Central Florida was struck by another hurricane this past week. Milton narrowly avoided the first direct hit on Tampa Bay in over 100 years, making landfall in Sarasota as a major Category 3 hurricane. However, in the days leading up, Milton reached Category 5 on two different occasions as it tracked from the Yucatan towards Tampa Bay, making it one of the most powerful hurricanes in recent history. In fact, over 5 million people were under mandatory or voluntary evacuation orders, and due to the strength of the storm, many locals who might ordinarily ride it out decided to leave. While many went just 10-20 miles inland, many others traveled further to get out of harms way, flocking to locations like Orlando, the Florida panhandle, Georgia, the Carolinas, and other states to stay with family or friends.
We don't have an exact number of evacuees, but with I-4 and I-75 gridlocked prior to the hurricane, it was obvious that gasoline demand surged dramatically in the state. And now, all of those people have returned home or are planning to return home, pushing demand much higher. On top of that, about 1.5 million people were still without power three days after the storm, in which many were relying on gasoline-fueled generators to power their homes and essentials. When looking at the economy, it's volatile times like these that expose bottlenecks. Today we want to use Florida's anti-price gouging laws to help explain why price controls are always counterproductive.
Policies preventing "greedy" suppliers from taking advantage of struggling customers during catastrophic times like a hurricane are highly popular. When you phrase it like that, who WOULDN'T agree, right? However, the problem with many policies is that they are sold to Americans based on emotion - not fact. In a recent podcast episode, Part of the Problem host Dave Smith noted the same concept with Medicare for all. On the surface, this sounds great. However, it doesn't mention what's required to achieve Medicare for all. Would those same people support Medicare for all if it meant they had to lose access to their private insurance right now? What if their taxes increased by 10%? What if the quality of healthcare decreased? Suddenly, Medicare for all isn't so popular.
Price caps also sound great for the price of gasoline, but what if that means you have to wait 2 hours in line to maybe get just 5 gallons? What if there's a gas shortage for two weeks or a month? In general, prices are not some tool used to manage an economy like politicians insist. Prices are necessary signals informing producers of opportunities. They tell entrepreneurs precisely what customers want. If we lack prices, we lack information required to help people. If prices are unable to increase with demand, then there's no incentive to produce more, which results in shortages. It's important to understand that while the government may control the price or quantity of something, they cannot control both. This is where Florida statue 501.160 comes in:
Rental or sale of essential commodities during a declared state of emergency; prohibition against unconscionable prices.
Those who are quick enough or have the time to wait long enough for tankers to refill gas stations may be fine with the statute, but others should not be. Entrepreneurs aren't perfect, but there's a reason gas prices generally increase during the holiday season. Companies anticipate a greater demand for gasoline for travel, and therefore increase prices. This creates an opportunity for businesses, which incentivizes them to produce more. Profit is a reflection of value added to society.
The same can be said for Florida's gas shortage today. Some tankers can hold 11,000 gallons of gasoline. If prices suddenly spiked to $8.00 today in Florida, vs. $3.00 in Alabama, for example, that provides an opportunity for fuel distribution companies to generate $55,000 in gross profit from just one truck transporting fuel from another state. How many companies would immediately jump on that opportunity rather than waiting on trucks stuck at the flooded port of Tampa? On the flip side, if prices are capped near $3.00, that greatly discourages delivery of gasoline. There's simply not enough profit to be made.
Additionally, letting gas prices rise with demand likely would have meant that many would have avoided waiting in two hour long lines to buy overpriced gas that they didn't necessarily need just yet. Or, had the state of emergency not been declared, trucks may have had a day or two to transport fuel before Milton. Either way, Florida may be able to control the price of gasoline, but it's very clear that they have no control over quantity. Price controls are preventing much needed supply.
As we mentioned, this is true with healthcare. It's also true with labor and minimum wage laws. Employers just look to replace lower skilled (and now higher cost jobs) with automation. It's not that they hate people. It's that labor is being priced out vs. other opportunities. The same can be said for money and the price of money - interest rates. The Federal Reserve has demonstrated numerous times that they can control either the price or quantity of money - but not both. When the Fed lowers interest rates, the money supply grows dramatically, which is inflation. Money is more accessible for some (generally the wealthy and financial sector), but not most. Additionally, when the Fed decides to try to cap the quantity of money (efforts to stop inflation), they lose control of the price of money, which is why interest rates had to increase recently.
The best thing about "price gouging" being legal is that even if you do have actors that are too "greedy" and just want to take advantage of people struggling, they have significant competition. In our fuel distribution scenario earlier, if a company increased gas prices to $10/gallon to take advantage of people, the $8/gallon, $6/gallon, or potentially even $4/gallon still provides arbitrage opportunities for competitors. The profit incentive pushes prices lower and lower until the cost of production no longer makes sense. Yes, it may take a few days, but the incentive needs to be there to drive production.
True capitalism isn't inconsistent with a thriving society. In fact, it's required. Without free marketing pricing to tell producers what consumers want, shortages will continue to happen. If Florida wants to resolve shortages to help people, they should let the free market determine prices, which will inform producers to act quickly.
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