A Wall Street Journal story reports about an “anarchic market” and “grey market” in personal protective equipment or PPE (masks, gowns, and such) because, it suggests, there is “little gear coming from the U.S. government” (“A Chaotic Gray Market Determines Who Gets Coronavirus Gear-and Who Doesn’t,” May 8, 2020). As if government allocation of goods were normal. Welcome to the country of free enterprise.
In this area, America is not worse than most other countries but it is not better either. Many people don’t realize that any good is scarce in the sense that buyers and would-be buyers wish it were less expensive. They don’t realize an emergency is also a matter of degree. The emergency argument is, at bottom, an argument for government allocation in general. It is an argument for the Soviet or Venezuelan model, possibly in attenuated form: government allocation with a human face.
How government allocation works has been pretty obvious since, at the beginning of the pandemic, the FDA claimed a monopoly on testing kits while producing no workable ones.
A notable aspect of this system is that force is used when government priorities are not respected. The Wall Street Journal reports:
The federal government at times has diverted protective equipment arranged in deals by brokers and others bound for hospitals or firefighters. The Federal Emergency Management Agency last month seized a shipment of respirator masks at New York’s John F. Kennedy airport that a small Delaware seller of hazmat suits imported from China, documents show. The firm, Indutex USA, had orders to sell about 125,000 masks to buyers including nursing homes, a children’s hospital and a police department, said George Gianforcaro, its president. …
The government since has seized two additional shipments, or a total of 500,000 masks, Mr. Gianforcaro said.
One excuse is to prevent “illegal hoarding and price-gouging”:
A FEMA spokeswoman said the agency … detained Indutex USA’s masks in part to ensure they meet applicable safety standards, and as part of an initiative with the Justice Department to combat illegal hoarding and price-gouging. FEMA could decide to keep the masks or require the importer to sell them at reasonable prices, she said in late April.
Another notable aspect of government allocation is corruption, that is, the legal or illegal use of government connections to bypass, and profit from, the government restrictions themselves. A former Republican fundraiser has “rocketed up to become among the largest brokers peddling masks and other medical equipment to states in need as they fight the new coronavirus.” Whether this specific suspicion is valid or not, we should expect more cronyism when the government pretends to be running the economy.
Meanwhile, the Organization for Economic Cooperation and Development, once known for its top-notch economic analysis, just released a report on “The Face Mask Global Value Chain in the COVID-19 Outbreak: Evidence and Policy Lessons” (May 4, 2020) in which prices—the bread and butter of economists—are only mentioned with reference to the necessity of repressing “hoarding and speculation”:
According to Nielsen Retail, the price of face masks increased by 319% in the United States between end-January and end-February 2020. Before the crisis, a box of 100 masks could be bought for less than USD 4 in the United States. However, at the end of February, there were reports that single masks were being sold for USD 20. The same phenomenon has been observed with respirators, with the price of a box of 20 increasing from USD 17 to USD 70. Several countries are now implementing measures to curb prices and protect consumers.
OECD economists don’t seem to understand the allocative role of prices anymore, or else their political values weigh heavily toward government redistribution through direct allocation of goods and services. (Or perhaps the best OECD economists were not consulted?) The quote just above suggests that prices had already started increasing when governments effectively moved to cap them in their captive domestic markets. If governments had not imposed price caps, higher prices would have incited domestic producers to increase production while reducing the future profitability of hoarding. Physical shortages would not have occurred (see my numerous recent posts on this topic). The situation now would not be that the only way to get PPE products is either to get in front of the domestic queue (the federal government does this forcibly) or to import them from foreign producers not bound by domestic “price gouging” laws.
Even if prices are capped when demand is greater than supply, they find ways to adjust, although imperfectly, through a mix of marketing tricks (eliminating promotions, selling in larger quantities, jettisoning lower-margin goods, etc.) and assistance from grey and black markets. Also, in America, the states’ profiteering laws are often vague; but they still impose a legal risk to increasing prices. And, with the invocation of the Defense Production Act, the Department of Justice has been intensifying repression. It is worth reading what the DOJ says about one of its latest criminal prosecutions, against somebody who
set aside a section of his store for so-called “COVID-19 Essentials,” which he then sold to the public at inflated prices, including but not limited to N-95 filtering face piece respirators, PPE face masks, PPE surgical masks, PPE face shields, PPE gloves, PPE coveralls, medical gowns and clinical-grade sanitizing and disinfecting products.
This DOJ release is a must-read. In it, we are also told by a US postal inspector that
the conduct charged in the complaint is reprehensible and against our most fundamental American values.
According to the DOJ, the accused also “completed bulk sales at inflated prices to organizations serving vulnerable senior citizens and children battling the virus”—that is, to organizations that could not find PPE at lower prices and preferred to pay more rather than leave these vulnerable senior citizens and children battling the virus without PPE. Is it so difficult to understand that it is better to have the option of getting something at a higher price than not getting it at all?
Finally, note that it’s impossible to have something to sell to a consumer when he wants it if you have not “hoarded” it in some sense. “Hoarding” really means nothing else than keeping a stock of goods with the hope of selling them at a price the government doesn’t like.