Saturday, December 03, 2005

Government vs. freedom in dealing with crises

Even "conservative Republican" acquaintances of mine are indignant that oil companies made billions of dollars in profits while Americans paid "record prices" for gasoline and other petroleum products. My question is: "How are you going to stop them from making record profits? Or how are you going to punish them for what they did to motorists?" A "windfall profits tax" seems like a natural way of going about it. We could then issue tax breaks for motorists according to how far they drove, and thus by how much they suffered from oil companies' price gouging. That way we put a dent in those obscene profits, and help those who have suffered at the pump.

Aside from the economic woes that would inevitably result from such "solutions," they are offensive to the principles of freedom and self-governance. Government limits our freedom. This is a good thing when we are talking about the "freedom" to take somebody else's stuff without permission. But for government to step in between a consensual arrangement between two parties (the oil companies and their customers) so that one of the parties can get a better deal is obviously immoral. It's like hiring muscle to make sure that merchants sell to your "family" in exchange for kneecap insurance. Except in this case the toughs are the government. Regardless of who the enforcers are, their intervention is an affront to freedom.

As noted earlier, government is supposed to keep people from stealing stuff. But when they tax one group and give to another, they are facilitating theft. Do we really want government doing that?

Perhaps my conservative friends would say: "I don't want government to get involved, but I wish the oil companies would voluntarily lower their prices to help out their fellow Americans, instead of raising prices and getting record-breaking profits." To that even the most junior economist would reply: "What do you think will happen when the high prices cause people to cut back on consumption, and oil companies produce more to take advantage of the higher prices?" As a matter of fact, gas prices fell for about ten straight weeks, and most of that before the government even thought about getting involved. Free markets meet demands. That's what price fluctuations in a free market do: they regulate supply and demand to equal each other. If you limit the price of gasoline, everyone's going to try to buy it at once, and nobody's going to want to produce it - we already went through that in the 70's. It's like in the Soviet Union, when manufacturing honchos didn't have to limit costs, they hoarded all the supplies they could, without evaluating how much they really needed - just to be on the safe side. It resulted in dreadful waste because there wasn't a simple thing like price to keep demand down.

Same thing with gasoline in America. If we start producing less, oil companies are going to charge more for what they've already produced. Voila, record profits. But if they charged the same price, as the ignorant are suggesting they should have, people would have bought more gasoline than they truly needed (just like Soviet factory managers and their tools and materials), and people truly in need would have gone without.

Price-gouging laws limiting how much one can raise prices after a natural disaster have the effect of causing shortages. Wouldn't there be shortages after a natural disaster anyway? I'm glad you asked. The answer is not really. Take for instance the middle class Smith family and the poorer Green family, fleeing the path of a hurricane. The Smiths hear about the hurricane sooner, because their breadwinner works in a place where one hears about such things, and they start to evacuate at 2pm. The Greens start to evacuate at 4pm. They both need to refuel before they can get far enough to be truly safe. With the amoral, price-gouging gas station owner charging $4.50/gal, Mr. Smith sits for a moment and figures out exactly how much gasoline he needs to make it to the safe zone, and he buys an extra dollar's worth, just to be sure. The Green family shows up two hours later, and they hurriedly buy as much as they can without blowing the motel money, and they hurry on their way. The Smith family reaches the motel in the safe zone first. They want to rent two rooms, one for the parents, and one for the kids, but the amoral, price-gouging motel owner is charging two-star hotel prices for his junky motel (and the two-star hotels... you don't even want to know). At the new prices, the Smiths pile into one room. The Greens show up a few hours later, discover the new prices, and pile into an even smaller room, where they wait out the hurricane in the cramped conditions forced upon them by the evils of price-gouging. How horrible for them, huh? Well the Smiths and the Greens vote into office a politician who promises to end price-gouging, and he does, passing very effective legislation to that effect. The next year, there's a hurricane. Let's examine how wonderful the evacuation is without that awful price-gouging.

Again, the Smiths leave two hours before the Greens, and arrive at the gas station two hours earlier. The price is still below$2.50/gal, thanks to Sen. Cardigan. The Smiths fill up, and buy a gas can and fill that up too (because, after all, you never know when you might be able to fill up again). When the Greens arrive, the gas station is dry as a bone, because everyone who had gotten there in the previous two hours had bought as much as they could fit into their gas tanks and newly purchased gas cans; most of them even topped off. So the Greens hitchhike the rest of the way to the safe zone, and are fortunate enough to get to ride with some cultists who are picking up all the hitchhikers they can, so that they can preach to them all about the true meaning of the hurricane, and the great Zooboo, whose name is Phil. This for all six hours it takes to reach the safe zone. There the Smiths have found that the motel prices are actually quite reasonable, a la Cardigan. So they rent one room for themselves, and since they have more money and bigger kids than last time, and the prices are so reasonable, they get two for their kids - for a total of three rooms. (Evacuation is so much more comfortable without the gouging!) Many others who arrive around the same time do similar things. When the Greens finally show up with the Zoobooites, all the motels are full, as is the two-star hotel. There is nowhere else to stay in town. There is nowhere else to stay anywhere that the Zoobooites can reach on their tank of gas. But that does not seem to phase them. They're perfectly content to bed right down in the van, despite its accumulation of Zoobooite odors, and the Greens are perfectly welcome to stay with them, if they don't mind listening to the story of Phil, the great Zooboo, one more time.

So you see, you may have a wonderful time with government interference in the economy. If you're like Warren Buffet or George Soros, the lion's share of your income might come from gov't interference in the economy. But it's the poor who suffer. Not just in my light-hearted illustration, but in real life. Those who don't have the education or experience to produce more than $5.00/hour of help to an employer can't get a job when there's a $5.15/hour minimum wage. Inflation may have increased the dollar figure of their work's value to $5.50/hour. Should we increase the minimum wage so their new job will pay them more? Or will they not have a job?

It comes down to whether you want more government to protect you from things that you find inconvenient, or more freedom. Beyond that, it comes down to which is more noble.

SRS

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