The week of August 19, 2024: The Good Gouger, fiscal policy, China, and much, much, more.
The week of August 19, 2024: The Good Gouger, fiscal policy, China, and much, much, more.
A week or so on, and the great price-gouging/price controls debate rages on. Now we’re being (sort of) told that the vice president was “only” talking about a possible federal law against price gouging in the aftermath of a hurricane-style emergency, rather than wider price control legislation. Much of this, I reckon, has been an idea being road-tested. Suggestions of wider powers went down poorly, so what’s now being floated is Plan B.
I was struck by this tweet from August 16 by the Washington Post’s Catherine Rampell who had earlier written an article highly critical of what had then seemed to be Harris’ proposal:
I wrote about the policy her campaign sent to reporters this week, which she then backtracked from today. Even the lawmaker who *wrote* the bill I described as the likely template for Harris’s policy (the bill with price controls) thinks she endorsed it.
In a series of tweets on August 19, Rampell revisited the issue, commenting that:
[T]here’s still no actual “proposal” that has been released. So I’m not sure what people are evaluating when they say her “gouging proposal looks mild” or whatever.
In the New York Times (August 21), Jim Tankersley wrote this:
People familiar with Ms. Harris’s plans say the ban she envisions is nothing like price controls. Her plan, they say, would be modeled on dozens of existing state laws prohibiting price gouging, the sort of laws that prevent stores from quadrupling the price of snow shovels right after a blizzard hits.
Writing in the Atlantic (August 22), Jerusalem Demsas:
When I asked the Harris campaign for clarity, a senior campaign official told me that Harris was not supporting price controls, nor would her proposal to go after price-gougers apply beyond food and grocery stores.
In last week’s Capital Letter, I discussed price controls in general. Politically they may make sense, economically they normally do not. Are laws against “classic” price-gouging in the wake (or in anticipation) of an emergency any different?
Economist John Cochrane doesn’t think so. In fact, writing on Substack, he argues that “We should praise price-gouging. Yes, pass a new federal law, one that overrides the many state laws against price gouging.”
Oh.
In his The War on Prices, Ryan Bourne writes that there are anti-gouging laws in 37 states and Washington, D.C. Some of them prohibit prices that are “exorbitant” or “excessive” in an emergency. Virginia’s law prohibits ones that are “unconscionable.” Unconscionable? A price “grossly” exceeding that charged for the same or similar goods in the ten days before the emergency. Grossly.
The vagueness of such language (which is not atypical) means that vendors hiking prices on existing stock in response to the increased demand will tread carefully. Those who could have rushed in extra supplies if the price were right for them may well not take the risk. California’s certainty is, if anything, even worse. Price increases are limited to less than 10 percent above their pre-crisis level, unless the business can “validate” that it now faces higher costs. When prices really surge, the 10 percent, argues Bourne, will operate as a cap. That must be right. Faced with a process that includes “validating” their costs, most of the vendors who might have helped California out (at the right price) will decide not to bother.
In a 2011 paper, the Cato Institute’s Michael Giberson cited a case from 1996 when four men selling ice in the wake of Hurricane Fran had been arrested in Raleigh, North Carolina for charging a price much higher than the $1.75 per bag standard before the storm. As Michael Munger, writing for Econlib explained, North Carolina’s anti-gouging law prohibited mark-ups that were “unreasonably excessive under the circumstances.” This had been “been widely interpreted to limit price increases to around 5 percent or less.” The four gougers (in this article I’ll stick with the pejorative “gouge” and “gouger” for simplicity’s sake) lived in a part of the state where the electricity was working. They had loaded up two trucks with ice and driven to Raleigh, something they would not have done for a 5 percent mark-up. What they reportedly wanted, and got (until the police intervened), was $12 a bag. But, as Munger points out, had there been no anti-gouging law, there would have been more competition. The $12 ice price would have melted away.
In short, anti-gouging laws will mean, writes Giberson, that “fewer individuals outside of the affected areas will risk their time and money bringing ice, electric generators, or other goods into storm-ravaged areas if they risk arrest and fines for charging ‘unconscionable prices.’”
As Cochrane points out, the effect of anti-gouging laws on the supply of one good can hit the supply of another:
A truck bringing in food really should get some of the available gas. But if a price-gouging limit on gas means that truck can’t get gas, then it can’t bring in food either. A price-gouging limit on food means the truck can’t afford the gas.
Anti-gouging laws limit the price rises that discourage the hoarding that makes shortages worse. The more expensive a good, the more expensive it is to hoard. Cochrane argues that higher prices also send a signal to would-be hoarders that there is no need to hoard, say, toilet paper, as there “always be some in the store later.” Not everyone would get that message, I reckon, but, if enough did, it would help reduce the risk that emptying shelves trigger a panic. Hoarding is infectious.
Anti-gouging laws could also discourage stores from holding larger inventories of products that might come in handy in the event of an emergency.
Cochrane:
Inventory is a great source of supply. If you run a Home Depot in Florida, how many 4’x8’ sheets of plywood do you keep around? Well, if you’re allowed to sell them for $100 each when the next hurricane is coming, a lot. If you must charge only the regular price until the shelves empty out, then not so much. Inventory is expensive.
“Price gouging,” he argues, “is wonderful for all the reasons that letting supply equals demand is wonderful. When there is a limited supply, then a sharply higher price directs that supply to those who really need it. It’s day 2 after the hurricane. Who really needs gas?”
Only those who really need it will pay that higher price. But what if they cannot pay that price? Cochrane questions how often that will really be the case, but if people are facing real difficulties, he’d would rather give everyone $100 to pay for, say, the $10 gallon gas (or use for other purposes). This is, he points out, “mostly, what our government did during Covid.” That might be the way to respond to a disruption as prolonged and widespread as the pandemic. When the emergency is likely to pass quickly, directed targeted assistance would, assuming the mechanism to arrange it was in place, be preferable. But such assistance should work with prices, not against them. “Rule number one of economics,” writes Cochrane, is (his emphasis added) not to “distort prices in order to transfer income.”
If price is not to allowed to be used (beyond a certain point) as a method of deciding who gets hold of a good in short supply, how are such goods to be allocated? There is standing in line, where the extra “price” paid is time, stamina, and efficiency. Then there is rationing, which, if the emergency lingers, would have to extend beyond the ad hoc (stores imposing limits, say, on how much hand cleaner a customer can buy at one time), and be operated by the state instead. Neither alternative, Cochrane’s logic shows, does anything to increase supply.
And they will both divert it in ways that are anything but transparent. In the case of waiting in line, supplies will frequently be held under the counter and reserved for favored or (ahem) generous customers. Any government-run rationing system will not only give birth to a black market, in which illegality will put an extra premium on prices but will also give an unacceptable amount of power to those deciding the “fair” basis on which rations are allocated and to those given the authority to hand the rations out. As an opportunity for self-dealing, corruption and abuse of power, rationing is hard to beat.
But however strong the economic logic against anti-gouging laws, they remain popular. Bourne notes that after Hurricane Harvey, 67 percent of those polled thought there should be federal laws against gouging too. Only 3 percent said that no such laws should exist at any government level. And there are other polls that deliver the same message: anti-gouging laws are popular, “gougers” (the unflattering name is a giveaway) are not. According to Munger, when the police arrested the ice gang, the people who had been waiting to buy some reportedly applauded, even though they were now going to go home empty-handed.
In last week’s Capital Letter, I quoted the British economist Edwin Cannan, who, writing in 1915, commented on the response to (suddenly) higher prices (this was early in World War I, when inflation was taking off):
Buyers who have to pay higher prices suddenly become either ‘the poor’ forced to reduce their consumption of necessary articles or else employers of a particularly needy and deserving class which will be thrown out of work by the rise. All the injured persons are at once represented as being iniquitously robbed by an unscrupulous gang of speculators, middlemen, bloodsucking capitalists, or rack-renting landlords against whom all the resources of the State ought to be brought forthwith. The ideal somewhat vaguely held seems to be an immediate return to the prices of a few months or a year ago.
Cannan understood how counter-productive this could be:
[W]hen the price of a thing goes up, [people] abuse, not the buyers nor the persons who might produce it and do not do so, but the persons who are producing and selling it, and thereby keeping down its price’.
Irrational, yes, self-defeating, yes, surprising, no. As I noted last week, the premodern (and absurd) notion of the “just price” lingers on. Few people offend more against that principle than the gouger “taking advantage” of a crisis to make an extra buck. “Economics,” writes Cochrane, “has only understood how virtuous price gouging is in the last 250 years.” It is indeed true that an overwhelming majority today of economists oppose price controls, although that consensus waivers, at least to an extent, when it comes to “natural monopolies,” such as utilities. By extension, I suspect there might be concerns about cases when pricing turns into gouging and there is no realistic way that the price mechanism can operate to undercut the gouger by attracting competitors.
“Moral” rules generally take root when they appeal to some aspect of our psychology, often at a level when the rational takes second place. As a species, we seem to be hardwired to have a sense (however inaccurate) of fairness. Presumably for evolutionary reasons, we admire altruism too. The Good Samaritan is a hero, the Good Gouger, acting out of self-interest, is not. But those who describe gougers as vultures forget that vultures perform a useful environmental role.
Businesses know where public opinion stands. Companies, writes Cochrane, “are very reluctant to price-gouge,” essentially for reputational reasons. During the pandemic, Costco would let stores run out of toilet paper or ration supplies rather than raise prices. Giberson refers to a finding by the South Carolina’s attorney general’s office that during price spikes following Hurricanes Gustav and Ike “[gas] station owners reported that to avoid bad publicity they simply shut their doors instead of purchasing gasoline at elevated prices.” Reselling at higher prices might bring them opprobrium. Not passing on the higher cost of the gas they would have had to pay would have meant selling it at a loss. It was easier not to open at all. Everyone loses.
Laws against gouging, like rent control, are examples of how lawmakers attach greater importance to a policy’s electoral value than its economic worth. In that respect they too, like the Good Gougers, are simply responding to an incentive.
Cochrane concludes that “politicians just supply what people demand. (A very few lead.) If the culture disapproves, they follow. Supply and demand, cause and effect, logic, evidence and experience be damned.”
The idea of a federal anti-gouging law is not going away.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, makes use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee, David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 184th episode, David is joined by AIER’s Dr. David Hebert this week for a really fun, and depressing, conversation on government spending, government revenue, and how the budget sausage is made. It’s informative, interesting, and infuriating.
The Capital Matters week that was . . .
Fiscal Policy
Annual legislative sessions have wrapped up, and taxpayers have once again gained ground: For the fourth year in a row, budget surpluses have prompted many states to cut taxes. Unfortunately, the quality of tax cuts has varied — from broad pro-growth rate cuts in some states to narrow special-interest breaks in others…
Rich is right to point out that Kamala Harris is not an investor. It’s funny that a political party that vilifies finance thinks it is helpful to constantly talk about “investment.” Biden does it too, with a whole White House Web page on “Investing in America.” …
Hollywood is about entertainment, and it’s always entertaining when Hollywood discovers that taxes are bad for business. But of course, rather than calling for tax reform across the board, Hollywood would rather have tax breaks just for itself…
Industrial Policy
A key problem of industrial policy is, famously, that central planners cannot think of everything. Here is an excellent reminder of that inescapable reality. Before getting to the heart of the story, take a moment to savor this paragraph from the FT…
Labor
With the Democratic National Convention taking place in Chicago, it’s best to understand Chicago’s mayor, Brandon Johnson, not as a Democrat but as an extension of the Chicago Teachers Union (CTU)…
Healthcare
Stephen Parente & Theo Merkel:
In the New York Times last week, political scientist Jacob Hacker called Vice President Kamala Harris’s Medicare for All proposal something she should embrace as “a central part of her 2024 campaign.” Harris has long favored the dramatic expansion of the role of the federal government in health care, supporting the Medicare for All Act as a member of the Senate and proposing her own version of single-payer health care while campaigning for the Democratic nomination in 2019…
Housing
In America, housing is mainly a state and local issue. But Kamala Harris’s selection of Minnesota governor Tim Walz as her running mate excited some activists about the possibilities of federal housing reform. They claim that Governor Walz supported the “Yes in My Backyard” (“YIMBY”) movement to reduce zoning regulations and therefore he might recreate the same magic in Washington.
In reality, Governor Walz and his progressive allies supported the usual mishmash of new housing subsidies and mandates…
Electric Vehicles
Ford has been signaling for a while now that demand for electric vehicles (EVs) is not increasing at the pace that it had expected, so the news that it is delaying production of a next-generation all-electric pickup truck and canceling plans for a three-row electric SUV is not a huge surprise…
Stellantis has been bullied and bribed into making EVs, a type of car that the government wants consumers to buy. Consumers, however, are not cooperating with enough enthusiasm. As I noted in a recent post, carmakers now have two groups of “customers.” Those customers want different things. The first group are car buyers. They are purchasing EVs — U.S. sales of new EVs hit a record in the second quarter — just not at the pace that carmakers need and the second “customer” group, the government, (increasingly) demands.
The Economy
The Bureau of Labor Statistics issued its annual revision of the jobs numbers today, showing that it had overestimated job growth between March 2023 and March 2024 by 818,000 jobs. These revisions happen every year, but this was a bigger miss than normal.
Given the direction of the miss, some are attributing it to politics…
China
It’s hard to say what is going on in China’s economy at the moment (little that’s very good, I reckon), but here’s a piece of information about the suppression of information that is, in itself, informative…
More than 25 percent of the network is high-speed, which is impressive, as, in its own way, is $859 billion in debt. Nikkei Asia’s reporter (Kohei Fujimara) notes that the expansion of the network has not increased profitability. That’s not particularly surprising; expanding the railway network is presumably all part of Beijing’s plan to modernize the country. Whether the pace of that spending was wise is a different matter and, as usual, central planners have left a few hallmark signatures…
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