Forbes “Economist” Claims Price Gouging Laws Are Good Politics But Bad Economics

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Even while the flooding from Hurricane Harvey continues, a 2016 article from an “economist” at Forbes is being shared to remind us how good price gouging is for the economy. The article was written by lawyer Jeffrey Dorfman, a prolific “economics” writer and self-described libertarian who is notorious for providing one-sided “economics truths liberals need to learn.”

Here are some of the supposedly “simple” and “economic” points made in the Forbes article in italics, with some reflection:

If a hurricane knocks out power to a large area, generators are likely to be in high demand. It certainly seems unfair for Home Depot to earn extra profits by raising the price of generators they already happen to have in stock in their local stores.

It is unfair to both consumers and the general economy because:

  1. The supplier did not do anything special to enjoy these extra profits, and the supplier can even play games with supplies, hiding stock to insure extreme markups.
  2. Raising prices too high makes it extremely difficult for those with average incomes to make the purchase. Those who do ‘choose’ to be gouged will have less money to buy other things, and the overall economy will suffer.

Unfortunately for those who hate the idea of what Jimmy Carter would have called “windfall profits,” limiting price increases in a time of high demand removes the economic incentive that would have motivated other people to bring in an additional supply of generators. In simple terms, blocking profits on generators already where the shortage is also blocks new supply from arriving to rectify the imbalance between supply and demand.

Sufficient profits are already built into the price before gouging, or the products would not be there in the first place. Gouging provides “windfall” profits because the seller has not done anything to earn the extra money.

Since the items were worth transporting into the area at the regular price, we can be sure that providing more items to the needy area also would be profitable. In fact, bulk manufacturing and bulk shipments of larger numbers increase profit margins.

Given the opportunity to earn outsize profits, people in nearby areas might buy generators and drive them to where they are needed. Businesses would be willing to pay high freight charges to rush supply to the consumers clamoring for generators and willing to pay inflated prices. Anti-price gouging laws discourage such behavior, leaving the shortage in place.

These are valid points, but they do not apply to “anti-price gouging laws” generally. Consideration should be given to the circumstances. Only the most ideological would say we cannot have reasonable regulations.

Politicians like anti-price gouging laws because consumers vote and businesses don’t. Being seen stepping into the breach, defending people suffering from some setback (storm damage, broken pipeline, etc.), is a great visual for a politician.

Take this to its logical endpoint: Jeffrey Dorfman is saying that politicians consider what people want, and not what businesses want. If we consider what people want, then businesses will not be allowed to gain extra profits off of temporary and emergency situations.

Unfortunately, every economist would tell politicians that while some people will benefit from anti-price gouging laws, other people will suffer because of them. Artificially holding prices lower than it would take to balance supply and demand means that consumers lucky enough to buy some of the product in short supply get a better price than they would have without the anti-price gouging law… supply will run out and some consumers will have to go without.

Either way, some people will be left without needed generators. One way, suppliers gain those windfall profits, the other way consumers retain some money to buy other things and keep the economy flowing. That’s the difference. Let’s not pretend otherwise: this Forbes article is all about helping businesses make easy profits at the expense of both consumers and the economy.

Even where anti-gouging laws allow:

for price increases that are justified by any increased costs, such as having to truck gasoline in when a pipeline is out of commission, companies and entrepreneurs are likely to be scared off by such laws.

This argument may be used to revoke any regulation, which is the whole point of Forbes. Get rid of all regulations. Let’s go back to the 1800’s and set the poor businesses free.

In the real world, businesses aren’t “afraid” of regulations. Businesses function and profit in regulated environments all the time.

Nobody wants to be charged with price gouging, so the easy way out is to not take action to help solve the shortage.

This line sounds like an idle threat. If we don’t deregulate businesses, then they will stop functioning. Nobody will want to make a profit if he has to keep paperwork on it. Or nobody will want to expedite moving in needed supplies in a shortage situation even though he would move those items without a shortage. Ridiculous. Of course people will provide the items as swiftly as possible without the price gouging.

“Left alone, markets can sort this all out.”

There’s his bottom line — the magic of markets. Markets will provide everyone with everything they need. It’s called ideology. It is not “economics” at all.

Regulated markets can sort it all out, at the risk of being redundant like the Forbes article, without windfall profits to business and with reasonable regulations.

Bottom line: you can’t be a legitimate “economist” and a libertarian at the same time no matter how many credentials.

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