Tuesday, June 29, 2010

"Passing On" Cost

Republicans like to pretend that all taxes have a magic effect: the cost of the taxes will immediately fall onto the average citizen. An obvious example is gasoline; any sort of "carbon tax"* would just be a tax on the little people, since the gas companies would just up the prices exactly as much as the tax.

This is fiction. Companies don't base prices on the cost of production, companies base prices on the price people are willing to pay.

A good example is the PS3. Sony just announced that it finally costs them less to produce the PS3 than its retail price. That's right, for years, the PS3 has cost Sony more to produce than they've sold it for; every PS3 sold is a "loss" for the company. There are a variety of reasons Sony was willing to have temporary losses for a long term strategy, but one thing is certain: Sony certainly wasn't passing on the expense of production to the consumer.  If they were, the price of the PS3 would go down with the drop in production costs. Instead, the price of the PS3 is based on a long term marketing strategy that has nothing to do with cost of manufacture. People are willing to buy a PS3 at this price, so it will stay at this price until the market goes dry, then they reduce the price again.

A couple years ago now, the price of gasoline doubled. It wasn't sudden, but over the course of a couple months, it went from less than two dollars a gallon to about four dollars a gallon. No where in the world was there an interruption to the production of oil. I believe the price went up because of market speculation based on rumblings from the Middle East that never resolved into anything more disastrous than business as usual. The prices eventually went back down, although they ended up a little higher than when they started, naturally.

For other examples, look at the price of food, which doesn't even track with inflation, since marketers know that people notice increased food prices. In any world where prices reflect the costs, every price would track with inflation, since it's just as hard to produce something regardless of the value of the dollar.**

Another example of inflation craziness is wages. The American median wage has been going down for the past decade or so because of inflation. This includes the artificial wealth generated by the Bush administration, almost all of which went directly to the super rich.

Complete change of subject: Republicans want to eliminate the deficit, reduce taxes, and only make superficial cuts to federal programs while increasing our commitment in the Middle East with a military already stretched beyond its ability. The problem with Washington politics isn't partisanship, it's a complete separation from reality. I wonder if the Romans just became so secure in their self-evident superiority that they became completely divorced from the facts in the same way.

The Tea Party is right that we need a new political force in the United States, but they're almost exactly wrong on what that political force should be. We need a generation of realists willing to do hard work and make real sacrifices, and the Tea Party is even further from reality than our current government.

*A carbon tax is the best way to reduce emissions. It would be simple, raise money for the government, and allow people to continue savings with every reduction of carbon production. "Cap and Trade" is basically a joke, with caps set so high that even if they were strictly enforced, humanity will still be extinct in a century or two.
**Naturally, this isn't precisely true when you're dealing with two kinds of currency that change exchange rates, but that isn't really relevant.

No comments: