs lives when people are unable to get the medical care that they need in a timely manner. It seems that no government and no commodity, whether it is health care or guns, is immune to the economic laws of supply and demand.

Originally published on Examiner:
http://www.examiner.com/article/gun-shortage-shows-future-of-health-care-under-obamacare?cid=db_articles

Obamacare facts: Death panels and rationing

The phrase “death panel” is a politically charged term that originated with Sarah Palin in 2009. Palin coined the term in reference to the Affordable Care Act’s requirement that Medicare pay for end-of-life counseling sessions. Her original Facebook post on the subject read, “The America I know and love is not one in which my parents or my baby with Down Syndrome will have to stand in front of Obama’s ‘death panel’ so his bureaucrats can decide, based on a subjective judgment of their ‘level of productivity in society,’ whether they are worthy of health care.” Factcheck.org called “death panels” one of 2009’s “whopper[s] of the year.”

The ACA does not contain the phrase “death panel” and the end-of-life counseling cited by Palin was not mandatory. This does mean that Palin was totally off the mark however.

The ACA does establish an unelected board of bureaucrats who will be tasked with cutting Medicare spending. According to a description of the Independent Payments Advisory Board (IPAB) in the New England Journal of Medicine, the board will consist of 18 appointed members (including three from the Department of Health and Human Services) and will be required to submit proposals to reduce per capita Medicare spending in years in which spending is projected to exceed target rates.

The NEJM notes that the IPAB is prohibited from rationing care, increasing copayments, restricting benefits or modifying eligibility criteria. One of its few options is the ability to cut payments to doctors and, after 2020, specific providers such as hospitals and hospices. Overriding the IPAB’s recommended payment cuts would require a three-fifths vote of the senate. This means that stopping the IPAB’s cuts would be very difficult and most likely require a bipartisan effort.

The NEJM also points out that currently the IPAB’s recommendations for payment cuts for transactions through private health insurance are not binding. These price controls on private medical transactions would have to be approved by Congress, which, the NEJM says, “may not be able to cap Medicare expenditures without addressing private expenditures as well.” This points to price controls for private medical costs as a means of controlling Medicare’s runaway costs.

A consequence of price controls is fewer available doctors. If providers cannot charge a market price, the supply of providers will decrease. This is already happening in Medicaid. The Wall Street Journal reports that 31 percent of doctors already do not accept new Medicaid patients because the entitlement pays them at a lower rate than private health insurance companies.

Price controls are effectively a form of health care rationing. As price controls cause shortages, allotting the available care will fall increasingly fall upon government bureaucrats.

Rationing is the inevitable outcome of price controls and shortages. Donald Berwick, the administrator of the Centers for Medicare and Medicaid Services, said in an Associated Press interview, “The decision is not whether or not we will ration care. The decision is whether we will ration with our eyes open. And right now, we are doing it blindly.” President Obama appointed Berwick during a senate recess to avoid confirmation hearings.

Other countries with government administered health care have followed the price control and rationing model. Canada’s universal health care system has led to long wait times “for practically any procedure or diagnostic test or specialist consultation in the public system” according to the Wall Street Journal. In Canada, only half of ER patients are treated “in a timely manner by national and international standards.” Perhaps this is why the premier of the Canadian province of Newfoundland came to the United States in 2010 when he had to have heart surgery instead of going to a Canadian hospital. In fact, many emergency patients in border areas are sent to U.S. hospitals for treatment.

In England, the Daily Mail reported in 2008 that a government edict to treat patients within four hours of check-in had led hospitals to keep patients in ambulances for up to five hours before being allowed access to the emergency room. The four hour wait as measured by the government did not begin until the patients left the ambulance and entered the hospital. Over 45,000 patients waited more than one hour for access to the emergency room. Leaving patients in ambulances also means that the ambulances are not available for new calls.

In 2011, the Independent reported that budget cuts were forcing the British National Health Service to overtly ration health care. Two-thirds of the national health trusts in the U.K. are rationing treatments for “non-urgent” procedures. Examples of rationing include only allowing hip and knee replacements for patients in severe pain, delaying cataract surgery until the patient’s sight is substantially affected, requiring seven cases of tonsillitis within a year before allowing children to have a tonsillectomy, and mandating “exceptional circumstances” and six months of monitoring before inserting “grommets” in a child’s ears to improve hearing.

These economic laws hold true even in the United States. In Massachusetts, which has been cited as the prototype for Obamacare, the Boston Globe reported in November 2011 that tiered health plans with limited networks that force consumers to endure long wait times or pay more out-of-pocket to be treated sooner are becoming more common in the state. An analysis by the Cato Institute found that since Massachusetts enacted health care reform wait times have increased. Wait times for a doctor’s appointment in Boston, already longer than other metropolitan areas before the reform, have increased while they have improved in other cities. Health care costs in Massachusetts have increased faster than the national average and adverse selection, the sickest people choosing the best insurance plans, has led some insurers and employers to stop offering the most comprehensive plans.

Earlier this month, Massachusetts Governor Deval Patrick signed a health care price control bill into law. The New York Times reports that the new law will cap both public and private health care spending “so that it will grow no faster than the state economy.” The law sets up a commission to monitor increases in spending. The commission can demand an explanation from providers or insurers whose costs exceed the target rate. It can also fine organizations up to $500,000 if it finds that they did not make a good faith effort to reduce costs.

A 2009 Rasmussen poll indicated that only 32 percent believed that Massachusetts health care reform was a success. A more recent WBUR poll found that 78 percent still consider health care costs a significant problem for Massachusetts. Sixty-three percent say that costs have gotten worse over the past five years since the reform was enacted.

The discussion of quality adjusted life years brings the discussion of rationing full circle back to Palin’s original quote. Quality adjusted life years (QALYs) is a calculation that measures “the benefits gained from a variety of medical procedures in terms of quality and life and survival for the patient” according to Oxford University’s Bandolier Journal.

While the ACA currently forbids the use of QALYs “to determine coverage, reimbursement, or incentive programs,” an article in the New England Journal of Medicine is openly critical about the law’s prohibition, saying that the “notion that the country can avoid the difficult trade-offs that cost-utility analysis helps to illuminate” is “magical thinking.” If the law were amended to allow the use of QALYs, it might mean that older patients would be unable to receive certain surgeries because the procedure offered more benefit to younger people. It might also mean that babies like Trig Palin would be passed over for people in a more productive stage of life.

As the demand for health care increases due to more people being covered with health insurance, there are certain to be shortages since the supply of doctors and hospitals is not increasing. Rationing and shortages in such situations commonly take the form of long wait times for treatment and price controls. This has occurred in a multitude of other countries where government-controlled health care has been tried. Given the shoddy, backroom manner in which the ACA was written, it is unlikely to contain any new and different approaches that will work where previous government health care bureaucracies failed.

President Obama and the Democrats may have been able to pass the Affordable Care Act and get it past the Supreme Court. As yet, they have been unable to repeal the laws of economics.

Read the rest of this article on Examiner.com:

http://www.examiner.com/article/obamacare-facts-death-panels-and-rationing