A few days before the Democratic National Convention, presidential candidate Kamala Harris made a speech laying out her plans for the economy. It included a federal ban on “price gouging,” especially by grocery stores.
Many people—perhaps most people—view price gouging as wrong, maybe even evil. But they’re misguided. Price gouging typically occurs during times of natural disaster, or business disruption such as in the pandemic. It serves a vital economic function. We should want more of it, not less.
Let me explain with a little story. About 30 years ago, my wife and I—along with our four young children, our dog, and my mother —were driving from Chicago to Boston. By the time we reached upstate New York, we needed to stop for the night. This was before cell phones and the internet, so we pulled off at a big freeway exit to see what was available. Nothing. We tried hotel after hotel. Nothing. We asked them to call around. Nothing. It turned out it was the weekend of Woodstock ’94. Finally we found a seedy Super 8 motel that had two rooms left, for $400 each. This was back when Super 8 motel rooms were about $50 at most.
“Thank you, we’ll take them!” I said immediately. My mom was furious—our family was being gouged!
“How dare he charge so much!” she said.
I tried hard to explain why she should be grateful that the owner was charging so much.
“If he charged $50, or $100,” I said, “those rooms would have been gone long ago and we’d be sleeping in the car tonight. He took a big risk holding those rooms for us. Thank him and be grateful!”
Though my mom was an amazing, smart, wise, and well-traveled woman, she wasn’t having it. Nothing I could say would persuade her that the hotel owner wasn’t being terrible in “taking advantage of us.”
Natural disasters like hurricanes often give rise to shortages of items like 4 × 8 plywood sheets as people race to board up their windows. What do stores that still have some plywood sheets do? They raise prices. Ditto the gas station, when gasoline trucks are blocked by fallen trees from getting to the town. In the pandemic, people who worried about having enough toilet paper cleaned out the shelves. Stores that raised prices were accused of “gouging.”
Unlike price fixing, which is illegal, price gouging happens in perfectly competitive markets. There suddenly isn’t enough of something to go around, so prices rise sharply. If it were an auction, buyers would bid the price up themselves. Store owners who bought when prices were lower can make a temporary profit. But this practice so infuriates the public that 37 states have enacted laws attempting to ban it.
These price-gouging bans are woefully misguided. Price gouging is wonderful for all the reasons that letting supply equal demand is wonderful. When there is a limited supply, it tilts the field to those who really need it—and are thus willing to pay the higher price. Who really needs that high-priced gas? A handicapped person who has to get to a doctor across town? Or someone who could bike, take public transit, or walk to see a friend? Price gouging lets the really needy person move to the front of the line.
Why did people buy tons of toilet paper in the pandemic? They were worried about not being able to get it in the future. If the big grocery stores and pharmacies had not been worried about being sued, or about the likelihood of bad press, they would undoubtedly have raised the prices. Higher prices would have given would-be hoarders a clear message: Don’t spend a lot to stock up now. And if you really need it, there will always be some in the store later.
Indeed, most big companies are reluctant to price gouge. Costco let the shelves run out of toilet paper rather than raise prices. Other stores rationed: You can have only four rolls—no matter if you have a house of eight people with diarrhea or if you’re stocking up your summer house just in case. To some extent, companies are simply afraid of being berated by politicians for price gouging. It’s also terrible PR. People who buy some of the limited supply hate the high prices. People who can’t find any goods for sale don’t understand that they’re going home empty-handed because the store didn’t raise prices enough. Stores want a reputation for passing on the low cost to the customer. Price gouging risks that reputation.
Restricting price gouging also reduces supply. For instance, if you run a Home Depot in hurricane-plagued Florida, how many 4 × 8 sheets of plywood do you keep in your inventory? Well, if you’re allowed to sell them for $100 each when the next hurricane is forecast, a lot. If you are forced to charge only the pre-emergency price until the shelves empty out, then not so much. Keeping inventory around is expensive.
What about people who can’t “afford” $10 gas? Rule number one of economics is: Don’t distort prices in order to transfer income. Rule number one of politics seems to be the opposite. Agricultural price supports enrich farmers but lead to overproduction. Rent control causes rents to be unnaturally low for the lucky few who live in rent-controlled apartments, but discourages developers from building new apartments.
Price gouging works the same way. If gas is capped at, say, $4 a gallon in the wake of a disaster, it will simply extend the shortages and cause drivers to spend hours in gas lines to fill their tanks. That’s exactly what happened in the early 1970s, when President Richard Nixon imposed price controls on gasoline.
If the government is genuinely worried about who can “afford” higher prices, then it should hand out cash to consumers, and leave price gouging alone. For example, give everyone $100 to “pay for gas.” But if some people look at the $10 price of gas and decide they can put up with substitutes like car pooling, bicycles, public transit, or just putting off the trip, then let them spend the $100 on something else instead.
In fact, this is mostly what our government did during Covid. There was a lot of noise about price gouging, but by and large the government just handed out checks so everyone could pay higher prices. (The big exception was the moratorium on evictions.) We got inflation, but we did not get the economic devastation that would have been caused by price controls and rationing.
Yes, rationing. Nobody likes “price gouging,” but choices are always between hard alternatives, not a dreamscape where everything rains down for free. If we aren’t going to use higher prices to decide who gets the limited supply, the alternative is rationing by waiting in line, political preference, or knowing the right guy.
Here’s the bottom line: Price gouging directs scarce supply to the people who really need it, encourages new supply to come in, encourages holding stockpiles for a rainy day, and encourages people to substitute for less scarce goods when they can.
Yet the cultural and moral disapproval of price gouging is strong. Going back thousands of years, people (and theologians) have felt that charging more than whatever price they are accustomed to is immoral, especially if the merchant happened to have inventory purchased in an earlier time, when the price was much lower. This idea of a “just price” motivates a lot of the anti–price gouging rhetoric. Economics has only understood the virtues of price gouging in the last 250 years.
As much as the U.S. is the land of free markets, we have a ways to go in our cultural acceptance of market behavior. In a capitalist society, the motto should be: “You’re free to charge what you want for your property, and I’m free to not buy. Everybody stop whining.” But that’s not how Americans feel.
It is surely morally worthy to give what you have to your neighbors in a time of need, especially the less fortunate. But we should not demand gifts. Moral feelings are a terrible guide for laws.
John H. Cochrane is a senior fellow at the Hoover Institution, and the author of The Grumpy Economist Substack, from which this article is adapted.
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Russian comedian Yakov Smirnoff (real name Yako Pokhis) made his career in comedy here in the States during the height of the Cold War, tackling life in the Soviet Union in a humorous way. ("In the United States you watch TV, in Russia the TV watches you", that sort of humor.) He had one routine which is relevant here: He brought his elderly mother to the United States, and walked her thru a large supermarket, where every stall, every shelf was full. Now his mother had raised him in the Soviet Union. In order to feed her family, she would leave early in the morning with an armload of empty shopping bags. On one corner there would be a farmer selling beets, so she'd fill up one bag with beets. Several blocks away there were people queued up outside of a state dairy outlet. She's stand in line for an hour and finally manage to get a large block of cheese and a small tub of butter, which she put into a second shopping bag. Then take the bus to the other end of the city to the state store selling meat, stand in line for three hours, and manage to purchase six sausages and a chunk of pork fat. And finally, walking back home, she passed a person on the street selling shoes. Left shoes only, but she bought one anyway. Perhaps she'd eventually run into someone selling right shoes and then she'd have a pair to trade with someone who was selling a nice men's shirt for her son. Even missing buttons. She had a friend who worked in a button factory and could get her buttons.
Kamala Harris's planned economy. Just remember, and I know these people, very well. The folks behind Harris honestly and truly believe that the Soviet economy was the fairest, most equitable achievement of human society, with possibly the Cuban and Venezuelan economies today only slightly behind.
An example of consumers detesting "price gouging": in the early days of Uber (2013-2015 or so), a central feature of their app was "Surge Pricing." Based on supply of Uber drivers and demand for rides, Uber would add a multiplier onto the standard fare of a trip. Good idea to manage demand, terrible idea to make users happy.
The Surge Pricing was all people who used Uber would talk about. You'd see people wait outside a bar for 45 extra minutes until their surge pricing dropped from 2.3x down to 1.4x. People compared notes on the highest surge pricing they've ever seen (I once paid something like 13x to get home from a New Year's Eve party on the outskirts of Charleston, SC).
Uber, seeing how their users reacted, did the smart thing - removed all mention of the surge pricing from their app, yet (probably) kept the pricing structure the exact same. Now, when you ride for Uber, you simply pay the price it offers you. If it's 3x the price it was at 4:00pm that afternoon, nobody knows, and Uber is following what the author pointed out - “You’re free to charge what you want for your property, and I’m free to not buy. Everybody stop whining.”
This story's topic is a great example of what brought me to subscribe to the FP in the first place. It's a column that picks up a medium to long-term news story and offers a different perspective that's likely to inspire debate. Given, I have a soft spot for heterodox takes in general, but this argument for pricing flexibility makes a ton of sense.