Good Government Greed, Bad Economic Freedom!
By Pierre Lemieux
When the Treasury auctions government bonds (more than $100 billion per week these days), its goal is to obtain the highest possible prices (pay the lowest interest rate): that’s why a seller holds an auction. But private individuals are forbidden to hold auctions of goods deemed important in an emergency; they are forbidden to charge what the market will bear. Sanctimonious officials defend it and the populace often applauds.
In the sort of announcement that has become familiar in the current crisis, the Attorney General of Iowa, Tom Miller, announced a second lawsuit against a Brenda Kay Noteboom who had auctioned toilet paper and sanitizing products on eBay, and sold them at prices judged excessive by the state’s “price gouging” law. The majority of American states have such laws on the book (not counting the federal Defense Production Act). This is not the first prosecution against private auctioneers and it is not surprising that price-control laws would apply to formal auctions because, after all, the market itself is a vast, continuous, and invisible auction. “Price gouging” laws naturally target all free markets. As Miller explained back in April,
The prohibition on charging excessive prices applies to all sellers of merchandise, including brick and mortar stores, suppliers, internet stores, and sales on social media sites. Sellers who accept excessive prices on online auction sites are not exempt from Iowa’s price-gouging law.
His current attempt at justification in the official press release is worth quoting:
“Price gouging can harm all consumers, even if they don’t purchase an item at an excessive price,” Miller said. For example, selling household items necessary for a pandemic at substantially increased prices can lead to panic, hoarding and shortages of items needed during an emergency.
An elementary understanding of microeconomic theory suffices to grasp why this statement is false from the beginning to the end. A consumer who buys at an “excessive” price obviously thinks it is better for him to pay more than to go without (or wait weeks or months). The appearance of higher prices motivates producers to produce more, helping to avoid a shortage and eventually pushing prices down. Much more than expected higher prices, it is the expectation of shortages (nothing available even at higher prices) that causes panics. The expectation of high prices does lead to hoarding but, when these prices materialize, it is actions like Ms. Noteboom’s—selling hoarded goods—that ease the pressure on prices. Consumers will hoard less in a panic if prices are higher. Speculation on high prices does not cause them, it evens them out over time, while calling forth new supplies. Shortages are not caused by something becoming scarcer but by price controls that prevent the market from adjusting and supplying the good if somebody is in dire and immediate need of it. All goods are always “needed” by some people, and not only in government-declared emergency, which is why the free market is such a useful auction.
Besides ignorance of elementary economics, why is it that Miller, other attorney generals, and most people have come to think that way—in the “country of free enterprise”!—is an interesting question. In a previous Econlog post, I quoted a US postal inspector’s deep philosophical remark on the federal prosecution of a shopkeeper who sold his hoards in his own store (“N-95 filtering face piece respirators, PPE face masks, PPE surgical masks, PPE face shields, PPE gloves, PPE coveralls, medical gowns and clinical-grade sanitizing and disinfecting products”) at prices consumers were willing to pay for things they could not find elsewhere at government-decreed prices:
the conduct charged in the complaint is reprehensible and against our most fundamental American values.