A Man-Made Disaster

Post-Sandy 

by George Reisman

Hurricane Sandy caused the closing of a majority of the gasoline stations in the New York City area, did major damage to petroleum terminals, and reduced the ability of barges carrying fuel to reach their docks. All of this represented a substantial reduction in the supply of gasoline and other petroleum products in the New York metropolitan area. None of it was the cause of a shortage of gasoline or any other petroleum product, a shortage which New York's Mayor Bloomberg can think of no better means of alleviating than by imposing a system of gasoline rationing. (See the New York Times, November 9, 2012.)

In a free market, the effect of a good's becoming scarcer is not to cause a shortage of it, but a rise in its price. The rise in price serves to reduce the amount of the good buyers seek to buy to a point that is within the limit of the reduced supply available. However much the supply of oil and oil products was reduced by the hurricane, it was certainly not reduced to anywhere even remotely near the normal, everyday degree of scarcity in the supply of such things as gold or diamonds. And yet there is no shortage of gold or diamonds. Whoever is willing and able to pay the market price of these goods has no difficulty in obtaining them. But if our government officials, inspired perhaps by some such belief as that everyone should be able to obtain gold and diamond jewelry at an affordable price, decreed that the price of gold and diamonds should be cut in half, say, then, indeed, there would be shortages of gold and diamonds alongside the present shortages of gasoline in New York and New Jersey.

Even goods of which there is just a single specimen, such as a Rembrandt painting, are not in a state of shortage. When such a good is put up for auction, its price rises as high as necessary to reduce the number of bidders to just one. In the face of the high price, all the other bidders give up and walk away. They do not remain in the auction room for hours still waiting to buy the painting. They know that the price is just too high for them. But imagine an auction in which the auctioneer was prohibited from progressively raising the price until only one buyer remained. Imagine that he was compelled to hold to his first or second offer. In that case, the auction room might remain packed indefinitely.

What all this implies is that the shortages of gasoline now being experienced in the New York metropolitan area and elsewhere in the path of destruction left by Hurricane Sandy simply do not need to exist. They could be made to disappear very quickly, within a matter of hours. All that would be necessary is to remove the threat of prosecution of gas station owners, and all others in the chain of supply of gasoline, for raising their prices to the extent necessary to reduce the quantity of gasoline demanded to conform with the reduced supply of it available.

Confronted with such a price — possibly one as high as $10 or $20 a gallon, or even higher, given the apparent extent of the reduction in the supply of gasoline — many of the drivers of the cars presently waiting in line at gas stations, would simply drive off, park their cars, and make arrangements for alternative means of transportation, whether car pooling, bicycle riding, or whatever. Almost everyone would curtail his driving commensurate with the higher cost of driving. No one would drive into a gas station who was not prepared to pay the then-prevailing very high price of gasoline. The people who needed gasoline for such urgent purposes as getting to work, but who could not afford to pay such a sharply higher price, would not be in nearly as bad a position as needing gasoline to get to work and being simply unable to find it, or find it only after waiting in line for three hours. Such people could car pool and spread the high price of gasoline over as many of them as could reasonably fit in an automobile. The environmentalists, who seem to desire that such arrangements become a normal, everyday occurrence, should welcome this chance to see the achievement of their goal, however temporarily.

What caused the shortages and stops them from being overcome in this way is the fact that the necessary rise in prices is illegal. It is against the law. According to a Bloomberg news release of November 9, 2012, "New Jersey law defines price gouging as an 'excessive price increase,' or of 10 percent or more, during a declared state of emergency." The same news article also reports that "New York law prohibits selling goods or services for an 'unconscionably excessive price' during 'abnormal disruption of the market.'"

Thus state laws are what make it impossible for the market immediately to put an end to the shortages. It is these state laws that allowed the shortages to come into existence in the first place, by prohibiting the immediate rise in prices that would have prevented them, and that then make the shortages persist.

The same state laws make it impossible for the market speedily to restore supplies to their normal level, which would serve quickly to bring down prices from their abnormal heights.

If prices were allowed to be "unconscionably" high, it would be possible to bring in vital supplies that are more costly. For example, gasoline from more remote refineries. At prices of $10 to $20 per gallon, it would pay for tanker trucks to bring in gasoline from several hundred miles away. This would serve to spread the loss of supplies caused by the hurricane over a much wider area, with a corresponding reduction in the severity of loss experienced in the area of the hurricane's path.

The price of gasoline would rise in the areas from which the additional supplies came. That rise in price would pull in replacement supplies to those areas from still more remote regions. Thus, for example, while refineries in Pittsburgh and Cleveland were helping to supply New York and New Jersey, other refineries in the Chicago and Detroit areas would be helping to resupply Cleveland and Pittsburgh. The effect would be that the loss of supplies of gasoline in the New York metropolitan and New Jersey shore areas would be spread across much of the country, thereby resulting in a substantially reduced percentage of loss in the New York/New Jersey areas. Instead of those areas experiencing the effects of a 50 or 75 percent reduction in supply, a much broader area would experience the effects of perhaps only a 5 or 10 percent reduction in supply. The rise in price of gasoline would quickly diminish, reflecting this greatly reduced percentage of loss of supply.

The "unconscionable" rise in the retail price of gasoline that made it possible for the gas stations to pay higher prices to their wholesalers and distributors bringing in gasoline from remote refineries would also cover the high costs of speedy repairs, such as those entailed in round-the-clock repair work, using extra crews, and paying premium wage rates. Thus, in the absence of the price controls, in very short order New York/New Jersey area refineries, terminals, and docks would be repaired, and the gas stations now closed would reopen. This would serve to achieve a full restoration of supplies, along with a return of the gasoline distribution system to normal. These results would quickly bring gasoline prices down to their normal level.

All of this is prevented for no other reason than that our government officials are utterly ignorant of economic law. They believe that prices have no connection with reality and can be dictated by them with no effect other than to make supplies less expensive — for people who can't get the supplies, because the supplies don't exist, and who are led to waste endless hours, day after day, trying to get the supplies that don't exist. By what standard is this a more reasonable arrangement than allowing prices to be "unconscionably" high, for what would certainly be a very short time, and thereby quickly fixing the problem?

The press is as much to blame as the government officials. With rare exceptions, the reporters are as ignorant of economic law as the politicians. Both are unqualified for their jobs. They just don't know what they're doing.

The ultimate responsibility, of course, rests with the general public and with the educators who failed to provide people with even the most rudimentary knowledge of economic law.

In a society in which economic law was widely understood, legislators and prosecutors who sought to prevent price increases in cases of emergencies would be regarded as public enemies and barred from office. They would be barred not by a mere lack of support, but by a lack of support manifested in the utmost public contempt and ridicule for their ignorance and destructiveness.

These laws should immediately be overturned. They are in violation of the Ninth and Fourteenth Amendments to the US Constitution. The Ninth Amendment states that "The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people." Obviously, the people retain the right to take the steps necessary to cope with catastrophes, such as Hurricane Sandy. These laws fly in the face of that right. They make it illegal for people to take those steps. The Fourteenth Amendment makes the provisions of the US Constitution applicable to the states.

A panel of federal judges should be convened at once and asked immediately to render these laws null and void. New York and New Jersey are in an emergency situation. It is intolerable that their people be made to suffer the effects of disastrous legislation piled on top of a natural disaster and thereby needlessly enlarging and extending the effects of the natural disaster.