Political Advice For The Next Natural Disaster
In a country covering three and a half million square miles, there are bound to be numerous natural disasters occurring over the course of any particular year. The typical reaction from politicians, mayors, governors, and even presidents, is to issue solemn threats to all potential sellers that they will be punished if they are caught price gouging.
Gouging regulations are a form of maximum price control. The only difference is that, with formal price controls, there is a stated upper limit beyond which offenders will be punished. With gouging, the upper limit is open to interpretation. In both cases, the net effect is that prices are held below what the market requires, often significantly so. The relationship of supply and demand to prices is one of those principles that are almost universally accepted by economists, as well as anybody else who has taken the time to understand it. It still holds true during disasters.
Whether or not politicians, consumers or anyone else likes the reality, when there is scarcity of anything, where the quantity demanded exceeds the quantity supplied, the price will automatically rise, and the greater the demand or the greater the scarcity, the higher the price. In a widespread disaster, many goods are likely in short supply, as stocks have been destroyed, as are vehicles and roads to resupply. At the same time, homes, food, and water are destroyed or contaminated, causing a spike in demand for these things, as well as building materials and most other supplies. Prices naturally rise rapidly. Calling it gouging is a politicians way of trying to look like a white knight saving the people from certain destruction.
Recognizing that people respond to incentives, however, what happens when prices are allowed to rise as the market would dictate? At a high price, families without a home would try to squeeze more people into a hotel room rather than rent multiple rooms. An extra room is thus left for another family. People would conserve fresh water, boil their own, or even sell some of their excess to those who don’t have any, and the list goes on. Demand is held in check.
On the other side, if prices were allowed to rise appropriately, vendors would work harder to replenish and outside suppliers would bring materials in, decreasing the scarcity. On both the supply side and the demand side, the actions would mitigate the price spike.
With price controls, in nearly every case, people purchase more of the bargain materials, taking it off the market, leaving none for others who need it, exaggerating the shortage. Suppliers have little incentive to incur the extra cost to expedite new deliveries, and outside suppliers are repelled by anti-business mentality.
If politicians really had the well being of the people in mind, when the next disaster strikes, they would make a loud and clear pronouncement: “Price gougers are welcome! Everyone come and make as much profit as you can!” What you would find is that people conserved more at higher prices and helped each other through difficult times. Not only would you see local vendors scrambling to get new supplies, within days you would witness an influx of out-of-town suppliers with truckloads of goods and an army of contractors and other workers descend upon the area. Within that same period of time, there would be so much extra material and supplies that prices would likely fall to the previous level or below. Instead of many years, as it did with Hurricane Katrina, recovery would happen quickly.
Politicians being politicians, I don’t realistically believe that proposal would see the light of day. They are more interested in pandering to vocal activists and to populist economic ignorance.
Dan McLaughlin is the author of “Compassion and Truth-Why Good Intentions Don’t Equal Good Results.” Follow him at daniel-mclaughlin.com.