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Gouging you and me

June 13, 2007

Tags Legal SystemInterventionismPrices

In May, the House of Representatives passed a bill that could lead to fines as high as $3 million per day for gasoline price gouging, which it defined as charging a price that "grossly exceeds the average price offered for sale by that person during the 30 days prior" or "grossly exceeds the price at which the same or similar gasoline was readily obtainable in the same area from other competing sellers." It now stands a good chance of passing as part of broader energy legislation.

Unfortunately, however, a law built on an undefined term such as "grossly exceeds" fails to meet the basic purpose of law. That purpose is to make clear beforehand what is not allowable, so that decisionmakers know the limits on their actions. Effective social cooperation can only be built upon clear rules which constrain government arbitrariness as well as abuses by others. But a law whose essential basis is an undefined term would leave every decision's legality subject to the whim of a judge or government entity, exercised after the fact. No one can know what actions are "safe" from prosecution. And a law combining arbitrariness with huge potential punishments (discriminatorily applied to "big oil" as well, since only firms with over half a billion in annual sales would be subject to the law) is an open invitation to government abuse. It only demonstrates that such lawmaking grossly exceeds Congress' competence.

In fact, the gouging law is so vague that it should be rejected because it expands Americans' exposure to arbitrary acts (such as inherently selective prosecution), rather than offering protection against them. And those arbitrary acts will be backed by government's coercive power, which far exceeds any alleged "market power" it is supposedly combating, which has to be continually earned in the face of competition. It invites exactly the sort of govern­ment abuse the American Revolution was fought to stop and our Constitution's framers tried to pre­vent from reappearing.

Since gouging in the House legislation is currently undefined, any prosecution undertaken under it would effectively create the law after the fact, and apply it to prior acts. The unfairness, as well as arbitrariness, of applying rules retroactively is obvious. What would happen if referees could change the rules of a game after the fact? What if casino payoffs could be changed by the house after the roulette wheel stopped? What if your employer could retroactively lower your wages for last year?

Not only is unfairness inherent in what would effectively make law retroactive, it also violates the plain wording of Article I, Section 9 of the Constitution. It bans ex post facto laws, reflecting Federalist 44, where James Madison des­cribes them as "contrary to the first principles of the social compact, and to every principle of sound legisla­tion...all of them are prohibited by the spirit and scope of these fundamental charters."

Why would Congress consider, much less pass, a bill that fails basic standards of logic, fairness and constitutionality? Because it would give them power without responsibility.

With the standards for prosecution, which is very costly for the accused, never spelled out, politicians can manipulate firms' behavior by threatening prosecution and preen as defenders of "the people" without being bound by effective accountability or constraints. It works the same way civil rights legislation, whose supporters explicitly denied creating quotas, led to them—firms didn't know what would be called illegally discriminatory, so to protect themselves from the uncertainty and cost of litigation, they often began relying on quotas.

If the most intelligent law Congress can pass about gasoline pricing essentially criminalizes behavior that is legal until, after the fact, it can be selectively redefined as illegal, they don't know enough to advance Americans' general welfare. Their grandstanding and abuse of government power only reveals their gross incompetence in yet another area of our lives. But unfortunately for Americans, that seldom deters Washington from "helping" us.

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