Earlier (July 9, 2012) I addressed the problem of juries
without economic understanding assuming that no one is really hurt when big
corporations or someone else’s insurance pays for a legal verdict. This mindset often causes corporations to minimize costs by paying a settlement rather than the added expense of a court battle where the odds are stacked so heavily against them. The point I made was that
whether it’s paid after a long trial or as a result of one of those
out-of-court settlements, the money does not come from some secret stash or
magic money tree. It comes indirectly
from you and me.
The sight of this wonderful spider web while on one of my
weekly nature walks reminded me to expand on this topic. When the fly or bug hits a spider web, the spider hiding in
the corner feels the vibration and quickly locates its prey. The signal is sent through the web and gets
back to the spider. For the spider, this
is good news.
On the other hand, when a corporation or government or
anyone else we do business with spends more money, the effect is the same, but
it’s bad news for us. Most companies are
in business to make a profit. When expenses increase, profit decreases.
To offset this they either reduce other expenses or increase
their prices. If an action affects a
whole industry, it’s very easy for everyone to raise prices. (Look at how different brands of gasoline go up and down at the same time when they all face an OPEC action or bad weather near the refineries.) We end up paying more for these cost increases whether the reason is higher
utility rates, shoplifting, legal actions, higher taxes, or anything else. We are all connected, like the web example and the cost comes back to us.
Take cigarettes as an example. States sued the tobacco companies. The cost of those legal settlements was merely passed on to smokers in the form of higher cigarette prices Since all companies were affected, no one was afraid to raise prices. The effect of the suit was equivalent to raising cigarette taxes, but raising taxes would have been perceived as "punishing" the wrong people. Ironically, after the settlement, tobacco companies' stock price and profits continued to rise. As it turned out, the Attorneys General looked like heros, the tobacco companies prospered and smokers paid the price.
A more recent example comes as a survivor of the Aurora, Colorado shooting is preparing to sue the theater. Who do you think will ultimately pay for that? Everyone who plans to see a movie at any theater in the future will be affected by higher prices to cover the additional liability costs.
Take cigarettes as an example. States sued the tobacco companies. The cost of those legal settlements was merely passed on to smokers in the form of higher cigarette prices Since all companies were affected, no one was afraid to raise prices. The effect of the suit was equivalent to raising cigarette taxes, but raising taxes would have been perceived as "punishing" the wrong people. Ironically, after the settlement, tobacco companies' stock price and profits continued to rise. As it turned out, the Attorneys General looked like heros, the tobacco companies prospered and smokers paid the price.
A more recent example comes as a survivor of the Aurora, Colorado shooting is preparing to sue the theater. Who do you think will ultimately pay for that? Everyone who plans to see a movie at any theater in the future will be affected by higher prices to cover the additional liability costs.
It is the same story with government spending. Decisions made
in Washington or your state capitol or town hall indirectly affect your
wallet. Local or state politicians, who
proudly declare that a new bridge won't cost you anything because it's federally funded, would like us to forget that our federal taxes pay for that bridge and for every other similarly funded project in America. It is our money. When governments force utilities to buy a certain percentage of their power from higher-cost "green" sources, we end up paying through higher electric bills. When governments subsidize a product or go deeper into debt, the subsidy or the interest on the new debt is paid for with our money.
It's important to remember that these things don’t happen in a
vacuum. Just as the vibrations of the
web reach the spider, the vibrations caused by added costs or higher taxes set up economic vibrations that eventually find their way to
our wallets. To believe in some magic money
tree or other isolated source of insurance, government or corporate funds is to delude ourselves. Many politicians and lawyers would be very happy if we continued to delude ourselves in this way.
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