Monday, November 3, 2008

The Obama Inflation Machine

Inflation is the most worrisome disease that can hit any country's economy. It can seriously devalue that nation's currency and literally destroy the purchasing power of the poor, and those on fixed incomes. In the world of active employment, salaries always lag behind any inflated costs for goods and services; especially for essentials such as food and clothing. And, as usual, it is always the poor who are the biggest losers when inflation spirals out of control.

I've said before that I am not an economist. But I did study economics in college. I have seen its practical application in both business and in our economy. One thing I do know is that if you overstimulate demand for a scarce commodity, you will see prices rise. That's part of the basic economic principal behind the Law of Supply And Demand. I also know that businesses and corporations don't have a pile of money that they leave sitting around; waiting for the government to collect it, due to the latest tax plan. Any excess money is generally used to expand the business, which typically means hiring more people. Further, any business gets its income from selling things. Ultimately, they will offset any higher costs, like new taxes, by passing those higher costs on to you and I in the form of higher prices. If, because of overseas competition, they are unable to pass their increased costs along, they will have to reduce expenses, and that usually means that people will get laid off or may lose their jobs completely.

This is why I am concerned about Mr. Obama's tax, regulation, and spending plans. It makes no sense to give each person a $500 tax credit when your policies will cost them one or two thousand dollars more per year for the products and services they need to buy. This is especially true for the poor, and for those of low and fixed incomes. Based on Mr. Obama's expressed policies, I see serious (society affecting) inflation ahead of us. Here are the areas I see being hard hit:

1. Healthcare Costs.

Right now, there are about 46 million uninsured in this country, or about twenty percent of our population. Both John McCain and Barack Obama want to provide full healthcare insurance for Americans. However, the Obama plan is more coercive and government dependent than that of John McCain. The problem with either plan (but more so with the Obama plan, which appears to extend government healthcare coverage to illegal aliens) is that you are going to throw 46 million newly insured at our health system. Assuming that the current system is based on providing primary and secondary care for about 250 million people, that it is a lot of new demand that will be placed on the current providers of healthcare. To complicate the demand scenario, there is a push for preventative care; especially by Barack Obama. This fact, alone, will increase the frequency of doctor's visits and that will place a whole lot of demand on an already overtaxed primary care system. The bottom line? Demand will totally outstrip the supply of healthcare. Prices can only go up, and the lines will only get longer for any and all healthcare services; from doctor's visits to hospital care. You only have to look to the U.K. and Canada to know this to be true.

2. College Education Costs.

Obama wants to make college more affordable. This is because the cost of higher education is spiraling out of control. The reason is that we have too many students (too much demand) for the available education in this country (the supply). As long as colleges and universities can keep turning away students in the first year, costs will continue to go up at a rate that is faster than inflation because the demand is just too high. Now, Obama wants to place even more demand on the system by making college education more affordable through his new, $4000 tax credit. This is insanity. If we want more affordable higher education in this country, the focus should be on broadening the availability of colleges and universities to increase the supply. To address the student as the driver of the problem is simply foolish economics. It is truly the tail wagging the dog.

3. Energy Costs

Like the rest of the Democrats, Barack Obama will exclusively focus on using wind and solar for our future energy needs. Even though he has loosely "implied" that he might drill for oil, don't even expect that to be the case if he gets into office. He plans to spend $150 billion over the next 10 years to implement wind and solar systems. That's $15 billion a year. But, this is a complete ruse. To the uninformed, that sounds like a lot of money. But, to put that number into perspective, our largest of 6 major oil companies, Exxon-Mobil, will expend 30 times that $15 billion in a single year to bring their share of oil products to market. In essence, Barack Obama's plan is like trying to kill a dinosaur with a flyswatter. Further, the only purpose of solar and wind is to replace our current domestic production of electricity. That production, for the most part, is being cheaply and primarily produced from domestic coal and domestic natural gas and some nuclear energy. Oil and gasoline are not even being addressed by Obama's plan. Wind and solar's only purpose is to reduce the effects of global warming and to satisfy his special interest group, the environmentalists/global warmists. It isn't to make energy cheaper for America. If it was, wind and solar would be cropping up all over this country on its own.

While Obama fiddles with solar and wind, the true energy reality of this country is that we have over 200 million vehicles (cars, trucks, buses, boats, and airplanes) that need oil-based fuels to operate. With an "average" age of over 9 years, those vehicles aren't going to go away anytime soon, and new oil-dependent cars are rolling off the assembly line everyday, and will continue to for many years to come. We are losing 2 percent or more of our domestic oil supply every year. It is a scarce commodity, and we need to make it survive. If you put it all together, Mr. Obama will do nothing but dramatically increase our energy costs in the future. The only reason costs have come down now is because of the possible economic downturn. Once that is over, expect prices to skyrocket because the needed supply to meet the demand won't be there.

4. All Other Domestic Product and Service Costs

For most any American business, Mr. Obama's plans for protectionism, increased taxes, mandated healthcare, and the ease of unionization, will, at the very least, just drive prices for goods and services through the roof. To pay for all this, companies will just raise prices and you and I will be the ultimate footers-of-the-bill for Obama's new policies. Worst case, we could see the end of some American businesses. That end could easily come to those who are already struggling against foreign competition, and who are unable to raise prices in the face of the new Obama policies.

Take for example increasing taxes on businesses. When taxes are applied across the board, there is a rollup effect. That's because 99.9 percent of all businesses rely on other businesses to exist. Every business has suppliers and subcontractors that they utilize to conduct their own operations. Those suppliers could be as simple as a pencil manufacture. And, often, those suppliers and those subcontractors have their own suppliers and subcontractors that they depend on. When taxes are applied, and prices increased, those costs have to be passed on. They are compounded all along the supply chain. A business will not only have to raise prices for its own increased tax burden; but it will also have to raise prices to compensate for the increased costs that are being passed on to it by a supplier who is compensating for its own increase in taxes. There ain't no Santa Claus in this process.

The same compounding effect will take place when a small business is now forced to provide healthcare insurance to all of its employees. That new cost could be rather high. Further, unionization could seriously result in higher salaries being paid. Put it all together and many businesses will have no other choice but to raise prices in order to compensate for higher taxes, higher salaries, and high healthcare insurance costs.

Even Mr. Obama's plan to increase income taxes and apply FICA to those making more than $250,000 a year will have an inflationary effect. Someone making that amount of money will see their income reduced by at least $33,000 a year under his plan. That's a lot of money. As a result, you can expect those people to look to replace that lost income by either demanding a higher salary, or by looking for a higher paying job elsewhere. These people are getting a salary above $250,000 because they have a high value to a company, and because they would have a high value to any other interested companies. This could result in high prices being passed on to you and I. If prices cannot be raised, then some "lower salaried" employees could lose their jobs to compensate for the higher salaried personnel getting raises.

There is no free ride. All these promises of 95 percent of Americans paying less tax under an Obama administration are just more smoke and mirrors. You and I will pay, and we will pay heavily for all those who think they're getting a free ride. Mr. Obama has two different sized hands. The small hand is the one you see, and that's the one giving you the hand out of lower taxes, free healthcare, or a government check in the mail. The other hand, the big one that you can't see, will be the one that's in your wallet when inflation exceeds any benefit or payout that you thought you were getting from this guy. Mark my words!

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