Economics 101: you can’t increase costs on businesses without increasing costs on consumers

I found this via Twitter:

to which Mark Buehner replied:


Here’s the story, from The New Republic:

Obama’s New Rules for Coal Plants Are a B.F.D. The Ensuing Political Fight May Be Even Bigger.

Conventional wisdom holds that second term presidencies rarely yield accomplishments and that this second term president, in particular, has lost the ability to get much done. In one week, President Obama has a chance to prove that the conventional wisdom is wrong.

And he can do it while helping to stop the planet from cooking.

On June 2, Obama will to unveil a new set of federal regulations on power plants, designed primarily to keep coal-fired plants from spewing so much carbon into the atmosphere. The hope is that these new regulations will slow down climate change—at first incrementally, by reducing emissions from existing plants in the U.S., and then more dramatically, by providing the Administration with more leverage to negotiate a far-reaching, international treaty on emissions from multiple sources.

Along with other steps the administration has taken, like setting higher fuel standards for cars and trucks, the new regulations could make climate change action one of Obama’s signature achievements—something historians will cite alongside Obamacare, rescue of the auto industry, and the Recovery Act. As Jonathan Chait has written in New York magazine, “By the normal standards, of progress, Obama has amassed an impressive record so far on climate change.”

Of course, a lot hinges on what the EPA actually proposes next week—in particular, whether the new regulations are strong enough to make a difference. It also depends on whether the new regulations can withstand the furious political and legal assault that conservatives, parts of the energy industry, and climate change deniers have launched.

To prepare you for next Monday, and everything to follow, here’s a quick guide to what’s going on and why it’s so important.

Of course, you can read it all at the link. But the big kicker is that the Obama Administration wants to impose tighter regulations on existing plants, not just new ones, and that means, unless the Republicans in Congress can block them, added expenses for current suppliers of electricity (pun most definitely intended.) And that means higher costs for consumers of electricity: for individuals, for factories, for businesses, really for everybody. Not only will the electric utilities pass those costs down to the individual in the form of higher electric bills, those costs will be passed down to the commercial users, who will, as you would expect, pass their increased costs down to the consumers. As we have pointed out before, the end consumer pays the total costs of all production, including all taxes, regulatory expenses, and costs of doing business.

I’ve used this example before: when I buy a gallon of milk, I am paying the corporate and fuel taxes of the dairy farm, I am paying the Social Security and Medicare taxes and the diesel fuel taxes and all of the other taxes on the trucker who hauls the milk from the farm to the dairy processor and bottler, I am paying the corporate income, Social Security and Medicare, utilities, excise, unemployment compensation and other taxes of the dairy, I am paying the diesel fuel and road usage and all of the other taxes for the trucking company which hauls the packaged milk from the dairy to the grocery store, and I am paying all of the taxes heaped upon the grocery store. Then, in the end — so to speak — I am paying a fee to the Borough of Jim Thorpe for the, umm, disposal, of the digested byproducts of the milk.

That quote was related to taxes, but the same applies to every expense the businesses bear, throughout the chain of production. The end consumer is the one who does not take the product and sell it further down the line, and those are almost always individuals. If the businesses don’t pass down all of their costs, then the businesses lose money, and eventually go out of business.

And that’s why Mr Cohn tells us that this is a BFD, because every penny of added costs is going to be imposed on the public.

Wages are stagnant, The Wall Street Journal reported, slightly trailing the low inflation rate, in a report that most Americans already knew was true without seeing the numbers.

From The Wall Street Journal. Click to enlarge.

Economic growth remains sluggish, advancing at a seasonally adjusted annual pace of less than 2% for three straight quarters—below the prerecession average of 3.5%. That effectively has put a lid on inflation, which has been near or below the 2% level the Federal Reserve considers healthy for the economy. With demand for labor low, prices not rising fast and 11.5 million unemployed searching for work, employers aren’t under pressure to raise wages to retain or attract workers. Businesses are changing how they manage payrolls. Economists at the Federal Reserve Bank of San Francisco in a recent paper said that, in the past, companies cut wages when the economy struggled and raised them amid expansions. But in the past three recessions since 1986—and especially the 2007-2009 downturn—companies minimized wage cuts and instead let workers go to keep remaining workers happy. As a result, to compensate for the wage cuts that never were made, businesses now may be capping wage growth. “As the economy recovers, pent-up wage cuts will probably continue to slow wage growth long after the unemployment rate has returned to more normal levels,” the researchers said.

Globalization continues to pressure wages. Thanks to new technologies, Americans are increasingly competing with workers world-wide. “We are on a long-term adjustment, as China, in particular, but all developing countries, get their wages closer to ours,” said Richard Freeman, an economist at Harvard University. According to Boston Consulting Group, there will be only a roughly 10% cost difference between the U.S. and China in making products such as machinery, furniture and plastics by 2015.

The upshot: Even though rising home prices and stock values are making some people optimistic, many workers can’t push for higher pay—crimping their spending and potentially the recovery. “Workers feel like they have absolutely no bargaining power,” said Robert Mellman, an economist at J.P. Morgan Chase & Co.

Many companies have learned the dirty little secret: they don’t have to give raises to keep employees, because employees have little opportunity to go elsewhere for more pay. If the Obama Administration adds additional costs for no additional gain, companies are going to be under even more pressure to not give raises, to not increase their labor costs any further.1 President Obama is pushing for an increase in the minimum wage, but as we have previously noted, even the CBO estimates that such a raise will cost jobs, and that an increase in the minimum wage is likely to result in clustering more people closer to the minimum wage, as workers currently earning more than the minimum are unlikely to see raises that keep them at proportionally higher wages. In the long run, with all of the Obama Administration’s oh-so-nobly-intended actions taken together, the American people wil be poorer in real terms when Mr Obama leaves office than when he entered . . . and he entered during a deep recession.

I would like to think that this is all because no one in the Administration understands economics and business in the slightest, but the more probable answer is that at least some of them do, and they just don’t care. It is going to take a long time to undo the damage that this President has done to our economy.

  1. The Obama Administration acknowledged that roughly two-thirds of small businesses will see their health insurance costs rise due to the rules imposed by the Department of Health and Human Services under the Patient Protection and Affordable Care Act. That’s yet another cost of labor being added to businesses, which will make the giving of raises less likely.

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