The Corner

Economy & Business

Biden, Gas Prices, and ‘Gouging’

President Joe Biden speaks during the Democratic National Committee’s “Back on Track” drive-in car rally to celebrate the president’s 100th day in office at the Infinite Energy Center in Duluth, Ga., April 29, 2021. (Evelyn Hockstein/Reuters)

It is no news that Joe Biden’s understanding of how markets work (and the good that they can do) is not the strongest, but it would be nice if the president didn’t feel the need to remind everyone else of that fact on such a regular basis. But politicians are what they are, and if there are votes to be won (or at least not lost), well . . .

U.S. News & World Report:

President Joe Biden warned gasoline stations not to engage in any price gouging as motorists wait for fuel to start flowing reliably through the Colonial Pipeline, which reopened on Wednesday after falling victim to a cyberattack.

“Do not, I repeat, do not try to take advantage of consumers during this time,” Biden said Thursday in remarks at the White House. “Nobody should be using this situation for financial gain. That’s what the hackers are trying to do. That’s what they’re about, not us. That’s not who we are.”

In almost all cases, shortages such as the shortfalls in the gas supply that we now seeing in parts of the east coast, are made worse by panic buying, and in almost all such cases, putting a price on panic can defuse it, and reduce the extent to which a bad situation is made worse by (in essence) stockpiling.

Kyle Smith had something to say about price gouging during the toilet paper crisis of 2020.

Here’s an extract:

You, sir! You whose shopping cart squeals beneath the weight of half a dozen 48-packs of toilet tissue! Come now, be reasonable. How many rolls do you really need to get you through the next week or so? A four-pack, you say? Wonderful. Bless you for your civic-mindedness. You may now put 284 rolls of TP back on the shelves so that a dozen fellow citizens who really need it can get it.

Wouldn’t it be wonderful if someone trustworthy and courteous and concerned with the common good could stand in front of the registers at Costco calming people’s fears and successfully urging them to buy only what they actually need? Someone as folksy and good-hearted as, say, Jimmy Stewart during the scene in which there’s a run on the Building and Loan (i.e. bank) in It’s a Wonderful Life?

Good news, friends! We already have Jimmy Stewart. He’s right here among us. Only his name is “market pricing.”

My colleague John Hirschauer has looked at worrisome remarks made by politicians about interfering with pricing signals and explained the academic research on the wisdom of setting price controls during a crisis. Now let’s consider the matter from the point of view of community and common sense. Free enterprise — sometimes called capitalism — is a wonderful thing in normal times because during every non-coercive transaction, the buyer would rather have the thing he’s buying than the money, and the seller would rather have the money. Each freely entered-upon transaction increases global well-being.

But capitalism is especially useful in a crisis, when there is market disruption. When times turn dark, capitalism is, more than ever, your friend. Let’s say stores run out of toilet paper or hand sanitizer or diesel fuel because of panic buying during the age of COVID-19, and no one can find these items in stores. Why people are punching each other over the Charmin while leaving the Robitussin and Tylenol alone is a mystery, but that is of no moment. What matters is that toilet paper is suddenly more valuable simply because demand has surged. That means people are bidding up the price. Or they would be, if the stores allowed this. If Costco quadrupled the price of whatever item is selling out, there wouldn’t be any shortages of anything. Market pricing would restore normal functioning.

Costco doesn’t do this because of what economists call “good will,” which essentially means “fear of bad publicity propagated by economic illiterates.” . . .

Economic illiterates, eh?

Drawing on an article in The Economist, we also touched on this question in a Capital Note back in October.

Here’s an extract:

From The Economist:

“Unscrupulous traders use a crisis to charge exorbitant prices. Politicians, wanting to protect consumers, crack down on profiteers. But how to work out what price is too high, and what redress is appropriate?”

The answer (almost always) is that this is not something in which politicians — particularly from a command-and-control place such as New York City — should get involved.

But, back to The Economist (my emphasis added), where its correspondent tells the story of his or her local corner shop:

“This type of shop was once familiar in New York, but has largely been squeezed out by chains and bank branches. The owner is an immigrant who opens early and closes late. In crises the shop stocks the products that customers need. When flooding from Hurricane Sandy caused a blackout in 2012, it sold batteries, torches, candles and board games. During the pandemic it has been piled high with boxes of sanitiser, bleach, masks and gloves.

Stocking up comes with risks. Acquiring inventory is costly. Demand drops off when normality returns—unwanted board games linger in the back of the shop. And this time, the rules changed. In March a woman bought a box of masks (each mask costing $2), and then said she was from the city’s office of consumer affairs, and charged the shopkeeper for violating new price-gouging rules. Two days later, says the shopkeeper, another inspector charged the shop again, this time offering guidance on the right prices. Masks should cost no more than $1; gloves selling at $19.95 should sell for only $14.95. Each package marked above the permitted price would be fined $500. There were many packages.

Most economists oppose restrictions on price gouging not because they like fat profits, but because higher prices lead to more supply. Indeed, in many places sanitiser and face-masks are now ubiquitous and cheap. Then there is the tricky question of what counts as price gouging—in a pandemic. New York City banned price rises of more than 10% from pre-pandemic levels. But what if the shop had not sold the items before? And why 10%? Price increases “in excess of an amount reflecting normal market fluctuations” were banned. But what, in March, was normal?”

Read the rest of the piece and it becomes obvious that if anyone was gouging (there were a lot of fines), it was the city, not the shopkeepers.

What was it that someone once noted?

Oh yes, this.

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