Oftentimes it is difficult to see the effects of government policy until a crisis reminds us just how much damage bad policy can inflict on our economy.  A current illustration of this can be found in the current baby formula supply crisis in the United States. 

While there are factors outside of human control that have contributed (such as panic buying during the COVID scare and a recent bacterial infection at a production facility), government intervention in the marketplace greatly exacerbated the problem.  The intervention came in the form of “price gouging” laws and protectionism.  Let’s take a closer look at each in turn.

Price Gouging

“Price gouging is an effective tool for preventing shortages and hoarding.” (Elijah Gullett)

Though the statement above is not something you are likely to hear from mainstream news outlets or your average politician, it is a truth we would do well to learn. 

During times of crisis, such as a hurricane, wildfire, power outage, disease outbreak, etc., it is not uncommon to hear stories of greedy capitalists exploiting the suffering by drastically increasing prices on essential goods and services.   In order to prevent these selfish business owners from making money by taking advantage of the suffering of others, anti-price gouging laws are needed curb this wanton avarice…or so the argument goes.  However, with some scrutiny, this line of reasoning fails to stand.

“Price gouging” is needed in times of crises, because it ensures scarce resources are properly allocated.  In a free market, prices are not set arbitrarily but are reached by the principle of supply and demand.  If demand increases and supply remains the same an increase in prices will signal to the manufacturer that more supply is needed.  If you were to artificially keep the price down so as to avoid the supposed moral evil of “price gouging”, that signal would not be sent and no change in supply would be triggered.

On the consumer side of the equation, an increase in price gives incentive for the consumer to conserve and buy less.  This will help ensure that scarce supplies do not run out too quickly and buys time for the manufacturer to increase the supply.

What happens when the civil government steps in, as do state governments during times of crisis, and forbids the raising of prices to match increased demand?  The profit incentive from the increase of prices will be lost to the manufacturer and supply will remain the same.  In the meantime, the increased demand and relatively cheap products will ensure that the shelves remain empty.  Who can forget the hoarding phenomenon of 2020?  If “price gouging” was allowed, consumers would be less likely to collect items they did not really need. 

It is evident then, that with the profit motive for businesses removed, fewer consumers will be served and more will be harmed.  The demanded goods will be unavailable except to those willing to wait overnight in a line, purchase online at actual prices, or buy on the black market.  The invisible hand of supply and demand will make certain that the goods demanded will reach the greatest number of customers at the best price.  In this sense, “price gouging” can be seen as a loving act, while price control hurts more people.

How did this affect our current crisis?  In 2020 baby formula was one of those items hoarded by frightened consumers.  This hoarding was made possible because of anti-price gouging laws at the state level.  In other words, the price remained at a level that did not signal to the consumer that hoarding was not economically wise.  For that reason, consumers had more formula than they actually needed.

Panic can only last so long.  When the hysteria finally quieted, all the hoarders found they had ample supply of formula to last for quite some time.  As a result, demand dropped, which signaled to the manufacturers to decrease production.  This was the context of the baby formula market when the bacteria were found in the Michigan plant.  But that’s not the whole of the story.

Protectionism

When the power of the civil government is used to reduce competition and obtain favors for preferred businesses, harm comes to the consumer.  This relationship between civil government and business is also known as crony capitalism and is found even in the baby formula industry.   (For an interesting perspective on the problem of crony capitalism see “The Road to Crony Capitalism” published in the Winter 2019 edition of The Independent Review). 

In a recent article, “What’s Behind America’s Shocking Baby Formula Shortage,” Derek Thompson points out that a contributing factor to the current crisis is US policy towards the baby formula industry.  Large companies use the power of the federal government to protect their market share by limiting competition – both at home and abroad.  This is done through agencies such as the FDA, the Department of Agriculture and even Trump’s new North American trade agreement.  Onerous regulations and high tariffs work for the benefit of the large established corporations to keep competition down at home and abroad.

As Derek Thompson points out, many argue that if the United States could just produce everything within our own borders, our economy would be much more resilient.  The baby formula crisis has proven otherwise.  Thompson describes our dilemma best when he concludes:

America’s reasonable instinct to protect infants has metastasized into an unreasonably protectionist trade policy that makes the U.S. formula market exquisitely sensitive to existential shocks (like a pandemic) and domestic shocks (like a major recall). Today, the shocks are everywhere, and that’s why baby formula is not.

Any time a government steps outside of its God-given limits, the people suffer.  As the Proverbs say, “When the wicked rule the people groan” (29:2).  No doubt there is a lot of groaning in households in need of baby formula.  The more we arm ourselves with an awareness of the economic fallacies promoted by the politicians and crony capitalists, the better prepared we will be to oppose their destructive policies.  Price gouging is good while protectionism is bad.  Don’t get hoodwinked by nice sounding arguments to the contrary.

A Note on the Importance of Words

Oftentimes the reality of a situation can be obscured by the terms that are used.  This is certainly the case with the scourge of abortion – where the dismembering of babies inside the womb is described as “women’s reproductive health” or some other nice sounding term.  An ingenious branding tactic, this practice causes people to sound mean spirited as they defend the truth.  When arguing for the protection of innocent children becomes an argument against “women’s reproductive health,” those advocating for the right position are instantly at a disadvantage.

This is certainly the case for the topic at hand today.  After all, who wants to argue for “price gouging” or against protection?  Being armed with better terminology (words that better reflect truth rather than obscure reality) can help us overcome this disadvantage.  Instead of being forced to argue for “price gouging,” what if the debate was framed between counterfeit prices and true prices?  Similarly, instead of arguing against protection, what if we argued for consumer rights and against cronyism?

Framing our discussions with words that reflect reality over emotion will help us better understand each other’s arguments.  Why are true prices better than counterfeit?  Why are consumer rights to be valued over cronyism?  Using these terms grounds our conversations on this important subject in what is really happening.  Let us be careful not to give up the argument in the terminology.