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Backdoor Price Controls

Tags Legal SystemInterventionismPrices

09/28/2005William L. Anderson

Ramilaben Patel owns some small convenience stores in the Chattanooga, Tennessee, area, with gasoline being one of the many goods that his businesses sell. For about 30 minutes on September 1, his Tiptop Food Mart #3 in East Ridge advertised regular gasoline at $4.99 per gallon. Even with the recent price increases due to supply disruptions in the wake of hurricanes Katrina and Rita, the price was considerably higher than what other stores were advertising. Not surprisingly, Mart #3 sold no gasoline in that half-hour, and the price quickly was brought back down to market levels.

That should be the end of our story, but the Attorney General of Tennessee was not content to permit Mr. Patel to have lost sales by asking more for his gasoline than the market will bear. No, the AG has determined that Mr. Patel is a lawbreaker, so he must appear in civil court to answer to a charge of "price gouging." While prison is not in his future, Mr. Patel almost surely faces a fine, and perhaps a stiff one. ("Price gougers" in other states may not be as lucky, as some states do have criminal statutes forbidding such activity as raising prices when supply shrinks and demand simultaneously rises, as is the case during weather-related emergencies.)

According to Paula A. Flowers, commissioner for the Tennessee Department of Commerce and Insurance, "We are taking this very seriously. Under Tennessee law, price gouging is illegal, and we will aggressively pursue anyone who violates that law."

The way that the AG's office found out about Mr. Patel's alleged indiscretions was through its price-gouging "hotlines" in which "concerned citizens" (such as Mr. Patel's competitors, no doubt) can call toll-free (the toll paid by taxpayers, of course) numbers to report these so-called malefactors. (Not to be outdone, the US government also has a website through which one can report on businesses that charge more than the authorities believe should be the case.)

While government agents and the news media (which is happy to report the appropriate telephone numbers and websites to use) like to call this "consumer protection" and "response by concerned citizens," there are a couple of other terms that might be more appropriate: intimidation and spying. I can think of another term as well: backdoor price controls.

When federal price and allocation controls were ended in February 1981, those of us who had an inkling of knowledge about the price system were relieved, and the oil and gasoline markets performed quite well. Even during the disruption caused first by the Iraqi invasion of Kuwait and the subsequent Gulf War (or, more accurately, US War in the Gulf), the market performed very well, despite attempts by Senator Joseph Lieberman to introduce a law calling for five year prison terms for anyone raising the price of gasoline during a "crisis."

What I mean by "performed quite well" is that the repeated gas lines, shortages, and chaos at the gas pump did not occur after price and allocation controls were lifted, no matter what the short-term problems might have been. Those of us who drove automobiles during the 1970s still have memories of "out of gas" signs, long lines, rationing, and other follies that occurred only because the government was setting the price of crude oil at one end and gasoline at the other. Furthermore, had it not been for heroes like Marc Rich gaming the system, the chaos would have been even worse.

Fast forward to 2005, a time when Hawaii has brought back gasoline price controls (a system that will fail, and fail miserably at the first crisis) and more than 20 states now have "anti-price gouging" laws that make it either a civil or criminal offense to raise prices of goods during a natural disaster. Now, unlike the controls of the 1970s, in which market participants at least knew what the legal maximum prices were beforehand, these state laws tend to be nebulous, permitting the authorities to decide after-the-fact what is "price gouging" and what is a "reasonable" response to the kinds of supply disruptions that are the case when a disaster hits.

(Apparently, the AGs have taken a hint from the late Justice Potter Stewart's definition of pornography. For example, Florida makes it illegal to charge prices that are a "gross disparity" over an average of prices 30 days before the disaster hits. However, the law does not define what "gross disparity" means; like "insider trading" laws, the terminology is meant more to intimidate businesses than to set a reasonable legal standard.)

Furthermore, in the wake of these disasters, we are now seeing news accounts of severe gasoline shortages not only in the hard-hit places, but all of the states where AGs are aggressively pursuing their powers to stop "price gougers." After all, no one wants to be a Ramilaben Patel, who will have to cough up some of his hard-earned dollars after being fined for setting gasoline prices so high that no one would buy his gas.

And, not surprisingly, we are seeing a return of the crisis-led behaviors of 30 years ago when people "topped off" their tanks in fear of gas stations running dry — behavior that guaranteed that stations would run out of gas. With what can only be called de facto price controls, we see that the individuals in the market act in the same manner that they would if the controls had been set by law.

Yes, if markets were permitted to work — in the absence of what can only be called the imposition of "economic crimes" as was the case in the former communist countries — people would see quick price increases, and no one who remembers paying about $1 per gallon likes to fill up at $3 for the same product. However, if the political classes insist upon levying "price-gouging" legislation, then we have to live with the consequences that always occur when governments interfere with legitimate market processes.

Instead, we have gas lines and citizens being recruited by the state to engage in domestic spying on their neighbors. After what has been a very successful run by relatively free markets for almost 25 years, we are back to the 1970s. Politicians never seem to learn the lessons of economics or history, but we already knew that.



Contact William L. Anderson

William L. Anderson is a professor of economics at Frostburg State University in Frostburg, Maryland.

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