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SOMETIMES YOU JUST HAVE TO IGNORE THE ECONOMISTS  
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Zephyr Teachout
August 22, 2024
The Atlantic
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_ Kamala Harris’s proposed price-gouging ban might irritate
academics, but it makes sense to everyone else. _

, Illustration by Ben Hickey

 

Last week, the economics commentariat and much of the mainstream media
erupted with contempt toward Kamala Harris’s proposed federal
price-gouging law. Op-eds, social-media posts, and straight news
reports mocked Harris for economically illiterate pandering and warned
of Soviet-style “price controls” that would lead to shortages and
runaway inflation.

The strange thing about these complaints is that what Harris actually
proposed was neither radical nor new—and it certainly wasn’t price
controls. In fact, almost every state already has
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law restricting at least some forms of price gouging. Although Harris
has not specified the exact design of her proposal, one hopes that it
would follow the basic outline of state-level bans: forbidding
unwarranted price hikes for necessary goods during emergencies.

Price gouging in the popular imagination has a “know it when you see
it” quality, but it is actually a well-developed body of law. A
typical price-gouging claim has four elements. First, a triggering
event, sometimes called an “abnormal market disruption,” such as a
natural disaster or power outage, must have occurred. Second, in most
states, the claim must concern essential goods and services. (No one
cares if you overcharge for Louis Vuitton handbags during a
hurricane.) Third, a price increase must be “excessive” or
“unconscionable,” which most states define as exceeding a certain
percentage, typically 10 to 25 percent. Finally, the elevated price
must be in excess of the seller’s increased cost. This is crucial:
Even during emergencies, sellers are allowed to maintain their
existing profit margins. They just can’t increase those margins
excessively.

For example, early in the coronavirus pandemic, some New York City
residents complained that grocery stores were charging exorbitant
prices for Lysol. But because those stores were merely passing along
price increases from their distributor, they didn’t get in trouble.
Instead, the state pursued a case against the wholesaler,
which agreed
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year to pay $100,000 in penalties and restitution. (During the
pandemic, I took a sabbatical from teaching law to work for New York
Attorney General Letitia James, with a focus on price gouging; I
worked on the appeal of the Lysol case.)

Price-gouging bans are broadly popular—except among economists
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is that, in the perfect world of simple economic models, allowing
sellers to charge whatever they want during periods of heightened
demand is actually a good thing: It signals to the rest of the market
that there’s money to be made on the product in question, which in
turn leads to more supply. Accordingly, prohibiting gouging leads to
less production of essential goods and services. Plus, letting prices
rise helps ensure that the product will be sold to the people who
value it the most.

Here, regular people seem to understand a few things that economists
don’t. During an emergency, such as a natural disaster, short-term
demand cannot be met by short-term supply, setting the stage for
sellers to exploit their position by raising prices on goods already
in their inventory. The idealized law of supply and demand predicts
that new investors would rush in, but the real world doesn’t work
like that. A short-term price spike won’t always trigger the
long-term investments needed to increase supply, because everyone
knows that the situation is, by definition, abnormal; they can’t
count on a continued revenue boom. During a rare blizzard, sellers
might jack up the prices of snowblowers. But investors aren’t going
to set up a new snowblower-manufacturing hub based on a blizzard,
because by the time they had any inventory to sell, the snow would
long be melted. So after the disruption, all goes back to
normal—except with a big wealth transfer from the public to the
company that raised prices.

And that’s before taking into account the barriers to entry that
exist in today’s concentrated markets. Incumbents in heavily
consolidated sectors like food are largely insulated from the threat
of new competition. Price-gouging laws thus operate as a kind of poor
man’s antitrust. They don’t address the lopsided balance of power,
but they at least prohibit that power from being exploited in certain
high-stakes contexts.

The other big problem with the textbook economics take on price
gouging is the assumption that temporarily higher-priced products will
find their way to the people who value them the most. That might be
true in a world where everyone had the same amount of money to spend.
In the world we actually inhabit, that is not the case. During a power
outage, a working-class cancer patient who desperately needs to buy
the last generator in stock to keep his medications refrigerated might
not be able to outbid a healthy millionaire who just wants to run
their air conditioner.

This is another way of saying that price-gouging bans are a form of
moral policy. The laws recognize that consumers, not being the coldly
rational Homo economicus of academic models, are going to be less
price-sensitive during disaster; their desperation can be exploited.
And people who lack the savings to get through a crisis or the
resources to comparison shop are even more likely to suffer from price
increases on essential items. In a pandemic, war, or major weather
event, it seems morally repugnant to give an unearned bonanza to a big
firm while denying essential services to vulnerable members of
society. All parents, not just the wealthiest, should have an equal
chance to obtain diapers even if supply chains are disrupted.
Price-gouging laws represent a different set of market rules, grounded
in fairness.

Price-gouging laws also protect against volatility and instability.
During the immediate aftermath of COVID, unchecked price increases
made an already-bad inflation problem even worse, contributing to a
dangerous spiral that harmed the macro economy as well as individual
consumers.

The problem with price-gouging laws is that they exist only at the
state level. Few states have the resources to take on the
multinational corporations that dominate markets for many essential
goods. Even if they did, they would still face jurisdictional
challenges. If a company makes baby formula in Wisconsin and then
sells to a distributor in Minnesota, which then sells to a supermarket
in Oregon, that company might radically hike the price it charges in
Minnesota when the next pandemic hits—but then be unreachable by the
Oregon attorney general even if Oregonians end up paying the cost.

Most price gouging today happens far beyond the reach of most state
attorneys general. A strong federal law would help not only the public
but also the small-business owners who lack the ability to do anything
but pass on big increases—and who become, unfairly, the face of ugly
profiteering for many consumers. If properly designed, such a law
would very rarely need to be used. With a federal ban in place, the
biggest corporations in the world would keep a price-gouging expert at
the ready to wag their finger the next time they’re tempted to
exploit a disaster for profit.

Support for this project was provided by the William and Flora Hewlett
Foundation.

_ZEPHYR TEACHOUT
[[link removed]] is a professor
of law at Fordham Law School. She is the author of Break ’Em Up:
Recovering Our Freedom From Big Ag, Big Tech, and Big Money._

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* price gouging
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* economics
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* prices
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* Kamala Harris
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