Sumner: ObamaCare Likely to Raise Restaurant Prices

     He says it will in the long run, and likely in the short run. He corrects Yglesias who he says is wrong in saying this about restaurant owners complaining that ObamaCare will force them to raise prices.

     "Matt Yglesias makes an uncharacteristic error in mocking a restaurateur who claims that Obamacare will increase prices:

This is self-refuting nonsense. The only situation in which it would make sense for 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.

      "The restaurant industry has relatively free entry and lots of firms (meaning it’s what economists call “competitive” or “monopolistically competitive.”)  Here are some facts about those industries:

1.  Higher variable costs raise prices in both the short and long run.

2.  Higher fixed costs raise prices in the long run.  (Which is just another way of saying that all prices are variable in the long run.)

      "So he’s wrong in the long run, and probably even a little bit wrong in the short run, as workers are usually considered variable factor.  However the short run impact will probably be pretty small–it will mostly come out of profits.  In the long run competitive and monopolistically competitive industries earn zero economic profit, and hence all cost increases are passed on to consumers."

      http://www.themoneyillusion.com/?p=20006&cpage=1#comment-234028

      He says this however, because he is assuming the Neoclassical competitive theory of the firm. This is shown by the fact that he says Yglesias is right if it's a monopoly industry. 

     
      "Matt’s argument does apply to monopolies, when the cost increase is a fixed cost.  My favorite example is big contracts for athletes.  Many sports fans blame high ticket prices on the big contracts, but the causation goes the other way.  Owners set prices at a level that maximizes revenue.  Then owners and athletes fight over the pie.  As TV money made the pie much bigger, athletes were able to grab much bigger salaries.  But if they didn’t get the money, it would go to owners.  BTW, I’m not saying teams are a pure monopoly, but rather that the entry into the industry is controlled.  The issue of free entry affects pricing far more than whether something is a monopoly or has numerous competitors."

        Notice that he's even saying that in an industry that is not a pure monopoly but that entry is controlled Ygelsias would still be right. So his argument here comes down to whether you believe in the competitive theory of the firm. The next question would be how much most companies actually resemble this purely competitive model.  This sentence is key as it shows that Sumner-as most mainstream economists do-a purely competitive firm:

        "In the long run competitive and monopolistically competitive industries earn zero economic profit, and hence all cost increases are passed on to consumers."

         It isn't surprising that Sumner presumes the Neoclassical theory of the firm-it would be news if he didn't and most mainstream economists do. I'm not sure but Yglesias may well assume it too-though I don't believe that he's a trained economist-though he is now Slate's 'business and economics correspondent.' In any case he gets a different result here. Of course while Ygelsias says that higher prices might raise revenue, they also might not. 

     As to the Five Guys franchise holder who's whining about ObamaCare precipitated this whole discussion, he's joining a group of big business owners who are feverishly trying to avoid the costs of ObamaCare. 

       "Mike Ruffer, a Five Guys franchise owner who operates eight of the chain restaurants in the Durham, North Carolina area, has decided to join the restaurant industry’s war on health care reform, claiming that the additional costs of providing his workers with health care coverage will raise the prices of hot dogs and burgers for customers who patronize his establishments."

           “Any added costs are going to have to be passed on,” Ruffer told the Examiner:

Ruffer was the star witness at a Monday Heritage Foundation seminar on the impact Obamacare will have on small businesses. He is typical of many: Because he has enough full time employees to activate the law, he faces either coughing up the money to provide health insurance or paying a fine of up to $3,000 per worker.

Ruffer initially thought he would escape the law because he created each restaurant as its own company. But the law doesn’t recognize that distinction,so now he’s trying to determine if he can fire enough workers, or cut enough hours, to slide out of the grasp of Obamacare.

     "As the Examiner explicitly states, Ruffer is actively trying to “escape” the health reform law, and has had his mind made up about it for a while. That’s become an increasingly commonposition among large employers — particularly in the service industry, where large restaurant chains have been threatening to cut workers’ benefits by shifting costs onto them, cut back on wages, cut back on hours, or raise their products’ prices. Ruffer has, by his own admission, considered every single one of those options. But that isn’t a reflection of the reform law itself — it’s a reflection of companies’ desire to protect their own bottom line by having their low-wage employees go uninsured or obtain coverage through Medicaid, rather than provide them with basic benefits."

   "To date, these employers’ efforts have not been met with much public enthusiasm, and have even resulted in massive PR backlashes. Employers who choose this route are also putting themselves at risk of driving away potential employees who would rather take jobs that offer more robust benefits, as the vast majority of employers plan to keep offering health coverage plans under Obamacare. "

     http://thinkprogress.org/health/2013/03/12/1703151/five-guys-obamacare-escape/

     As TP notes, he's still in the minority of employers. Indeed, this kind of makes you think about Morgan Warstler's Auction the Unemployed scheme. While I think it interesting-very thought provoking actually and worth talking about whether you want to do it or not as it clarifies a lot-this story shows that so often it's the big business guys-who Morgan is not trying to help-who are really worried about supposed costs that are too high to make a profit. 

      http://diaryofarepublicanhater.blogspot.com/2013/03/morgan-warstlers-bold-gambit-to-auction.html

    Most employers, however, are not fighting ObamaCare-either out of a good sense of pr or they don't see it in the apocalytpic terms of this group trying to do anything to circumvent it. You wonder why you would rather cut employees or even cut back hours to avoid it. I mean why not just shut down? You won't have to pay any health care benefits then. 

   "From the minute that President Obama signed his landmark health reform bill into law, conservative critics have beenissuing dire warnings about how expensive Obamacare will make employer-sponsored health coverage, asserting it would be cheaper for larger companies to drop coverage for their workers — and pay a fine if their employees obtain federally subsidized coverage through Obamacare’s insurance exchanges — rather than provide basic health benefits. As it turns out, those predictions aren’t actually becoming reality."

     "According to Modern Healthcare, a new “survey of nearly 800 large and midsize employers found that just 6 percent of respondents intend to completely exit the healthcare system over the next three to five years” over concerns about the penalty that Obamacare will level against large companies that don’t provide adequate benefits for their workers."

    "That assessment stands in stark contrast to some Obamacare opponents’ more outlandish claims. Major conservative institutions and healthy policy experts — including the Heritage Foundation and Douglas Holtz-Eakin, who is a former Congressional Budget Office (CBO) director — have predicted that anywhere between 20 million and 35 million Americans will lose employer-sponsored insurance because of Obamacare. Even respected consulting firm McKinsey and Co. predicted that “30 percent of employers will definitely or probably stop offering [employer-sponsored insurance] in the years after 2014,” the year that most Obamacare provisions — including the employer mandate — kick in."

     http://thinkprogress.org/health/2013/03/01/1657041/obamacare-employers-wont-drop-coverage/