Because of the shutdown of my college campus, students in the three economics classes I teach are now scattered like the wind around the United States and the world. In our online Zoom classes, I recently asked each of them a simple question, “Is there anything you need that you cannot find in stores?”
I was curious because here, where I am right now in New York City, toilet paper, paper towels, hand sanitizer, and masks have been unavailable. A student in St. Louis reported that sugar was unavailable. Another in Indianapolis said that her neighborhood store ran out of ground beef, and a student in Chicago said that rice was unavailable.
But when I asked my two students living in Toronto, Canada, what was unavailable, they said… nothing. In some stores there were fewer items than usual on the shelves and in others, prices had risen but, except for about a week-long shortage of toilet paper that coincided with the shutdown of the American border with Canada, everything is actually available for purchase in stores. (I had a similar response from international students from as far away as Lahore, Pakistan, and New Delhi, India!).
The Canadian National Post, citing the Canadian Food Inspection Agency, says that “There are no shortages or disruptions to [food] production, importation or export,” and that “the shelves remain stocked.” It does say that the availability of some items has been reduced, but no actual shortages exist. Economists define a shortage as, basically, “empty shelves.” A shortage is where no goods are available for sale at the going price.
Canada: No Shortages and No National Law Against “Price Gouging”
The economist in me was intrigued. My first thought was, “What are the laws against ‘price gouging’ in Canada?” I already knew that the United States has a growing number of stringent state and federal laws and executive orders that prohibit price gouging.
But when I researched the laws in Canada, I found this remarkable statement by an attorney who specializes in business law:
“A price surge as a result of natural market forces is not something that is regulated by Canadian competition laws or otherwise. Canada’s competition laws generally don’t interfere with the free market.” [emphasis mine]
The statement was not remarkable to me for its statement of economic principle. The law correctly acknowledges that prices will surge during an emergency when demand spikes (as it did for masks) or when there are supply disruptions (as happened with toilet paper and meat). But, those price increases are allowed to happen because Canada’s competition laws generally don’t interfere with the free market.
As a result, there are no substantial or long-lasting shortages because prices will rise to equilibrate supply and demand. As the same National Post commentator noted, “Canadians will have enough food to eat. But it will be more expensive.”
In contrast, consider a typical statement on this subject in America. After signing the emergency declaration on March 4 that invoked the state’s law against price gouging, California Governor Gavin Newsom said, “As you may have noted, we are seeing literally small hand sanitizers like this going for as much as $17. I’ve seen some online for even more. That’s unconscionable, that’s usurious and we need to go after those who are price gouging not just for hand sanitizers but medical supplies and other equipment.” The punishment for violating California’s anti-price gouging law that limits price increases to 10% during an emergency is a stiff one year in jail or a fine of $10,000.
In contrast to Canada, which has no national restrictions against price gouging, 39 American states now have stringent laws or executive orders against raising prices during emergencies. That number is growing as new states begin to issue executive orders banning the practice without even waiting for specific enabling legislation.
The U.S. federal government has even weighed in. On March 23, President Trump invoked the Defense Procurement Act to target “hoarders and price gougers.” Attorney General William Barr has “ordered all 93 U.S. Attorney’s Office to appoint a lead prosecutor to tackle coronavirus-related price gouging.”
A Natural Experiment Between the United States and Canada
We are witnessing what political economists call a “natural experiment.” Two classic natural experiments that illustrate the contrast between economic principles are East and West Germany and North versus South Korea. Both cases are natural experiments because a single society that originally shared the same culture, language, and economic way of life was “split in two” by geopolitical events and subsequently governed under starkly different political-economic principles.
Both countries were split apart by World War II. The “experiment” was that the free, capitalistic halves of the countries prospered in the subsequent decades while the unfree, communist halves floundered. As if deliberately designed by some economic experimenter, these “natural experiments” demonstrate the superior economic efficacy of capitalism over communism. To this day, North Korea presents visual testimony of its gaping relative poverty to South Korea in this famous photo of the two Koreas at night.
We are witnessing in real-time a similar — and tragic — natural experiment between the United States and Canada, two societies that are so similar in culture, language, temperament, and trade that they are practically a single country.
During this coronavirus pandemic, Canada has largely chosen to embrace market principles when it comes to prices, while the United States has progressively ratcheted up enforcement of its anti-price gouging laws. These laws have spread across most of the states over the past 30 years, and now even the federal government has begun enforcing them.
What is the result of that natural experiment? Like the darkened lights of North Korea, America endures unpredictable “rolling shortages” while Canada largely has been able to maintain the availability of goods during this coronavirus emergency, albeit at higher prices in many cases.
What is the problem with anti-price gouging laws?
Anti-price gouging laws cause shortages. They do not allow market prices to form and perform their most important function: coordinate markets and equilibrate supply and demand. Adam Smith famously called that coordinating and equilibrating function of market prices the “invisible hand” because it works so well in bringing goods to market and ensuring that there are no shortages, especially when demand spikes and/or supply is disrupted during an emergency.
Higher market prices during an emergency increase the actual availability of goods in two important ways:
- On the demand side of the equation, the higher prices motivate buyers to economize and buy less of the good. Consumers re-evaluate what they actually need when prices rise and they buy less. This increases the availability of the good for everyone by reducing the size of individual purchases.
- On the supply side of the equation, it raises profits for those who produce the good which, in turn, motivates them and gives them the financial means to increase production. Firms can now afford to pay for overtime, bring on additional shifts, pay more for scarce raw materials — do whatever it takes — to increase production.
A law that makes higher market prices illegal — whether it uses the pejorative term “price gouging” or more accurate and benign-sounding terms like Uber’s “surge pricing” or “emergency pricing” as some economists call it — prevents this market adjustment process from happening. An anti-price gouging law is simply a form of price control, and price controls have been known to cause shortages, whether during the 1970s oil crisis when oil price controls led to epic gasoline shortages, or during Hurricane Katrina, when state anti-price gouging laws prevented generators and other supplies from being brought to the hurricane-ravaged region.
When an emergency arrives suddenly, shelves may become empty during an initial bout of panic-buying, but when merchants raise prices in response (if they are permitted), people immediately reduce their purchases, goods become available on the shelves and, because producers begin producing more in response to the higher prices, prices eventually fall as more and more supplies become available. This benign process of adjustment has not been allowed to happen in the United States.
None of this happens when prices are not permitted to rise. In California, prices are not allowed to rise more than 10%. In other states, such as Florida and New York, prices cannot rise to “unconscionable” levels (whatever that means). This means that people will hoard and panic-buy as they fear shortages, and manufacturers will not have the means to ramp up production.
Anti-price gouging laws — more generally any form of price control — are a recipe for a disaster during an emergency. They make the harmful effects of the coronavirus itself far worse as medical workers and the public cannot get masks, gloves, sanitizer, food items, and even toilet paper. They do not allow markets to clear. Ultimately, people die. This is why this natural experiment is so tragic for the United States and so unnecessary.
Epilogue for North America’s Two Neighbors
What does the future hold for Canada and the United States, in terms of price controls and the availability of life-saving goods such as masks and sanitizer, food products, and goods we simply need such as toilet paper?
Unfortunately, Canada is beginning to imitate its more populous neighbor to the South. Canada’s most populous province, Ontario, passed a law modeled after the state anti-price gouging laws in America. It took effect recently, on March 28, but it is unclear whether enforcement has vigorously begun. The law demands even stiffer maximum penalties for violations than most U.S. state laws — fines up to C$500,000 for individuals and one year in jail and up to C$10,000,000 for companies — and an equally vague definition of gouging as charging “unconscionable prices in respect of necessary goods, services and resources” or simply prices that are “unfair.”
This economist can make a prediction for Canada. If Canada wants to replicate the shortages that are ravaging its neighbor to the south, enforce the law. Let’s see what happens. The economist in me will be intrigued as (yet another) natural experiment unfolds.
But the humanist in me is saddened at the unnecessary harm that Canada is projecting for itself. We do not need another “natural experiment” to understand the principle that markets work, if left alone.
We do not need to see people actually die if they cannot obtain a valuable mask or hand sanitizer and they are unnecessarily infected with the coronavirus.
Let America be a lesson for Canada. Don’t follow our example here. It is not working. It is costing lives. It is so senseless, and it was so avoidable.
Made available by the American Institute for Economic Research.