One would think that basic economics and economic history, including a century of communist experiments, have demonstrated one thing: when prices are forbidden to adjust, shortages are created, the allocation of goods by government becomes a nightmare, and black markets develop. It would seem that especially in times of emergency, whatever government does, it should leave prices alone.
Prices of medical products related to the current epidemic (face masks, disinfecting products, medical gowns and gloves, ventilators, and such) just like prices of common consumer goods were already capped by states’ “price gouging” laws triggered by the governors’ emergency declarations. Price controls have been further tightened by President Trump’s March 23 Executive Order on Preventing Hoarding of Health and Medical Resources to Respond to the Spread of COVID-19 and by the March 25 Notice of Designation of Scarce Materials or Threatened Materials issued by the Department of Health and Human Resources. Not surprisingly, shortages have appeared.
Note that, in a free society, if a government wanted to put its hands on a good or service, nothing would prevent it from bidding on the free market like everybody else. A free-market price is the result of a continuous auction. But—and that’s the problem from Leviathan’s viewpoint—the government would have to compete against private bidders, such as individuals or private hospitals. In a statist regime, the majestic state will not humiliate itself into having to bid against ordinary people.
In a shortage situation created by itself, a government may choose to buy things instead of requisitioning them. It will then benefit from the low prices it mandated, which is also a form of requisition. Moreover, it will probably find ways to get in front of the queue. Axios reported an amusing event (“Inside the Start of the Great Virus Airlift,” March 29, 2020): the federal government bought 60% of the total load of medical supplies and all the N95 masks carried on the first FEMA-chartered plane coming from Asia—from Shangai of all places. (And we who thought that imports from China were a calamity!)
Producers and middlemen who hold stocks of the price-controlled products are faced with a quantity demanded much greater than what they can supply; and they are forbidden by law to let prices rise and signal where are the most-valued uses and the most imperative demands. What are they going to do? Sell to the first-come, more or less haphazardly? Ration themselves the product among their customers? In the case of “scarce” or “threatened” products, this might be risky as it could bring on them the wrath of the central planner.
So, reveals an interesting Wall Street Journal story (“Manufacturers Seek U.S. Help in Deciding Where to Ship Scarce Medical Goods,” March 29, 2020), the producers and distributors beg the government to tell them to whom they should ship their products. Two short excerpts:
“We just cannot and never will have a window into what the most urgent need is,” said Scott Whitaker, chief executive of the Advanced Medical Technology Association, a trade association that represents producers of medical devices. …
Charlie Mills, chief executive of Medline Industries Inc., a large privately held manufacturer and distributor of medical supplies, said as the company works to ramp up its production of supplies, it is being inundated with orders. He said he would welcome the government having a “strong say” in how to respond.
Since prices are not allowed to rise with rising short-run marginal costs, the shortage will continue. (In fact, it will continue even in the long term if the long-run industry curve shows diminishing returns to scale.) As by an invisible hand, the government will be pushed into doubling-down on authoritarianism. This reaction was illustrated by Trump’s bossing General Motors around and by Peter Navarro’s talking tough, which is easy when you have laws and decrees and armed men behind you. Navarro is Trump’s new “equipment czar”; the informal title says everything.
A little secret, though, lied in plain sight in Soviet Russia and Eastern Europe, or in Venezuela more recently: coercion does not work very well and does not relieve shortages (although it may be effective in getting the goods in the hands of the Prince’s favorites). The same was true was true when the French government controlled the price and allocation of wheat in the 18th and 19th centuries. In his Treatise on Political Economy (first edition: 1803), Jean-Baptiste Say observed:
Markets are never well supplied by gendarmes and henchmen. [My more literal translation of the original French: “Les marchés ne sont jamais garnis de denrées par des gendarmes et des sbires.”]
When the government bans products or, what partially amounts to the same, caps their prices, black markets develop. Americans being very entrepreneurial, the contrary would be astonishing here. There are some indications that this is starting. The attack on “hoarding” by the president and his attorney general is a move against black markets and is very similar to the reaction of all governments that control prices. Peter Navarro, who—to maintain my academic tone—is not the most knowledgeable and enlightened henchman in the president’s entourage, declared (“‘This is War’: President’s Equipment Czar to Use Full Powers to Fight Coronavirus,” Wall Street Journal, March 28, 2020):
This is war. … The clear signal President Trump wants to send to anybody who thinks they can hoard or price gouge is that they must immediately move their inventory out of their warehouses and offer them at a fair price.
On July 26, 1793, during the Reign of Terror, the National Convention, the most liberticidal parliament that followed the 1789 French Revolution, made hoarding a capital crime and ordered hoarders (“les accaparateurs“) to declare and put for sale the essential products they had. (See Florin Aftalion, L’économie de la Révolution française, Hachette, 1987, p. 356) By that time, needless to say, the individual rights guaranteed in the Declaration of the Rights of Man and the Citizen had been forgotten. These were difficult times, times of emergency.
President Trump even suggested that some hospital employees might be stealing masks (the Wall Street Journal says “mismanaging” masks; “White House Extends Social-Distancing Guidelines Until End of April,” March 30), presumably to sell them on the black market:
“Where are the masks going?” Mr. Trump asked, adding later, “I don’t think it’s hoarding. I think it’s maybe worse than hoarding.”
Theft is, of course, to be condemned, which also covers the cases when the government seizes legitimately obtained private hoardings. Black markets may not be the best way to cultivate virtue but they are mostly a morally legitimate business. For the buyers, they provide a welcome escape route from inescapable shortages. “Hoarders and speculators,” as governments usually call them, are very useful.
Perhaps unwittingly, the Wall Street Journal gave us a glimpse at the legendary inefficiency of government allocation (by FEMA, in this case) when it revealed that, in an attempt to organize the allocation of medical supplies,
FEMA last weekend sent a spreadsheet to producers and distributors.
Not much has changed since old-time government allocation, except that it’s now done electronically. When price adjustment is forbidden, you get the government of the spreadsheet, by the spreadsheet, for the spreadsheet.
READER COMMENTS
Matthias Görgens
Apr 1 2020 at 10:16am
Alas, those price controls are insanely popular. And shortages tend to make them even more popular. At least for a while.
blink
Apr 1 2020 at 10:37pm
Like @Matthias, I am afraid the ship has sailed on this one. The only way to avoid these restrictions is to pre-commit. Let’s agree to flexible prices next time and set up a service poor people, etc. may call who are liquidity constrained or in other special financial circumstances and help them directly — perhaps provide loans, coupons, or access to philanthropic funds we have collected in the interim.
Pierre Lemieux
Apr 2 2020 at 9:15am
@blink: Interesting ideas. How to implement them is the problem.
Maniel
Apr 2 2020 at 12:06am
Someone (reportedly) once said, “we get the government we deserve,” or words to that effect. Since, most citizens have little interest in economics, we usually get governments with little or no knowledge of economics. Our current government is exemplary in that regard, a situation that confirms (for me) Bryan Caplan’s opinion of the (low) value of education.
Pierre Lemieux
Apr 2 2020 at 9:22am
@Maniel: I would not give up so quickly on education. If the situation is as bleak as you seem to describe it, we’ll soon be back to the caves.
Pierre Lemieux
Apr 2 2020 at 9:29am
@Maniel: To double down on pessimism, back to the caves is more or less what Hayek feared in The Fatal Conceit.
Tom DeMeo
Apr 2 2020 at 9:32am
You are a basketball coach with several good players, and you also coach LeBron James. You believe in the power of competition to improve your team, so you set up some practice skill competitions, with the reward being that you get to play the last 6 minutes of the 4th quarter if you are in the top five.
Because LeBron is LeBron, he wins these competitions far more often than anyone else on the team, but he doesn’t always win. Still, the coach believes in the system and enforces it even with LeBron, and the team makes it to the finals. The system promotes effort and competitiveness from the entire roster.
In the last practice of the year, several other players perform unusually well, and LeBron gets a couple of bad bounces. He doesn’t qualify. Do you play him in the 4th quarter of game 7, or do you stick with a system that gives the right signals over the longer term?
Markets do not perform better, or even well, in the short term when circumstances are changing rapidly. What they do is adjust better over the longer term.
Jon Murphy
Apr 2 2020 at 10:09am
As compared to what?
Tom DeMeo
Apr 2 2020 at 12:34pm
As compared to a competent logistics command structure with a set of focused objectives.
Jon Murphy
Apr 2 2020 at 1:16pm
Why do you assume markets, or more accurately market participants, do not have “a competent logistics command structure with a set of focused objectives”? People are not behaving randomly
Mark Z
Apr 2 2020 at 11:52am
“Markets do not perform better, or even well, in the short term when circumstances are changing rapidly.”
Yes, they usually do. What evidence is there for this broad assertion that markets only work in a stable long run? Supply for goods often adjusts rapidly to prices. This has happened with masks in the current crisis. The supply is responding, but price controls are diverting it elsewhere.
Tom DeMeo
Apr 2 2020 at 12:54pm
“Supply for goods often adjusts rapidly to prices”
That is certainly true, but in a short run emergency situation, price signals have not adjusted to market knowledge. They are just actors seeking perceived marginal advantage. It takes longer for a market to reach an equilibrium than it does for a smart leader to make a triage assessment.
Markets don’t work better because they are magic. They work better because they provide for feedback and adjustments to failure. When circumstances change dramatically, they start from a point of an unstructured free for all, and then the consequences of the transactions inform improvement. We don’t have time for that at the moment.
Jon Murphy
Apr 2 2020 at 1:17pm
Right; Because, as Mark points out, prices cannot adjust by legislation. It’s not a market failure; it’s a government failure
IVV
Apr 2 2020 at 10:03am
I suppose the true issue is when is the problem hoarding, and when is it an attempt to corner the market?
I’d imagine that personal hoarding, or the oversurplus stockpiling of a scarce good, is a rational response to a shortage. If you can’t know when a particular good is going to be available and in what quantities, then when you have the option to acquire that good, you do, even if you don’t need it yet. You’re still bearing the warehousing costs (even if it’s just navigating around the mountain of toilet paper in your bedroom), market effects be damned.
Secondary to that is opportunistic hoarding, where you overstockpile a scarce good for sale on a secondary (maybe black) market. This is taking advantage of an opportunity and can be good for the hoarder, even though it can exacerbate scarcity. This exacerbating of scarcity is the true problem inherent in this; if you could claim this arbitrage without affecting scarcity, no one (except Leviathan and its allies) would have a problem.
However, then there’s market cornering, where you try to purchase everything available on the market to drive up scarcity and force everyone to pay your price. This is another form of market failure, because prices once again cannot be discovered. This is bad for everyone and should be guarded against. Most of the time, this is impossible, but opportunities abound when there’s a shortage. This may be caused by government or not.
Pierre Lemieux
Apr 3 2020 at 1:27am
IVV: Speculators and hoarders buy low and sell high; otherwise they go bankrupt. I think it is Jean-Baptiste Say who said that just as merchants move goods in space, speculators move goods in time.
Anne Leroux
Apr 2 2020 at 10:58am
Up in Canada, in 2015 election, we discarded a competent, quiet, brilliant, hard working economist, for a trust fund baby with great hair, whose only claim to fame is that he can string long series of adjectives together and pretend its a speech. POOR Canada!
Mark Barbieri
Apr 2 2020 at 11:53am
I have tried explaining the problems of price controls and anti-gouging laws to many of my friends, some of whom are smart, well educated, and predisposed to favor free markets. Virtually all of them still support anti-gouging laws and price controls during times of crisis. It’s hard not to give up. People just don’t get it.
Maniel
Apr 2 2020 at 6:37pm
@Mark,
Don’t give up (as Pierre said to me); you are moving the equilibrium, however slightly.
Still, the reason for my reply is that there has to be a board game (or on-line game) somewhere in all this. The basis of a relevant simulation would be that price acts as the mechanism to bring supply and demand into balance. Somehow, people have learned that it’s wrong to raise the price of just about anything for just about any reason (they don’t really believe in markets). There’s a lot to unlearn there, but it might be possible through experience; just a thought. Of course, to be realistic, the market for economics based games is probably a little thin.
Mark Z
Apr 2 2020 at 11:56am
Amusingly, given the importation of masks from China, the US actually still appears to be (or was fairly recently) exporting masks on a large scale to other countries in part because domestic price restrictions diverted sellers abroad (one of the links at Marginal revolution few days ago): https://www.forbes.com/sites/daviddisalvo/2020/03/30/i-spent-a-day-in-the-coronavirus-driven-feeding-frenzy-of-n95-mask-sellers-and-buyers-and-this-is-what-i-learned/#4bb7ce3d56d4
Pierre Lemieux
Apr 3 2020 at 1:41am
Thanks, @Mark Z, I had not seen this story. Very interesting and consistent with the hypothesis that price controls are killing American buyers. I am a bit surprised, though, that American buyers don’t make the moves, because they would not be the ones in legal jeopardy. And they must be entrepreneurial enough to find the money quickly. Or perhaps they do, and it’s the sellers who prefer to sell to foreign buyers to avoid “price gouging”.
Pierre Lemieux
Apr 3 2020 at 3:29pm
The next step, if history is any guide, is to try and correct the failure of previous interventions with another one (until the next one): forbid exportations. Indeed, the White House has noticed the bad exporters: see, in today’s WSJ: https://www.wsj.com/articles/3m-under-attack-from-white-house-pushes-back-11585922687?mod=hp_lead_pos3.
Vivian Darkbloom
Apr 3 2020 at 7:36am
“The attack on “hoarding” by the president and his attorney general is a move against black markets and is very similar to the reaction of all governments that control prices.”
I’m not sure the use of the term “hoarding” is appropriate here or particularly pertinent to the issue of government *price* controls. By most definitions, “hoarding” means keeping goods *off the market* (not even *on* the” black market”) to willing buyers in the hope that the increasing scarcity will drive the price up. I might, for example, anticipate a pandemic or in the early stages of a pandemic anticipate it will become worse and store a vast number of NP-95 masks in the belief that the due to the scarcity of masks available for sale “on the market” buyers will become more desperate as the death toll rises. How many people need to (needlessly?) die before the supply (in the sense of masks offered for sale) is so low that the “optimal price” (from the perspective of the hoarder/speculator) is achieved and the supply “market”‘ can catch up?
As you noted in response to a prior comment, this is equivalent to “moving goods in time”. Requiring that goods be offered for sale does not, in my view, necessarily equate with a government price control. And, the pandemic experts seem to agree (at least in *their* “silo”) that time is indeed of the essence.
Pierre Lemieux
Apr 3 2020 at 3:23pm
@Vivian Darkbloom: I think you are partly right but you may not see the whole phenomenon. You are right that “hoarding” and the black market are not synonymous. “Hoarding” occurs when some people expect prices to rise, either on the free market or on the black market, by the stuff, and hope to be able to resell it later at a profit. For any hoarder, of course, there is a non-hoarder who has lost the bidding war (or who thinks that prices will drop). It’s the same, by the way, with anything: traders buy shares or bonds when they expect their prices to rise and hope to sell them at higher prices. And note two things: (1) When prices do rise, they rise less than they would have otherwise because the hoarders sell. (2) The black market is just the free market reappearing after government tries to close it or to control it (by imposing price controls, for example).
Vivian Darkbloom
Apr 3 2020 at 4:15pm
You are missing or misstating (at least) two aspects of my comment. First, “for any hoarder there is a non-hoarder who has lost the bidding war..” Note, and these were not stylized facts, that the hoarder is withholding his hoarded goods from the market. Thus, there is no bidding possible for goods that are hidden from view. Second, you ignore the timing issue, which is crucial in the example of NP-95 masks (stocks and bonds do not present the same issues as NP-95 masks where timing is crucial!).
I live in France. At the supermarket where I do my shopping (Intermarché among others) there is now a policy limiting each customer to purchases of three items of the same thing (toilet paper being a prime example). The sign at Intermarché indicates that the policy was introduced at the instigation of the government (I don’t know if that is true). Nevertheless, the policy against this type of hoarding makes perfect policy sense to me and it is not, as you indicated, a “price control” or some regulation of the “black market”. When there is a shortage of essential goods, limits on hoarders help ensure that these goods are better allocated among those who need them. Hoarding by private consumers is not a phenomenon that helps ensure that goods will reach those who need them in the short and intermediate term. Having a year’s worth of TP stocked away and sheltered from “the market” is not an efficient allocation of goods during an actual crisis and those stocked-away goods are not making the market more efficient in the time frame that is crucial. Nor, as I stated in my original comment, does hoarding by speculators who hope that the price will rise because people eventually become so desperate from the lack of supply that they will pay anything to gain access to those goods *withheld from the market* constitute an efficient market response to a need in the short-term.
Pierre Lemieux
Apr 4 2020 at 1:09am
See https://www.econlib.org/dont-confuse-shortage-and-smurfage/
Vivian Darkbloom
Apr 4 2020 at 5:14am
Don’t confuse hoarding with shortage and “smurfage ” (your invented term) caused by pricing or “lack of production”! And, further to my point above, the hoarding done especially by non-speculators (i.e., normal consumers who are stockpiling essential goods for their potential personal use long in the future) will never come to the “market” at any price. The goods sitting on shelves and pantries do nothing to exacerbate a problem of immediate need. You are again confusing the issue of shortages caused by pricing and shortages caused by hoarding. The current situation of hoarding is not limited to speculators hoping to gain a profit by re-selling (although due to the timing and logistics issues it is exacerbated by speculators). Importantly, it is also to a great extent caused by consumers who are hoarding goods they don’t need immediately (at the expense of others who do have an immediate need). Again, time is of the essence when there is an immediate need and goods exist (stockpiled by hoarders) but not available *at any price* to those who need them now.
Jon Murphy
Apr 4 2020 at 9:39am
Oh? And why not? Do you not think that if someone offered a hoarder, say $1m, for a roll of TP, they’d give it up?
Vivian Darkbloom
Apr 4 2020 at 10:51am
It’s pretty simple, Jon. Hoarders don’t advertise their wares that are not for sale. Do you know how many rolls of toilet paper I have in my pantry?
Jon Murphy
Apr 4 2020 at 11:04am
True, but irrelevant. You know what does advertise? Prices. eBay, Amazon, etc. If you’re on Amazon and you see TP selling for $1m, I bet you’re gonna throw some up for sale.
Vivian Darkbloom
Apr 4 2020 at 11:12am
Sorry, Jon, but it is not “irrelevant’. But, I do have some nice red apples for sale!
Jon Murphy
Apr 4 2020 at 11:24am
So, you’re saying that if you see TP being sold for $1m, you’ll not at least be tempted to sell?
Vivian Darkbloom
Apr 4 2020 at 11:34am
No, for the simple reason that I have not seen any offers at all. Here where I live there is no regular postal service, even if I were interested in buying some. Keep making up those ridiculous hypotheticals all you want but that’s reality Jon, the world we live in; not your textbook. That red apple is still for sale, though!. If only I could find a way to get it to you!
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