Hurricane season is upon us, which means that things will get pretty dangerous for a lot of areas -- not just from high winds, but from severe flooding. All potential targets of hurricane blasts should take precautions.
One of those precautions should be for politicians to embrace the cold, heartless laws of economics. Economic laws don’t care about emotional, heart-rending situations. They exists whether we like them or not. Political interventions into the workings of those laws may make people feel good about themselves, they may make politicians more popular among a certain set of voters, but the interventions inevitably have adverse effects that the politicians and others who promote them are not held accountable for.
In almost every major disaster we hear politicians threatening people who offer goods and services, promising to severely punish any price gouger. The essence of every instance of price-gouging regulation is price controls, the setting of prices below what the market price is.
In a market, the price is related to the relative amounts that consumers demand, meaning they are both willing and able to buy at any given price, and the amounts supplied, meaning the amounts that suppliers are willing and able to sell at any given price. The higher the amount demanded is relative to the amount supplied, the higher the price will be, and vice versa.
When a hurricane makes landfall somewhere, we all know what will happen in reality. Homes and other buildings will be destroyed or severely damaged, water supplies will be contaminated, food and most other goods will become more scarce than usual. There will be a huge increase in demand, not just for immediate consumption, but also to replace the massive amounts that have been destroyed. There is a difference between scarcity and a shortage. Economics and economic laws are about how people deal with that scarcity.
At the same time, there will be a severe decrease in the amount that suppliers are willing and able to offer for sale. Supplies of consumer goods and building materials will have been damaged or destroyed. When we have a tremendous increase in demand combined with a severely restricted supply, the inevitable result will be a rapid rise in prices. It is a recognition of relative scarcity.
The inevitable effect of maximum price controls, of which gouging threats are a form, is to transform scarcity into a shortage. Normally when a price increases, it is a signal for consumers to buy less and for suppliers to provide more. When the price is forced significantly below that level, the demand is artificially exaggerated and the supply is prevented from fully adjusting to the reality. Given the actual situation, the quantity demanded is much higher than the quantity supplied. An actual shortage is created, whereby some people who need the items and would be willing to pay a higher price cannot get any, even though others who didn’t need them bought more than they really needed because the price was obviously less than the market price.
These things are inevitable, regardless of politics, regardless of feelings, regardless of compassion. If politicians in one of the affected areas or at the national level really want rapid recovery, the obvious step is to embrace price gougers, to invite suppliers, from inside and outside the area, to wring all of the profit from it that they can. The other side is that only people with the highest needs and wants will be willing to buy at the high prices. The result will be that the area will quickly be flooded with goods and services. The rapid increase in supply will drive prices down. Not only will victims of the disaster benefit from lower prices, they will have all of the materials they need to rebuild at prices they can afford. Compassionate results come from embracing reality, not from rejecting it.