Price controls, write-downs, and ObamaCare

I'm still guest posting over at The Bobo Files once a week. This week's entry deals with the write-downs that several major companies are going to have to do because of ObamaCare. Last week's post dealt with price controls and ObamaCare. Check them out when you can.

And here come the price controls

From The Washington Post:

President Obama will call for new government power to regulate insurance-rate increases as part of comprehensive changes to the health-care system that the White House will unveil on its Web site Monday, senior officials said.

The proposal -- part of a package that a top official said will serve as a "starting point" for the bipartisan health summit Thursday -- comes as Obama has pointed to recent rate increases as evidence that his proposed changes are necessary.

Last week, Health and Human Services Secretary Kathleen Sebelius drew attention to a California health insurance company, Anthem Blue Cross, which planned rate increases of up to 39 percent. Obama mentioned the increases in his weekly radio address and at a town hall in Nevada.

The new proposal, which a White House official described Sunday night, would give Sebelius new authority to oversee, and potentially block, rate increases that are deemed unfair.

VH: I'm sure that this will work out like other price control schemes have since time immemorial---It will fail miserably. It will make insurance premiums even more unaffordable. You would think that all those Ivy league economists that buzz around the White House would have a clue.

Price Controls And Government Handouts Strike Again

From the WSJ:

Dairy farmers created traffic chaos in Berlin, blocked milk-processing plants in France and protested at the European Union's headquarters in Brussels on Monday, seeking more aid to cope with a drop in milk prices...

...Dairy farmers say price declines of as much as 50% over the past year have forced them to sell milk below cost. EU farm ministers began two days of talks Monday and were expected to discuss ways to increase dairy farmers' incomes. France and Germany have promised to coordinate support action to boost milk prices.

The above is another stellar example of price controls and the ills they bring. Price controls have negative consequences because price ceilings/floors mean a refusal to pay the true costs of a resource. It also illustrates how government, by choosing to subsidize and support one group over others, creates a sense of entitlement and dependence that is ultimately counter productive to the society that ventures down that path.

Speculators = Vampires!

Some of the theories that have been bandied about regarding oil prices and speculators have reached new levels of dogma. The little poisonous gem that I happened upon was a piece that I found (via The Liberal Journal) on the Counterpunch website titled “Gas Price Gouging,” by Mike Whitney. Here’s an excerpt:

This is not about shortages or scarcity; it's about gaming the system to fatten the bottom line. The whole scam is being executed by the same carpetbagging scoundrels who engineered the subprime fiasco; the investment bankers. The Wall Street Goliaths are using the futures market to recapitalize their flagging balance sheets after sustaining huge losses in the mortgage-backed securities boondoggle. That's the whole thing in a nutshell. Now they're on to their next swindle; distorting the futures market with gargantuan leveraged bets on food and oil.

Yes, it’s the carpet-bagging investment bankers. And don’t forget the Illuminati and the Free Masons. They have a hand in everything. Here’s another zinger:

In fact, oil is being deliberately kept off the market to keep prices high. Consider this: if supply isn't keeping up with demand then why aren't there any lines at the gas stations like there were during the '70s?

Somebody needs to tell this fellow that the reason that there was rationing of gasoline and long lines to gas stations (that would then run out of gas) was due to the implementation of price controls by President Nixon. Once wholesale prices for gasoline rose beyond what a retailer could afford to buy (they had to make some profit to pay employees, taxes, utility bills, etc), gas stations ran out of gas. This meant that there was less refined gas to go around. Somehow, Mr. Whitney believes that the lack of rationing and long lines is proof that there is plenty of gas and that prices are being manipulated. The fact that prices are allowed to rise and that it is in effect a signal of the healthy elasticity of the market - there are no long lines - is proof that the mechanism of supply and demand is working as it should. Mr. Whitney does not understand basic economics.

While the futures market is a convenient scapegoat, it is simply a price discovery mechanism. Here’s one example of how the futures market works nicely: One of the reasons that Southwest Airlines has been able to be successful in recent years, while other airlines are faltering, is due to its prescient ability to lock in lower fuel prices with the futures market: It acts as a hedge against volatility and inflation. The futures market is not without risk. If a company bets incorrectly, they could lose money. It isn’t the perfectly gamed system that Mr. Whitney and others believe it is.

Note that many commodities have spiked in price over the last couple of years. It isn’t just oil. Does that mean that corn, wheat, copper, and fertilizer are being manipulated by speculators too? Should congress make laws to meddle in the trading of those commodities as well? The rise in oil is occurring globally, not just in the U.S. Attempting to stifle speculators in U.S. financial markets will do nothing to the global price of oil.

So, what’s the answer? Why has oil jumped to its record highs? The primary answers are the weak dollar and good old supply and demand, folks. I know that this is not as sexy and as attractive as a conspiracy theory. But there it is. If the Fed ever decides to fight inflation and strengthen the dollar, commodity prices would fall like a rock. It’s as simple as that. Alan Reynolds of the Cato Institute explains it best:

There is no mystery behind the rise in oil prices. They rose too high too fast because of booming demand for oil for petrochemical products, electric power and shipping from many emerging economies (particularly China, India and the Middle East). Meanwhile, the supply of oil slipped in the US, Mexico, Venezuela, Nigeria and Russia.

Now, I’m not saying that the futures and options markets have absolutely no effect on the global price of petroleum. All I’m saying is that its effect is greatly exaggerated for political reasons.

When Congress returns from vacation expect more heated rhetoric on this issue; there are currently at least ten bills submitted by Democrats attempting to address “speculation.” I blame congress for legitimizing the arguments put forth by bloggers like Mr. Whitney: No quarter is given to facts or to the unintended consequences that may follow bad legislation.

Mexico imposes price controls on food

I guess Mexican president Felipe Calderon has taken a cue from Venezuela’s Hugo Chavez and has decided to ruin his country’s food supply. How long before we start to read about shortages in some of the 150 foods targeted for price control? Well, at least this hapless experiment is set to lapse after six months:

Food manufacturers promised Mexico's government to freeze prices on more than 150 food products Wednesday to help families cope with rising costs.

President Felipe Calderon announced that prices for goods such as cooking oil, flour, canned tuna, fruit juices, coffee, ketchup and canned tomatoes will remain fixed until Dec. 31. (Read More)

Americans don’t want to return to the 1970’s

From CNN: As much as Americans fret over the rising price of gas, one thing worries them more: the possibility of having to wait in long lines to buy rationed gas.

A CNN/Opinion Research poll released Tuesday shows that 55% of those surveyed are more worried about long lines at gas stations and rationing than about the high prices that drivers have paid in recent months. The poll shows 40% of the respondents are more concerned about the high prices.

While gas rationing is not expected at this time, it was a hallmark of the 1970s- era energy crisis, when drivers lined up outside gas stations and sales of gas were limited to certain days of the week.

However, at that time, gas was in short supply, which is not the case today.

I’ll tell you this, if current politicians repeat the mistake of enacting price controls in order to placate the public and to pander for votes, we will see gas stations run out of gas and the return of rationing.