As I write this, I’m sitting on my couch listening to the rain. After a quick check of Twitter, I saw this AL.com report: “Gov. Ivey declares state of emergency for flooding.”
The governor has acted quickly.
The governor has acted decisively.
The governor has issued a proclamation that will make matters worse.
Say again? Worse?
Yes, worse: by prohibiting “price gouging,” the governor — like virtually every other governor in every other state during a time like this — has worked to throttle the most information-gathering-and-distributing mechanism available: the price system.
It’s like clockwork. Whenever there is a disaster, officials take action to thwart price increases. It sounds compassionate because we recoil at the idea of gas station owners and contractors taking advantage of others’ misery. It isn’t, though, because price controls create shortages and ensure that resources don’t go where they are needed most.
The shortage-creating effects of price ceilings like rent controls or rules that prevent “price gouging” are standard topics in introductory economics classes. Price ceilings raise quantity demanded and reduce quantity supplied relative to where they would be in a free market. This means there are unrealized gains from trade.
Economists call this deadweight loss, and it is represented by the fact that there are mutually beneficial trades that would have been made at the market price that aren’t made at the controlled price. If a gallon of gas is worth $8 to a consumer and costs $4 to supply, the trade would take place at freely adjusting prices. With a price ceiling holding the price of gas at $3 a gallon, however, this trade doesn’t take place.
Pay with Time
There’s another cost too. As I and many others have pointed out elsewhere, price ceilings change how people pay. Price ceilings limit what people are allowed to pay in cash, but they don’t change the fact that goods like gas and bottled water and flashlights are now a lot more valuable than they were pre-disaster. If people can’t pay with cash, they will pay with time. Instead of clearing debris (perhaps for money), making hard decisions about what they can and cannot do without, and doing all sorts of other valuable things, people stand in long lines waiting for price-controlled goods.
They bear a cost — their time is valuable, after all — but without generating a benefit. Cruelly, price ceilings that are supposed to protect consumers from being exploited actually leave them worse off than they would have been without the price ceilings.
In fairness, the proclamation does waive some federal regulations on (for example) transportation, which will make it easier to clear debris and to get supplies into the area. That will mitigate some of the damage caused by the price control. Better, I think, to have a one-two punch of suspended regulations (and therefore greater flexibility for people responding to the disaster) and prices that reliably tell people which resources are most needed where.
Prices are Messengers
Of course, these allocation decisions might be pretty easy if you’re on the ground in Limestone or Lauderdale County, where my mother’s family is from. They get considerably more opaque the farther you get from the scenario. It’s raining in Birmingham, but it’s not that bad here. I’m not particularly inconvenienced by it and am not really changing what I had planned to do. I suspect a lot of people in Birmingham are in a similar situation.
If the prices of gas, Uber rides, plywood, flashlights, and so on were allowed to change in real time to reflect on-the-ground conditions elsewhere, the information we need about what is most valuable where would be transmitted very quickly. People in Birmingham wouldn’t even have to know that there is flooding in North Alabama in order to get the message. Rising prices of things like gasoline and bottled water would be the messengers.
My family lives on the side of Red Mountain in Birmingham. You can see the Vulcan statue from our kitchen. I’ve told our kids many times that if our house floods, the fact that our house has flooded will be the least of our worries because we’re probably looking at an apocalyptic scenario. We’re not close enough to the action to know what, specifically, to do.
Moreover, we’re far enough away that any relief effort on our part is likely to be ham-fisted and ineffective if not positively destructive. What does someone in the town of Elgin Crossroads need if Second Creek is flooding? Blankets? Sandbags? Flashlights? Bottled Water? Gas for the generator? I’m reminded of this post from New York University’s Development Research Institute after the 2010 earthquake in Haiti. A lot of what we think helps, doesn’t.
It’s been a long time since I was there last, and I don’t have what F.A. Hayek called “knowledge of the particular circumstances of time and place.” Human decency, of course, demands that I lament the tragedy that so many people are dealing with as I type this. It compels me to want to do something. Merely meaning well, however, is not the same thing as doing good, and this is especially important when people are genuinely suffering.
Prices are most important in these scenarios. Economists have compared them to signal flares, and it is especially tragic that the flares are being snuffed out precisely when they are most needed.