Economics

America’s Cartels

They enforce their monopolies with guns. But the surprise is that, in America, cartel agents also have official government badges…

I’ve been reading about economics lately. Refreshing myself, I guess you could say. I became strongly interested in economics only when I realized it affected me where it hurts the most: my pocketbook.

So, I became interested in the subject when I started working. I was working, earning decent money, and then things went crazy in 2008. First, the price of oil skyrocketed. Then, a gas shortage hit Atlanta in 2008 as a result of two hurricanes damaging oil refineries on the Gulf Coast. To get gas, you had to get up at 4am and drive to the nearest gas stations. I needed gas to get to work. I was willing to pay a lot of money per gallon just so that I could go to work and keep my job.

But the gas station operators weren’t allowed to raise the per-gallon price of gasoline, or else they would be decried as unfairly taking advantage of the situation — profiting at our expense. I would have welcomed higher prices. That would have meant shorter lines, or maybe no lines if the price was high enough. Instead, I encountered long lines and empty pumps.

THE GREAT RECESSION

Then, of course, as the price of oil began declining, the financial crisis kicked in. Bear Stearns had imploded in March of 2008. Then came the demise of Lehman in September. Housing prices began their great move downward. And so did the stock market. The Dow Jones finally hit bottom, and a 12-year low, in March of 2009.

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My concern was this: what am I supposed to invest in? I had grown up learning that I needed to invest in stocks and the stock market. But when I saw that pretty much everybody got sucked down the drain in the financial crisis, I asked myself: how did no one see this coming?

As it turns out, I later learned, a lot of people had, indeed, seen it coming. They just never received much air time or publicity. Even I knew the housing prices were astronomically high and unsustainable! I saw it for myself because I visited ground zero of the housing bubble. I spent a summer in California in 2005. While there, I pulled a flyer for a house for sale for $950,000 that was a single-story ranch consisting of 1600 square feet of finished space. I took it home as a souvenir.

HOW TO INVEST?

Being fresh out of school, what I knew was this: I didn’t want to lose my investment money. The prevailing theory of economics was busted because it failed to predict the collapse. The experts were blind to a housing bubble even as late as 2007! So, I turned to alternative viewpoints.

What I discovered were America’s cartels. Not like the Mexican drug cartels you hear about. I mean legitimate, government-supported cartels. Even though I remembered learning in high school that cartels were no good, I had no idea the US government actually enforces them in certain industries.

To refresh you, a cartel is a group of sellers (producers) who collude to keep their prices high. In a normal market arrangement, sellers compete against each other to drive down the price of their goods. Consumers like cheap goods, and producers like consumers’ money.

So, to gain more sales, companies lower their prices in an attempt to poach the customer base of their competitors. But then their competitors wise up to what they’re doing, so in response they lower their prices (if they can, without going out of business).

THE CARTEL ARRANGEMENT

But a cartel is a group of sellers who agree not to compete with each other. They agree to keep their prices the same: high. But, realistically, in a free market, this kind of arrangement won’t last for long. One of the sellers will be secretly investing in more productive machinery or technology that lets them produce the product for cheaper. Then, at the right time, they defect from the group. They drop their prices and attempt to out-maneuver the other guys. And of course, the others soon follow.

But the American cartels aren’t like that. You see, they have something that most cartels don’t: the backing of the US government. To keep the American cartels intact and prevent cartel members from defecting, the US government makes it against the law for any member of the cartel to do so.

Since we are taught in school that cartels are bad because they keep prices artificially high and extort the consumer, the American cartels take another approach. There’s no discussion of prices. Instead, they focus on certain “quality” requirements, mandated by law, that provide the appearance of protecting the public from fraud, or ensuring a minimum level of safety and health benefits.

But, in reality, they have the effect of keeping prices artificially high, same as a textbook case of a traditional cartel.

They don’t come right out and say that they’ve enlisted the help of the US Government in enforcing the cartel agreement. That would be shady and sound too conspiratorial. Instead, these companies who are members of the cartel announce that they are complying with the regulations of such-and-such federal agency to ensure the health and safety of the public.

Experts from the industry write the regulations for the industry. The regulations tend to favor the biggest companies who have the deepest pockets.

That means that none of the companies can decide to skip a requirement that is unnecessary in order to lower the price of the good or service. If any of the cartel members were to attempt to do this and step out of line, then the US regulators would step in and use the threat of fines, or jail time, or maybe even violence, to shove them back in line.

AMERICA’S BIGGEST CARTEL

The biggest of America’s cartels are the banks. The effect of the banking cartel on you and me is that it reduces the interest rate they pay us on our deposits. And, oh yea, they induce recessions every now and then.

To become a bank, you have to abide by certain federal rules and regulations. They are established and enforced by the Federal Reserve, which is the central bank.

The banks have to play by the rules established by the Fed, but they are rewarded for it. The banking cartel restricts competition. Not just anyone can open a bank and compete for our deposits. This means there are fewer banks offering better deals than the others to lure our business. They make greater profits because they don’t have to pay us as much interest on our investment capital that we lend them (in the form of our savings accounts).

On top of that, they get to be bailed out by the taxpayers in times of crisis. They reap the profits, but they pass the risk and the loss onto us in the form of government bailouts directly, like TARP in 2008, or indirectly through support from the Fed.

OTHER IMPORTANT CARTELS

Another major cartel is the medical cartel. They restrict entry. This limits the number of doctors. This keeps the prices of medical care high because there are fewer doctors competing over our money. There are fewer doctors around to offer us better deals.

Or, the existing doctors aren’t allowed to offer us better deals because that would violate the terms of their medical license, which is granted by the government. Even if cutting a corner to offer a cheaper price was of no consequence to our health, the doctor would lose his source of livelihood and be forbidden from practicing medicine ever again.

Related to the medical field is the pharmaceutical field. Pharmacy companies develop and sell new forms of medication to treat various illnesses. But the Food and Drug Administration (FDA) requires so much testing and analysis that only the richest firms can afford to undergo the medical trials required to “prove” the new drugs are safe. This restricts the number of medications available to us. Smaller companies may discover innovative ways to manufacture or produce new drugs that help us, but they don’t have the deep pockets required to do the testing.

Nutrional supplements, like vitamins, can cure or prevent certain diseases naturally. But they can’t be patented. This represents a threat to the American drug cartel who relies on patents, protected by the government, for revenue.

CONCLUSION

These are just a few of America’s cartels. There are many others, but these just may be the largest. At least, they have a significant impact on our daily lives.

The cartels use government-enforced rules to restrict competition. They promote the rules as necessary for “ensuring the health and safety of the public.” Most every profession is cartelized these days.

The engineering profession is no different. This quote from the National Society of Professional Engineers wears its cartel rights like a badge:

A century ago, anyone could work as an engineer without proof of competency. In order to protect the public health, safety, and welfare, the first engineering licensure law was enacted in 1907 in Wyoming. Now every state regulates the practice of engineering to ensure public safety by granting only Professional Engineers (PEs) the authority to sign and seal engineering plans, and offer their services to the public.

On the surface, the point of a professional engineering license is to “protect the public health, safety, and welfare.” In reality, it simply restricts the supply of engineers available to design buildings and structures. This keeps prices artificially high.

Allowing the government to license professions reduces the personal responsibility of the individual consumer. They relax because they don’t think they need to scrutinize the work and character of the outfit they are hiring. “The government has vetted them. So they must be good.”

And why not? They’re not allowed to make decisions on who to hire based on their own personal judgment. Instead, they have to submit to the criteria established by government officials. The consequences of this policy are reduced innovation and higher prices.

 

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