Prometheus 6

Quote of note:

After Hurricane Katrina blew through the Gulf Coast, the price of lumber and other building materials shot up. Demand for these items was suddenly higher, and the people who sell them knew that they could charge more. So they did, in what seemed to be - and may, in fact, have been - an act of pure greed.

But it was also an act that had some clear benefits for society. With the cost of renovations now higher, some homeowners will delay their projects until the prices come back down. That will make more materials available for New Orleans and will also help reduce prices. It's the market economy's version of a virtuous cycle.

Raising prices helps reduce prices. Is there no limit to the depths of absurdity people will descend to? 

A Time for Some Well-Placed Greed
By DAVID LEONHARDT

SOMETIME next spring, when the snow melts away, a good number of homeowners will start to think about building a new outdoor deck or adding a room to their house. Around the same time, the reconstruction of New Orleans should be in full swing.

Both projects will need lumber, nails and manpower, and most everyone can probably agree that New Orleans deserves priority. Houses and schools should be rebuilt there before the rest of the country spiffs up its yards. A new deck can wait a year. A destroyed home cannot.

Fortunately, the economy has a system for persuading the rest of us to step aside and let New Orleans have the lumber. You've probably heard of it. It's called price gouging.

After Hurricane Katrina blew through the Gulf Coast, the price of lumber and other building materials shot up. Demand for these items was suddenly higher, and the people who sell them knew that they could charge more. So they did, in what seemed to be - and may, in fact, have been - an act of pure greed.

But it was also an act that had some clear benefits for society. With the cost of renovations now higher, some homeowners will delay their projects until the prices come back down. That will make more materials available for New Orleans and will also help reduce prices. It's the market economy's version of a virtuous cycle.

But it does not feel very virtuous while it is happening, which is why it goes by unpleasant names like gouging and profiteering. Try coming up with a rule that separates evil gouging from efficient pricing, however, and you're likely to run into a thicket of trouble.

As everybody knows, the price of gasoline also spiked after Hurricane Katrina. The details were different - supply shrank, rather than demand rising - but the dynamic was essentially the same as with lumber. When there was not enough gas to go around, it suddenly became more expensive.

Elected officials were quick to cry gouging. The Republican governors of Georgia, Kentucky and Missouri took steps to limit price increases. New Jersey sued about 20 gas stations for raising their prices more than once on a single day, a violation of state law.

"Companies that prey on hard-working families through fraudulent practices should feel the full force of the law," Acting Gov. Richard J. Codey, of New Jersey, a Democrat, said last week. "Katrina was a devastating hurricane, not a financial windfall for the shameless."

Suing gas stations may be good politics, but discussions of gouging make many economists squeamish. Judith A. Chevalier, an economist at Yale, was having lunch with some colleagues last week when the talk turned to gouging, and they struggled even for a definition.

"We came up with so absurdly narrow a definition that I'm embarrassed to describe it," she said. (If you must know, it involved a desert, a group of people stranded there and a river to which only one of them had access.)

Laws against gouging usually spring from good intentions, like wanting to keep money in the pockets of American workers instead of Saudi princes. In practice, though, the rules tend to create problems by muffling the useful signals that prices send. A law that forbids two price increases in one day, for example, may cause a gas station to close when prices are rising rapidly and then reopen in the morning, when it can charge more. "That's just insane," said Ms. Chevalier.

A better solution is usually to tinker with people's ability to pay for something rather than with the price. If we want the residents of a destroyed city to afford the reconstruction of their houses, we should pay for it directly, rather than cap the price of wood and create lines for lumber.

If gas is going to cost $3 a gallon for the foreseeable future, government officials may do better to raise the take-home pay of low-income families with tax credits than to police gas station prices. Those families could then afford their drive to work, but rich and poor alike would still need to be more discerning about when they drove. The person who was planning to take a long trip to visit a friend might have lunch with a neighbor instead, leaving more gas available for somebody making a 100-mile drive to go to work or to see a doctor.

That trip would now cost more than it did before a couple of hurricanes idled refineries in the Gulf of Mexico. But what is the alternative? You could outlaw all price increases - not just those insidious ones that happen on the same day - but that would risk long gas lines, because demand would not change with supply.

"In all these situations, there's not enough to go around," Russell Roberts, an economist at George Mason University in Fairfax, Va., said. "The question is who should get it."

A decade ago, the answer was: not Mr. Roberts. He was teaching at Washington University in St. Louis, and he and his wife were in fact thinking about building a deck on the back of their house. The architect had originally given them one estimate. When it came time to move ahead, the contractors quoted them prices that were about twice as high.

The Mississippi River floods of the mid-1990's had intervened, destroying homes and increasing the demand for carpenters' time. So the Roberts family waited until the price came down.

The effect was the same, however. The resources went where they were most needed. And carpenters had an incentive to work extra hours after the flooding because they were getting paid more, just as floating gas prices give oil companies a reason to stock up before a storm.

There are certainly situations where freely floating prices don't work. A wealthy person with a broken arm should not be able to outbid a middle-class heart attack victim for the immediate attention of an emergency room doctor. Replacement kidneys should not be up for auction. Safe passage out of a flooded city seems like a reasonable thing for all citizens to expect.

But a guaranteed right to cedar decking that costs no more than $1 a foot? Or to gas prices that change only once a day? They probably do not belong on the list.