Natural Disasters: Gouge Away

Hurricanes and the politics of prices

I am a victim of price gouging.

Less than a day after Hurricane Fran's visit September 6, I ventured out of my neighborhood just south of Raleigh, North Carolina, to look for gasoline. I, along with seemingly half of the population of Wake County, found it at a nearby service station, the owners of which had rented someone's generator to get the pumps going. The line stretched far down U.S. Highway 70. I didn't mind waiting. Nor did I mind paying about 15 cents a gallon more than I had the previous week. Driving away with $10 of gas, I didn't feel gouged. Excited would be more like it. Not only did I have transportation, but also a potential source of air conditioning–a necessity of life even in late summer.

It is often said that natural disasters bring out the best in people, and I suppose that is true. But they bring out the worst in politicians, particularly when they occur during election season. Democrat, Republican, liberal, conservative, Bill Clinton, Jesse Helms–somehow these petty differences wash away in flood waters and torrential rains. What you're left with is a sincere desire by selfless leaders in federal, state, and local government to get people the help they need to recover.

If you doubted their sincerity here in Fran country, you had only to read the Federal Emergency Management Agency's official newspaper, Recovery Times, stuffed into your local fishwrapper a few days after the hurricane blew through. Subtitled "People Helping People," Recovery Times objectively reported on the front page: "North Carolina Gets Fast Help from FEMA and State." The banner headline splashed across page two was even more reassuring: "President, Gov. Pledge Fast, Compassionate Aid." Personal, caring messages (helpfully accompanied by photographs) from Clinton and North Carolina Gov. Jim Hunt, also running for re-election, assured stricken readers that "your government" will be "with you as long as it takes to help you on the road to recovery."

That road to recovery was paved with good intentions but incredibly wrongheaded government policies. North Carolina Attorney General Mike Easley, for example, decided shortly after the wind subsided to declare legal war against "those trying to make a quick buck at the expense of others." He called on citizens to report what they perceived to be price gouging to his office. Many did. Even more of them, however, took Easley's pronouncement as an indication that any price they didn't like was unfair, and the resulting haggling sometimes got nasty.

Tree-removal firms and self-employed carpenters probably got the worst of it. Already beset by the often-broadcast suggestion that homeowners hire only licensed contractors (monumentally stupid advice when rain is pouring through a hole in your roof and a skilled carpenter with plenty of experience and references is offering his services), these entrepreneurs were treated by many as guilty-until-proven-innocent.

"[Easley] gave customers the impression that every tree service is in town to rip people off," said the owner of one Charlotte-based firm that sent a crew to Raleigh. Her fellow tree-service owners called the attorney general's office to ask him what a "legal" price for tree removal was, and got no answer, making it impossible to defend their charges to angry customers.

After any serious natural disaster, gas-powered generators are perhaps the most sought-after items. Their scarcity is caused by a combination of their usefulness to those with freezers full of meat, the fact that the market for generators is pretty small in normal times, and state regulation that forbids retail competition for electrical power (otherwise entrepreneurs would fill the gap between full service and no service by selling short-term, higher-priced power). If comments from retailers around here are any indication, generators will be even more scarce the next time we need them.

"I wish I had never seen a generator," said one retailer from nearly Lillington, tired of arguing with customers. "This is the worst thing that has ever happened to me in this business." Another retailer from Raleigh said that he sold his generators below retail and still got customer complaints. "We went out of our way to help people, and I'm not sure it was worth it."

Understood correctly, the law of supply and demand is just common sense. A bag of ice is worth more to an Arab than an Eskimo. Similarly, it is worth more to me after my refrigerator loses power than before. But a competing theory, often advanced in the aftermath of storms and other disasters, is that price-gouging occurs whenever price increases are not justified by increases in production cost. This is little more than the labor theory of value rearing its old and ugly head.

Two stories from my own neighborhood illustrate the inanity of this idea. The first involves Honda Yamaha of Raleigh, paradoxically located in the town of Garner just down the highway from the service station that mercilessly sold me the gasoline I needed. Honda Yamaha sold Garner resident David Carter a generator for about $2,000–hundreds more than what Carter omnisciently said was its "actual price." Another Honda Yamaha customer said he drove 300 miles to Richmond, Virginia, to buy a generator for a couple of hundred dollars less, and thought he was even gouged there. Ever since the hurricane, Carter and others have been picketing the store to protest its prices, even though they were roughly the same as those charged throughout the area.

I've heard variations of this story from numerous individuals, both friends and perfect strangers. Some customers have gone to Tennessee and South Carolina to find generators. In the telling, it never occurs to them that if retailers weren't brow-beaten by politicians like our attorney general, they might be able to raise their prices enough to induce faraway stores to sell or transport their generators to the afflicted area, thus alleviating the scarcity at least a little bit and eliminating all these road trips.

Only Marxists believe that a product's value is determined by its production costs or the amount of labor required to make it. In a free enterprise system, prices are subjective and depend upon the needs and preferences of consumers at a particular point in time. A price is a bundle of information. When it goes up, it signals producers to make more or redirect existing products to areas of higher demand. If you artificially keep a price low, regardless of consumer demand, then you create shortages, as we found in the 1970s with price controls on gasoline.

My second story is set just after Hurricane Hugo devastated South Carolina and Charlotte in 1989. My next-door neighbor then worked for a construction company in Raleigh. The day after the storm, I saw him packing up his pickup truck with a chain saw and other tools. "I'm taking the day off," he said, "and driving to Charlotte." He had heard that one could make really good money cutting trees and clearing debris.

Was he taking advantage of a disaster? In a sense, of course he was. But if there were no prospect of making more money in Charlotte than at his job in Raleigh, he would have stayed put–thus reducing by one the number of skilled workers helping clean up Charlotte. Most people can't afford to take unpaid holidays and volunteer their time, or sell products below cost, or transport products from distant climes without compensation. (An aside: North Carolina's governor eliminated this barrier to compassion for state employees by giving them the week after the hurricane off, with pay. That meant that the rest of us had to pay millions of dollars in salaries to state employees out cleaning up their yards during the daytime, while we cleaned up our yards after work and on weekends.)

You can't repeal the basic incentive structure of economics with a government proclamation. Control prices after a hurricane, as North Carolina's state government did by fiat and some local governments did by ordinance, and you are making a conscious decision to force some people to wait longer for help. Let prices rise to the market level, and the supply of ice, water, food, gas, generators, and labor will expand as well.

Politics, however, has a different set of incentives. On page three of Recovery Times, among a listing of all the grant and loan programs available to those clever people who didn't bother to buy insurance, victims of Hurricane Fran could find a number to call for "assistance in filing consumer complaints about disreputable business practices." Remember, it's about people helping people.

Contributing Editor John Hood ([e-mail]) is president of the John Locke Foundation, a Raleigh-based think tank quite probably still in need of a good building contractor–licensed or not, price negotiable.