While the wake of Hurricane Sandy has citizens in New York, New Jersey, Connecticut and beyond struggling to make sense of the destruction, lawmakers are also grappling with concerns over the potential of price-gouging by area businesses that would capitalize on disaster-driven consumerism. New Jersey's Attorney General announced on Friday that it has issued subpoenas to 65 businesses, "part of an ongoing investigation into more than 500 consumer complaints regarding alleged price gouging." Yet, far from being the answer, these federal interventions are roadblocks to rebuilding.
The Roman emperor Diocletian imposed a maximum price for bread in 301 A.D. punishable by death. The result? Almost no bread for sale until he repealed the price decree. Nearly 2,000 years later similar laws are causing shortages in New York and New Jersey.Government-imposed price controls are making the disaster worse a week after Sandy hit shore.
New York State law makes it illegal for merchants to charge an "unconscionably excessive price" for goods that are "vital and necessary" for consumers, though the law never defines "unconscionably excessive." New Jersey law is more specific. It makes it illegal for businesses to raise their prices more than 10 percent within 30 days of a declared state of emergency.
New Jersey Attorney General Jeffrey Chiesa stated "Anyone violating the law will find the penalties they face, far outweigh the profits of taking unfair advantage of their fellow New Jerseyans during a time of great need." He's right. One gas station paid a $50,000 penalty for raising prices 16 percent during hurricane Irene. But much as the Roman threat of death couldn't force producers to bring products to the market, neither can New Jersey's excessive fines.
Gasoline may be more scarce than usual because power outages prevent stations from opening and some ports remain closed but the shortage of gas is caused by the price controls alone. Prices play important functions in communicating information about relative scarcities and incentivizing people to act appropriately.
High prices tell suppliers to bring more of a commodity to the distressed area. If gas prices in New York and New Jersey could rise high enough to reflect its true scarcity the profit incentive would induce more suppliers to redirect gas from other states to these areas. Instead, the federal government is scrambling to deliver 22 million gallons of gas itself since the price controls have destroyed the private incentive. But there is no reason to think the federal government is any more efficient at delivering gas than it is at delivering mail.
High prices play an important role on the demand side as well. As unpleasant as high prices are for consumers, those high prices ration the scarce gas to those who value it most highly. The prices communicate that people should use as little gas as possible and only those who value it most highly should use it.
When high prices are prohibited from serving their function the result is a shortage where there are more buyers than sellers. Buyers still compete with other buyers to try to get the scarce gas, but because price competition is illegal their competition takes less beneficial forms.
The main way potential buyers compete to get scarce gas is by getting in line first. Long lines, in some cases miles long, are common in the stricken areas of New York and New Jersey. Stories like Reggie Ridley's are common. He's a janitor from Harlem and "he has woken up three hours earlier than usual -- around 5:30 a.m. -- to start looking for gasoline. Once, he was unable to find gasoline at all, so he had to park his car at a garage and take the subway to work... 'I've been very tired. No sleep,' he said. 'Every place I go, it's been a long line, four- to five-blocks deep.'"
Unfortunately, efforts like Reggie's don't make sellers any better off so it doesn't induce a greater supply like higher prices do. It also doesn't guarantee that gas goes to its most valuable uses. Instead, whoever is lucky enough to get to the front of the line at the right gas station gets it.
Governor Chris Christie has imposed a rationing scheme based on license plate numbers. Even numbered plates can get gas only on some days while odd numbered plates can get gas on other days. This may reduce lines but it does nothing to ensure that gas only goes to its highest valued uses.
Tony Kurasz was six cars from the pump when a Bayonne N.J. gas station ran out of gas after he waited in line for three hours on Saturday. The New York Times reports that it was the second time that day that a station ran out of gas while he waited. Kurasz complained, "This is crazy. I remember the last time we went through this, in the '70s. It's strange to be back here again."
It's not a hurricane induced problem that Mr. Kurasz remembers. It was the near decade-long gasoline price controls of the 1970s that caused shortages, long lines, and bizarre rationing schemes based on license plate numbers. For thousands of years governments have imposed maximum price laws and the results have always been the same - shortages that leave consumers worse off. It's all the more cruel when this policy disaster comes after a natural one. It's time politicians learned from economics and history and let prices coordinate our use of scarce resources.