Minnesota’s Economic News — W/E 1/28/22
State and local taxes and spending Minn Post: A new Minnesota law is saving certain kinds of businesses a boatload in federal income taxes Star Tribune: Minnesota lawmakers face $7.7B…
Hurricane Harvey is the first hurricane to hit the state of Texas since Ike in 2008. It is the strongest to hit the state since Carla in 1961. It is the strongest hurricane in the Gulf of Mexico since Hurricane Rita in 2005. It is the strongest to make landfall in the United States since Hurricane Charley in 2004. It is wreaking devastation on the coastal portion of Texas.
Markets and morality
While it has been doing so, it is quite likely that you’ll have seen this going round on social media.
If you want to put a business out of business the free market provides a way of doing so: don’t shop there.
But beyond that, why should we be outraged by these higher prices? Like any other price, prices for gas or bottled water are produced by the forces of supply and demand. It would seem obvious that a vast event like Hurricane Harvey would impact both. It follows, just as obviously, that prices will be impacted.
Aren’t these bottled water sellers trying to exploit the thirst of Hurricane Harvey’s victims in the name of greed? Perhaps. But Walmart exploits your hunger. It doesn’t give you food because it cares about you but because it makes a profit from doing so. As Adam Smith wrote 240 years ago, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest”.
This is why the old saw about ‘profits over people’ is so misguided. A company can only make a profit by efficiently providing a good or service that people desire. If the company fails to serve the desires of the people there will be no profit.
How the price mechanism can help
Hurricane Harvey has devastated a swathe of Texas. It has wrecked communications and transportation infrastructure. The supply of necessary goods and services in the afflicted areas isn’t going to increase greatly any time soon. What gas or bottled water there is will have to be made to last.
Imagine Al. Worried for his family, he travels to the local grocery store and buys up all their bottled water. Shortly afterwards, Bob arrives. He too is worried for his family and wants to buy some bottled water. But there isn’t any for Bob and his family. Al bought it all.
Now, imagine that the grocery store owner raised the price of bottled water. All arrives looking to buy some. He sees the high prices and buys half the amount he would if prices had stayed the same. He isn’t happy about it, but he takes his water back to his family and they use it sparingly. Then Bob turns up. And, in this case, there is water for him to buy. Again, he isn’t happy about the higher price, but he gets water he wouldn’t otherwise get and he takes it back to his family and they use it sparingly.
In this way, a limited resource, bottled water, can be distributed more efficiently. Both Al and Bob see the higher price and curse the store owner, but Bob gets water he wouldn’t have otherwise. When resources are scarce, as they are in parts of Texas right now, the price mechanism can do an effective and necessary job of rationing them.
And economies aren’t static, they are dynamic. High prices for gas or bottled water act as signals. They are effectively big flashing lights saying ‘We need more gas and bottled water over here’. The problem along the Texas coast isn’t that millionaires have stockpiled bottles of Dasani. The problem is that there isn’t enough Dasani to go around. It is not a question of dividing up the Dasani there is more equitably. It is a question of just getting more Dasani to Texas. If we mute these signals with price controls the shortages of gas and bottled water will continue, and so will the suffering.
Hurricane Katrina – Walmart to the rescue!
When Hurricane Katrina struck in 2005, the response by government agencies was, by general agreement, woeful. Here are people in institutions whose job it was to provide goods and services to Katrina’s victims without a profit motive and they failed.
By contrast, big box stores such as Walmart, Lowe’s, and Home Depot responded pretty speedily. Walmart brought supplies to New Orleans long before FEMA managed to. Sheriff Harry Lee of Jefferson Parish in suburban New Orleans said “if [the] American government would have responded like Wal-Mart has responded, we wouldn’t be in this crisis.” Phillip Capitano, mayor of the New Orleans suburb of Kenner, said that “the only lifeline in Kenner was the Wal-Mart stores. We didn’t have looting on a mass scale because Wal-Mart showed up with food and water so our people could survive.”
As the economist Steve Horwitz writes in a study of the private sector’s response to Katrina,
“In the three weeks following the storm’s landfall, Wal-Mart shipped almost twenty-five hundred truckloads of merchandise to the affected areas and had drivers and trucks in place to ship relief supplies to community members and organizations wishing to help. Home Depot provided more than eight hundred truckloads of supplies to the hard-hit areas and used buses to transport one thousand employees to the region from other areas. Besides what Wal-Mart sold as a result of quickly reopening its stores, the company also provided a large amount of free merchandise, including prescription drugs, to those in the worst-hit areas. For example, several truckloads of free items went to New Orleans evacuees staying at the Astrodome and at the Brown Convention Center in Houston. Most important, Wal-Mart got this assistance to the devastated areas almost immediately after the storm had passed rather than in the days—in some cases weeks—that it took government agencies to provide relief to residents.”
As Horwitz explains, these retailers responded this way because they had an incentive to.
What works for them, or what feels good for you?
The victims of Hurricane Harvey do not need moralizing. They need goods and services. They need water, food, medicine and medical assistance, clothing, and shelter. Whether they get this from a greedy corporate baron or from some altruistic agent of the government, they are unlikely to care too much. Policy choices must be motivated by what alleviates their suffering, not what best confirms to a misguided worldview dominated by worries about evil businesses. Right now, that is of no importance.
EDIT: I seem to have missed the woods for the trees a bit here. The meme at the top of the post shows 24 bottles of Dasani selling for $42.72. That is $1.78 per bottle. The Agua is selling for just 83c per bottle. This is a crisis?
John Phelan is an economist at the Center of the American Experiment.