When economic theory becomes realSubmitted by Dither on Fri, 11/02/2012 - 16:36
Where I live, on the east end of Long Island, New York, there are severe gasoline shortages. The recent hurricane shut down the pipelines and wholesale terminals that supply this region. But that is only one part of the problem. The natural disaster was followed by a man-made disaster.
Under conditions of economic freedom, a reduction (or even a predicted reduction) in the supply of gasoline would have caused prices to rise, which would have tamped down on demand, effectively rationing the existing supply. At the same time, rising prices would have made it profitable for new sellers to enter the market, thereby increasing supplies and eventually reducing prices through competition.
Unfortunately, in the state of New York, it is illegal to raise prices during an emergency. Doing so is called "price gouging," and carries stiff penalties. What, precisely, constitutes price gouging? This question is not answered in the text of the law, which leaves it to prosecutors and an angry lynch mob (aka a jury) to decide. The end result is that sellers are dissuaded from raising prices. Anti-gouging laws are effectively price controls, and have the same effect.
In the midst of a gasoline shortage, higher prices would have conveyed to people the necessity of reducing their consumption. If prices had temporarily doubled, for example, people might have turned to carpooling or biking to work, or filling their tanks half-way instead of topping off, thereby leaving some gasoline for others who might have needed it.
Instead, not only did people NOT cut back, they actually INCREASED their consumption because they knew shortages were likely, and prices remained at pre-storm levels. Before, during and after the storm, people went about buying gasoline in large quantities at artificially low prices. I witnessed people filling plastic containers with gasoline in addition to topping off their vehicles.
The results have been predictable. On my commute to and from work (a one-hour drive each way), I pass about a dozen gas stations. Most of them are out of gas and closed for business. The few that remain open have lines of cars outside them stretching half a mile down the road, both ways. It seems likely these sellers will soon run out of gas as well, and many people who spent hours waiting will have nothing to show for it. Tempers are flaring, fights have broken out, robberies have been committed, and police are now standing guard at the stations that still have gas.
Finally, having made it illegal for the market's price system to ration a dwindling supply of gasoline, the government stepped in with rationing of its own. It mandated that gas stations limit the amount of gasoline purchased by customers.
In the midst of all this chaos, politicians are urging consumers to report sellers who raise prices — in other words, for doing the one thing that, had it not been outlawed, would have prevented the situation from getting so desperate in the first place. And it's clear to me that the politicians are only pandering to the economically ignorant masses. Under one story I read online about the gas shortages, a woman commented, "At least they're not raising prices." She went on to say that she had already reported one gas station for having modestly increased its prices. Other commenters congratulated her.
The pipelines and terminals will likely come back online soon. There are contradictory reports from elected officials and industry representatives as to whether it will be a few days or more than a week. I hope it is the former.
Still, it's hard not to feel like we are doomed when a real crisis hits us — one that won't be over in a week. The people are their own worst enemy. They aren't able to identify cause and effect. The worst sorts succeed in politics by playing to the basest instincts of an ignorant herd. Problems are compounded by one government intervention after another.
Let this be a cautionary tale. Good luck to all of you.