Institutions and Katrina:

Lots of interesting commentary on the relationships between economic institutions and Katrina. In addition to Tyler's post yesterday on the economics of levees as public goods, Vic Fleisher asks whether what happened in New Orleans is a natural or man-made disaster. He's right that to a large extent the disaster has been self-inflicted.

And at least some neighboring states that were largely untouched by the natural disaster apparently feel obliged to inflict at least some of the man-made pain upon themselves. Georgia, for instance, has issued an executive order prohibiting "price-gouging" by gas stations that "overcharge" Georgia drivers. I assume that I need not belabor the economic folly of this sort of legislation for our readers (although imposing anti-gouging rules in a state that did not suffer the natural disaster does seem like a new level of political inspiration). But I can't help but note the great irony that the Governor Perdue simultaneously imposed the price caps, thereby eliminate the market forces that provide incentives to conserve fuel, while going on to encourage drivers to conserve fuel by not taking unnecessary trips over Labor Day weekend and by encouraging business to permit their workers to "tele-work" next week. Then, of course, we get to the most amazing part of the announcement:

Perdue said there is no reason to panic about gas shortages and rising prices....

"There does appear to be some spot shortages in unbranded, spot-purchasing service stations," he said. "We expect that to be a temporary problem.

"There is no reason to panic. There is plenty of gas on the way. The only way we would have problems is if people rush out and try to horde and try to accumulate gasoline they won't need for a while."

Well, there is one other way to prevent unnecessary hordeing, as Adam Smith recognized some time ago, but Gov. Perdue seems to think that is the problem, rather than the solution.

On the other hand, seeing pictures of Biloxi and the Mississippi Gulf Coast, we shouldn't forget that there is certainly a pretty big dose of natural disaster here as well. Although I have a question about that as well. Seeing the wrecked casino boats in Biloxi (the fact that they are boats is a function of laws that effectively required them to be built in that fashion) my first impression was that the law magnified the disaster by insuring that the boats would be completely trashed. Now I'm not so sure--while it increased the ex ante risk of destruction of the casinos, I wonder if this will reduce the ex post repair costs, as unlike a traditional building, they can just build these casino boats elsewhere and just ship them back into Biloxi. I honestly don't know how the economic trade-off works here.

I also wanted to recognize Steve Bainbridge's post on "outsourcing disaster relief" which raises some nifty ideas.

Related Posts (on one page):

  1. Walter Williams on "Price Gouging":
  2. Institutions and Katrina:
With no offense intended, when I read statements like this:
I assume that I need not belabor the economic folly of this sort of legislation for our readers (although imposing anti-gouging rules in a state that did not suffer the natural disaster does seem like a new level of political inspiration).
my natural inclination is to think that the speaker means "I hope you won't notice that I am unable to support my effort to depict my political position as economic argument." There are arguments that can be made - on both sides. Your failure to present ones, couched in terms which condescend to anybody who dares to question your conclusion, does not impress me.
9.3.2005 11:48am
Devin McCullen (mail):
From what I've seen and heard, gas prices in parts of Georgia are running as high as $6 a gallon. I know it's closer to Katrina than most of the rest of the country, and their gas supplies may be more directly affected, but that still seems exceedingly high to me. I understand that in the long run, market forces will ensure that gas is accurately priced, but that doesn't mean there can't be abuses in the short run, and that the government shouldn't do anything about them.
9.3.2005 12:38pm
Ketzl Brame (mail) (www):
I think your post might be based on a misapprehension. The Georgia anti-gouging law doesn't establish price caps per se. It does put businesses under the burden of having to defend their pricing decisions if they receive citizen complaints, the defense being this: Increases are only permitted that accurately reflect increases in the cost of new stock or the cost to transport it.
9.3.2005 2:42pm
Justin Kee (mail):
As this event is partially a man-made disaster, who should be held accountable?

a. The people who chose to live in the afflicted area.
b. The local officials who were in the best position to know of the consequences and prepare for the event.
c. State officials who had greater authority and resources with which to prepare and respond to the event.
d. Federal officials who analyzed and funded the levees that broke and have control over the greatest amount of resources with which to respond to the event.
e. All of the above.

I would choose (e). As to the approportioning of culpability, the debate seems to revolve around blaming (a,b) and blaming (d). A reasonable question that needs to be asked is of the two divisions, which one was in the best position to have remedied the risk?
9.3.2005 2:53pm
Zywicki (mail):
Visitor: Are you suggesting that there are economic arguments to make on both sides? I would be interested in hearing the argument on the "other side". I am not familiar with serious economists who would defend price caps, especially outside the disaster zone itself, where the supply curve may be vertical and thus a different rationing system may be warranted. Are there economic arguments on the other side for rationing by cuing, rather than price?

Ketzl: No, I'm not. In terms of economics, they are same thing--the Georgia law is simply a price cap set according to cost, but it is still a cap because it is still set below the market price.
9.3.2005 3:59pm
Jeremy (mail):

Are you seriously suggesting that there are absolutely no economic arguments in favor of government acting to prevent price gouging?
9.3.2005 5:48pm
Splunge (mail):
Are you suggesting that there are economic arguments to make on both sides?

How about this: however efficient a market, it cannot communicate information about consumer utility to vendors faster than a natural speed limit, sort of like the speed of light, set by (among other things) the rate at which consumers make purchases. For example, a gas retailer cannot know that the price he has set is too high until a representative number of consumers have had a chance to buy at his price and declined to do so.

At its best, government can function as a kind of magic faster-than-light transporter device which communicates information about consumer utility to vendors faster than the market can. In principle it can even communicate information to vendors before that information has been created by consumers. For example, one can reasonably regard a national government's funding of public safety or scientific research as an attempt to communicate to present-day vendors information about what future consumers will want them to be doing.

If the government communicates correct information about consumer utility to vendors faster than the untouched market can -- and I agree that's a big "if" -- then it can create a "super-efficient" market that (paradoxically) reaches equilibrium faster than a strictly free market could. For example, wasteful price oscillations after a sudden supply shock can be significantly reduced.

It's important in this context to distinguish between short-lived government actions that short-circuit meaningless fluctuations and long-term government direction of a market (european socialism), or government supercession of a market (Stalinism), which are obviously idiotic.
9.3.2005 6:57pm
Splunge wrote:
...however efficient a market, it cannot communicate information about consumer utility to vendors faster than a natural speed limit

Could you cite an example where price caps were used in this way? What magical source of information would enable government to divine the "true" market price?
9.3.2005 7:20pm
AppSocREs (mail):
Am I the only one here who remembers the disaster that Carter's attempt to cap oil prices caused in the 1970s. It led to scarcities at the pump, mile-long lines at gas stations, and a long-term maintenance of artificially high gas prices that was not relieved until Ronald Reagan assumed office. Reagan eliminated Carter's caps, almost immediately gas became plentiful, and soon after gas prices began a steady decline that persisted into the Clinton administration.

Price is a method of rationing gas that favors those who most need the gas: If you really need it, you'll pay what you have to. As supplies diminish, prices rise and only those who really, really need gas buy it. If supplies apparently run out, someone will supply more gas if the price is right, even if they have to airlift it in from Abu Dubai.

To put it in simplistic terms that even those woefully ignorant of economics can understand: Capping prices, even if only by an implied threat, means that all the citizens of Georgia can buy gas at "reasonable" prices now for their trips to the mall and movie house, but there may be no gas for ambulances next week.
9.3.2005 7:22pm
Shelby (mail):
Screw everything else; I want to know how government can communicate faster than the speed of light!

Splunge, all of humanity awaits with baited breath.
9.4.2005 12:16am
Shelby (mail):
...or is that "bated"?

In any event, I'll take the bait. Yes, Jeremy, "there are absolutely no economic arguments in favor of government acting to prevent price gouging". None, zip, zero. Fantasy (i.e. Marxism, which is faked-up historical "science,") does not count.
9.4.2005 12:18am
janon (mail):
In the disaster zone itself, the economic argument that could justify price controls is that there is not a competitive market; each station owner is a monopolist because a buyer who finds a station with gas will get in line rather than take the risk of shopping elsewhere. The station owner is in a position to extract an economic rent (the difference between the monopoly price, which will be set at the point where the owner maximizes profits, and a fully competitive price). The problems with the government trying to reduce that price to a hypothetical competitve one are (1) how do you determine that price (the classic problem in any type of rate regulation of monopolies) and (2) despite the economic inefficiency of allowing the owner to extract an economic rent, it's the best way to reduce consumption.

Having said that, market economics doesn't have much application in a place where civil order has collapsed. If the main constraint on pricing is the owner's fear that some of the people in line for gas have guns, it makes sense for the government to step in and impose limits to try to calm the mob down.
9.4.2005 11:33am
Jim Anderson (mail) (www):
I guess I have to be the pedant who points out that it's "hoard" and "hoarding."
9.5.2005 1:04am