Sunday, March 15, 2020

Emergency Situations Call For Proven Failed Policies

The pandemic of the novel coronavirus (SARS-COV-2) is upon us. But rest assured; our fearless leaders are here to help by making sure we keep reality at bay. I'm talking about an old favorite of head-in-the-sand, wish-it-all-away virtue signalers--price gouging laws (aka, price controls).

Because it worked so well exactly never but makes those who don't like an certainly very bad and difficult (but nevertheless necessary) change feel like something is being done, we shall inflict self harm.

Let's turn this into a partial list of things to remember about price gouging laws:
  • Price controls that limit market clearing prices don't change the reality that suddenly and acutely certain goods and services are more scarce--demand has risen while supply is temporarily mostly or entirely fixed.
  • They don't allow us to efficiently allocate goods. I hear you cry, "But what pray tell is so great about efficiency in a crisis?!?" Okay, okay, I sneaked in some technical jargon. When economists speak of efficiency, they are sorta saying how can we do the best for the most. We have to get what we have (water, ice, lumber, medical supplies, etc. depending on the disaster) to those who need it most. Most is key. While we always want to satisfy this to the best of our abilities, in a crisis it becomes crucial. What substitutes do we have for allowing prices to gauge who wants/needs it most? We could use:
    • First come, first served
    • Personal, arbitrary preferences
    • Non-price competition (to the beautiful, the rich and powerful, the special interest, etc. go the spoils)
    • Government or other authorities trying (honestly trying) to determine who should get what (more on this fantasy world below)
  • All other methods listed above have SUBSTANTIAL costs associated with them. And there is very little reason to believe they would outperform the price dimension. They are all subject to manipulation (both malicious and innocent; intentional and accidental). They waste resources including time when resources are especially scarce. They encourage hoarding and black markets (more below). The best they possibly can do is match the outcome price would achieve while avoiding some of the dreaded downsides of allowing prices to rise. But just how bad and realistic are those downsides?
  • The downsides to letting prices rise to the new equilibrium levels are hypothetical straw men. If you are worried or distressed by the idea that someone, somewhere will profit off of a bad situation you need to realize that is a reflection of your own envy and a mischaracterization of who actually is in a position to provide goods and services. If you are worried that only "the rich" will be able to get the precious thing(s), then you are ignoring the fact that "the rich" always will have access, ignoring the charitable impulses of most everyone including those with more wealth, and ignoring that your wrongheaded description of "the rich" still leaves "the not rich" without access--store shelves get emptied when prices don't rise properly (see the Art Carden link at the bottom).
  • Black markets will spawn and propagate where markets in the light of day are prohibited. If you think you are ending the high prices "problem" by stopping prices in stores, etc. from rising, you are woefully naive. Those same "greedy" people who would otherwise raise their price up to the market-clearing, too-high-for-your-comfort level will simply take the items off the shelves and sell them in the alley at a more reasonable (given the new economic reality) level. And who do you think is buying in the alley? I can assure you, it is not the Boy Scouts.
  • Demand is not the only curve that can change. Supply very crucially can and will if we entice it. As also indicated in the next bullet point, one must answer the always important question: "And then what?". Allowing prices to rise sends signals literally worldwide that scream: "HEY, STOP WHAT YOUR DOING! THOSE [goods and services specific to the given situation] ARE DESPERATELY NEEDED ELSEWHERE. Help us reallocate them there. And help us make more of them!" The Mike Munger links at the bottom have a lot on this very important point. In a dire situation I don't just want some (water, medicine, etc.). I want all we can get including that for which it has not yet been economical to access/build/develop. I want the best pharmaceutical firms and minds working on a vaccine today--not just the most altruistic. I want the best doctors out of their personal quarantines and on the front lines--not just the most altruistic or frankly those with lower opportunity costs. If you have a severe, acute, and emergency back injury, you don't want to be paying only enough to entice a chiropractor to help you.
  • Think past the first level--there are strong incentives (social and economic) for businesses to not allow prices to fully rise or to themselves supply the charity we would want to make sure those without means can get the goods and services they truly need.
  • It is a very bad way of forcing charity as it imposes the cost of charity on those supplying goods and services as well as those who otherwise would have access to those goods and services. Think of the guy who really needs ice for baby formula or a nearby hotel room to keep his job but who showed up later than the guy who didn't need those things so badly but wasn't deterred from taking them because the price wasn't giving him the crucial information that somebody else needs it more who isn't yet here to say so.
  • It is immoral as it denies the property right that the owner of the resource has and it disallows her from most easily finding the person who needs it most and it punishes her for having been there in the first place to supply it. In a disaster we want the church to have been built and maintained for Easter Sunday. That is expensive. One way to get that insurance policy against pain in a disaster is to allow those who bear it 99% of the time to reap the reward for having bore it. 
  • Lastly, you want to substitute a market process with a government process in a time of desperate need. Do you really, really, really think those in government are in a better position (access to knowledge, incentives and feedback effects, corruption temptations, organizational structure, etc.) than the market to do the job? I would not trust a group of (non-government) people to have the judgement, knowledge, and ethics to dictatorially make the best decisions. Why would that change for those same people if I simply put them into a government system?
Links to more thorough sources:

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