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Another Unintended Consequence

Almost all actions of politicians have unintended consequences. In times of tragedies their mistakes are amplified. Last week, before during, and after “Super Storm” Sandy hit the northeastern United States, governors and attorneys general in that part of the country put out blanket warnings that violators of so-called anti-price gouging laws (laws meant to protect consumers from excessive pricing of essential goods and services during emergencies) would be thoroughly investigated and brought to justice for violations. While these actions may be reasonable to the emotional observer, when one applies economic logic to the circumstance it is easy to understand how anti-price gouging laws have actually caused the current gasoline shortages in the Northeast.

In essence, anti-price gouging laws are price controls. That is to say, they prevent suppliers of goods from charging market prices if those prices are deemed excessive by government. Needless to say, since suppliers are not in the business of losing money, when the price of any good exceeds a government mandated maximum price, suppliers will stop supplying that good. They obviously are not going to sell an item at a loss as that is a sure recipe to put yourself out of business. Consequently, a shortage of that good develops. We have seen this happen time and again most notably with beef during the Nixon price controls in the early 1970s and rental properties in New York City under rent controls.

So how does this apply to the current gasoline shortages experienced by motorists in the Northeast?

Faced with threats by state officials including reductions in profits, fines, directives to set up reimbursement funds, and other penalties, merchants were intimidated to comply with the anti-price gouging laws. Consequently, a critically important market mechanism was prevented from kicking in: namely, rising prices in the face of potential shortages caused by disruptions to market flow.

You see, in the free market, something valued that is in short supply will always cost more than it does under regular market conditions. That is why the price of meat rises when there is a drought. Instead of a drought, the supply of gasoline to the Northeast has been disrupted by a storm. Although they are different climatic events, the effect is the same. Yet, governors and attorneys general prevented gas suppliers from raising gas prices to meet market conditions. Because of anti-price gouging laws consumers were able to purchase gasoline before Sandy at below market prices. It’s no wonder this temporary price control on gasoline has caused shortages in their states. Demand was allowed to exceed supply. If the market were left to its own devices, prices would have been allowed to rise and there would be gasoline in New York City right now for emergency use. But instead, state officials imposed a cap so every Tom, Dick, and Harry could fill up their tanks unnecessarily before the storm.

At the end of the day, anti-price gouging laws are indicative of how we have been running our economy for decades. All sorts of schemes have been implemented to help the poor, homeowners, consumers, students, the sick, the handicapped, etc, etc, etc… They all come with unintended consequences because they are based on emotions not logic. During normal times their consequences are bad enough. In times of tragedy they simply make things worse.

About Kenn Jacobine

  • Glenn Contrarian

    Kenn –

    If everyone thought the way you did, you’d be right…and if everyone thought the way Ayn Rand did, she would have been right. But most people don’t, and they never, ever will.

    For instance, what do you think would happen if in the middle of a disaster, when someone’s lost his or her house and they’re at wit’s end trying to figure out how to feed and shelter their family – and there’s more than a few living in their cars right now, now that the weather’s about to turn cold – and these people drive up to a gas station and see that suddenly the price of gas has gone up to $10/gallon, or $20/gallon or higher?

    Knowing you, you’d probably say that market forces would work things out and the people would simply try to find somewhere else to get gas…and most would.

    But some would not. Their frustration would take over and suddenly you wind up with dead gas station attendants whose only crime was working for the guy who decided to jack up the prices…and things spiral downhill from there. People can understand that it’s out of the station owner’s control if there’s no gas…but they cannot and will not understand if he’s trying to gouge them in their hour of need…and innocent people would die.

    There are times, Kenn, that the principles of the marketplace need to be suspended for the good of the people, for the sake of good order and discipline. Libertarianism works just fine for those of a libertarian mindset, but simply does NOT work for most people. That’s why libertarianism – like its polar opposite of communism – cannot and never will work on a national scale.

  • Kenn Jacobine

    Glenn,

    You base everything on emotion. You cannot complain about so-called price gouging in one conversation and then shortages of gas in the next. My view on this has nothing to do with being a libertarian. It is an economic principle that is cemented in the laws of nature.

    Believe me, because we haven’t followed economic principles in a really long time, we are headed for another crash. Since we have attempted to re-inflate the bubbles the next crisis will be even worse. It will make the aftermath of Sandy look like a picnic because there won’t be supplies or supplies at prices people can afford anywhere in the country. It will be interesting to see what Chris Christie does then?

  • Igor

    Actually, most of our troubles come from failed attempts to ‘privatize’ government functions for the past 30 years. Privatized operations simply have no defense against corruption.

    Market forces are only good for small subsidiary businesses, like making light bulbs.

  • Kenn Jacobine

    Privatization caused the housing bust? It is responsible for 10s of trillions in federal debt and unfunded future liabilities? It is responsible for the insolvency of many local and state governments including California? It has produced endless wars and the military industrial complex? I don’t think so.

  • latitude38

    all one has to do is recall the infamous wage/price controls initiated by richard nixon during the seventies to understand the current unintended consequences

  • Kenn Jacobine

    This just in from Reason TV: entrepreneurs in NYC buying gas at stations then selling it to motorists unwilling to wait in long lines for current market prices. Bottom line – the free market is all powerful, resistance is futile.

  • Glenn Contrarian

    Kenn –

    You base everything on emotion. You cannot complain about so-called price gouging in one conversation and then shortages of gas in the next. My view on this has nothing to do with being a libertarian. It is an economic principle that is cemented in the laws of nature.

    No, I don’t base everything on emotion, but neither do I ignore it. It is every bit as great an error to ignore the effects of human emotion as it is to base everything upon it.

    Believe me, because we haven’t followed economic principles in a really long time, we are headed for another crash. Since we have attempted to re-inflate the bubbles the next crisis will be even worse. It will make the aftermath of Sandy look like a picnic because there won’t be supplies or supplies at prices people can afford anywhere in the country. It will be interesting to see what Chris Christie does then?

    Still waiting for the Godot crash? Yes, Kenn, we WILL have another crash sooner or later, just like we will sooner or later have another war, another plague, another big meteorite wipe out half a continent. The key, Kenn, is to delay as much as possible between the crashes…and if history is any guide, the nearly eighty years between the Crash of 1929 and the Great Recession of 2008 is pretty doggone good when it comes to economic ups and downs.

    And I’m still waiting for you to show modern examples of how nations (and the standards of living of their populations) have prospered under libertarian principles. I mean, there’s lots of nations in the world that operate under varying degrees of libertarian principles…and they’re ALL third-world nations.

  • Igor

    @4-Kenn: Yes, privatization caused the housing bubble.

    Back in the 30s and 40s banks (and savings and loans) were founded and operated by individuals and the FNMA was a modest government operation that helped bankers and potential homeowners by creating a secondary market for mortgages. That way a banker could increase his deployed loans by selling mortgages to the FNMA and use the proceeds to make new loans to new homeowners. It worked great, and made home loan money available to new homeowners. The FNMA also made a very small profit, as demanded by its charter, so that it was not subsidizing home loans, it was just facilitating loans. This secondary market had always been refused by private investors. But in the 50s they demanded the right to buy stock in the FNMA and hold it for security and profit. Once they had ownership rights they demanded voting rights, and so in the 60s LBJ privatized FNMA. When FNMA was government owned (a Government Secured Entity, GSE)it was operated for the benefit of bankers and home owners, but as a private company it was operated for profit, and that’s when the stuff hit the fan. FNMAs owners/operators quickly realized that their profits (and personal bonuses) depended on revenue (total throughput) rather than sound financial operation, so FNMA started to fall apart as caution was thrown to the wind for the sake of higher revenue numbers.

    The rest you may know.

    If FNMA had remained a GSE we’d be OK today. But the combination of investor greed and LBJs perfidy sealed its fate.

    FNMA is a text-book case of privatization failure.

  • Cindy

    “the free market is all powerful”?, it operates according to “laws of nature”?

    The cult of Ayn Rand is much worse than that of L.Ron Hubbard.

  • http://www.facebook.com/jeff.genest JeffG

    Not all price controls are government initiated. Some are the result of collusion among so-called competitors. Why else would the same drugs produced by the same companies be so much more expensive in the US than they are in Canada?

  • Igor

    There’s no such thing as a ‘free market’. Any market is unstable. If you could setup a ‘free market’ it would be subverted in microseconds by monopoly interests.

    Any market is unstable, and a ‘free market’ is simply an attempt to ignore that instability. Markets can achieve a ‘metastable’ state (like a rolling stone on the side of a hill caught in a slight recess), as with a market monopoly, but capitalism de-stabilizes everything, so it’s temporary.

  • Alex

    Kenn, people “think” they understand science and economics (even history) but don’t. My understanding of each is but a mixture of reading and experience but I wouldn’t dare assume to know all. However, there are some basic principles that CAN’T be erased and what you highlight is concrete fact.

    Sometimes I wonder if people who eshew basic mathematical fundamentals in business are just as bad as Creationists.

    Now the new nonsensical fad is to equate free markets to Ayn Rand. Or libertarian principles – which I didn’t detect in the piece.

    Alas, no need to argue the specifics of your position (there really isn’t one) just call you a “racist” or “misongynist” or in this case “cultist.”

    You can’t posit a logical economic argument without being called Randian. It’s nuts.

    If that be the case, I guess Vico, Pareto, Bastiat, Law, Smith, Ricardo et al were “Randian.”

    As a business owner, I can attest to that which you speak. A class on starting your own business should be mandatory for all North Americans. Only then would they think twice about government intervening in the market place for the emotional “greater good.”

    Alas, these are illogcal anti-business times my friend.

    The narrative is clear even on this thread.

  • Clavos

    Alas, these are illogcal anti-business times my friend.

    QFT

  • Igor

    Most interference in markets is at the behest of business. They have the power.

  • Libertad Intelligente

    Ken another part to add is that the gasoline trucks would come in from other states to fill the demand. However additional expenses would be incurred to pay for the drivers salary and the shipping from a distance. They would have to charge higher prices for such service, but they cant due to price gouging laws. Therefore we have an inefficient shortage costing the economy millions/billions in lost production and time wasted waiting in gas lines.

  • Kenn Jacobine

    That’s right, as price goes up suppliers rush in to fill the supply.

  • Igor

    @16-not if the monopoly that prevails in that market prevents it.

    For example: Lipitor, the most popular pharma drug in the world, costs me $160 per bottle, even though it was developed at taxpayer expense and is only worth $10 per bottle, because Pfizer has a monopoly enabled by a ridiculous patent extension. But they paid their congress-whores for it, so they get it.

    Most markets are monopolized by some crooked monopoly.

    Suppliers CANNOT rush in to fill the supply. They will either get sued, or they will lose the favor of the patron companies who control them.

  • Kenn Jacobine

    Igor, your comment rightly indicts the Congress – whores. Maybe the problem is with democracy and not capitalism? You think?

    But the fact remains that without Pfizer you wouldn’t have Lipitor. You can’t have it all, the cure for free, because you did nothing to invent the cure, unless you are a stock holder in Pfizer. And you might say well I had no idea that Lipitor would be effective. Neither did the investors who risked their assets so they could sell a product that helps millions of people like yourself. Furthermore, the reason healthcare is so expensive in the U.S. is because of government involvement. Drug companies and hospitals, and doctors jack up prices because that is what Uncle Scam will pay. Our monetary system is such that the dollar has been devalued to the point where things in high demand cost more – the prices of those thongs has been bid up with an influx of trillions of nwe dollars.

  • Kenn Jacobine

    Not thongs but things – pardon the Freudian slip

  • Clavos

    Well, the price of thongs too…

  • Glenn Contrarian

    But thongs are bad for men’s blood pressure, right? That’s why we need Lipitor.

  • Kenn Jacobine

    Can you imagine what the price of thongs would be if the government subsidized our purchases of them?

  • Dr Dreadful

    Kenn in a thong and a Freudian slip is a mental picture I’d rather not have…

  • Clavos

    @#23:

    Now, that’s well and truly funny, Doc!

    PS You owe me for a new laptop screen…:)

  • Glenn Contrarian

    Seeing where this conversation is going, perhaps the title of the article was more appropriate than the author thought.

  • Dr Dreadful

    LOL @ Glenn.

  • Igor

    @18-Kenn: Nonsense! I, like other taxpayers, have a vested interest in Lipitor because we all paid the taxes that trained the doctors and that nurtured the science, and nurtured the businesses. You can’t just arbitrarily cut off the benefits at the shareholder level and then say “henceforward citizens are mere customers, not entitled to any benefit from their advances”.

    “But the fact remains that without Pfizer you wouldn’t have Lipitor. You can’t have it all, the cure for free, because you did nothing to invent the cure, unless you are a stock holder in Pfizer.”