Gouge away - price gouging following natural disasters

Reason, Dec, 1996 by John Hood

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 Gamer just down the highway from the service station that mercilessly sold me the gasoline I needed. Honda Yamaha sold Gamer 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.