On March 18, 2020, President Donald Trump issued Executive Order 13910, declaring a national emergency related to the COVID-19 pandemic. This led to the Justice Department’s creation of a COVID-19 Hoarding and Price Gouging Task Force.

Prior to 1979, there were no U.S. anti–price gouging laws (APGLs) at either the federal or state level. But by 2020, 37 states had APGLs that were triggered by a national state of emergency. In the COVID emergency, not only did those states initiate certain APGL provisions, but many other states’ governors issued executive orders to similar effect. These pandemic APGLs generally apply to personal protective equipment (PPE), drugs, disinfectants, and related goods, but some could be interpreted more broadly.

Economists almost universally disdain APGLs or other forms of government price controls. Economic theory and substantial empirical evidence indicate that APGLs make society worse off by:

  • increasing hording and shortages,
  • sending the wrong price signal for consumers to conserve,
  • not providing goods to their highest-valued use and users, and
  • not providing the proper price signal for current and potential new suppliers to increase supply.

However, people in general (and therefore politicians) tend to have a strong emotional reaction to even the hint that a business or individual may be taking advantage of an emergency. This may be due to a lack of knowledge of economics and/​or irrational behavior.

Previously in these pages, University of Georgia economist Dwight Lee suggested a morality focus regarding APGLs. (See “The Two Moralities of Outlawing Price Gouging,” Spring 2014.) He argued that there are two different moralities at play in an emergency: One is the intentional behavior by people or businesses to sacrifice for others; he calls this “magnanimous morality.” The other is the mundane morality of the market as firms’ pursuit of self-interest can help others in an emergency (even if those facing the emergency are thousands of miles away).

I would argue that there is a range of business responses that fall somewhere between these two moralities. Businesses may:

  • donate goods during an emergency,
  • provide goods at a loss,
  • provide goods at a lower profit margin,
  • redirect goods to an emergency area even though that increases transportation costs, and/​or
  • voluntarily decide not to raise prices or to raise prices less than market conditions warrant.

Such actions may create customer good will and therefore could even be profitable in the long run (if not in the short term). Firms that have already invested in building brand or corporate names are more likely to engage in such activities. For example, as the late Ball State economist Steven Horwitz noted in a 2009 Independent Review article, “Since 2004, Walmart has had a corporate policy of instituting regional price freezes when hurricanes approach in order to avoid accusations of price gouging.”

Unfortunately, APGLs (and even posturing by politicians) can stifle mundane morality and the shades-of-gray quasi-magnanimous morality by creating additional risks and constraints on business. This legal/​regulatory risk is on top of the normal business risk associated with making a capital investment for products (such as facemasks and ventilators) for which future demand is uncertain. Early in the COVID pandemic, automaker General Motors partnered with Ventec Life Systems to produce ventilators, a decision that would almost certainly not have occurred without a federal contract that effectively side-stepped APGLs and eliminated demand-side risk.

Different sort of emergency / There are several reasons why APGLs are worse for society during a pandemic vis-à-vis a more typical emergency. First, there is the much longer time period for a pandemic. The strongest argument for APGLs is that, during a typical emergency, the time period is so short that supply is not very price responsive. This argument becomes weaker as the time period of the declared emergency becomes longer and businesses have more time to respond and increase supply.

After two years of “emergency,” on February 18, President Joe Biden “continued” the national COVID emergency. Seven of the 37 state APGLs preclude any price increase (i.e., 0%) during an emergency, while others allow no more than 10%, 20%, or 25% increases. Some employ such vague language (e.g., “unconscionable” or “excessive” pricing) that suppliers face a risky business environment and are uncertain as to what prices will be legal. Consider goods not covered by pandemic APGLs. During the pandemic, gasoline went from $2.40 to over $4.30 a gallon (after first dropping below $2). Prices on food, rent, new homes, new and used vehicles, and a host of other goods and services rose faster than many APGLs would have allowed if they were covered by the law. To constrain prices for PPE and related goods for over two years should seem to everyone to be unrealistic and unreasonable.

Second, most typical disasters are narrow in geography, but COVID-19 is a worldwide pandemic. If the United States limits the prices of PPE and related goods, those goods are likely to be diverted elsewhere in the world. Moreover, modern worldwide supply chains mean U.S. manufacturers’ costs will rise more than during a typical time period or during a U.S.-only disaster.

Third, there is no physical destruction during a pandemic. Downed power lines and instantaneous loss of housing experienced in many natural disasters are different problems than shortages of PPE. Therefore, personal hoarding is more likely during a pandemic; one can hoard sanitizers and N‑95 masks, but not housing, clear roads, and electricity. Hoarding exacerbates shortages that could have been at least partially mitigated with prices that send the right information.

Fourth, COVID-19 is infectious. Righteous indignation over price increases codified in APGLs accentuates shortages, but a shortage has a compound effect via infection. The loss of PPE or drugs for one person can lead to death or illness for others. In addition, this pandemic has caused far greater loss of life than other forms of disaster, and APGLs have contributed to that.

Conclusions and recommendations / Like virtually all economists, I recommend against any price controls in an emergency. Somehow, prior to 1979, the United States managed to navigate disasters without APGLs. However, given the public’s distaste for someone seemingly taking advantage of an emergency, I offer the following, more circumspect, recommendations.

First, tone down the rhetoric with respect to APGLs. It can send the wrong signal to businesses that are contemplating expanding supply. Raising prices is not “fraud” nor a “scam.”

Second, APGLs should have specific percentage price caps and not rely on vague language such as “excessive” or “exorbitant.” Vague language increases business risk.

Third, specific caps on price increases should not be set at 0%. Such a mandate is inconsistent with normal business.

Fourth, if an APGL is triggered, policymakers should either state with specificity when the emergency will end or provide additional upward price flexibility over time.

Fifth, distinguish between new sources of supply (e.g., generators brought in from another part of the country during a hurricane or expanded production of masks during a pandemic) and hording for resale.

And sixth, APGLs are particularly ill-suited for pandemics. COVID-19 will not be the last pandemic in history, but perhaps it will be the last pandemic triggering APGLs.

As a practical perspective on enforcement, consider Louisiana Attorney General Jeff Landry’s comments in a March 23, 2020, news story in The Hill. He provided two examples of fraud: misrepresentation that a telephone caller was from a hospital seeking funds for a ventilator to save a young man’s life, and calls offering fake COVID-19 tests. Landry stated: “We should, when we catch some of these people, lock them up for the entire rest of their lives. This is no joke.” But, in contrast, he also stated: “Price gouging is a subjective test. We have to factor in market supply, demand, [and] where the product is coming from.”

Readings

  • “Gasoline Prices after Hurricane Ike in South Carolina,” by Michael Giberson. Knowledge Problem, Aug. 17, 2009.
  • “How California’s Price-Gouging Order Can Cause More Deaths,” by Richard B. McKenzie. Regulation 43(2): 7–8 (Summer 2020).
  • “States See Surge of Scams, Price-Gouging Tied to Pandemic,” by Reid Wilson. The Hill, March 23, 2020.
  • “The Problem with Price Control Laws,” by Michael Giberson. Regulation 34(1): 48–53 (Spring 2011).
  • “The Two Moralities of Outlawing Price Gouging,” by Dwight R. Lee. Regulation 37(1): 28–31 (Spring 2014).
  • “Walmart to the Rescue: Private Enterprise’s Response to Hurricane Katrina,” by Steven G. Horwitz. Independent Review 13(4): 511–522 (2009).