A Stitch in Haste

A bunch of blogs had some very good price gouging threads after Hurricane Charley, on which I missed out on commenting, but this Hit and Run thread links to a very good Boston Globe article that sums up the libertarian case very well.

There was one small omission, however, upon which I commented in the H&R thread. Here it is:

Another aspect of "gouge is good" that people often overlook is what I call the "touch the toaster" argument.

You can tell your child not to touch the toaster, that it's hot and he'll get burned and it will hurt. But in the end, often the only way he'll learn is to actually let him go ahead and touch it. Ouch. But the burn eventually heals and the lesson is learned.

Likewise, if you're reckless in your emergency planning and end up getting gouged once: ouch! But you likely won't make the same mistake the next time.

Price gouging Intelligent emergency planning -- it does a body good (or: gives new meaning to the phrase "Got Milk?").

UPDATE: Obviously the "once in a century" phenomenon of yet another massive storm heading toward Florida serves as an ideal example of the "touch the toaster" principle I describe. If market-clearing pricing (sorry -- "gouging") had been fully permitted during Charley, one might hope that people would not make the same "touch the toaster" mistake now that Frances approaches. There should be no reason to tolerate willful ignorance of the microeconomic impact of a hurricane so soon after one just hit (i.e., "How was I supposed to know there'd be no gas?").

Meanwhile, the good folks at Catallarchy have observed a new "un-gouging" phenomenon -- apparently "greedy" merchants aren't greedy enough to risk their lives for "excessive" profits.

And of course, my best wishes to all those in the storm's path (especially my friend Paul and his parents!).

Huh?

The city wants to make sure New Yorkers are not overcharged for Passover items.

City officials are urging customers who believe they've paid too much to report the store to the Department of Consumer Affairs.
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"The Department of Consumer Affairs can’t be everywhere, but New Yorkers are,” DCA Commissioner Gretchen Dykstra said Monday. “If you become our eyes and ears and call 311, we will make sure we send and inspector out to make sure where you buy your Passover goods is fair to all New Yorkers.”

I'm not Jewish, so I admit I'm wandering through the wilderness on this one, but -- to be succinct -- WTF?!?

Jews know when Passover is. The stores know when Passover is. Passover doesn't entail any macroeconomic shocks (well, at least not in the last 3,500 years or so). And, most importantly, competition among stores still exists. Every supermarket in the five boroughs commandeers an entire aisle or more to Passover food and supplies this time of year.

So why exactly should there be any price gouging? Compare and contrast: Do we see "price gouging" on Christmas Eve or the deepest discounts? The Department of Consumer Affairs can't find something more "Affair-ish" to pursue?

I don't get it. Why is this example of the "Politics of the Warm Fuzzy Feeling" different from all others?

Strange.

Related Post:
Price Gouging: Touch the Toaster

London hotels are being criticized for "gouging" in the wake of the London attacks:

With the transport networks down and no way of returning home, one businessman from Manchester told the BBC he had paid £250 for an £80 room.
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Grant Hearn, the CEO of hotel chain Travelodge, said the price rises were a "disgrace".
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The BBC News website received e-mails from readers who said higher than usual prices were charged by some hotels which belonged to the Thistle Group. A Thistle Group spokeswoman said: "Thistle Group did not raise their prices as a response to yesterday's tragedy, Thistle maintained their usual strategy offering the best rate available based on the fact all London hotels had been fully booked."

Some hasty stitches:

--London hotels were 80% booked Thursday night. I don't know the actual room count, but let's assume that there were 10,000 hotel rooms available and 50,000 people who wanted them. How exactly should hotels allocate their scarce supply? Is "first come, first served" necessarily a "better" or "more ethical" system than "those who value the room more should pay more for it"?

--Why do some people automatically assume, when the opportunity presents itself, that "gouging" is somehow "smart but wrong" and that businesspeople will race to engage in it? In business, "wrong" is rarely if ever "smart."

On the one hand, large chains such as hotels or home improvement stores hardly need the negative publicity (i.e., "name and shame") that comes with allegations of "gouging" just for a fleeting bump in revenues. Small, local merchants, meanwhile, would be foolhardy to alienate their local (and repeat) customers for a one-time windfall that could easily be offset by lost customers down the road.

--Buried deeper in the article:

The Hilton Metropole, located near the Edgware Road bomb blast, was used as an emergency treatment centre for casualties.

The Marks & Spencer department store on Edgware Road also allowed rescue staff to use it as a treatment unit, gave food and water to rescue teams and casualties, and also provided blankets and clothing.

A spokeswoman said: "They just did whatever they had to do. The priority was making sure the casualties were OK. That meant giving them blankets and clothing from the shop floor.

"It's what anybody would do in that situation. We are part of the community."

So much for how "greedy" and "evil" businesses are. As I mentioned above -- being a good neighbor is also being a smart entrepreneur (i.e., "smart" and "wrong" don't mix).

Maybe journalists (not to mention politicians and bureaucrats) don't understand that, but businesspeople do (and those businesspeople who don't will suffer economically in the long run anyway, just like those who irrationally discriminate).

Here is a quick cheat-sheet on price gouging laws courtesy of the Congressional Research Service:

At least 13 states — Alabama, Arkansas, Florida, Georgia, Indiana, Louisiana, Mississippi, New York, North Carolina, South Carolina, Tennessee, Virginia, and West Virginia — have laws that specifically address price gouging in the event of a declared emergency. Other states may exercise authority under general deceptive trade practice laws depending on the nature of the state law and the specific circumstances under which price increases occur.

Note that all four states affected by Katrina are on that list.

Other hasty stitches:

--Changes in price are often defined over a 30-day window.

--Most of the laws focus only on demand-driven panics, such as the great "Johnny Carson Toilet Paper Scare" of December 19, 1973. Bona fide supply shocks that drive up prices but not profit margins are exempt from the laws.

--"Declared emergency" can in some states be a fungible term that does not require a natural disaster. It is usually up to the governor of the state to actually declare the "emergency."

--There is of course no federal price gouging law, but the report points out that antitrust law can apply if collusion is found, and reminds us of Richard Nixon's implementation of price controls under the Economic Stabilization Act of 1970. Other federal laws also apply specifically to oil- and energy-related "crises."

More thoughts at Coyote Blog.

The Georgia Department of Consumer Affairs is celebrating its first "settlements" with (i.e., shakedowns of) 15 gas stations that supposedly engaged in "price gouging" after Hurricane Katrina --

OCA began price gouging investigations immediately after Governor Perdue’s August 31, 2005 Executive Order to control spiraling motor fuel costs in the wake of Hurricane Katrina. The statewide settlements include both consumer restitution and civil penalties ranging from $1,000 to $10,000 depending upon the severity of the violation.

"I refuse to stand by and watch while Georgia citizens are being exploited," said Governor Sonny Perdue. "Gasoline price gouging will not be tolerated, and we will continue to track down businesses who took advantage of Georgians during the hurricane crisis."

The Governor's announcement today marks the first wave of settlements. OCA is investigating more than 100 potential cases. OCA received more than 3,300 complaints or inquiries regarding price gouging since August 31, 2005.

Of course, it's unclear why Georgia's hack politicians and bureaucrats think that small retail gas stations have sufficient market power to "price gouge," but not enough market power to simply pass on the cost of the fines to customers. Go figure.

And in case you're wondering, Georgia defines "price gouging" as any increase in the price of any good deemed "essential" after a state of emergency has been declared. In other words, it is the stated, criminally and civilly enforced policy of Georgia to create shortages of vital supplies in time of crisis. Brilliant.

Who gets to declare a state of emergency when a state is flooded with idiot politicians and bureaucrats?

(Via Fark.)

Illinois' activist attorney general is engaging in outright extortion over the so-called Hurricane Katrina "price gouging" faux scandal:

The Illinois attorney general is notifying several gas stations that they can donate $1,000 to the American Red Cross or risk being sued for price gouging in the wake of Hurricane Katrina.

The office of state Attorney General Lisa Madigan detailed the options in letters that began arriving at the 18 stations this week. Officials said gas prices at some Illinois stations rose as high as $3.63 a gallon after Katrina hit the Gulf Coast.

"When we're in an emergency situation, such as we were, retailers have the obligation not to increase their prices to the general public over what wholesalers are charging them," said Deborah Hagan, chief of the attorney general's consumer protection division.

You don't need to have taken a microeconomics class (although it would help) to understand that if a retailer is forbidden to earn a gross margin (i.e., is forced to sell his inventory at the wholesale price), then he is, by definition, being forced to lose money (specifically, his fixed costs).

And what the heck does the American Red Cross have to do with this? Assume (falsely) that there can even be such a thing as "price gouging." Why should those, in Illinois, who are "guilty" of such "gouging" be forced to subsidize people outside Illinois through Red Cross donations?

There's a word for an offer to buy your way out of being harassed:

Shakedown.

And there's a word for those who, like Attorney General Madigan, engage in such practices:

Mafioso. (Or is it Mafiosa when it's a woman?)

Maybe we should just stick with "thug."

They know it when they see it?

Energy companies could be fined up to $150 million, and officials jailed, if found to be price gouging under legislation approved by the House.
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The House-passed price gouging legislation directs the FTC to define price gouging and calls for penalties of up to $150 million for refiners and other wholesalers and $2 million for retailers who violate the law. It covers marketers of gasoline, diesel fuel, crude oil and heating fuel.

Wholesalers and retail outlets such as corner gas stations and service station chains face civil penalties triple the amount of their unfair profit. Violators also could go to jail.

So, Congress has no idea what constitutes "price gouging," but they're going to ban it anyway? Complete with jail time and punitive fines for "unfair" profits?

I suppose the alternative would be worse, namely to borrow a page from antitrust law and make it up as they go along ("this merger is anticompetitive, but that one isn't" ... "you can merge, but you have to sell this or that unit" ... "redesign your product to make it less useful" ... etc.). A post facto definition is arguably better than no definition at all. (Whatever happened to the "void for vagueness" doctrine?)

There's a saying; I have no attribution to offer:

If you charge more than everyone else, then you're gouging.
If you charge less than everyone else, then you're undercutting.
If you charge the same as everyone else, then you're colluding.

Such is the Politics of Antitrust.

Meanwhile, here's my definition of "price gouging": anything that will give a politician a sound bite.

Fill 'er up.

More thoughts from Greg Mankiw, Truck and Barter.

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Maybe this is price gouging? Even if, I don't think it's quite what the politicians have in mind.

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Or maybe this is price gouging. I really don't think this was what the politicians had in mind.

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Procter & Gamble reported quarterly earnings of $2.21 billion. Procter & Gamble's operating margin in the quarter was 19.4%; ExxonMobil's is about 15.0%. Procter & Gamble is either a monopolist or oligopolist in every single one of its markets; ExxonMobil produces only 3% of the world's oil.

Anyone in Congress calling for an FTC investigation of Procter & Gamble? No? Go figure.

I mocked Congress' attempt to stop price gouging by oil companies in this post. As you may recall:

The House-passed price gouging legislation directs the FTC to define price gouging and calls for penalties of up to $150 million for refiners and other wholesalers and $2 million for retailers who violate the law.

Who knew that the FTC would be even more mockworthy than Congress?

The Federal Trade Commission on Monday said it found 15 examples of gasoline price gouging after Hurricane Katrina, though the agency said it has not identified any widespread effort by the oil industry to illegally manipulate the marketplace.
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For the purpose of the report, and as mandated by Congress, the FTC defined price gouging as "any finding" that the average price of gasoline in designated disaster areas in September 2005 was higher than in August 2005.

Good grief.

So the fact that a major domestic refinery was knocked out during Katrina isn't responsible for higher prices during that month. The fact that transportation channels were disrupted isn't responsible. The fact that local workers in the petroleum industry -- like everyone else in the region -- simply packed up and left isn't responsible.

No, it was price gouging by the "wicked, bad, naughty, evil" energy companies. Yes, you must give them all a good FTC spanking! And after the spanking, the oral testimony (i.e., before Congress or, worse, before a judge and jury for their supposed "crimes").

None of which, of course, increases the supply of oil -- the only effective way to lower gas prices -- by a single drop.

Lovely.

Undeterred by the fact that the FTC found no price manipulation — absolutely none — by energy companies in the wake of Katrina, some activist members of Congress are determined to fight it anyway:

Brushing aside objections from the head of the FTC at a committee hearing, Sen. Ted Stevens of Alaska said his legislation would outlaw price gouging but he still had to decide how to define price gouging.

"We will find a way to define it so that it can be enforceable," Stevens told reporters after a hearing on rising gasoline prices.

Searching frantically for a way to criminalize something that does not even exist. Talk about a bridge to nowhere.

To review:

--Price gouging is a fiction. It has no viable definition in either economics or common sense.

--Therefore, any politician or activist who asserts otherwise is either a liar or a fool.

--Meanwhile, any attempt to interfere with otherwise open and competitive markets, in the name of "fighting price gouging," is both disingenuous and counterproductive, as it will, at best, be futile and may, at worst, disrupt (i.e., worsen) the very markets that the central planners fear and allege are already "disrupted" (e.g., by a recent hurricane).

--New York City has not had a recent hurricane, or any other event that would "disrupt" any markets.

You may now proceed:

The City Council voted yesterday, 43-6, to override Mayor Bloomberg's veto of a bill that would make it illegal for gas stations to raise prices more than once a day.

Over the summer months, council officials said they saw evidence of price gouging, with some stations raising prices arbitrarily, sometimes more than once a day.

So, to re-review:

--Since "price gouging" is a fiction, it follows that "evidence of price gouging" is also a fiction. More specifically, "raising prices arbitrarily" would not even be possible in a perfect monopoly facing a perfectly inelastic demand curve. The retail gasoline market in New York City has neither of those characteristics, not even close.

--"A liar or a fool." Forty-three times over. Par for the course when it comes to the New York City Council.

--Not allowing retail vendors to raise their prices, even in this absurd and symbolic manner, will only disrupt the market. The laws of economics are not up for a vote.

--Again, New York City has not had a hurricane recently, or any other event that would "disrupt" any markets. Indeed, oil prices are falling quite noticeably. So why this particular action at this particular time — other than the fact that an election is approaching?

Remind me again how politicians are "enlightened public servants" — and why judges should defer to their actions?

More thoughts at Market Power.

To review:

Vague laws offend several important values. First, because we assume that man is free to steer between lawful and unlawful conduct, we insist that laws give the person of ordinary intelligence a reasonable opportunity to know what is prohibited, so that he may act accordingly. Vague laws may trap the innocent by not providing fair warnings. Second, if arbitrary and discriminatory enforcement is to be prevented, laws must provide explicit standards for those who apply them. A vague law impermissibly delegates basic policy matters to policemen, judges, and juries for resolution on an ad hoc and subjective basis, with the attendant dangers of arbitrary and discriminatory applications.

--Grayned v. City of Rockford, 408 U.S. 104 (1972), quoted in Village of Hoffman Estates v. The Flipside, 455 U.S. 489 (1982)

Armed with that, let's review the Federal Price Gouging Prevention Act, H.R. 1252:

It shall be unlawful for any person to sell, at wholesale or at retail in an area and during a period of an energy emergency, gasoline or any other petroleum distillate ... at a price that --

(A) is unconscionably excessive; and

(B) indicates the seller is taking unfair advantage of the circumstances related to an energy emergency to increase prices unreasonably.

Under this bill, every participant in the petroleum industry, from the franchisee of the corner gas station to the CEO of Exxon, is supposed to instantly know, under threat of civil and criminal penalties, the exact legal meaning of the following words:

• unconscionably
• excessive
• unfair
• emergency
• unreasonably

Not to mention similar terms deeper in the bowels of the bill: grossly, readily, usual, seasonal.

And if he doesn't know the exact legal meaning? If he takes a non-conspiratorial, non-insidious guess that happens to be wrong? Then too bad so sad: he will incur civil and criminal penalties that make antitrust violations (another hopeless swamp of gobbledygook) look like a parking ticket.

One becomes perplexed as to which approach to take when reading such a demented bill: To damn these politicians for not being economists (i.e., for not expecting them to know better), or to damn them for being lawyers (i.e., precisely for expecting them to know better).

This is not "reasoned statecraft." This is not "legislating from experience." This is not "giving experts the tools they need." This is pandering to the Great Unwashed (and the Great Uneducated). It is the Politics of the Two-Digit IQ.

One last thought:

Men of common intelligence cannot be required to guess at the meaning of the enactment.

--Winters v. New York, 333 U.S. 507 (1948)

We are not dealing with "men of common intelligence." We are dealing with politicians. That's precisely the problem.

And remind me again why judges should defer to these intellectual and moral defectives?

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One postscript:

The President may issue an energy emergency proclamation [that] may include a period of time not to exceed 1 week preceding a reasonably foreseeable emergency.

Translation: A merchant can be charged with criminal "gouging" for conduct that occurred before the opportunity to "gouge" even existed — he can somehow "pre-gouge." Kafka would be impressed.

If the Ex Post Facto Clause had any teeth left nowadays, then I would invoke it here. But why bother? Like so many of the Constitution's intended protections, the clause is essentially a nullity today.

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More thoughts at Reason Magazine, Hodak Value, Econbrowser, Knowledge Problem.