Everything Barack Obama knows about economics he appears to have learned from the Original Mattress Factory: Eliminate the middle man and save! He believes this applies to health insurance, student lending, and who knows what else?
If the president would spend even a few moments in the quiet contemplation he supposedly loves so much, he’d ask one simple question: If middlemen raise costs, why doesn’t every retailer eliminate them? How can middlemen survive? Are they all just the lazy brothers-in-law of business owners?
To pose the question is to see the answer: “middlemen” are simply a part of the production-and-delivery chain. They actually perform useful tasks, from holding and delivering inventories to bearing and diversifying risk. These are tasks that can be performed “in-house” or through business-to-business transactions, but they must be performed. Firms that can get all these tasks accomplished at lower cost by doing them in-house have every incentive to do so. The continued existence of independent middlemen is simply evidence of the general phenomenon of lowering costs through specialization noted by Adam Smith 236 years ago.
What happens when the government becomes the middleman? Obviously, the intermediate tasks must still be performed, so the only way costs can be reduced is if the government performs those tasks more efficiently than private, for-profit firms would. Obama thinks that this is achievable because the government doesn’t take a cut as profit. This is nonsense.
Profit is what’s left over after revenues have been collected and costs have been paid. If you run a high-cost firm, your customers won’t pay you more in revenue simply because you ask for it. If you don’t meet the competition, you’ll lose those customers. The route to higher profits is to lower costs. Period. This is how middlemen survive–by performing intermediate business tasks at lower cost than their clients could do them in-house.
Now, there are some people–just not very many–who believe that the government can perform most business tasks at lower cost than private firms can. These people are called “socialists.” To the rest of us, the idea that bureaucrats whose compensation does not depend at all on finding ways to lower costs will actually deliver lower costs is absurd.
Barack Obama keeps saying that the free-enterprise system delivers the highest possible standard of living, but only as a prologue to arguing that one industry or another could perform better if only its tasks were taken over by the federal government. Whether Obama makes this argument as a true socialist or as a true ignoramus is unimportant.
What’s important is that he loses this election.