Tag Archives: Unintended Consequences

Unintended Consequences of Price Gouging Laws

gouge

From The OK Disaster Scam Prevention Packet, as prepared by OK Attorney General E. Scott Pruitt’s “Public Protection Unit”

Most states have laws that purportedly protect people from evil “price gougers” in the wake of man-made or natural disasters. Some are toothless and silly, affording publicity seeking politicians to give themselves some good press, while others are draconian or invasive.

One point to consider is that price gouging laws do nothing to address or fix the shortage of a certain commodity due to either high demand or diminished supply. They’re not a solution.

These laws impose a “finder’s keepers” marketplace, where those conveniently situated to suppliers can hoard much needed goods at what are effectively below-market rates, rather than a market-based economy where buyers and sellers can decide what prices they’d like to charge or the price they’re willing to pay.

Oklahoma’s law seems especially pernicious because it restricts the ability of prices to rise by 10% not just for the immediate time after the disaster, but for 30 days after – and for “dwelling units, storage space and goods related to home repair and restoration”, 180 days after.

While big-box stores like Home Depot and Lowe’s have the size and scale to absorb potential losses from such a prohibition, it’s doubtful that your local mom-and-pop hardware store will escape as unharmed.

Of course, there are individuals who would try and skirt the law, and that’s not hard to understand because it is a bad law. Jim’s Hardware could mark up all items by 55% immediately before the disaster, and presumably be able to better absorb the price shocks they’d experience afterwards. However, you can bet that your local “consumer reporter” would be all over that in about a New York minute.

Lastly, even if price gouging laws do result in savings before the shortages occur, it’s worth asking whether, on net, the prosecution of violators if price gouging laws ends up costing taxpayers more than the money the few who were lucky enough to stock up on D-Batteries and bottled water saved?

Put another way, can you put a price on feeling good that you weren’t “ripped off” — even if you are living in the dark and thirsty? Will that round out the balance?

Could it be that these laws harm more than they help?

Here’s a good video on the topic:

Bomblecast #20 — The Minimum Wage

ep20

In this podcast, we talk about the minimum wage and President Obama’s proposal to raise it $9 an hour.

Here’s Episode #20:

Michigan Mandates “Buy American”

Of course, just a day after Independence Day, it’s time for some in the media to write about how one state is pursuing economically stupid policies under the flag of patriotism.

55KRC Radio asked on facebook:

Isn’t it just painful to think that a U.S. flag is not made in AMERICA!?

The post linked to this article, which noted “Flag sellers in Michigan said this is the first Fourth of July under a new law requiring all U.S. flags at state government buildings to be domestically made.”

Patriotic, right? Think again. I don’t see anything patriotic about government picking winners and losers, even when it comes to our country’s flag.

You mean to tell me there aren’t domestic flag sellers who sell flags made in China, Canada, or anywhere but the U.S.? Did the law require that they be sold by a Michigan company? When the flag is worn, and must be ceremonially burned, does it have to be done with American matches in an American-made 55 gallon drum that once held American oil?

I’m kidding about the latter, but silly policies originate out of well-intended, but still silly, laws like Michigan’s. One wonders, does this law apply to Michigan state flags?

Look, the flag is such an important symbol that no government official would be stupid enough to advertise that flags — on a pole or given out during a parade — aren’t American-made. That stings. I get that.

But mandate that all government buildings use American flags? Economic nonsense, yes, but popular economic nonsense nonetheless. I’m sure some budget geeks in their offices in Lansing aren’t too happy with this change, since Michigan is low on cash.

Don’t forget to consider some of the unintended consequences…. like:

  • It will drive up demand for American-made flags, making it likely that Michiganders who want an American-made flag will pay a higher price.
  • Higher demand and higher prices might make it more likely that people will purchase foreign-made flags.
  • Limiting competition means that it is likely government will have to spend more taxpayer dollars then they otherwise would.

In the article, a few choice quotes:

“A U.S. flag,” Carol Klee said, “should be made in the U.S.”

“Customers come to us because they know our flags are made in the U.S.,” he [Dancy] said. “People take pride in buying quality.”

I disagree that an American flag “should” be made in the United States. We have limited resources, should we be mandating that those resources be used to produce all of our flags, like Mrs. Klee suggests? No. I’d rather those labor and capital resources go to more productive uses, like building airplanes or medical imaging equipment. Some flags will be made the in the U.S., and that’s fine with me. All of them, though? Come on. By Carol’s logic, should all Michigan flags be made in Michigan? Detroit flags made in Detroit?

Just because something is made in the United States does not always mean it is high quality, which is what Dancy implies.

I think we have a great work force, but “Made in the USA” doesn’t always mean something is a high quality good. American companies make both high and low quality goods, and products in between. There’s nothing wrong with that. Specializing in low-quality goods isn’t something people should be ashamed to admit takes place all over the globe, including here in the United States.

There are high-quality American flags and there are low quality flags. American-made flags tend to be of the high-quality type, since most low-quality flags are made in low-cost  places, and are silk screened. Sewn flags are costlier and more intensive (both in labor and machinery) to make, which is more our specialty, but cost much more.

Which is why I think this mandate is ill-advised, since it pretty much guarantees, increased demand and other factors aside, that Michigan’s government will spend more per flag. 

Additional views on Buy American clauses:

NYT Editorial: “Indeed, whether it is from the point of view of diplomacy or of job creation, “Buy American” is a terrible idea. One that could make the global recession worse.”

Bloomberg’s Unintended Consequences

Sensible people should be outraged by New York Mayor Bloomberg’s recent nanny state sugar decree.

However, I’d posit there’s a big (largely unreported) unintended consequence: it might make people drink more, not less, sugary drinks. It’s quite simple, actually.

Here’s why:

The “Bloomberg rule” calls for a ban of sugary drink sales for any size of 16 ounces or more. The most common sizes these days are 12 and 20 ounce drinks. Bottles and cans. Most people will order a bottle, while some prefer a can.

Regular bottle drinkers, if relegated to a 15.99 ounce drink might buy two instead of a normal 20 ounce drink. Meaning they’d consume close to 30 ounces, nearly 10 more than they normally would.

Nobody likes obesity, but everybody should love freedom to purchase the drink size of their choice. Maybe that’s just me. 

Basic Tenets Part 6 — Beware of Secondary Effects!

Source: 4-block world (h/t Mark Perry)

As you know, I’m writing brief blog posts on these 8 guideposts for economic thinking.

1. The use of scarce resources is costly; trade-offs must always be made.
2. Individuals choose purposefully —
 they try to get the most from their limited resources.
3. Incentives matter — choice is influenced in a predictable way by changes in incentives.
4. Individuals make decisions at the margin.
5. Although information can help us make better choices, its acquisition is costly.
6. Beware of secondary effects: economic actions often generate indirect as well as direct effects.
7. The value of a good or service is subjective.
8. The test of a theory is its ability to predict.

Source: Economics: Private and Public Choice, | Gwartney, Stroup, Sobel, Macpherson

This is probably one of my favorite aspects of economics because people rarely consider the unintended consequences of certain policies. Especially politicians, political hacks, and worst of all: hacktivists.

Thomas Sowell put it this way in his book Basic Economics:

“One of the big differences between economics and politics is that politicians are not forced to pay attention to future consequences that lie beyond the next election. An elected official whose policies keep the public happy up through election day stands a good chance of being voted another term in office, even if those policies will have ruinous consequences in later years. There is no “present value” to make political decision-makers today take future consequences into account, when those consequences will come after election day.

Although the general public may not have sufficient knowledge or training to realize the long-run implications of today’s policies, financial specialists who deal in government bonds do.”

Bastiat put it a little more bluntly:

“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”

It doesn’t matter the political party, listen closely to the rhetoric of folks and you’ll see that they promote economic policies that their constituents or supporters favor, but they won’t often delve into the weeds of the nitty gritty unintended consequences of what they’re proposing.

First, some definitions: direct effects result directly from the policy. More often than not, they are the focus of the policy (make type of energy X “cheaper”, or make socially frowned upon behavior Y more expensive.) Indirect effects result indirectly from the consequences of pursuing a policy. Indirect effects can be the intended goal of a policy, but that is not often the case.

A few examples:

Steel Tariffs, Import Quotas, and Buy American

Coming from Cleveland, steel is a sensitive topic for many of my friends. I’ve written about it in the past on this blog. President Bush pushed for (and imposed) tariffs on foreign made steel. Many Presidents and Congresses did so before Bush. Senator Brown (OH) is pushing for “Buy American” policies to require our military to use American steel in our military armor.

Both have unintended consequences that are rarely brought up in the debate.

First, import quotas and tariffs serve to make imported steel more expensive, thus making American-made steel more competitive or in some cases, cheaper by comparison. However, the overall price for domestically available steel increases as a result of that distortion. It also can cost jobs in other industries.

From my earlier post:

“President George W. Bush’s trade policies on steel would protect between 4,375 and 8,900 jobs — but at the expense of an estimated 35,000 to 71,200 jobs. Now, if you were one of those 35,000+ workers who lost their jobs, you might not realize the connection between tariffs or import quotas and why you lost your job.”

Similarly, Sen. Brown (who supports far more zealous action than President Bush) pushing for the DoD to buy American steel for its armor has unintended consequences. The first is it will increase the demand (artificially) for U.S. steel, which will likely drive prices higher. People wishing to use American-made steel (let’s say because it’s part of their made in America marketing campaign) now have to compete for that steel at higher prices, or buy imports.

Ironically, the result of making the military “Buy American” might be that it is more expensive for Americans to buy American-made steel goods, or it might lead to them buying more imported goods.

Of course, this is simplifying things — we aren’t taking into account our environmental regulations, tax rates, the effect of unions on wages, OSHA and other factors on the domestic steel industry, but you get the point.

Using food/feed as a fuel source:

There is nothing wrong with the idea of using alternate sources of fuel. My first landlord here in Virginia used to power his old Mercedes Station Wagon with frying oil. Sure, it led to flies being attracted to the door to my English basement, but it saved him money.

Agriculture is an area where there are tons of government-imposed distortions, from price controls, trade restrictions to subsidies. Name a type of food, and there’s probably some law that benefits domestic producers.

When it comes to using tax policies to provide benefits for ethanol production, there are unintended consequences. Corn is a scarce good (although we plant a lot more of it because of our ethanol policies) with alternate uses. Now, not all corn is the same, but corn is used in our food and it is used in the food of animals — from livestock to feeding your hamster. (Special note: since land is also scarce, increasing acreage for corn leaves less land for other crops.)

We also mandate that our unleaded gasoline use a blend of ethanol, in addition to providing lots of subsidies. Ethanol, like steel tariffs, import quotas, and “Buy American” mandates, is bad policy.

It doesn’t take a genius to recognize that our ethanol policies keep corn prices artificially high. Of course, people who use corn for more normal things — like feeding animals — dislike the policy very much because it imposes higher costs on them, and eventually, higher costs on you when you buy their products.

Ethanol (outside of the Midwest) is pretty well recognized as a bad policy decision by our government. This is because we’ve kept at this bad policy for so long we’ve seen the long-term effects.

Yet, Congress and the White House makes decisions every day that can have similar long-term effects, without having a debate on serious thoughts like these: “Hey, doesn’t this sound kinda similar to that whole ethanol thing we did?”  Sadly, our bad ethanol policies are not dead.

Conclusion:

It would be better for us to stop picking winners and losers. I have no reason to believe that bad trade policy and bad agricultural/energy policy actually lead to increased U.S. employment. Rather, the policies keep more people employed in favored industries, but with costs — lower employment in other areas and higher prices for some others.

Keeping goods and services at market prices, rather than artificial/distorted prices, is (in my opinion) better for the long-run. We cannot (and should not) make everything. Whether it’s fuel, steel, corn, cotton or sugar, our policies should be neutral. Similarly, we cannot subsidize everything, and it would be better to subsidize nothing.

Remember, whenever we try and keep out those “evil” foreigners trying to sell us goods at lower prices (the horror!), we reduce the purchasing power of others. This means they have less of an ability (and willingness) to buy our exports. You can imagine what that does to U.S. employment.

In short, the secondary effects of well-intentioned policies often retard, not grow, the economic pie of our country and the world.

Further Reading:

Econlib: Unintended consequences

Sowell: The Housing Boom and Bust

Cato: The Meaning of Hayek

Hayek: The Road to Serfdom