Thursday, May 7, 2020

Markets work even in crisis

A lovely result of the corona virus outbreak has been how we see stifling aspects of regulations. Right left and center are figuring out that the regulations need reform. Now, the forces for regulatory stagnation are always strong, so the insight may fade with the virus. Still, let us enjoy it while it lasts.

The trouble with regulations is that, unlike "stimulus," the action is all in minute detail not grand sweeping plan.

John Goodman writes in Forbes
The Americans for Tax Reform calculates that 397 regulations have been waived in order to fight COVID-19. That count is probably way too low. The federal Food and Drug Administration (FDA) has eliminated so many restrictions it would be hard to count them all. ... 
Consider that, up until a few months ago: 
·     The only tests for the coronavirus that were approved for use in the United States were produced by the Centers for Disease Control (CDC) and half of those tests turned out to be defective. 
·     It was illegal to produce, sell and distribute ventilators, respirators, and other  medical equipment without complicated and burdensome government regulatory permission. 

 ·     It was also illegal to produce, sell and distribute personal protective equipment such as masks, gowns, gloves, etc. 
·     Medicare actually dictated how many beds a hospital could have and no one could create additional beds anywhere without government permission. 
·     In most cases it was illegal for a doctors to practice across state lines – consulting with patients in states where they had not been licensed to practice. 
·     It was illegal for employers and insurers to waive the deductibles and copayments for coronavirus detection and treatment for the 26 million families with Health Savings Accounts (HSAs). 
·     Medicare refused to pay for doctor consultations by means of phone, email, or Skype – except under special circumstances. 
·     Medicare refused to pay for direct primary care services (concierge care) that would give patients 24/7 access to a physician, including contact by phone, email, and video at nights and on weekends. 
·     It was illegal for employers to put money into an HSA so that employees could choose their own direct primary care physician. 
. And it was illegal to use employer money to buy individually owned insurance that employees could take with them when they moved to another job or exited the labor market. 
These barriers to sensible virus responses are largely gone for now. Will there be another ratchet effect, holding these responses in place after the COVID scare is gone? Let’s hope so.
On the other hand, Jerry Brown noticed that planning and zoning rules were hindering recovery from wildfires and rebuilding after earthquakes, and rescinded all sorts of rules. Construction happened fast. Once. That wisdom did not stick.

The ill effects of price controls, even in a crisis, especially for items whose price is objectively pretty low, is another one of those issues like free trade where economists and laypeople look at each other with jaws hanging in disbelief. Actually, it is a life-changing proposition -- counterintuitive to common sense, and clear as a bell when you understand it. It's a great conversion moment. Demand curves do slope down, and supply curves do slope up.

Russ Roberts writes beautifully on price controls and face masks:
What usually happens when masks are in short supply is that prices start to rise as buyers compete for the masks that are still available. The higher price encourages the manufacturer to add a night shift. Hire more workers. Work the existing shifts more intensely. If prices rise enough, companies that make other things may find it profitable to start making masks.
Russ doesn't quite emphasize enough that it's more expensive to ramp up mask production quickly. So charging double the normal price doesn't even mean "profit," a rent that can be taxed away without distortion.
The higher prices encourage hospitals that don’t need masks — the ones in Wyoming, say — to not hoard them, leaving them free to go to New York. Buyers of masks pay a premium, but there are a lot more to go around.
Demand curves slope down, people are more careful to allocate expensive goods.
It seems cruel, heartless, and immoral to make hospitals pay more for masks just when they are most desperately needed to save lives. But the alternative, a world where prices do not rise when life and death are on the line, is cruel and heartless, too.
I add, masks are 50 cents on a normal day. We are spending and losing a trillion dollars a month on the coronavirus. Haggling over who has to pay for masks is like complaining about the price of chewing gum at a $1,000 a night resort.
If you hold prices down artificially when masks are in high demand, you destroy the financial incentive to make more masks. You also destroy any incentive to create excess capacity or stockpiles for a future pandemic. 
This is really an important point. Price controls are said to discourage "hoarders." But in fact it is exactly "hoarders" that we want!

This message needs to be multiplied by about a million and sent to the Federal Reserve. Their actions have destroyed the incentive to keep some cash around, some extra equity on the balance sheet, and the ability to sweep in and buy at "fire sales."
Ironically, perhaps, this seems to be happening in China, where over 3000 companies, including FoxConn and a Chinese automaker added mask making to their production lines at the beginning of the year. But it doesn’t seem to be happening very much in the United States. Why?
Markets are failing in America because we’re not letting them work. It’s not a market failure. It’s a policy failure...
U.S. distributors can’t pass higher prices through to hospitals in the midst of the crisis, for fear of being accused of profiteering. ..
Most states have laws against “price gouging.” In California, for example, a state of emergency was declared on March 4, 2020 which limits price increases to 10% with violators subject to a year in prison and a fine up to $10,000 and other financial consequences.
As for any masks in private stockpiles, forget about it. An auctioneer in Houston, Texas, offered 750,000 masks for bids. The state attorney general sued him for price gouging. The masks are in limbo.
From the Department of Justice press release on April 2, 2020:
“If you are amassing critical medical equipment for the purpose of selling it at exorbitant prices, you can expect a knock at your door,” said Attorney General William P. Barr. “The Department of Justice’s COVID-19 Hoarding and Price Gouging Task Force is working tirelessly around the clock with all our law enforcement partners to ensure that bad actors cannot illicitly profit from the COVID-19 pandemic facing our nation.”
This sounds good but it comes at a cost — government has destroyed the opportunities to make profits by increasing the supply of masks.
3M, the largest manufacturer of N95 respirators in the U.S., says that it has doubled production in the last two months to about 100 million per month with plans to double that number in the next 12 months.
Double in 12 months? This will be over long before that.
That’s great, but I wonder if they could get there quicker if they could charge more for masks. 3M has been under attack from President Trump for selling some of their masks to Canada and they’ve been under attack from 20 attorneys general demanding that 3M police the price distributors charge for their masks.
Incentives matter. Pride or fear or kindness will motivate you. But so does money. And because responding with urgency is usually expensive, money makes it easier to indulge your kindness.
Bottom line: Prices allocate resources and transfer incomes. Governments control prices to transfer incomes, putting up with the bad allocation of resources. Cheap items that are critically needed in a pandemic are exactly the items where allocating resources takes full precedents over transferring incomes -- especially between branches of a government spending trillions of dollars. 

1 comment:

  1. When prices rises due to increased demand, production naturally increases to keep up with the demand as good as it can with their limited resources. If they need to buy more material the price of that material will also go up with the increased demand. Meaning that they HAVE to make a larger profit in order to keep up with the new demand.

    I start to think about the price gouging laws which hurt the people in New Orleans after hurrican Katrina struck. The people in New Orleans were offering up towards $10,000 for an electrical generator as all their electrical infrastructure had been destroyed by hurricane Katrina. They were in dire need of electricity, and the people around the country responded to that need, they bought generators where they lived and wanted to drive to New Orleans with them and sell them to the people who needed them. This was not allowed because of price gouging laws.

    The net result the people of New Orleans had to suffer without electricity far longer, in a crisis like this people arent selfish they will readily buy something for themselves and share it with other people because they know what its like to be without. So the price gouging laws hurt everyone, it limited heavily how much readily availiable electricity they could get their hands on.

    Meanwhile the people in New Orleans were WILLING to pay that much for an electrical generator. They badly wanted one and offered a lot of money for one, but no its price gouging, meanwhile in reality its just supply and demand.

    How do they imagine stores makes any money? They buy products cheaper and sell them at a higher price where the people who needs those products live. Is that also wrong, should we shut down all our stores as well. Its not only for profit, it is also about supplying people with the things they want and need.


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