What’s Wrong With Price ‘Gouging’ In Baby Formula Crisis?

As night follows day, the shortage of baby formula around the country has politicians shouting about the evils of “price gouging” and vowing to stop it. But what if “price gouging” relieves shortages and makes sure parents who need the formula the most can get it?

News accounts tell the story of panicked mothers who’ve had to drive hours in all directions to find formula. In response, President Joe Biden is pressing the Federal Trade Commission to “bring all of the Commission’s tools to bear” to stop sellers from raising formula prices.

Parents would be better off if the Biden administration had instead focused on boosting supply. The Food and Drug Administration sat on warnings about contamination at a major plant in Michigan for weeks. And then dawdled in getting the plant cleared to reopen. It was only after the shortages made headlines that Biden claimed to be “on top of it.”

Then there’s the fact that even as Americans were struggling to find formula, the administration was shipping pallets of the stuff down south for the illegal border crossers Biden has been inviting into the country.

It is incompetence piled on top of incompetence. And parents are now paying the price.

Nevertheless, the question is how to deal with shortages like this when they emerge. And attacking “price gouging” won’t help anyone. In fact, it will only make the situation worse.

Understanding why requires a comprehension of some basic economics. Namely, that when demand exceeds supply, prices go up.

Back when we were writing editorials for Investor’s Business Daily, we explained the phenomenon this way:

The truth is that while jacking up prices during an emergency seems unethical, it can be the best way to deal with an emergency situation. High prices not only discourage hoarders, they also send up a flare to suppliers to rush more into production and bring more into the region.

This is economics 101. People might grumble about the cost, and post pictures on Facebook to cries of shame, but at least they can get the stuff.

In the case of infant formula, raising prices in one area would be an immediate signal of stronger demand there, and would encourage those who have extra formula in other parts of the country to move it to areas with shortages, charging “price gouging” higher prices to cover their own extra costs.

Bans on gouging, in contrast, have the same effect as price controls: they exacerbate shortages and lead to rationing, corruption, and black markets. The economic literature is full to the brim of studies on this effect. And anyone who waited in long lines during the 1970s to buy gasoline knows first-hand what price controls produce.

What’s more, price-gouging laws only shift costs, they don’t eliminate them. In the case of infant formula, parents are paying in time, gasoline costs, and emotional stress. They end up driving hours out of the way in search of formula not knowing if any will be there, and have to worry about their infants surviving all the while.

How many of them would gladly pay a premium to have reliable access to the formula they need, when they need it?

Unfortunately, politicians are unwilling to use events like this to explain the facts of economic life to the public. Instead, they want to fan emotional flames for political gain, look for scapegoats to mask their policy disasters, and make it appear as if they’re doing something by rushing out bills to ban “gouging.”

That’s not just for infant formula, either. The Biden-fueled inflation spike has also created a whirlwind of Democratic anti-gouging legislation.

House Speaker Nancy Pelosi is pushing a bill that would let Biden issue an emergency declaration making it illegal to increase the price of gasoline. “Price gouging needs to be stopped,” she says.

Meanwhile, Sen. Elizabeth Warren, D-Mass., has a bill called the Price Gouging Prevention Act of 2022 that would “prohibit the practice of price gouging during all abnormal market disruptions — including the current pandemic — by authorizing the Federal Trade Commission (FTC) and state attorneys general to enforce a federal ban against unconscionably excessive price increases, regardless of a seller’s position in a supply chain.”

The language is so impossibly vague that it could apply to any price hikes anywhere in the country for any product, so long as some politician could attribute it to an “abnormal market disruption” or declare a price hike “unconscionable.” This would effectively put the federal government in charge of setting prices for pretty much everything.

It’s unlikely that any of these “anti-gouging” measures will make it to Biden’s desk (unless a few spineless Republicans side with Democrats). That’s good. Because if Democrats had their way, the short-term shortages we’re suffering today would become permanent ones tomorrow.

— Written by the I&I Editorial Board