Government Must Resist the Urge to Micromanage the Economy during Crisis

April 9, 2020
By Trevor Bratton

The coronavirus pandemic has severely increased demand for basic products like toilet paper, hand sanitizer, and paper towels—to the point that finding these items on store shelves has become a major challenge. Fearing an increase in prices as supply catches up, some have called upon lawmakers to put price controls into place. But capping increases in prices may do more harm than good.

As Americans are all too aware of these days, resources like paper products and sanitizer are scarce. And when it comes to scarce resources, rapid increases in demand—in this case, due to widespread worry—encourages businesses to raise prices. This price raising has two important effects: It keeps demand under control, and it provides a signal to firms to increase their supply of the product in question. This reaction doesn’t just stop with point-of-sale retailers such as Walmart or Target, as many believe: Retailers get the goods they ultimately sell to you and me from a distributor. Increased consumer demand causes an increased demand on the retailer’s distributor as well. The whole system repeats itself.

When the government stops this naturally occurring market phenomenon, disastrous consequences can result. Artificially lowering prices, or holding them constant when the market tells them to rise, tells firms to decrease their production, all while telling consumers to increase their buying. This is how temporary increases in prices turn into long-term shortages of goods, and, in turn, higher prices over time. The same low-income or elderly customers that the government tried to help are now hurt because they have less options and higher prices. After Hurricane Sandy, New Jersey barred business from raising prices more than 10%. The result forced many stations to close and, for the few that stayed open, lines that took 12 hours to reach the pump. Prices that otherwise would have fallen after the disaster remained at disaster levels due to vast shortages until supply was able to rebound.

Then, as if they weren’t hurt enough, these folks are given the double whammy. They’re hurt again because goods are simply harder to find. When demand is high but companies decrease production from a government-imposed price ceiling, that encourages hoarding by those who can afford to purchase large quantities of these goods. Meanwhile, the “little guy”—the low-income family of four, or the elderly person on a fixed income—cannot purchase a single package of toilet paper.

But government doesn’t just mess up basic economics: It also imposes ridiculous barriers that slow or cease production. The increased consumer demand for certain products over others spotlights a profit-making opportunity to firms. Subsequently, some businesses shift their production of one good to another to meet this demand. For example, during the COVID-19 outbreak, some struggling distilleries—many of which have been forced to lay off employees—have been shifting their limited means of production to produce hand sanitizer. After initial government attempts to halt their sanitizer production via licensing or FDA oversight, distilleries were ultimately allowed to continue, keeping their employees employed and even donating sanitizer to those who need it most.

Increases in prices, just like this virus, are only temporary. Certainly, price increases can be difficult during hard times, but by allowing the free market to work, Americans will be much better off in the long run.

Trevor Bratton is a Policy Analyst Fellow at the Goldwater Institute.