Avoiding a Hurricane of Economic Fallacies

By IPI President Tom Giovanetti Every time there is a major disaster such as a hurricane its only a matter of hours before the economic fallacies come flying along with the wind. The first fallacy to arrive is the price gouging fallacy. Price gouging is simply a pejorative term to describe the normal market response to shortages. Its literally just supply and demand but because even supposedly free-market states like Texas have laws against price gouging and elected officials loudly trumpeting their aggressive enforcement of these laws there is clearly a lot of misunderstanding. Mostly people misunderstand the idea of price itselfwhat exactly is a price anyway? A price is the most important concept in a market economy because a price carries all of the immediate real-time information necessary for consumers and suppliers to make good decisions. In a functioning market economy well in advance of a coming hurricane prices on gas water plywood and other relevant commodities would start inching up. The price increases signal suppliers to start directing more resources to the area where prices are rising in order to meet the demand and these signals would start days before the arrival of a hurricane. In fact its likely that during hurricane season prices will always inch up slightly. As consumers began stocking up prices would continue to gradually rise sending more intense signals that would drive more supply to the area. Entrepreneurs would seek to exploit the increased demand by loading up their pickups and bringing supplies into the high-demand area. This is how markets work to serve consumers and minimize harm in a disaster. But when government steps in and arbitrarily restricts pricing markets cease to work and signals arent sent. In fact contrary signals are sentif you calibrate your prices to increased demand you could get in trouble. And price gouging laws encourage even worse behavior like store employees hoarding supplies or customers buying up everything and selling at exorbitant prices on the black market. So price gouging laws actually harm the very people they are intended to help. Soon after the price gouging fallacy comes the broken window fallacy often stated as despite the devastation of Hurricane X there is actually a silver liningthe hurricane will actually be good for the economy! The idea is that a broken window is actually a good thing because it creates work for the window repairman. But the idea that disasters are good for the economy is a fallacy or it would make sense to go through town and break all the windows! Yes disasters result in increased economic activity but this activity is necessary just to replace what was lost. A disaster is a net lossit doesnt result in additional economic growth. Absent a disaster those resources would have gone into creating something additional which would have been better for the economy. Lets try not to compound economic disasters with economic fallacies. Markets work better than governments even in a disaster. Todays TaxByte was written by IPI President Tom Giovanetti.