A Crisis Is No Time to Abandon Our Principles

The past 12 months have been dominated by crises of various kinds. Everything changed for most of the world last March. We were forced inside our homes and had to learn quickly how to adapt to working, and educating our children, from home. We worshiped alone. Some put off needed surgeries and preventative medical treatment. Fear is a terrible thing, and in its shackles, we are often willing to bend or even abandon principles.

As we moved out of 2020, another crisis hits us: The Colonial Pipeline attack, which disrupted petroleum supplies on the East Coast. This induced more panic buying and fear about the future and, for some, renewed calls for government intervention.

We’re tempted to ignore sound economic principles in both a systemic crisis like the pandemic and in more regional crises like oil supply disruptions. We cannot ward off bad things with good policy or wealth. What economics teaches us is that we need systems that are adaptable, such that when there is a disruption to the status quo we can discover new and better ways to function. Yet in a crisis, often people clamor for government intervention, propelled by their fear, to control markets and people. This leads to less adaptability.

The Colonial Pipeline attack provided another instance of fear-driven overreaction. You may recall seeing stories of people who were pumping gas into plastic tubs and garbage bags and loading up the back of their SUV’s. This hoarding is counterproductive to the ultimate end of increasing the supply of gasoline. The hoarding is driven by price-gouging laws which vary from state to state. Yes, that is a counterintuitive but accurate claim: Price gouging laws cause hoarding. It seems, on their face, like price-gouging laws are designed to protect consumers in a time of crisis, when, in fact, they harm consumers at times when we are desperate for gas.

Modern price-gouging laws usually prohibit the rapid increase of a price to an “unconscionable” level. This word is often used, which is vague and unhelpful. When there is an exogenous supply shock, in this case due to a cyberattack that disrupted the flow of gasoline in the pipeline, the natural and necessary market response is to allow the price to rise. When gas went from $2.58 to $2.88 and then $2.98 in a matter of days, it sent people scurrying for government protection. Price-gouging laws usually state that the price of an item can not increase beyond a certain percent, often 10 percent, based on the average price of that good over the past six months. The law thus suggests that anything above that 10 percent increase is “unconscionable.” But is it? Economics would suggest that not letting the price rise to its new natural level, which may very well be more than 10 percent higher than its six-month average, is unconscionable.

Market prices do important work in the coordination of people and goods, and they allow for discovery and adaptability. Market prices emerge because of trade and exchange; they do not exist prior to exchange and trade. Thus, no government agency can know what the price of gas should be after such a supply shock. The supply shock is disruptive and unwelcome, but the new price is what informs consumers that they must slow down their consumption.

Price changes inform us that underlying levels of scarcity are changed. If we are worried about conservation, which we should be, we must act prudently in the crisis, which means we each need to be induced to reduce our consumption on the margin. But price-gouging laws all but ensure that this adaptability and conservation will not occur. They provide incentives for hoarding, inducing the very behavior we want to avoid.

Economic principles reveal that we live in a world of scarcity, which means that our resources have varied and competing ends. As such, we must always ration; we cannot have everything we want the moment we want it. Prices, due to their nimble nature, instantly give us the information that we need to ration differently, and they provide productive incentives for us to do so. In this way, the price signal is decentralized and communicates directly to consumers without the need for bureaucrats and policy makers to get involved.

For example, if the price of gas could rise to what the market determined it should be after a crisis, there would be less hoarding and more gas for others. The problem with hoarding is that it preferences those who have time to stand in line or wealthy people who can pay to have someone stand in line for them.

Price-gouging laws, by prohibiting the natural or real price increase, allow those who can get there first to stock up. No one wants to be the victim of monopolistic price-gouging. But anytime there is a supply shock, whether it is brought on by a cyberattack, hurricane, ice storm, or pandemic, we need short-term prices to increase so that the longer-term prices decrease. When prices jump quickly, the market sends a profit signal to producers, which initiates a response to bring more product to the market — and this is exactly what we need. When the price cannot rise, would-be producers aren’t signaled, and consumers actually end up with higher prices.

Prosperity is marked by increased wealth, access, and affordability. No one wants to pay more than they did the previous day, and it’s also important to remember that no one today has a right to the prices they paid yesterday. But it’s not market control that provides the incentives to rescue us from a cost-crisis, it’s market freedom.