The Gouge on Price Gouging

By Mike Cronin

In military slang, the word gouge can mean information or intelligence. For example: One person tells another a trick or hack for getting a task done quicker. The second person might say “thanks for the gouge.”

On the other hand, people are very much not thankful for what they perceive to be the price gouging happening in Houston and the rest of the Hurricane Harvey impact zone.  Loosely defined, price gouging is when a vendor radically raises their prices, as often occurs in and near disaster zones. Potential customers believe such vendors to be vultures, capitalizing on the misery of others.

But is that what is really going on?

In a recent Facebook post, A group called  “Educate the People” shared pictures of a convenience store billboard showing gas prices over $8.00 per gallon, and a case of bottled water going for nearly $45.00.  The caption beloe the pictures read “Heartless Capitalist Texas Store Owners.”

“Educate the Public” indeed! It’s not heartless. If millions of people are trying to “get out of Dodge,”(or stockpile at the last minute) because a disaster is imminent or in-progress, then supply trucks aren’t going into Dodge. When that happens, the things we normally take for granted are suddenly in much more demand, soon to be much scarcer, and thus suddenly much more valuable. When the demand for something skyrockets, but the supply is shrinking, the price must skyrocket as well. It sucks if you want to buy the thing that has quadrupled in price (so you have some to spare), but if you genuinely need it for survival, there just might still be some available because the people who merely wanted it weren’t willing to fork over the cash. It may seem like the store owner is profiteering, but consider: The store is still open and doing business when everyone else is trying to flee or hole-up!

If the store owner left his prices at the normal level (or was forced by the government to do so), he’d be out of stock in hours – or even minutes, with no routine resupply on the calendar. What is he, or his customers most in need, to do then?

The purveyors of “Educate the Public” should consider taking some remedial economics lessons instead of pandering to a generation of Americans who are being taught that they are entitled to something just because they think they need it.

To save them some time, here are the applicable points:

Price, cost, and value are not the same thing; however, in a functional system of mutual trade to mutual benefit, they are closely related. If the thing is becoming scarcer because the gap between supply and demand is increasing, the price will go up as a message to the consumer that the scarcity of the thing has increased.

When some force, usually in the form of government, compels a vendor to ration items, or to limit prices, the system is no longer about mutual exchange to mutual benefit. It has become dysfunctional, shredding the relationship between price, cost, and value. The price of an item no longer communicates the scarcity to the consumer. This increases the risk that hoarders and black-marketeers will buy up all the stock in a short amount of time, leaving the shelves bare, and leaving people in crisis with far fewer options. This will in turn lead to more desperation and lawlessness, not less.

In short: price gouging is not evil, though radically increased prices may shock and offend our sensibilities during a crisis, lulled as we are by generations of living in the stability of the largest economy in the world. On the other hand, anti-price gouging and rationing laws just might be evil, because they create more harm than they cure – by causing or exacerbating  shortages in the guise of mollifying the unthinking and easily offended.

A Hard Truth About Pay

By Mike Cronin

Some fields of human endeavor are inherently hard to learn. Medicine, for example. Becoming a doctor requires a person to study for eight or more years beyond the baccalaureate level and become an expert on the composition, functioning, and behavior of the human body. The sum of human knowledge on the subject increases greatly each year due to the efforts of scientists.  People who have acquired skill as a physician are relatively scarce, but because we all want to have our diseases cured and our injuries repaired, they are in high demand and they command high salaries.

On the other hand…some fields are made hard to enter by the members comprising them.  Consider: The Constitution of the United States is the ultimate law of the land.  It was written by well-educated men – in elegant prose that any reasonably literate reader can understand, even after two centuries of language drift.  It is about 17 pages long, and one need not become a lawyer to understand and apply it. Yet somehow that document can describe the limits and give operating instructions for three branches of government.   Now consider that the field of law grows every year. The vast majority of that growth is due to politicians making new laws, not by legal “scientists” discovering new truths.  And most of these new laws are written in “legalese,” which is often designed to be vague or confusing to the lay person.  Understanding modern law requires years of schooling not because it is inherently difficult, but because it is purposely made and kept so by legal practitioners. In other words, most of the difficulty in understanding law and becoming a lawyer is self-imposed by the field of law, not by the need to learn nature’s secrets.  Even so, the end result is a person who, like a doctor, has acquired a relatively rare ability set, so he or she can also command a high salary.

Some star athletes at the pinnacle of professional sports (specifically the NFL, MLB, and NBA in the US, and Soccer/”Futbol” throughout the world) get paid even more than doctors and lawyers – sometimes fantastically more.  Yet any able-bodied person can go out and play football, basketball, baseball, and soccer.  The difference is that the professional “star” athlete has a skill even more rare than medicine or law – the ability to entertain us and win championships.  Most professionals have to spend years at college to acquire the knowledge and skill to practice their trade; the star athlete had to be born with a greater degree of natural athleticism than the rest of us, and he had to learn his sport and hone his skills from elementary school through college. His career will likely be over by the time he gets to 40; the professionals in more intellectual and academic settings will just be hitting his or her stride by that point.

As difficult, or even deadly, as it is to be a teacher, or a first-responder, or a military member, or a tradesman, it is far easier to acquire the skills and knowledge to enter such professions  than it is to become a doctor, lawyer, or pro sports star.  And because they are easier fields to enter, there are lots more people qualified to enter them, and lots more people in them.  The skills, knowledge, and abilities just aren’t as rare, so the salary just isn’t as high.

We might like to think our priorities are all wrong because we pay people who put their lives at risk to protect us far less than pro athletes or entertainment stars. After all, isn’t protecting our lives more important than entertainment? Don’t teachers deserve more because they are preparing our children to be productive members of society? I think most of us would agree that our military and first-responders and teachers certainly deserve more. As a veteran, I certainly would have liked to earn more than I did, and I might have even deserved more than I got…but I didn’t get paid based on what I felt I deserved. But there is a hard, inescapable truth: No one really gets paid on the basis of what they “deserve” or on how difficult their job is. The real basis for pay is how rare and how in demand your knowledge skills, and abilities are. Those with the rarest, most in demand attributes will always be offered bigger salaries than the rest of us with more mundane skill sets.

The Minimum Wage Makes Minimum Sense

 

By Mike Cronin

Minimum wage laws, which are meant to reduce poverty, actually cause dysfunction and increase poverty and criminality. The political architects of such laws know this, or remain purposely blind to it, so that they can make promises, get votes, and gain or remain in office.

So how does a mandated minimum wage increase poverty?  While the person who has a minimum-wage job may or may not be defined as poor, it is the person who can’t get a job that suffers the worst effects of minimum wage laws. Since there is no corresponding minimum revenue laws, minimum wage laws dis-incentivize job creation.  Business owners, especially small business owners, have to make a certain amount of money in order to break even, that is, just to pay for their business loans, employees, suppliers, landlords, taxes, and whatnot. Yet there is no law forcing anyone to buy the offerings of a given business.  If a business doesn’t earn enough revenue, they can’t afford to pay even the minimum wage to their employees, so they either have to hire less people than they otherwise might have, they have let people go, or they have to go out of business. In any of those cases, jobs were either lost or not created, which makes it harder for unskilled people to find work, which leads to increased unemployment and poverty.

For example:  If you are old enough, you might remember the days when movie theaters had ushers.  It’s an extremely low-skill job; you could teach it to a high-school kid in an hour or two – and pay him or her correspondingly low wages. There was a match between worker skill level, worker responsibility level, and worker pay.  These days, no one is going to pay a kid $8.00 or $10.00 an hour just to usher, so the usher’s duties got blended into other jobs (assistant manager?) and the job all but disappeared.

Similar entry-level jobs are hard to find anywhere, which makes it harder for high school kids to find work and establish an employment track record.  Instead, such kids either remain with their parents longer, causing the parents to have to support a child longer than they had planned, reducing the parents’ own wealth; or the kid lives on the streets, greatly increasing the likelihood he or she will resort to criminal conduct to survive.

There is a another way some employers skirt the minimum wage laws and pay cheap rates for low-skill labor: They pay illegal immigrants illegally low wages in cash under the table.  This incentivizes illegal immigration, which, in effect, imports more poverty. The illegal immigration “infrastructure” is an underworld, and it attracts other crime: tax evasion, prostitution and other forms of human trafficking, narcotics, gunrunning, gambling (esp. on illegal dog and cock fights), ID forgery, and so on.

To be sure, the minimum wage laws aren’t solely responsible for poverty, illegal immigration, and vice.  Rather, they are a large and obvious contributor to those maladies, even as they fail to produce the promised positive effect.  But they sure sound good.