Friday, September 09, 2005

A Little Economics Lesson in Wingnuttia

Courtesy of John Stossel. Excuse me for the long quote but it is needed:

Politicians and the media are furious about price increases in the wake of Hurricane Katrina. They want gas stations and water sellers punished.

If you want to score points cracking down on mean, greedy profiteers, pushing anti-"gouging" rules is a very good thing.

But if you're one of the people the law "protects" from "price gouging," you won't fare as well.

Consider this scenario: You are thirsty -- worried that your baby is going to become dehydrated. You find a store that's open, and the storeowner thinks it's immoral to take advantage of your distress, so he won't charge you a dime more than he charged last week. But you can't buy water from him. It's sold out.

You continue on your quest, and finally find that dreaded monster, the price gouger. He offers a bottle of water that cost $1 last week at an "outrageous" price -- say $20. You pay it to survive the disaster.

You resent the price gouger. But if he hadn't demanded $20, he'd have been out of water. It was the price gouger's "exploitation" that saved your child.

It saved her because people look out for their own interests. Before you got to the water seller, other people did. At $1 a bottle, they stocked up. At $20 a bottle, they bought more cautiously. By charging $20, the price gouger makes sure his water goes to those who really need it.

The people the softheaded politicians think are cruelest are doing the most to help. Assuming the demand for bottled water was going to go up, they bought a lot of it, planning to resell it at a steep profit. If they hadn't done that, that water would not have been available for the people who need it the most.

According to "Professor" Stossel, the black market profiteers in Europe during the WWII did a real favor. They saved all the red meat, cream and eggs and guaranteed that it went to the neediest.

The mistake Stossel makes is not distinguishing the need for water (dehydration and thirst) from the ability to pay for water (wealth). He assumes that everybody has the twenty dollars in their pack pockets, and that those who won't pay the necessary twenty are the ones who are less thirsty, rather than being the ones who are poorer.

Stossel is correct that hoarding can be a problem during disasters. But he advocates more hoarding (by the sellers) as a solution. This is a cruel and unethical solution, making some very rich and causing lack of water elsewhere. What is usually done during disasters of this kind is some kind of rationing. The rationing guarantees that as many people get the water as possible and makes hoarding less likely.

But rationing means intervening with the holy markets, Stossel might grumble. Indeed. There are many reasons for interfering with markets and the economic consequences of disasters are good ones. Those who worship the markets (rather than see them as one tool among many in our economic toolkit) think that markets would function well even if the market distribution would leave all but the wealthiest dead of thirst. Which it would in the case of disasters like Katrina if water became extremely scarce. So remember this when you interpret Stossel's argument that "price gougers save lives".