Goverrhea: Thoughts On the Anti-Price Gouging Bill

The House is really stretching to reach new heights of absurdity, with its passage of HR 1252, the Federal Price Gouging Prevention Act.  Not only does this bill have no chance of doing anything positive for consumers (despite what its 124 co-sponsors would either ignorantly and/or disingenuously tell you), but it virtually guarantees a rash of unintended and harmful consequences.

Deliberately blind to the impact of OPEC, fresh Alaskan supply outages, ongoing military conflict in the world's oil capital region, the dawn of the summer driving season, and the simple fact that wholesale crude oil prices - not your friendly neighborhood franchisee - drive the retail price of gasoline, this bill nonetheless seeks to flog retailers for "gouging" consumers.  But since price-gouging has not been found to be a problem in the American retail gasoline market, despite 30 years of dogged investigation, this price control aims to fix something that simply ain't broke.  Just because the bill serves no actual purpose, however, doesn't mean it won't have any impact.  Like most any price control, the primary problem with this price control is the fact that it's a price control.

When government imposes its awkward hand on the price of gasoline (a price driven by a rational market encompassing millions of widely distributed participants; a market, it bears repeating, that demonstrably does not exhibit price-gouging tendencies), it necessarily moves the price away from the market-clearing equilibrium.  That necessarily upsets the balance of supply and demand (in this case by lowering supply, since the downward artificial price pressure constitutes a disincentive for suppliers to supply it).

Problem: not enough gasoline; gas too expensive.  Congressional solution: lower supply.

I'm sure the obligatory (if superficial) delving into free market theory has sent any of the bill's 284 supporters who may be reading this running for the door with fingers firmly implanted in ears.  But unfortunately for us, assuming the bill is ever enacted, there's plenty more bad news to explore.

In their collective bureaucratic wisdom, the 124 cooks who whipped up this fetid broth settled on some marvelously ambiguous triggers, deeming retailers to be in breach if they deign to take "unfair advantage [of] unusual market conditions" or sell their wares at "unconscionably excessive" prices.

In a capitalist system, in which merchants are permitted (and expected) to maximize profits by seeking higher prices, just as consumers are expected to maximize value by seeking lower prices, until the two sides equilibrate at some market-clearing price, how are merchants expected to know when their appropriate profit-maximizing behavior constitutes "unfair advantage" or when their prices become "unconscionably excessive"?  The easy answer is: they won't know.  They certainly won't know when their rational, profit-maximizing economic behavior might become "unfair" or "unconscionable" in someone else's eyes.  And that's a big problem.

The penalties laid out by this bill are (to use the Congressional parlance) unconscionably excessive.  They call for civil and criminal fines of up to $150 million dollars for corporations and up to $5 million and 10 years in prison for individuals.

Thanks to the bill's severity and ambiguity, your friendly neighborhood gasmonger is going to shutter his business the day this bill is enacted if he knows there's a chance he may be personally fined millions of dollars and spend up to a decade behind bars, should his state attorney general not approve of his pricing.  The brave ones may stick it out and try to cut enough costs that they can afford to lower their prices below market rates in order to ensure compliance.  Some if not most of them will quickly turn unprofitable and go out of business themselves.  The craftier ones may find enough costs to cut (e.g. lowering wages, reducing operating hours, cutting corners on safety, deferring property and equipment maintenance) that they manage to survive.

Once things shake out, we can say with near economic certainty that we'll have far fewer retail gasoline suppliers in business selling far less supply and providing a reduced quality of service.  That seems like a daunting price to pay for a law that stands no chance at providing any offsetting benefit.

The bad news is that so many legislators don't understand the inevitability of these negative consequences, whether because they're unable to grasp the causality or because they're unwilling to let it get in the way of such a delightful bit of panderage.  The good news is that the outlook is not so inescapably grim, so long as we manage to reject this nonsensical line of thinking.  We know how to lower the price of gasoline (and retail energy in general).  Yes, investment in alternative energies is vital, but it's a long-term solution.  But we've got three bullets in the clip right now - building new refinery capacity, building new (or reconditioning old) nuclear facilities, and drilling in ANWR and currently forbidden coastal regions.  None of these will bring new product to market tomorrow, but within a few years, they'll offer meaningful relief to millions of gas-buying Americans.

It's true that none of those measures carry the satisfaction of sticking it to evil oil companies or throwing small business owners in prison for sentences normally reserved for repeat violent offenders, but they do offer the consolation of actually improving the situation in question, rather than making it significantly and perhaps irreparably worse.