Price Gouging and Politics
Do you remember what happened on May 7th of this year? The Colonial Pipeline, which originates in Houston, Texas, and carries gasoline to the Southeastern United States and the Eastern Seaboard, suffered a ransomware cyberattack by a cyberattacker known to operate in Russia. The cyberattack, which impacted computerized equipment that manages the pipeline, is believed to have been at least tacitly approved by the Russian government.
Soon afterward, demented Joe Biden warned gas station owners against price gouging. He said, "I also want to say something to the gas stations: do not, I repeat, do not try to take advantage of consumers during this time. I'm going to work with governors of the affected states to put a stop to price gouging wherever it arises... Nobody should be using this situation for financial gain."
Okay, we've been put on notice by Demented Joe to not price gouge because it takes advantage of consumers. So it's worth our time and effort to study what it is. And to see how Joe ignores his own warning.
Price gouging occurs when a seller increases the prices of goods (and/or services) to a level much higher than what is considered fair. ThoughtCo.com offers this: "Price gouging is loosely defined as charging a price that is higher than normal or fair, usually in times of natural disaster or other crisis... Price gouging is typically thought of as immoral, and, as such, price gouging is explicitly illegal in many jurisdictions."
If supply changes and the price doesn't change (no price gouging), a shortage will always develop. When a shortage occurs, the supply of the goods always gets rationed in some way -- perhaps by people who showed up first (panic buyers?), maybe by people willing to pay the higher (gouged) price to the goods' owner.
The important thing to remember is that everyone gets as much as they want at the original price is not an option.
Higher prices will allocate the supply of goods to the people who value them most. When the supply of goods is fixed and prices are used to allocate goods, rich people will buy all the supply and leave less wealthy people with none. This isn't a concern for luxury items, but it presents a philosophical dilemma (something liberal politicians never pass up) when considering necessity items. This opens the door for politicians to define the terms 'luxury' and 'necessity.' Here's where the argument leaves economics and enters the realm of politics. For example, if a beer shortage occurred, politicians would say beer is a luxury, but I personally consider it a necessity.
The price of all goods operates in response to supply and demand. As supply and/or demand change, the price changes in response. A free-to-respond price leads to higher prices where the good is needed most, encourages suppliers to more urgently sell their goods, thus more quickly resolving the problem. However, when price gouging is prevented (by limiting free price change), the result is always shortages. Supplies of goods in the short run are often limited to whatever inventory is on hand (like with gas stations for days after the pipeline was attacked), so short-run supply is perfectly inelastic (unresponsive to price change). If the goods' owner causes the unavailability, then price gouging is possible. But if not, from a supply/price/demand perspective, price gouging is not possible. I've found nothing to suggest Colonial Pipeline caused the unavailability.
There are several state laws as well as a federal law to 'prevent' price gouging. But they actually do more harm than good. Ludwig von Mises, in Human Action, said, "...[Economics] says that [government interference] produces results contrary to its purpose, that it makes conditions worse, not better, from the point of view of the government and those backing its interference."
Further, there are problems in specifying a legally permissible increase in prices for goods caused by rising demand and/or limited supply. That's because there is no single definition of price gouging, the term has no fixed meaning. Alabama, Florida, and Maine forbid selling at an 'unconscionable' price. Idaho and Texas prohibit sales at an 'exorbitant or excessive price.' New York outlaws 'unconscionably excessive price' increases during an emergency. New York's Senator Brad Hoylman would "establish that an 'unconscionable excessive price' is a price greater than 10% higher than before an emergency began." Here's my favorite: Asked when rising prices become price gouging, New York Attorney General Letitia James said, "there's no definitive answer to that question, but you know it when you see it." Yeah, right. Laws to prevent price gouging are written to make politicians look good. But what they ultimately do is make them appear foolish.
Let’s examine the current situation in this country in terms of Demented Joe's policies, that of filling jobs, higher unemployment benefits, and price gouging.
Filling Jobs: This doesn't directly have anything to do with price gouging, but it provides a perfect backdrop for illustrating the concept. About 10 million people are unemployed despite employers struggling to find employees. The National Federation of Independent Business (NFIB) conducted in March a survey of its members and discovered that 42% of business owners had job openings they couldn't fill. Many business owners said higher unemployment benefits as one of the main reasons why people weren't returning to work. This poll illustrates why there is a problem from the worker's perspective. About 1.8 million people actively collecting unemployment benefits said they turned down jobs specifically because of the generosity of the benefits.
Higher Unemployment Benefits: For many low-wage workers, enhanced unemployment benefits exceed what they could make by working. The federal Coronavirus Aid, Relief, and Economic Security Act (passed under Trump, expanded, extended under Biden) offers all workers an additional $600 per week on top of the state aid which ranges from $144 to $515 per week. An unemployed low-wage worker can receive from $744 to $1115 per week in benefits to remain unemployed. That's between $18.60 (256% of minimum wage) and $27.88 (384%) per hour (assuming a 40-hour week) to do nothing.
Price Gouging: Here's where Demented Joe's mendacity shows through. Higher unemployment benefits exceed the predominant hourly minimum ($7.25) wage by 156% to 284%. Are these amounts above minimum wage that are caused by higher unemployment benefits 'unconscionable?' Are they an 'exorbitant or excessive [labor] price' increase? Is this, the labor price increase, 'price gouging?' Is an employer willing to pay more than $20.46 ($18.60 + 10%), or up to more than $30.67 ($27.88 + 10%) to get employees and pass the cost increase on to customers guilty of price gouging those customers?
Laws (especially Senator Hoylman's proposed law) say 'yes.' Yet I can find no protests, no identification, no documentation of this type of price gouging.
Price gouging is, in a free market economy, impossible. But we don't have a 'free' free market economy. Politicians, trying to make themselves look good, intervene by passing anti-price gouging laws. Politicians 'talk the talk' but don't do their homework. That, coupled with the majority of the unthinking, uneducated U.S. population, makes price gouging appear possible.
When the next cyberattack occurs (it will, thanks to Biden's bumbling), get ready for politicians (of every stripe) to decry price gouging. There is political capital to be had. You can bet Demented Joe will make a statement designed to harvest some.
Image: Steven DePolo
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