Resource Allocation: Why You Can’t ‘Just Ignore the Economists’

In a recent Atlantic article titled “Sometimes You Just Have to Ignore the Economists,” law professor Zephyr Teachout castigates economists for their nigh-universal denouncing of Vice President and now presidential nominee Kamala Harris’s plan to impose nationwide anti-”price-gouging” laws on groceries.

Teachout’s criticisms of economists and how “regular people seem to understand a few things that economists don’t” stem from her misunderstanding what she calls “abnormal” conditions: that is, “short-term price spikes.”

But the price-gouging, as Teachout and Harris present it, is for items whose prices have skyrocketed due to inflation. This is hardly a short-term phenomenon. Teachout’s critiques of economists’ opposition to price-gouging are thus premised on a basic misreading of the causes of price increases in recent years.

General Trends vs. Specific Trend

When we refer to prices rising due to inflation, we are speaking of a general increase in the overall price level. We can measure this with the consumer price index (CPI). By looking at the Federal Reserve Economic Data (FRED), we see that consumer prices have risen almost 32 percent since January 2016, with a sharp increase once the COVID pandemic began.

To get a sense of how the cost of production can rise over time, we can look at the producer price index (PPI). Again, FRED data are very clear on this: costs to producers have increased by 41 percent since January 2016. Looking specifically at supermarkets and other grocery stores reveals the same increase in producer costs. Taken together, these data paint a completely different picture to that presented by Teachout: consumer prices have risen slower than producer costs. If anything, producers are absorbing more of the cost of production than they used to — not less. This underscores the fallacy of blaming businesses for “greedflation.”

Other data support this analysis of grocery prices. A Food Industry Association report shows that grocery stores around the country did indeed see their profit margins rise in the aftermath of the pandemic. Labor costs fell as consumers shifted to purchasing groceries online and opting for pick-up instead of walking around the store themselves. But the profit margins quickly fell back to their historic averages as the pandemic abated and, more importantly, as COVID policies constricting international shipping sunsetted. Profit margins for food and grocery stores may remain slightly higher than their pre-pandemic levels. But those were historic lows, not the norm.

If Harris was to ban “price-gouging” on groceries purchased by consumers, the result would be disastrous. By preventing prices for groceries sold to consumers from rising in response to inflation, Harris would encourage shrinkflation — the idea that sellers would rather reduce the size or quantity of a product while keeping price constant rather than keep the size or quantity constant and increase price — which President Joe Biden has denounced. Fortunately for us, even Democratic lawmakers are calming constituents and telling industry leaders that Congress would not pass Harris’s proposal.

More Troubling

But back to Teachout’s arguments for anti-price-gouging laws: she claims that “short-term demand cannot be met by short-term supply.” But an economist would point out that producers do not need to “spin up” new factories or increased capacities in the short term. Instead, they need to respond to price-signals. In such cases, resources bound for other parts of the country would be redirected to the area where the price is higher. This is what happened with lumber during Hurricane Katrina and bottled water during Hurricane Sandy. Trucks carrying these precious resources were recalled and rerouted to New Orleans and New York City, respectively. This reduced the supply in the “low-demand” areas of the country and provided the increased quantity-supplied in the area experiencing temporarily high demand.

Lest we think that this phenomenon is isolated to natural disasters, we saw the same happen in Flint, Michigan during its water crisis. Because the price of bottled water rose, more bottled water was sent there to people in desperate need of it rather than other locations where it was less necessary.

It is possible that the idea that “temporarily higher-priced products will find their way to the people who value them the most” might not, as Teachout claims, perfectly hold in the real world. Teachout gives the example of “a working-class cancer patient who desperately needs to buy the last generator in stock to keep his medications refrigerated might not be able to outbid a healthy millionaire who just wants to run their air conditioner” as evidence of this.

However, the relevant insight from economics is not “the glory of prices.” The right answer is to ask “compared to what?” Let’s take Teachout’s example of the cancer patient in need of a generator. Like Teachout, I would rather live in a world where the middle-class cancer patient gets the generator rather than the millionaire who wants to run his air conditioning. But what alternatives do we have to free prices?

Suppose that instead of allowing prices to fully rise, we cap the price increase (as occurs under current price-gouging laws). But when monetary costs are prevented from rising fully, non-monetary costs will rise to fill the gap. One such cost is time. In the months following natural disasters, we typically observe queues outside stores as people desperately try to access the small amount of goods available at artificially low prices. We see people flocking to Red Cross donation trucks, clamoring to get the supplies their families desperately want. We see people driving around town looking for stores that are open, making phone calls to other stores in town and the surrounding area trying to get a hold of someone who has what they want and is willing to hold it for them until they can get there.

In other words, rather than paying with money for these goods, these people are paying with their time and effort. Such time and effort are resources that could have been directed towards rebuilding. After all, you can’t begin the cleanup and rebuilding effort if you’re standing in line.

Another way to solve the allocation problem would be to use democracy. But consider what we would need to do to accomplish this.

First, we would somehow have to rank the alternative uses of the resources. Should we rebuild the hospital first or the daycare center? Rebuilding the hospital means that people who are sick or injured can be taken care of more quickly. But as anyone with children will tell you, if you want to get something done around the house, the first step is to find a way to get the kids out of the house. Rebuilding the daycare center first might provide more parents with more opportunities to get more facilities rebuilt more quickly.

A second difficulty with a democratic approach to deciding resource-allocation would be finding a time where everyone could come together and voice their concerns. Finding such a time is hard enough in politics. But even if we could find such a time, we would have to assume they would do so honestly, lest we try to make a democratic decision with false information. Do we really think that everyone will tell the truth all the time? And do we really believe that democratic votes will render the most efficient outcome? And by what criteria would people be able to know whether the vote has produced the best outcome for everyone?

These are the types of matters with which college freshmen enrolled in Econ 101 courses are required to grapple. They are also core questions that Teachout’s analysis does not address.

In the end, this is the fundamental problem with Teachout’s criticism of economists: her grasp of economics itself just does not hold water. Just as economists should stay out of court proceedings, so too should lawyers stay out of making pronouncements about how economies operate.