Liz Warren’s Crusade against “Big Grocery
2022-01-17 · Guest: Don Boudreaux (Professor of Economics at GMU) · 52:30
Economic fallacies of inflation and price controls
Bob Zadek and Professor Don Boudreaux discuss the economic fallacies surrounding inflation, Elizabeth Warren’s attacks on the grocery industry, and the dangers of price controls. They explore how government policy, rather than corporate greed, drives rising costs and how market signals like price changes are essential for resolving supply issues.
Topics: Inflation, Price Controls, Elizabeth Warren, Grocery Industry, Monetary Policy, Milton Friedman, Price Gouging, International Trade, Comparative Advantage
Speakers: Bob Zadek, Don Boudreaux
Introduction and the Shift to Economics [00:00]
Bob Zadek: Good morning, everyone. Welcome to the Bob Zadek Show, the longest-running live libertarian talk radio show on all of radio. The show of ideas, never once the show of attitude. Thank you so much for listening this Sunday morning.
For the past couple of years, any one of us citizens who are at least marginally active in the democratic process had to get a quick master’s degree in epidemiology so we could follow what we are being told by public officials, so we could understand when people are blowing smoke at us or when they are being honest and candid with us. And it’s really been a challenge, and it continues to be a challenge.
Of late, I wonder how many of you have noticed that all of a sudden we have to put aside the quick master’s degree in epidemiology that we worked so hard to get so we could evaluate what we are being told in what passes for the news. And now, all of a sudden, we have to put away the medical books and dust off economic textbooks. Because now, what is starting to crowd out all of the news and the noise involving COVID, we are now having to deal with what is going on in the world of economics and public policy.
We are suffering the beginnings, perhaps, of an onslaught of inflation where we can no longer afford goods and services that we seemed to have used to be able to afford. We are being told that we are suffering from the ravages of price gouging, and we have public officials who are starting to scream at us that we, the innocent public, are being victimized by “Big Grocery”—a relatively new term—and other alleged monopolists in society. And they, the businesses who sell us what we want and need, those businesses are the predators and the cause of all of our problems. And of course, once public officials convince us and help us identify who the enemy is—the enemy du jour—they, being the public officials, have the perfect cure, which invariably involves more government and, as Madison observed, or I believe it was Jefferson actually observed several hundred years ago, as the power of government increases, liberty decreases. And that’s what we are experiencing now.
And all of this is because of now we are suffering an economic pandemic replacing the medical pandemic. The symptoms of the economic pandemic are, as I said, greed exhibited by grocery stores and others, ravage inflation reducing our buying power, and the cure is, among other things, price controls. Well, what we have learned about epidemiology doesn’t help us very much in determining who is right and who is wrong. We have to dismiss the Faucis of the world, and we now have to learn from economists what is going on, what is really going on that’s affecting us so profoundly economically.
Introducing Don Boudreaux [01:16]
Bob Zadek: So, of course, we turn to economists to help us understand. And the economist I must turn to at times like this is Professor Don Boudreaux. Don is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at Mercatus, the Mercatus Center at GMU, George Mason University. He is a professor of economics and was former economics department chair at GMU. Don publishes a must-read daily blog, and I truly mean must-read, called appropriately Cafe Hayek, which I have been reading for certainly more than a decade. In fact, a fun fact about my show and therefore about Don is that in the second week of the Bob Zadek Show’s existence, Don was my guest. And Don, I’m sure you will not remember, but you helped us all understand the subject of insider trading. We had a wonderful hour together more than a decade ago as you explained to me insider trading and, to use my words, not yours, why insider trading not only should not be illegal, but—and these are my words, not yours—should be mandatory. So Don, you have been such a wonderful teacher to me and to your readers and, of course, to your students. I’m proud and delighted to welcome you to the show this morning.
Don Boudreaux: Thanks, Bob. It’s an honor. I do remember that program, although I didn’t realize that I was your second guest. I’m honored to learn that fact.
Bob Zadek: Oh yes, you were. And indeed, I think part of me, part of me decided to do the show just so I could persuade you to spend an hour on the phone with me, which I feared otherwise you’d simply be too busy. But if I gave you the carrot of, “Hey, we’ll be on radio together,” I would have you all to myself for an hour. And what a luxury it is and it was. So thank you so much for joining us again this morning.
The Real Cause of Inflation [02:31]
Bob Zadek: Now Don, all of a sudden, all of a sudden, as I have said in the intro, economics and economic issues have starting to crowd out the COVID being in the news as much as it is. Of course, it is there every single night. We are reminded of the most meaningless of statistics—how many new, quote-air-quote, “cases” there are, whatever that even means. Cafe Hayek blog discusses COVID-related issues quite a lot. Of course, I would love to commandeer the radio station for the entire day at gunpoint so we could spend a lot of time talking about COVID, but we’ll defer that to another day. This morning, I’d like to help our friends out there have a deeper understanding of the economic issues that we are starting to learn about—learn in air quotes—every single night on the news, and have you help us understand what is really going on in the world of government policy and economics.
And let’s start with the issue of inflation. Now, most people have little or no real understanding of inflation other than things cost more. Now, of course, that is so simplistic as to not help anybody understand anything. So tell me, tell us about what is the dynamic of inflation and what causes it and, most importantly to us, why it adversely affects us. Because after all, Don, if everything goes up, if the cost of everything goes up, that ought to mean that wages go up proportionally. Therefore, it’s, if you will, revenue-neutral. We pay more and we earn more. Who cares? So help us understand the dynamic of inflation.
Don Boudreaux: Inflation is a reduction in the purchasing power of the money unit. So in the U.S., a reduction in the dollar’s purchasing power. It takes more dollars with inflation to buy the same thing than it took in the past. That’s what inflation is. Inflation is caused by the increase of purchasing power beyond the increase in the amount of things to buy. And that happens when government injects nearly always happens when government injects more purchasing power into the economy.
What’s happened in the past two years is we have had an unprecedented injection of purchasing power into the economy, along with, at the same time, a government-engineered obstruction of production. So we had at the same time government reducing the amount that comes to market, reducing the amount of goods and services that are able to find their way to market, and at the same time increasing the amount of purchasing power in the hands of ordinary people. When that happens, the inevitable result is a rise in prices.
Now you are exactly correct that if it were the case that all prices rose at the same time along with wages, then there would be no impact. You know, the price of everything you buy doubles, but your wages double, you’re no better off or worse off. Unfortunately, that’s not how inflation works in the real world. The money gets injected, the purchasing power gets injected at particular points. Those persons who first spend the money, which is mostly now, you know, it’s often the government or the people who first get the bank loans, they are able to buy things at low prices and the rise in prices happens not all at the same time. It happens in a very staggered fashion. And wages, the rise in wages, usually lags the rise in the overall prices of goods and services. And so for a while, workers are made worse off. They find that while their wages might be rising, their wages are not rising by as much as are the prices of the goods and services that they buy. And so that means really a reduction in their real income.
Inflation causes a huge amount of uncertainty in the economy. Entrepreneurs know what to do by looking at how prices move. And so if there’s a—if the price of apples rises relative to the price of pears, then entrepreneurs know, okay, we should shift more production into apples and away from pears because consumers now want apples more than they do pears. That’s what the price rise in the price of apples means. But if the rise in the price of apples occurs not because consumers want apples anymore than they did before, but simply because of the happenstance of the way the inflation is causing prices to rise at different rates, then entrepreneurs don’t know why the price of apples rose compared to the price of pears. Is it because people want more apples or is it simply because of inflation? And this uncertainty that inflation injects into the economy stymies entrepreneurial investment, it stymies entrepreneurial creativity. It causes people to reduce their willingness to take real risks in the economy. And so it’s just bad overall.
History is filled with lots of instances of inflation, from relatively minor inflation where the problems aren’t too bad to hyperinflations like as happened in post-World War I Germany. And the higher inflation gets, the faster at which the rate of inflation runs, the worse the damage. But it always causes some damage.
Elizabeth Warren and the “Big Grocery” Myth [04:43]
Don Boudreaux: Politicians, of course, as you alluded, love to blame everyone other than themselves. So we had Elizabeth Warren recently blaming the rise in grocery prices not on her own institution, the government, which injected unprecedented amounts of purchasing power into the economy, but blaming it on greed, blaming it on the alleged monopolization of retail grocery. Nothing could be more absurd than that. First of all, you can’t—people don’t spend greed units. We Americans spend dollars. And so if there are no more dollars to spend, prices can’t rise. We’re spending more dollars because the government injected more dollars into the economy. And as far as the competition in the grocery industry is concerned, this is absurd. We have all sorts of options of how to buy groceries. We can buy groceries through Amazon, we can go to Walmart, we can go to Target, we can go to Kroger, we can go to the many local supermarkets that are around like Trader Joe’s, Whole Foods. There’s enormous amounts of competition in retail grocery. So for Elizabeth Warren to blame rising grocery prices not on the government but on greed and monopolization only shows that this woman is either astonishingly economically ill-informed or she’s mendacious. One of the two. There’s no other third alternative.
Bob Zadek: Now, she has been complaining—and part of the reasons I asked you to join us this morning is that she has been quite public and outspoken in her complaint about what she perceives as bad behavior. And yes, she used the word greed. She has been publicly unhappy with the behavior of the grocery stores because they are, with motivated by greed rather than by duty to be good stewards of the investors’ money and make sure their enterprise earns a profit. She has been complaining that they have been unlawfully focusing on profits at the expense of the customers. How dare they try to make a profit and earn enough to pay their wages and pay their suppliers? And she has been complaining and, of course, implicit, Don, a subject you know probably better than any other economist whom I have read, she has been inviting, if not demanding, antitrust—how absurd is that?—antitrust action against the grocery stores because, using the word grossly improperly, because they have a monopoly. Of course they do not, as you have explained. And she has been complaining that they deserve antitrust action because they are doing something wrong. Now Don, I can’t for the life of me even understand what they’re doing wrong other than earning a profit. Where is the crime? Where is the evil? And if they are a monopoly, they’re very bad at it because their profit margins are so low. So they are much worse at being monopolists than they are at selling groceries.
Don Boudreaux: Yes, yes. I mean, look, Bob, you know as well as I do, this woman is just—she’s just doing complete political grandstanding. I have no high opinion of any of—of most politicians, and I certainly don’t have a high opinion of Elizabeth Warren. But I have trouble believing that even she is so stupid as to think that the rise in prices today is caused by the monopolization of consumer retail. There’s no more competitive industry in the world than consumer retail. You don’t like the prices charged at Kroger, you go to Target, you go to Walmart, you get on Amazon, have DoorDash deliver things to you. I mean, it’s an amazingly, wonderfully competitive industry. The prices are rising not because of any evil being done by executives in the grocery industry. Prices are rising because of the evil being done in the very institution in which Elizabeth Warren plays such a large and dominant role, that is the government. She voted in favor of these incredibly prolific spending programs. The Federal Reserve has been injecting spending power into the economy. The inevitable result of that is inflation. All sensible economists knew a few years ago that we would get inflation from this increase in spending power combined with the obstruction of the supply chains. And that’s what’s happening. If anything, I’m surprised that the inflation isn’t even higher than it is. But of course, Elizabeth Warren, like all successful—like most successful politicians, she doesn’t dare look upon herself, look in the mirror to put the blame on her. So she’s trying to make political points by demonizing the retailers who have no choice but to raise prices because the currency in which they are being paid for the groceries that they sell is being reduced in its purchasing power. And so she’s just political grandstanding. She’s got to know better than that. And the fact that I think she does know better than that does not speak well to her ethics.
Bob Zadek: And what’s quite what’s so strange is grocery prices, I think it’s fair to say, Don, have never been lower than they are now in history.
Don Boudreaux: In real terms, right. If you look at the amount of time that ordinary Americans have to work in order to earn enough income to buy, you know, a pound of potatoes or broccoli or cans of green beans or lettuce or other grocery items, for nearly all of those items for decades, at least leading up to COVID, that amount of time has increasingly shrunk, meaning that they’ve become—these grocery items have become much more affordable to ordinary Americans. The nominal prices of these things are today rising because of inflation. And to the extent that again, these prices are rising faster than the rise in wages, then there is this short-term increase in the real cost that Americans are paying for groceries. But again, that problem, and it is a problem, that problem is caused not by greed, it’s caused not by monopolization. She has no evidence of monopolization. She hasn’t presented any evidence because she has none, other than the fact that prices are rising. But the most obvious explanation for the rise in prices is the increase in spending power.
Milton Friedman famously said—Milton Friedman being the most famous monetary economist who ever lived—Milton Friedman famously wrote many years ago that, and I quote, “inflation is always and everywhere a monetary phenomenon,” meaning that ultimately, if you find instances of steadily rising prices, you can bet that that is caused by the money supply and purchasing power rising faster than the output of goods and services. And that’s what’s happening now. Elizabeth Warren and her cronies in Congress, they don’t want to take the blame for it. They want to get all the credit for increasing spending and being heroes to Americans. They don’t want to face the consequences, the ill consequences of their own poor decisions. And so she’s trying to pass the buck off onto innocent parties. And it’s quite dismaying to see the blatancy, how blatantly she does that.
The Futility of Price Controls [06:41]
Bob Zadek: Milton Friedman once observed that inflation is a—his words—“printing press problem.” I remember, I think he said that on a Donahue show or perhaps in a public address. He said it is nothing other than a printing press problem. We are printing too much money, which means government, of course, runs the printing press. So it is a government-induced problem. And the relevance of what you just said, Don, to our audience is that there are several points I want to emphasize because you made so many good points one after the other.
The first is it is a pretty standard device for government, when they are at fault, to look around for another demon. And to the extent that government can direct the public’s attention to a non-governmental actor, in this case grocery chains, and demonize them, then the attention is deflected from government, the real problem. And that has been the success. So throughout history, and often on my show, I have done my best to remind our listeners that what is going on here is nothing other than “it’s not our fault, it’s somebody else’s,” and using the pulpit they have by dint of their position in government, they try to deflect the blame and just find any old demon who they can direct attention towards.
Now, on this subject of the demonization, and it will go well beyond grocery stores in this show, but what is interesting to me and scary is that some economists—I don’t know if it’s accurate to say many, so I’ll just say comfortably some economists, Don—as I segue into the next topic I want to help our friends understand, is they are having caused the problem of inflation, they now resort to the governmental fallback of—Don, you’re going to tremble as soon as I say the words—price controls. Oh my goodness, oh my goodness. So help us understand what I mean, help our friends understand what those words “price controls,” sometimes “wage and price controls,” mean to you and how insidious is that cure. And despite that, government seems to be looking in that direction, as are many economists, under the theory that, well, prices are too high, no problem, by governmental fiat we’ll just rule that we’ll lower prices, case closed. Help us understand the evils and the mechanics of wage and price controls.
Don Boudreaux: I’m going to turn again to Milton Friedman. He’s not the only economist who said this, but I first heard it from him, but it’s so wise. So price controls basically are just the government prohibiting, making it illegal for sellers to raise prices, right? Or putting restrictions on how high they can raise prices. And so if you raise prices by too much, you know, you get threatened with a fine or jail. And so the government can indeed, with enough force, prevent people from raising prices. But that doesn’t control inflation.
As Milton Friedman once said, trying to control inflation with price controls is like trying to control a heater that’s pumping too much heat into a room by putting a little metal strip into a thermometer to prevent the mercury from rising. You can prevent the thermostat from registering the correct room temperature. That’s easy to do. But that doesn’t change the room temperature. If you command the thermostat to say, “all right, do not rise above 72 degrees,” well, you can stop the thermostat from rising above 72 degrees. But if the excess heat is continuing to be pumped into the room and the temperature in the room is 80, 85, 90, that’s the temperature in the room.
And so one problem with—one reason I like this analogy is everyone understands that you don’t change the temperature in the room by causing the thermostat to lie. And in fact, you make things worse because if you thwart the operation of the thermostat, if you prevent the thermostat from registering the correct temperature, then the heating system stops altogether. Then there’s no break on the amount of heat that the heating unit continues to pump into the room. And so price controls are a heavy-handed attempt to mask—they’re a lie. Price controls are, to change the analogy a little bit, they are a command by the government to every seller to lie to the economy about the real value of the things they have to sell. Consumers are willing to pay $10 for some product, the government says no, you can’t charge more than $8, and so producers don’t sell it for more—they don’t charge a price higher than $8 for it. But that becomes a lie.
Another analogy that I’ve used in my blog is, let’s say a city has a high and rising murder rate. That’s very bad. We don’t like high and rising murder rates. And then the mayor doesn’t like the high and rising murder rates, doesn’t want to take blame for his or her policies that caused it. And so the mayor orders the city newspapers to report a false number, to report a number of murders lower than the number that actually occurs. Well, the mayor might be able to do that, and with enough force the mayor will be able to compel the newspaper reporters to lie about the number of people who are being killed. That doesn’t change the underlying fact that lots of people are being killed.
Price controls are a laughable means of controlling inflation. They do the opposite. They do nothing to control inflation, and by preventing the actual truth from getting out about the actual pressure on prices to rise, they actually make things worse. Bob, you and I are old enough to remember August of 1971 when Richard Nixon imposed a nationwide wage-price freeze on all prices and wages in an attempt to control inflation. It was a terrific failure. Nixon himself understood it wasn’t going to work. Nixon did it because he thought it would be politically advantageous to do. But we can look at the history of that. It didn’t work. Wage-price controls have never worked for any of the things that they have been attempted to be used to do, and they certainly are no means of controlling inflation. You are correct, there are some people who have economics degrees who propose to use wage-price controls to control inflation. These people to me are like people who have, say, physics degrees who might go around proclaiming the possibility of building a perpetual motion machine. You can say it, but that’s not going to make it a reality.
Bob Zadek: And of course, prices—and I just want the audience to really appreciate this—not allowing prices to reach their market level, their, if you will, true level, price is information. Price is what buyers and sellers use to help them understand how to allocate their resources and their time. Let’s imagine you as a consumer have a used car you want to sell. And the used car is worth, if the market were allowed to function, it’s worth $25,000. By dint of governmental wage and price controls, they, the government, dictate you only can sell your car for $10,000, even though it’s worth 25, in order to stem inflation, air quotes. What will you do? You will, of course, hardly sell your car worth $25,000 in the market for 10. Why would you? Why would anybody? What you will do is you will do one or the other of two things, and I ask our friends to decide whether they like either of these alternatives. You will, on the one hand, not sell your car, which means you don’t get to have money, the $25,000 that you value more than your car—that is, your freedom is denied. A buyer who would love to buy your car for $25,000 is denied that opportunity because you refuse to sell it at, quote, “too low a price.” Or if you don’t like that, here’s the alternative: the deal goes forward because the market will struggle to perform, and you will do it in an underground garage, in what we all know to be the black market, in the secret economy that is done because humans will always find a way to perform lawful acts if they can’t do it in the open, they’ll do it in the shadows. So you like wage and price controls if you like the fact that people are denied the freedom to do what they want with their time and property, or you like wage and price controls if you sort of like the idea of people transacting business in underground garages and in the shadows. Other than that, what is there to like?
But the scary part about it is even the White House, as recently as last month, has looked somewhat fondly, or at least they expressed some appeal for wage and price controls. Jen Psaki, in just last month in December, in a press conference in complaining about meat prices—another villain, government-induced—she indicated that the White House was looking and the Department of Agriculture was looking at wage and price controls to stem, here it is, Don, “corporate greed.” So the scary part is that notwithstanding Nixon’s sorry experience in ‘71, certain bad ideas just never seem to die.
Don Boudreaux: That’s exactly right. This is economic ignorance of an indescribable degree. Again, it’s politically convenient. They’re trying to deflect blame. Fortunately, I think that these people in the administration and today’s progressives are so clueless that they don’t understand that the American people are not quite that gullible. The American people, I think, get it. There are enough of us still alive who remember the experience of the 1970s and we remember the experience with wage-price controls and with price caps on energy, and we remember that it didn’t work out so well. And we remember that one of the first things Ronald Reagan did, in fact, I think it was his very first official act as president right after being sworn in in January of 1981, he eliminated the price controls on energy. And so we saw was an immediate spike in energy prices, including gasoline, and then they went right back down because that inspired sellers to get back into the market. And so enough people remember those experiences, I think, to understand that what these people in Washington are peddling is just nonsense. It’s almost as if the Biden administration and the likes of Elizabeth Warren almost as if they think that their only constituency consists of 20-something progressives from Brooklyn who have no memory of anything beyond, you know, George W. Bush’s administration. They really are insulting the intelligence of most Americans with the things that they say.
Trade, Supply Chains, and Comparative Advantage [09:19]
Bob Zadek: Now, another point I want to remind our audience about is that if you read some of what is offered to us as news in what’s left of mainstream media, you would be led to believe that our economic woes are just happening to us. They are existential, like a tornado or hurricane or an infectious disease. But the point I ask you to remember as Don and I speak is that no, these are not just things that happen to us. They are the result of conscious, albeit wrongheaded, decisions by government. Mistakes, if you want to call it what it is. So these are not just “woe is us, how unlucky we are.” These are not events and misfortunes that are happening to us; they are caused upon us by governmental actors, which means we cannot be passive and just feel sorry for ourselves. We have to understand that it is happening because of government. Government is there because of the democratic process. Therefore, we have to understand these issues and then use our understanding to make intelligent decisions to the extent that we participate in the process. These are not existential. They are caused by identifiable human beings making mistakes.
Now Don, another area where economics is profoundly and adversely affecting Americans and well beyond America, of course, is the area or the mistakes made and the gross misunderstandings on the subject of trade and that is, of course, related to what has been called the supply chain, which I don’t know if there is sufficient understanding of how those the mistakes of government in those two areas of trade and related issue of the supply chain and the unavailability of labor. To what extent—and of course the answer is a great extent—but help us understand to what extent is a misunderstanding of basic economics the cause of these issues.
Don Boudreaux: Oh, to a huge extent. There’s a naive belief, and this is a belief that unfortunately knows no political boundaries—it’s on the left, middle, right, progressives, hardcore conservatives—very many people believe that it’s very simple to what’s called “repatriate” supply chains. “Oh, well, because of the pandemic, we’ve had trouble buying masks or we’ve had trouble buying this kind of equipment or that kind of goods. So let’s just let’s just put tariffs in place or import restrictions in place so that we make more of these things at home.”
What this kind of naive—and it is naive—view overlooks is, number one, that we can’t make more of one thing at home without making less of other things at home. And so we never—these people who say, “well, we got to make more of our own masks, or to grow more of our own food, or to make more of our own steel”—well, what are you going to give up to do that? Because you can’t shift American workers into producing these things without taking American workers away from producing other things. You can’t take American capital and American raw materials and intermediate goods away from producing the things that they’re currently producing to use them to produce these other things without having a reduction in output of the things that were previously produced.
The pattern of production across the globe is determined overwhelmingly, despite what most people think, determined overwhelmingly by cost, by what economists call comparative advantage. The reason we buy however much steel we buy from Brazil or however much clothing we buy from Thailand, the reason we buy that much steel and clothing from these foreign countries is because we can get those things at a lower cost from those countries than we can make those things at home. And so we buy those things from foreign countries, that frees up workers and resources here in America to produce things that are of even higher value for us.
But people don’t think through the full process of why international trade occurs as it does. And of course, people like Elizabeth Warren and Donald Trump and lots of people on both sides of the aisle are ready to demagogue this issue. Blaming foreigners, of course, is probably second only to blaming speculators and investment bankers for the ills that are experienced in the domestic economy. And so politicians resort to that kind of blame game. But it really does worry me, Bob, that the widespread failure to understand the nature of international trade is going to lead to more sympathy, more popular sympathy for trade restrictionism, which will only make us more poor. It will reduce our level of prosperity compared to what that prosperity would be in the absence of those trade restrictions. And I should add also, history, the empirical record, overwhelmingly backs what I say. People study this empirically, and if you look at the freedom of a country to trade with the median real income, the level of economic growth, whatever reasonable measure you want to use to measure how prosperous ordinary people are, you find a high correlation between freedom to trade and that kind of prosperity and high economic growth. You find a high correlation between trade restrictionism, protectionism, and low levels of economic growth and performance. That has been true throughout history.
Bob Zadek: Don, what I have heard—and in this case you’re right, it’s mostly people on the right who talk about exporting American jobs and the corollary, bringing jobs back home. I actually say to those mostly people on the right, I couldn’t agree more. Let’s bring those jobs home. I’m all for it, so long as when you bring the job home, you bring it home with that salary. And if you want to bring back a 25-cent-an-hour job that’s being done in Thailand, I’m all for it and find somebody in the U.S. who will work for 25 cents an hour and have at it. I’m behind you 100%. Which is my somewhat snide way of saying exactly what you have said, which is we are taking advantage of the inexpensive foreign labor. And after all, why would we complain that somebody else is more or less voluntarily agreeing to work for what is to us a low wage for the sole purpose of giving us what we want at a price we are delighted to pay? Don’t we love the fact that the entire world is devoted to making us happier and wealthier? Why would we oppose that? We should love it. The world is making us happier. What’s wrong with that?
Don Boudreaux: Nothing. But there is this false nostalgia in America, Bob, as you allude to, that, you know, “oh, the ’50s and ’60s, those jobs were great.” Well, the ’50s and ’60s were great compared to the ’20s and ’30s. But pre-COVID, you know, things were a lot better than they were in the ’50s and ’60s. My dad had a sixth-grade education. He worked all of his life, most of his life, as a pipefitter in a shipyard. That kind of job is less and less common today in America. My father would be appalled if—he’s dead now—but he would be appalled if I told him, “yeah, dad, you know, I don’t like the job I have. I want to be a pipefitter like you.” He’d say, “son, that’s not a good job to have. It’s a good thing that most Americans are avoiding that kind of job.” Those kinds of jobs were fine in their time, but fortunately our growth has been such that most Americans can work at jobs that are both more pleasant and higher paying than was the job that my dad worked in all of his life.
And so trade, those who would restrict trade, impose tariffs, understand how they are simply acting against taking steps to deny us basic freedom. Why should we be denied the freedom, if I want to do it, who am I hurting by my buying a t-shirt made in Thailand? Why should it be the factor of government to say you are prohibited from performing that act that you want to do that doesn’t hurt anybody and you want to do it, but we decide, a total stranger theoretically who you will never meet may be harmed by being denied a job? Utterly absurd. But look at the effect upon the consumer. The consumer is being denied the freedom to make his or her own choices. I’m sorry, Don, I interrupted you.
Don Boudreaux: No, no, no. Bob, as you know, I agree completely. Although the economic case for free trade is very strong, both theoretically and empirically, ultimately I support free trade for the reason that you just alluded to. It’s the only ethical system. If someone earns income honestly, that person should have complete freedom to spend that income in whatever peaceful ways he or she chooses. And so if someone earns income by doing whatever honestly, and if someone who lives in Toronto makes that American a better offer than does someone who lives in Buffalo, that American should be free to buy that thing from the Canadian rather than a fellow American. But so many people demagogue the trade issue that this simple ethic gets confused and it gets camouflaged behind a lot of silly talk about imports destroying jobs and trade deficits. So I agree completely with what you just said.
The Economics of “Price Gouging” [12:31]
Bob Zadek: The last economic misconception that we will have time to discuss, and I’m raising the issue, Don, because there is so much misunderstanding about this issue and also, and this is purely selfish, because I love when you write about and speak about the subject. You do it so beautifully and you explain the principles so easily and with such passion. I am giving myself the treat of asking you to help us understand this ridiculously fake issue of price gouging.
Now, it’s relevant, of course, because there have been accusations that people have been hoarding masks and gouging people on masks and on medicine and doing all kinds of bad things to jack up the price. Help us understand—and there are, of course, statutes in the majority of cases making price gouging, whatever the heck that even means, a crime. So speak to price gouging as that phrase is used in public policy discussion.
Don Boudreaux: The issue becomes relevant usually in the immediate aftermath of a natural disaster—a hurricane, an earthquake, a tsunami. And what happens when natural disasters strike are two things simultaneously. So let’s say a hurricane hits my hometown of New Orleans, which they do with some frequency. So hurricane hits New Orleans, two things happen simultaneously. Number one, supplies get reduced. So, you know, the hurricane destroys a lot of inventories in hardware stores and grocery stores, knocks out roads and knocks out communications so supplies can’t get in very easily. And at the same time, it increases demand. People need to buy plywood to patch up their roofs and fix their doghouses. When these things happen, what that means is these groceries and these staple goods, hardware store items, they are much more scarce than they were before the natural disaster hit. That’s just a fact of reality.
And when things become more scarce, they become more valuable. Their prices naturally rise. And the prices should be allowed to rise because they signal—those high prices are a signal to the rest of the world, “Hey, prices are really higher now in New Orleans for plywood and propane. Let’s rush more supplies of those things to New Orleans because those people are in desperate need of them.” We know they’re in desperate need of them because they’re paying the higher price. But price gouging statutes prevent the prices from rising. And so they prevent the signal being sent out to the rest of the world to come to the rescue of the people who are in desperate need of these goods and services.
Of course, the politicians who pass these statutes, they claim they’re acting in the best interest of ordinary citizens, but they’re not. A price gouging statute is basically—it’s speech control in a very real way. A price gouging statute is a prohibition on people being able to express just how desperately they are in need of something. And so that signal doesn’t get sent out to the rest of the world. And so there’s a shortage. And as a result of which, the demand for goods doesn’t get met and there is a shortage. You’ve prevented the price from going up, you’ve also denied people access to the very goods they desperately need. So that policy simply exacerbates the shortage. Another example of government catering to the population and passing economically ignorant legislation.
Don, the worst five seconds of my life has occurred. We’re near the end of my show. I can’t stand it, but I must give the audience bad news. We are running out of time. This is Bob Zadek spending an hour with Professor Don Boudreaux. We have been talking about economic issues that affect Americans, how the government gets it wrong, and once you know this, you know how to use your vote and understand better what is going on. And we are not simply victims of an existential event, but rather an event which is consciously imposed upon us by economically illiterate public officials. Don, thank you so much for your time this Sunday morning.
Don Boudreaux: Thank you. It was fun.
Bob Zadek: I invite all of my listeners to subscribe to and to read the daily Cafe Hayek, a blog published seems like for decades by Professor Boudreaux. It is a wonderful read. It is all you have to know to understand what’s going on around us. So thank you to my friend and thank you to Don and everybody, please have a nice Sunday.