George Bush’s announcement this morning that the administration was concerned about “gouging” reminded me of why I wish that we’d had better options in the last two elections (and still do). I expect that kind of nonsense from Democrats, but you’d think that someone who was supposedly a businessman would know better. Or perhaps he does, and is just pandering. I’m not sure which is worse.
Every time we have a natural disaster like this, this idiotic topic comes up, and we once again have to explain Econ 101 to the products of our public school system, probably in futility. This time, it’s Rich Hailey’s turn.
Here’s what I wrote about it a three years ago, in the wake of Katrina.
[Update late morning]
Jeez, I thought that David Asman was smarter than that. Now he’s telling Fox viewers to take pictures of stations with high gas prices so that they can be reported to authorities. It’s hard for me to believe that Neal Cavuto would do that.
[Another update a minute or so later]
You know, I think that this is an explanation for socialism and collectivism’s continuing grip on the public mind, despite its long history of unending failure. There’s just something in human psychology to which it naturally appeals, and rationality just can’t break through. It just “feels” unfair for prices to go up in an emergency, regardless of the demonstrably bad consequences of attempting to legislate them.
[Late afternoon update]
Shannon Love explains how the gas station business works:
I’ll say it one more time for those who can’t be bothered to actually ask someone who owns a gas station. Gas stations set prices for the gas they sell today based on the wholesale price of the gas they will have to buy to replace it. Get it? The price you pay for a gallon today is the cost of the gallon the station will have buy to replace the one you just bought.
Gas stations sell gas at or near cost, so if they did not use replacement pricing any sudden spike in gas prices would shut them down and you couldn’t get any gas. I simply do not know why our public and private talking heads cannot understand and communicate this simple fact.
Because either they don’t know it, or they think that people don’t want to hear it. They operate on razor-thin margins, and can’t afford to hand out subsidized gas as charity, even if that wouldn’t screw up the market. And note, for those who say it’s “big oil” that is “maximizing profits” in the face of a national emergency, even if that were true (it’s not) “big oil” isn’t threatened with jail for “gouging.” It’s the gas station owner, who has no control over his wholesale gas costs. So people who demand that we crack down on gougers are essentially demanding that the station operators either operate at a loss, or pay fines, or go to jail. I don’t know why anyone would want to be in that business in the face of so much public ignorance about it.
Populist ignorance about economics is fashionable these days. Or maybe it’s always fashionable.
I blame the schools.
Meh, it’s populist drivel that the street and the talking heads demand. I don’t see any politician getting too far from it with any success. It would take a complete re-working of our education system to get that under control.
C’mon, Rand. There’s zero chance that George Bush is an economic ignoramus. For one thing, he’s got a lot more dough in the bank than you or I ever will.
But he’s also the President, and that means keeping enough ordinary people — who may well be economic idiots — happy that the government is doing what is should be doing. Maybe that means he has to give a little bogus speech about gougers, because doing so sucks the oxygen out of demands for more dangerous action. Who knows? People have made the case that FDR knew very well that some of his populist schemes were bullshit — but he needed to fend off the kind of really dangerous re-organizations that were taking place in Europe in the 1930s.
I think it’s a point worth pondering. Political leadership is the art of the possible. You can’t just ram the expert wisdom down the throats of the electorate, not in a republic you can’t.
Additionally, there is some interesting social — not economic — truth underlying the complaints about “gouging.” Are there any oil companies, or even individual gas stations, that could not afford to sell gas at a loss (because the cost of supply is momentarily way higher than normal) for a short time? No, not really.
Should they? Perhaps so. There is a strong feeling among people that when wide-spread disaster strikes, there should be a certain amount of sharing the pain. This isn’t pointless sadism, however: these actions reinforce the sense of community, the trust people have in each other that they can count on each other in bad times. They’re the equivalent of rituals about hello and good-bye, shaking hands, the endearments husband and wife exchange daily, and so forth.
So sometimes when leaders inveigh against “gouging,” they might be less economic idiots than social psychologists with significant insights into group dynamics. They might be saying: you folks need to take a little bit of a hit here, share some of the pain in your communities, to reinforce the informal social contract that, in the end, is what really keeps the community safe.
I’m not saying this is what’s going on — it may be mere stupidity. But it’s worth remembering that the art of political leadership, and the social psychology of H. sapiens, is actually just as subtle and sophisticated as, say, vector calculus and solving Navier-Stokes equations. Those of us who can do the latter, but are ignorant of the former, might want to preserve a smidge of humility about those whose skillset is the reverse.
I’ve come to think the public susceptibility to socialist-type economics is an innate desire to know that *someone* has their hands on the economic wheel, instead of the invisible kind. There seem to be enough people who either don’t understand or don’t want to accept that the seeming chaos of free markets is a good thing over time.
It’s those momentary up/down cycles that make people immediately nervous, thus they want to believe that there’s some kind of order to it all.
Carl, are you telling me that the masses can self-regulate and buy only as much as they immediately need, leaving more goods available for the next guy who may badly need them? Give me a break! Majority of people think about themselves and their families first, second, and third and will over stock if they can afford it. The limiting factor is not the need, but the cost.
So what is better, no gas at a regular price or some gas at a higher price?
Pat C, that reminds me of Joker’s comment in The Dark Knight to the effect that people are more comfortable when they know things are going to plan, “even if the plan is horrifying.”
Econ 101: Supply vs. demand and its effect on prices
Econ 102: Taking advantage of Econ 101 to maximize profits during times of national tragedy … also known as price gouging.
Nobody, sir, is suggesting that there isn’t a reason that retailers are raising prices dramatically. Nobody is suggesting that the law of supply and demand has been repealed.
We are noting that it is, whether you like it or not, illegal to take advantage of national emergencies to gouge customers.
The market in gasoline is not a free one. I, for example, cannot just open up my corner gasoline stand and begin selling. It is a heavily regulated market that the government controls through licensure and limiting refinery capacity.
If you attempt to build a refinery for gasoline in this country, the government will stop you. Other refiners, sir, are donating MILLIONS of dollars to those very same government officials who will stop you from building your refinery.
So, ECON 101: Fair prices are the result of a fair market. And this, sir, ain’t no fair market. And it never was.
Econtalk has a very nice hurricane gouging podcast up on the matter, that is entertaining enough to hold the marginally interested.
Here (link).
There’s a point that you’re missing here. A pretty significant segment of the American population believes that it’s a moral imperative for the nation to pull together in a time of crisis. In the aftermath of Ike, many Americans will do without in some way in order to pitch in and help, whether it’s Coast Guard personnel who will conduct search and rescure operations without grumbling, the families of emergency workers who will go without seeing their loved ones as they work to save lives, or average citizens who will donate money and goods to people impacted by the storm.
The oil companies, on the other hand, will raise prices while bodies are floating down flooded streets, and then insist that their actions are dictated by the impersonal forces of the free market, while cheerleaders like you will insist that those of us who criticize them for it don’t really understand what’s going on.
We do.
We understand that as gas prices have gone up more generally, due to a variety of factors outside the control of the oil companies, those same corporations have posted healthy profits. We understand that while we tighten our belts, oil company CEOs will get paid, on average, three times the amount that CEOs of other large firms get paid.
Don’t get me wrong here — I’m not some kind of socialistic lefty — I support the free market and support it strongly. I don’t think that most of us expect oil companies to run their operations as a nationalized public service, but we *do* expect them to be good neighbors and pitch in like the rest of us.
However, unlike the guys who get paid on average $30 to $40 million a year for their leadership, I also understand that oil companies have financial reserves that they could lean on in order to make crises like these less painful for their fellow citizens. The fact that they don’t do this opens them up to criticism and, in the public sphere, that criticism may very well translate into policy.
If (or probably more accurately *when*) that happens, the oil companies will have no one but themselves to blame.
There’s zero chance that George Bush is an economic ignoramus. For one thing, he’s got a lot more dough in the bank than you or I ever will.
So does Paris Hilton.
So sometimes when leaders inveigh against “gouging,” they might be less economic idiots than social psychologists with significant insights into group dynamics. They might be saying: you folks need to take a little bit of a hit here, share some of the pain in your communities, to reinforce the informal social contract that, in the end, is what really keeps the community safe.
It’s not about sharing pain. It’s about economic rationality. When the market signals don’t work, it results in shortages, and even more pain. It’s all about good intentions, with unintended consequences. If prices are too high for some people, give them a handout, but don’t subvert the market. It always leads to tears.
Democrat logic:
1. If you charge more than your competitor, you are “gouging.”
2. If you charge the same as your competitor, you are “collaborating in restraint of trade.”
3. If you charge less than your competitor, you are “predatory.”
Econ 102: Taking advantage of Econ 101 to maximize profits during times of national tragedy … also known as price gouging.
Econ 103: Rising prices does not necessarily imply rising profits.
“Rising prices does not necessarily imply rising profits.”
You’re absolutely correct, Rand.
However, the increase in cost to consumers at the pump over recent years has generally outpaced the increase in the price of barrels of oil. At the same time, oil companies have successfully lobbied for a variety of subsidies at the expense of American taxpayers in order to increase their profits even more. These are facts based on real world observation, not assumptions based on a naive belief that rising prices automatically translate into rising profits.
A lot of Americans understand this. And a lot of Americans understand that the oil companies are unique among large corporations in squeezing consumers at the pump when they have even the most transparent excuse to do so.
No doubt you will ask me for references here, but if you *need* to ask for references, that means you’re unaware of the facts relevant to this discussion, and if you’re unaware of the facts relevant to this discussion, then you probably shouldn’t go around calling other people ignorant.
In any case, I’m sure that you’ll find that Google is your friend.
Youngblood,
I am curious: How many thousands of dollars do you think a small mom&pop gas station in, say Tennessee, shell out randomly to their customers so that the country can “pull together?” Why should any one in the supply chain have suffer loss just so you don’t have drive a little bit less?
Honestly, if you want selfish, greedy behavior. look in the mirror. You want everyone to take a hit but you.
“The market in gasoline is not a free one. ”
Thank you, Captain Obvious. We, with our little pea-brains, already knew that. The fact that the government has passed laws to outlaw sudden increases in prices during emergencies hadn’t escaped our attention either.
We disagree with the laws.
I noticed that people within the American population who demand that gas station owners “help out the community” are the same people who don’t “help out the community” by driving less, buying a fuel efficient vehicle, riding a bicycle, or walking. I would make a bet that most of these people are FAT.
Shannon,
I don’t drive. I’m fortunate enough to divide my time between two East Coast cities, one with an excellent public transportation network and one with an adequate one. When I need to move something bigger than I can manage on public transit, there are cabs and automobile rentals. As a result, it would be almost impossible for me to drive any less than I do now.
A little over a year ago, I finished a four and a half year stint in the U.S. Army, during which I sweated and busted my ass for the good of both the nation and my comrades. I enlisted during a time of war, full well knowing what could happen to me as a result, and specifically requested and received combat assignments.
If those are the marks of a selfish and greedy individual, I’m cool with that.
I currently own and operate a small business and, yeah, I certainly am selfish and greedy in the sense that I want to make money — preferably a lot of it. I don’t fault anyone for wanting to do the same, whether they run a gas station or are in charge of making decisions for a huge oil company. Like I said, I support the free market.
At the same time, average Americans have been squeezed at the pump at the very same time that oil companies have posted record profits. This is a fact. Americans have been squeezed at the pump at the same time the government has reached into the pockets of taxpayers to subsidize those oil companies. Americans have been squeezed at the pump because increases in price at the pump have outpaced increases in the price of crude. That’s why, in a sluggish economy, the oil companies have *still* posted record profits.
Those record profits that Exxon-Mobil, Chevron, and other major oil companies posted at the beginning of the year give them a reserve that they could dip into to help smooth out the current crisis.
But they won’t.
And, in 2009, it’s entirely likely that the same oil companies that posted record profits in 2008 will do so again. It’s entirely likely that oil company CEOs will, on average, continue to be paid three times more than the CEOs of other major corporations. And, as long as that situation remains the same, Americans will complain, and politicians will respond.
In this way the oil companies, more than any other segment of the corporate sector, are laying the foundations for a response which will be socialistic in character.
And, as I said, they will have no one but themselves to blame.
It sucks that family-owned gas stations are caught in the middle, but it doesn’t change the fact that the oil companies are, in their own perverse way, asking for Americans to regulate their industry.
Additionally, there is some interesting social — not economic — truth underlying the complaints about “gouging.” Are there any oil companies, or even individual gas stations, that could not afford to sell gas at a loss (because the cost of supply is momentarily way higher than normal) for a short time? No, not really.
Should they? Perhaps so. There is a strong feeling among people that when wide-spread disaster strikes, there should be a certain amount of sharing the pain. This isn’t pointless sadism, however: these actions reinforce the sense of community, the trust people have in each other that they can count on each other in bad times.
I am reminded of an episode from the TV comedy series Taxi in which Elaine and Lotka (an immigrant from an East European communist country) were talking about greed. Its just an approximation, but their conversation went something like this:
Lotka: In the old country, everybody shares everything with everybody else…everything.
Elaine: Oh Lotka, that’s so beautiful!
Lotka: Because if you don’t, they shoot you.
Its just a matter of degree when you are merely fined rather than shot, but the basic impulses are the same. Sorry—but totalitarian impulses are totalitarian impulses. Trying to dress them up as sociological truth doesn’t really change that fact.
At the same time, average Americans have been squeezed at the pump at the very same time that oil companies have posted record profits.
Oil companies have “posted record profits” because the energy industry is the largest industry in the world. When their profits increase, they’re likely to set records. That doesn’t mean that they have record profit margins. They’re pikers when it comes to that. And the poor schlumps who sell the gas (and bear the brunt of these moronic “anti-gouging” laws) often lose money on it, in the hopes that they’ll make it up by sales in the minimarts.
And the fact that the oil companies have “posted record profits” has zip dot squat to do with the necessity of raising prices in a time of shortage due to a natural disaster, in order to provide the proper market signals needed to bring in new supplies.
Continual defiance of this economic reality will not help the “little people.”
There seems to be an equation in some folks’ minds that:
“I don’t like prices going up” = “someone is gouging.”
If indeed one can show that somehow competition has broken down and some cartel is keeping prices higher than they would be under competition – then go after them.
But that’s not what’s going on here. My local garage sells gas simply to entice customers to get tires, have a tune up, whatever – to use the services that actually allow the owner to squeeze out a bit of profit. The same is true of your Mom & Pop gas-and-food store. Gas profits are razor thin.
Hell, I hate the rising prices too. But I’m not going to ask some honest businessman to assuage my pain but losing money.
“That doesn’t mean that they have record profit margins.”
Exxon-Mobil’s profit margin went up from a little under 5% in 1998 to 10% in 2007, from a high of a little under 11% in 2006. (This is based on Exxon-Mobil’s own annual reports.) While Americans saw huge and rapid increases at the pump, the profit margin for Exxon-Mobil ticked down less than one percent, which was a significant amount, but certainly less than the hit that average Americans and small business owners took as a result of the price increases.
It looks to many Americans that while they have to tighten their belts, oil companies are riding high on the hog. This isn’t because many Americans are “economic ignorami”, it’s because it’s a fairly accurate reflection of what is indeed happening.
Emergency Preparation: No Price Gouging Here
–> We’re Honorable, So We Don’t Have Any Stuff
I offer my parable about price gouging.
—————————-
It had been raining for three days. Jim went to Sam’s Hardware Store in town. There were deep road puddles everywhere.
Jim: Hi Sam. I’m looking for a good water pump.
My basement is drowning.
Sam: Hi Jim. I’m sorry to tell you that I had three
WP-ABQ pumps in stock before this rain. A pretty
good value at $140 too. But, they sold out.
Jim: I’m in trouble. There is 3″ of water in my
basement and it is rising slowly. I really need that pump.
Sam: I feel for you. My last pump sold to a guy who
didn’t need it now, but wanted to be safe. At the standard
price of $140, he decided not to wait.
… Continued at EasyOpinions.blogspot.com
http://easyopinions.blogspot.com/2008/07/no-price-gouging-here.html
In this kind of situation there are only two options:
-Goods are available at higher prices.
-Goods are unavailable at lower prices.
Some of the people in this comment thread are pretending that there is a third option where goods are available at low prices. But that option doesn’t exist, and you cannot create it by ordering merchants not to raise prices or else. Merchants in that situation will shut down. To expect otherwise is to expect water to run uphill.
The point of a price system is to allow prices to fluctuate, because prices convey information. Rising prices tell buyers to conserve and suppliers to supply more, which eventually solves the imbalance. Prices going up during emergencies is therefore a good thing. It is the only reason for the market to deliver new supplies when costs and risks are suddenly increased by bad weather or other disasters.
Exxon-Mobil’s profit margin went up from a little under 5% in 1998 to 10% in 2007, from a high of a little under 11% in 2006.
That doesn’t make it a record. Many industries have higher margins.
Sorry, you need to work on the logic thing.
Meanwhile, the gas station across the street sold out of gasoline today because people are panic buying to try and save $1 a gallon a couple of days from now – causing the very thing they’re worried about.
Youngblood said:
Hmmm, lets see, I mostly walk or bike ride to my destinations. For longer destinations, I use my Honda Civic Hybrid for transportion. I spend only $40 every three weeks or a month on fuel. Yet I have no worries about fuel cost, imagine that. Those so-called average Americans who drive big ass cars yet complain about high gas prices (dipshit morons) might benefit if they just use their muscles for most of their transportation, they can shed some of their FAT that way!
Rand,
You clearly don’t know as much about this subject as you think you do, yet you assume that those who disagree with you don’t understand the issue. It’s kind of cool to be arrogant when you know what you’re talking about. You just appear silly when you don’t.
What’s happening here, if you haven’t noticed, is that many Americans are looking around at their own financial situation and the economic health of the country as a whole. They see a downturn. They see prices on everything that requires fuel transport going up. They know it’s harder to make ends meet.
At the same time, they see the royalties that oil companies used to pay waivered, which increases their tax burden. They see their tax dollars going to multi-billion subsidies. They see much higer prices at the pump. This suggests that the oil companies are in a crisis, that they’re facing the same slow economy as everybody else.
This isn’t the case. In fact, oil companies are reporting record profits and historically high profit margins — profit margins which have *increased* even as everyone else has gone into a slump. While they’re tightening their belts, oil company CEOs are, on average, getting paid three times the CEOs in other industries.
And that’s just the /initial state/, without any hurricanes to interrupt the flow of gas to the pumps. That only serves to exacerbate the situation.
You claim that many Americans don’t understand what’s going on. My counter is that Americans /do/ understand what’s going on — the oil companies are hitting them at the pump /and/ at tax time. It’s no surprise that they suspect the oil companies of price gouging when, instead of taking a hit like everybody else, the oil companies are the ones doing the hitting. The oil companies *could* open up their own oil reserves a little and dip into their profits to ease what everybody knows will be a temporary crisis, but they won’t. Instead, when 2009 rolls around, they’ll post record profits and maintain or increase their already historically high profit margin.
And that’s how the socialist impulse gains traction.
I’ve got the logic thing down, Rand. Unfortunately, it’s painfully clear that you simply don’t know what you’re talking about.
Youngblood said:
You think that the “socialist impulse” is going to convince Gazprom or Saudi Arabia to increase output? They’ll just say to the FAT Americans complaining about this, “Fuck off!”. Maybe it’s time to put a boot up the ass of environmentalists instead. People who complain about high energy prices yet oppose new supplies of energy are fucking morons and stupid idiots, period.
I think I understand what Youngblood is saying.
People fleeing a hurricane are already worried about their homes not being there when they return. To be hit by extraordinarily high gas prices is adding insult to injury.
Those people vote, and those who are not economically knowledgeable will tend to vote for politicians who promise to punish the oil companies. Even if they don’t, there are plenty of politicians who will try to appeal to the lowest common denominator, and will likewise punish the oil companies.
I take a back seat to no one in my support for free market capitalism. But the energy market in the United States is not free. It is heavily regulated, and the government’s thumb is on the scale everywhere you look.
I’m not saying that retail gas stations should take a hit. They’re already on the front lines, and are facing the same risks from the hurricane that their customers are. They are acting heroically merely by staying open in the teeth of the wind.
So the oil companies, who are already reaping record profits, should try to go easy on their customers during an emergency. If they get hardnosed and insist on charging what the market will bear everywhere and at all times, that will come back to bite them in the form of increased taxes, regulation, and maybe even government takeover.
The oil companies’ customers are suffering because of the hurricane. If the oil companies can show some empathy, and share the sacrifice during the emergency, they will earn the loyalty and respect of their customers. It is in their rational self-interest to do so.
Ayn Rand recognized that emergencies are different from ordinary day-to-day life, and require some accomodation.
Youngblood,
Did you actually read the link Rand had up there on why gas prices spiked (even though oil is now below $100/barrel)? It has nothing to do with the oil companies but in how bulk fuel depots (that are not run by oil companies) are attempting to minimize the price to its customers and to flatten price fluctuations. You keep blaming the oil companies for price fluctuations at the pump when they rarely have anything to do with it.
Oil company profit margin at its HIGHEST is 11%. So if oil companies all decided to immediately operate at a negative profit margin equal to their current positive profit margin, the price of oil would drop by only 22%. When oil was trading at $140/barrel that means it would drop only to $109 (which is higher than it is now using standard market pricing signals).
What you don’t discuss at all is how many of those oil companies and refineries were losing money hand over fist when oil was much lower in price. That’s why many US oil companies merged with foreign ones in the 90s, they just couldn’t stay in business as a stand alone US oil company.
You are asking for oil companies to kowtow to ignorance that is extremely dangerous to our economy and to the energy industry as a part of our infrastructure. Instead of asking that oil company have a economically destructive policy of losing money (and reinforcing economic stupidity of the consumer) you should be advocating for economic education of those who seem to think “social justice/moraliy” gets to magically trump reality.
I think that this is an explanation for socialism and collectivism’s continuing grip on the public mind, despite its long history of unending failure. There’s just something in human psychology
It’s called Empathy. People, at least people with conventional emotional affect, feel an emotional attachment to each other and this can manifest itself as a desire for fairness and concern – at the most extreme this could end up with collectivist tendancies.
I suspect, as with most things, this is/was an evolutionary imperative to survive. Just as Aspergers and Autism are probably evolutionary mechanisms for allowing hunters to prosper in dangerous times, the inverse is true for encouraging group behaviors.
Other things:
What is the problem here, “mom and pop” gas stations in the middle of nowhere or Shell or BPs or other’s margins?
11% is a pretty good profit margin for a multi-billion dollar company. Most of the global consulting services companies work at lower margins than that, I know we do, and logistics and freight run in single digits.
I think most CEOs would be estatic about that kind of margin on that kind of turnover.
As Michael Mealling points out the real problem is keeping those margins at lower price points and still investing in the infrastructure that’s needed.
As I see it, the main complaint about “gouging” is that it doesn’t fit with our obselete instincts about sharing mostly developed when we were in small tribes not countries of millions. In modern society, if you give away gasoline in a crisis situation at the old pre-crisis prices, then the people who really need gas, can’t get it. That’s the stark choice. Gasoline at a high price or no gasoline at any price.