Category Archives: Economics

Time for a Federal Price Gouging Law?

Amazon’s vice president of public policy, Brian Huseman, calls for a federal price gouging law in a recent post over at Amazon’s in-house blog. This is a bad idea for several reasons.

One is that there are already effective ways to reduce price gouging without regulation. At Amazon, Huseman writes, “We deploy dynamic automated technology to proactively seek out and pull down unreasonably priced offers, and we have a dedicated team focused on identifying and investigating unfairly priced products that are now in high demand, such as protective masks and hand sanitizer.”

This should be a competitive selling point for Amazon, not a call for more regulation. Regulations, remember, are made by the government we have, not the government we want. Amazon’s technology and in-house policies are almost certainly more effective than what Donald Trump, Nancy Pelosi, or Mitch McConnell would enact during an election year and a pandemic. Company-level policies are also more adaptable than federal-level policies as technology and circumstances change.​

In fact, if Amazon isn’t already doing so, it could license or sell its anti-price gouging technology to competitors for a profit. Price gouging is unpopular, and companies that fight against it look good to customers. Amazon does not need federal regulations to force this business opportunity into being.

Looking at price gouging legislation from Amazon’s perspective, but without the public relations filter, they stand to gain three things from a federal price gouging law:

  1. Regulatory certainty. One federal standard is easier to follow than dozens of state standards.
  2. Liability protection. Amazon will face fewer price gouging lawsuits if the company is cooperative with legislators, or even has a hand in crafting the rules.
  3. Rent-seeking, which is economists’ term for using government for unfair advantage. Price gouging legislation is a way for Amazon to raise rivals’ costs without having to improve its own offerings. Amazon has already invested in artificial intelligence algorithms (AI) and in enforcing guidelines for its third-party sellers. Many of Amazon’s competitors have not, especially the smaller ones.

There is something to be said for the first two items, though there are also arguments against them. But the third item, rent-seeking, is anti-competitive behavior at its worst. One of the primary reasons CEI opposes antitrust regulation, for example, is that antitrust regulations themselves are a major rent-seeking opportunity. Big companies routinely game the rules to thwart competition. Price gouging legislation is another example of the same rent-seeking process. These initiatives happen when companies compete in Washington, rather than the marketplace.

Other Factors

Amazon’s call for a price gouging bill might be part of a larger effort to get itself out of antitrust crosshairs. Ironically, such a bill would make retail less competitive. Not only would Amazon raise rivals’ costs, legislation would prevent companies from competing with each other to offer price gouging policies their customers most prefer.

The timing is as bad as the idea itself. Retail sales declined by 16.4 percent in the month of April, the worst ever recorded—for the second month in a row. Retailers have enough to deal with without having to spend resources complying with new rules their competitor helped to write.

There is a federalism angle, as well. A federal rule would impose standards on more than a dozen states that intentionally refuse them.

Prices Are More than Money

As any good economist will tell you, money isn’t everything. Prices are a lot more than money. Every good has a mix of both money and non-money prices. Price gouging legislation is ultimately ineffective because it only reduces ­money prices during a crisis. Tamping down on those means more severe non-money price increases. These cannot be legislated away.

A high money price causes people who don’t urgently need toilet paper or hand sanitizer to hold off until later, when the price goes back down. That leaves more left over for people who need it now. This matters a great deal during an emergency. On the other side of the equation, that same money price increase also induces producers and distributors to go the extra mile, often literally.

What about non-money prices? One example of a non-money price is when a good becomes harder to find. You might have to drive to a store further away or do some deep digging online for some potentially shady sources. Queuing and waiting lists emerge or shipping times might take longer. These things don’t cost money, but they still have a price. They are not measured in dollars, but in wasted time, extra hassle and stress, and lost opportunities. These non-money price increases leave people with less time left over for other things such as job searches, home schooling, or even taking some time for self-care.

Shortages will happen during a crisis. That is unavoidable. The question is how to deal with them. Just as pushing on a balloon doesn’t change how much air is in it, squeezing down on money prices with a price gouging regulation doesn’t actually do anything to stop price increases. It mostly just redirects them to non-money areas.

What is the correct mix of money- and non-money prices? That is a subjective value judgment. There is no truly right or wrong answer, which is another reason why federal price gouging legislation is bad policy.

Public opinion is pretty well set against price gouging. Importantly, though, most anti-price gouging activists have likely not considered the tradeoffs they would pay in steeper non-money prices. Some of them would likely change their mind if they did. Pollsters should find out. Corporate PR departments would likely change their tune quite a bit based on the results.

Federal price gouging legislation would not stop price increases or alleviate shortages. It would sharply increase non-money prices during emergencies and drive some economic activity into black markets. Companies can set their own price gouging policies without regulation, as Amazon has proven with a mix of AI and sanctions against violating sellers. The rent-seeking aspect of potential price gouging legislation is worth considering for people concerned about business ethics and about large companies gaining an unfair advantage over smaller rivals.

In short, a price gouging bill is #NeverNeeded. Congress has already passed enough harmful flash policy. There’s no need for still more.

Retro Review: Vlad Tarko on Elinor Ostrom

My review of Vlad Tarko’s excellent intellectual biography of Elinor Ostrom is up at Ostrom was the first woman to win the economics Nobel. In addition to popularizing the concept of polycentric governance, she, along with her husband Vincent Ostrom, co-founded the Workshop at Indiana University, which continues to produce high-quality multidisciplinary scholarship.

Trump Defers Tariff Payments for Struggling Businesses: A Good Start, More Needed

President Trump has deferred selected tariff payments for companies experiencing coronavirus-related hardship. U.S. Customs issued a press release here and the temporary final rule appeared in the April 22 Federal Register. It came after more than two weeks of starts, stops, denials, reversals, and at least one accusation of “fake news” from the president. This indicates that trade policy is still an area of uncertainty and not something rebuilding businesses can plan around—potentially endangering post-virus economic recovery.

The deferrals are better than nothing. But it is important not to oversell them. Here is a bit of context on the impact they are likely to have:

  • They are deferrals, not exemptions. U.S. producers will still pay all affected tariff duties, just 90 days later. Because of this, companies have no reason to reduce prices for consumers.
  • The deferrals are only for imports made in March and April—precisely when imports significantly slowed. That limits their usefulness in buying time for cash-strapped businesses.
  • None of the Trump tariffs from 2017 onwards are eligible for deferrals. Since Trump has roughly doubled tariffs, this means about half of all tariffs are not eligible for deferred payment. That includes the steel and aluminum tariffs, the China tariffs, and other recent measures against the European Union, Turkey, and India.
  • Antidumping and countervailing duties are also ineligible for deferred payments. These are the most common type of trade barrier, further limiting the deferrals’ impact.
  • Companies must be experiencing “significant financial hardship” to be eligible This means a company must have lost at least 60 percent of its sales since this time in 2019.

The Cato Institute’s Dan Ikenson estimates the deferrals will total about $6 billion. That is certainly enough to buy some time for some struggling businesses. For context, total customs duties in 2019 were $85 billion. Total U.S. imports were $3.43 trillion (in chained 2012 dollars; $3.77 trillion in 2019 dollars). The most newsworthy part of these deferrals might be how newsworthy they aren’t.

The administration and Congress could do much better. A more wide-ranging trade relief measure ewould include Trump’s newly enacted tariffs. It could even do away with them entirely.

Considering the hemming, hawing, and uncertainty that surrounded even this small deferral, Congress should give businesses some stability to plan around by taking back the tariff-making authority it delegated away to the president in the 1960s and 1970s. This would prevent further increases while insuring against ad hoc multibillion-dollar policy changes with little or no notice.

While better than nothing, this deferral is far less than what needs to be done to allow businesses to rebuild, save consumers money, and for supply networks to get medical equipment where it is most needed.

That said, the deferral has a subtle hidden benefit. It marks at least the second time the Trump administration has tacitly admitted that Americans, not foreign exporters, pay tariffs. The first admission happened last August when adviser Peter Navarro called a delay in upcoming new China tariffs “President Trump’s Christmas present to the nation.” More such presents would help protect public health right now while helping with economic rebuilding when the pandemic passes.

On the Radio: Tariffs and #NeverNeeded

This morning I was on the David Webb Show on SiriusXM’s Patriot channel to talk about possible tariff suspensions and how they would stimulate the economy. We also discussed the #NeverNeeded movement and how it would assist the coronavirus response while strengthening long-term economic fundamentals.

I’ll update this post with audio if I find a link.

Trump Administration Suspends Tariffs, but Not Confusion, for Three Months

On Friday evening, the Trump administration announced it would stop collecting all tariff revenue for three months, effective immediately. In ordinary times, the news would have been front page news for days. Instead, as with many late-Friday news dumps, it has gone virtually unnoticed. As it turns out, this may be the right response, for two reasons.

First, implementation has been contradictory and uncertain. Over the last week, U.S. Customs and Border Protection had been notifying some companies that some tariffs would be temporarily suspended, but on Thursday, it published a notice saying they wouldn’t. Then on Friday, a senior administration official announced that all tariffs would be suspended for three months, but then President Trump described the announcement, which had been reported by The Wall Street Journal, as “fake news.”

Second, companies would still have to pay the tariffs, just later—assuming the freeze happens at all. That means that when things start going back to normal, companies and consumers will be hit with an outsized tariff bill. The administration has not announced yet when it would collect the deferred tariff revenue, which makes it harder for companies to start rainy day funds to afford the shock payments. How much should they hold back, and for how long? How much of the savings can go to immediate expenses like payroll, rent, and utilities? Moreover, the eventual make-up payments will cancel out part of the $2 trillion stimulus package President Trump just signed.

This confusing mess needs to be resolved soon, one way or another. When Congress reconvenes, it should pass legislation to reclaim the tariff-making power it delegated to the president in the 1960s and 1970s. The Trump administration has already proven it cannot use its tariff powers responsibly. Now it is proving it cannot even handle temporary rollbacks competently. A tariff rollback, even if temporary, could be helpful to companies and consumers during tough times. But the contradictory official statements, the fact that the tariffs are deferred rather than canceled outright, and the uncertain timeline for revenue collection, are creating a mess. Companies and consumers won’t actually save any money, and they have no timetable for making deferred payments.

For more on a responsible trade agenda, see the CEI paper “Traders of the Lost Ark.”

CEI Experts on COVID-19 Relief Bill

My colleagues and I have a generally dim view of the proposed coronavirus stimulus bill. A roundup of our reactions is here. Here’s my contribution on its minimum wage proposal:

Senior Fellow Ryan Young:

“The Democrats’ demands require firms seeking federal aid to pay a minimum wage of $15 an hour. Small businesses across the country are struggling to make payroll. An unexpected increase in payroll costs could put far more workers at risk of losing their job than under normal times. At the very least, workers would see cuts to their non-wage pay such as insurance, meals, parking, and other benefits. These tradeoffs would appear at precisely the worst time.​”

Coronavirus and the Limits of “Flash Policy”

The coronavirus outbreak is serious, and it deserves a serious response. If you’re healthy, help people out. If you have elderly relatives or neighbors, reach out and see if they need anything. If you need help yourself, don’t be embarrassed to ask for it. If you need to cancel travel, work from home, or even self-quarantine, do so. It might be unpleasant, but it’s likely better than the alternative. And, of course, be diligent about washing your hands. But what about public policy? The real meat of Washington’s coronavirus response should focus on the long term, not the short term. Congress should refrain from passing what my colleague Wayne Crews calls “flash policy,” such as a crisis-inspired stimulus package, or bailouts, or rash monetary fixes.

There are a few immediate actions the federal government should take. My colleague Iain Murray suggests reducing tariffs, especially on medical supplies, faster approval for vaccines, and a few other things. Several of our other colleagues have additional ideas. But honestly, the list is short. The federal government is just not well-suited for fast, flexible crisis response. Most of the government-appropriate responses are at the state and local level, not the federal level.

Short-term flash policy is at best unnecessary. More likely, it is actively harmful. To show why, here is a graph of U.S. real GDP, 1929-present. The gray bars indicate where recessions are. If they weren’t there, they would be hard to see. The coronavirus may well give us another gray bar. Whatever Washington does now will have little to do with whether or not one appears, or how severe it will be, or how long it will last.

The graph’s 90-year span includes the Great Depression, World War II, oil price shocks, stagflation, and the 2008 financial crisis. Long term, the economy will be fine, even if the coronavirus has an impact on par with those events. We should be concerned not with a gray bar, but with helping the sick and containing the infection’s spread.

While there just isn’t much Washington can do in the short run, there are long-run policies Congress should enact. Easing regulatory burdens will enable faster, more flexible responses to future outbreaks—even in areas that might not seem to be outbreak-related. For example, my colleague Marc Scribner points out that drones and autonomous vehicles can help to prevent infections from spreading in the first place, and can make quarantines easier on the people who have to endure them. Lifting regulatory barriers against them won’t help with the coronavirus pandemic right now. But if there is another outbreak in five or ten years, it could help people then.

The point is that limiting damage from disease requires flexibility and adaptability. Intentionally or not, many regulations freeze things in place. They make adapting and improving more difficult. Easing those burdens will not calm the stock market today. Nor will it help anyone with coronavirus right now get better any faster. But less restrictive, more flexible regulatory institutions can improve everyone’s chances the next time an outbreak happens. And eventually, one will.

I don’t expect Congress or President Trump to take the long view right now. It’s an election year. Long-term regulatory reform would do little to calm volatile markets. People are scared right now, and not always thinking rationally. This is reflected in jittery markets, which are comprised of scared, sometimes irrational human beings. People won’t likely even listen to long-term policy proposals until the short term settles down a bit.

And that’s ok. Let’s take care of each other first. Let’s enact what policies are suited to the problem, such as reducing medical supply tariffs and expediting vaccine approval. Let’s avoid flash policies like stimulus or bailouts. Washington is inherently helpless against the coronavirus. Considering the harm that flash policies can cause, the coronavirus response is a time for limited government, not a new case for the opposite. Then we can talk about long-term institutional improvements such as regulatory flexibility and institutional safeguards against flash policies. Ultimately, sound institutions are what will allow for faster, more flexible responses to epidemics, and keep people safe.