By Karl Smith, Contributor More from the annals of things I can say without actually analyzing any data. Matt Yglesias writes: The only situation in which it would make sense for [restaurateur Mike]  Ruffer to raise prices is if price increases will on net lead to higher revenue. And if price increases will lead to higher revenue (which they might) then it makes sense for Ruffer to raise prices no matter what happens with Obamacare. In fact, Ruffer himself articulates the truth later which is that Obamacare is going to reduce his profits by about one-eighth and he (and any investors in his business) will eat the loss. With corporate profits as a share of the economy at an all-time high, nobody’s going to cry for him either. Its common for business folks to say that they will pass along X or Y cost to their customers. Indeed, this is how they see the world and probably how they respond on a gut level. Yet, as Matt hints at, this is fundamentally at odds with the notion of revenue maximization — and by extension profit maximization with no change in supply. What’s fun/cute/ironic is that the restaurateurs response only makes sense if you note that he doesn’t really understand the restaurant market. What he understands is how a restaurateur should respond to incentives which arise in the process of restaurateuring – which is different thing all together. In particular, he will raise his prices and he will see his profits fall: both from higher employment costs due to Obamacare and from decreased effective demand due to his price increase. In a growing economy – which is where rules of thumb are born and bread – lower profits mean that the restaurant business will look less attractive both to money-only investors and to owner-chefs. Analysts will say things like, “store traffic has shown a marked decrease in the last 18 months while unit costs have risen.’ Fewer restaurants will be started. However, because the economy is growing so is the demand for restaurant services. This means that the natural increase in demand will be focused more heavily into the existing restaurants and Mike will see his effective demand rise and his profits return to the previous level. Now that profits are up [analysts will be typing: traffic growth has resumed and the one time cost increase is behind us] more investors will get behind restaurants, more restaurants will open, competition will increase and Mikes profits will stop rising and stay at the equilibrium level. However, this all happened not because customers or even in the long run investors were forced to “eat the cost increase from Obamacare.” It happened because the growth of the restaurant industry was temporarily constrained. Indeed – though the probably also didn’t realize it – that is what the architects of Obamacare wanted. They wanted more health care for the poor. This implies transferring real resources that were employed somewhere else in the economy towards caring for the poor. The only …read more
Source: FULL ARTICLE at Forbes Latest