The two cities in America with the most expensive rents are San Francisco and New York City – despite the presence of strict rent control laws.
My gas bill for my Northern California home is higher than ever now, despite wholesale natural gas prices being lower than ever.
One of the primary causes of shortages during hurricanes is anti-price gouging laws.
And the primary reason mortgages are so much more difficult and expensive to obtain than they need to be is the presence of numerous regulations meant to protect consumers.
I bring all this up because Leonard Steinberg, whose Compass blog I love, often complains about “price gouging.”
In addition, one of Ms. Harris’ campaign pledges is to stop price gouging.
Price Gouging Is Not a Thing in Free Markets
I am going to make the point though that price gouging is not a thing in a free and open market – unless government steps in to protect us (which always makes things far worse).
Retailers can charge higher prices temporarily, but if margins are high, competitors will almost always step in and offer similar products at lower prices to steal market share.
Mr. Steinberg was delighted that the cost of his favorite coffee fell, implying that the retailer had stopped price gouging. But what really happened is that the retailer simply had to lower prices to compete with competitors.
This is so important because politicians use alleged “price gouging” as an excuse to regulate – and those regulations invariably make everyone worse off.
Examples of Price Control Follies
Nixon’s Price Controls: In 1971, President Nixon imposed wage and price controls to stem inflation – pretty much proving that Nixon was not very bright. All it did was foster massive shortages, which made inflation worse when the controls were lifted because the goods shortages remained.
1970s Oil and Airline Price Controls: One of the reasons the economy boomed under Reagan was because Jimmy Carter lifted price controls on oil and airlines that were imposed in the 1970s to protect consumers from “overcharging.” Those controls too just inhibited production and fostered shortages – and when they were lifted prices didn’t just plummet, they crashed. I personally saw both gas prices and plane ticket prices get shockingly low in the 1980s. It seems like Carter should get some of Volcker’s credit for inflation fighting.
Rent Controls: Swedish economist Assar Lindbeck famously said, “In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.” Rent controls prevent builders from building more housing and they prevent landlords from making improvements, and shortages get worse, and the housing stock falls into disrepair – every time.
Hurricanes: Steve Forbes used to point out that high prices during natural disasters attract more goods to the area (despite the logistical issues) – and that in turn alleviates shortages and brings prices down. Shortages remain much worse when price gouging laws are in place.
Utilities: Utilities are regulated as “natural monopolies.” But, politics and corruption get involved in many areas (like California) and utilities have become models of inefficiency, severely impacting consumers who can’t go elsewhere for power and gas.
Venezuela: Venezuela is the extreme case, as it all but destroyed its economy and ushered in mass shortages and starvation with its price controls (in an effort to cover up its hyperinflation).
Politicians love to blame retailers for the inflation they cause (it happened all through the 1970s; see Venezuela too) by bringing up price gouging – and it makes for great political talking points. But those politicians rarely understand the implications or how businesses actually work.
The grocery chains that have been ostensibly price gouging operate on paper thin 2% margins, for example, so forcing them to cut their prices would be forcing them to lose money in a hurry.
Keeping Politicians At Bay
Most of my readers well understand this. I just like blogging about it anyway so we can all work together to keep politicians at bay – so we don’t have a repeat of the 1970s, so mortgages don’t get any more difficult to obtain, so prices are actually allowed to fall, so shortages don’t get worse, and so we don’t turn into Venezuela (at least for a while).
