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For at least four thousand years (see the blog post by Tom DiLorenzo), political leaders in monarchies and democracies alike have instituted price ceilings.  The results have always been the same: chronic shortages.  Anyone who has read my posts here, especially my recent posts, have found me lamenting both the pharmaceutical shortages in the US and the many, assorted shortages in Venezuela.  Shortages come, not from the greed of merchants and other business people, but from government officials who delude themselves and their followers into believing they are better suited to set prices than those greedy forces of supply and demand.  They do this as if the political leaders are not greedy, themselves—but their greed to rule over others’ lives is perhaps the worst form of greed.  Well, this time, I turn my attention away from Venezuela and to Venezuela’s Marxist role model, Cuba.

Cuba, like Venezuela, is plagued by shortages of many goods and services.  Sometimes shortages occur in one area, but not in others, in one item, but not in others.  The reason for this is that prices are set by the government in Cuba, and not by market forces.  Markets create incentives for self-correction of shortages and surpluses.  Shortages lead businesses to raise prices which both give them an incentive to produce more and for buyers to cut back.  Surpluses lead to price cutting, reductions in production and increases in purchasing.  Bureaucracies do not provide such self-correcting incentives.

Well, what has caught the attention of the press is not the food shortages, or the shortages of corrugated roofing metal while having a surplus of nails, or even shortages of medical gauze, but a shortage of condoms.  Juan O. Tamaya, reports on the condom shortage here (read it!) in the Cuba section of the Miama Herald.  When the prices of items are held below the price that the market would predict, what economists call “equilibrium prices,” shortages will appear to raise havoc.  This particular shortage could lead to shortages a little down the line, perhaps in several months as unplanned pregnancies and STDs begin to increase.

While smuggling is not the cause of the problem, you can be sure that having separate markets, with prices held low for Cubans and higher prices for foreigners, encourages “arbitrage”  or buying large quantities at the low price to resell at the higher price.  Tamaya reports “Celaya wrote earlier this month in her blog Sin Evasion (“Without Evasion”) that the chronic shortages on the island seemed to be more frequent and affecting more products, including some that are usually widely available at steep, hard-currency prices.” (Read more here: http://www.miamiherald.com/2014/04/16/4063871/condom-shortage-hits-cuba.html#storylink=cpy).  I noted the same type of problem that worsens shortages in this recent Bastiat’s Bastions post on Venezuela.

I am sure you have heard the maxim that “people who do not study history are bound to repeat it.”  Price controls and chronic shortages occur when people fail to study economics and economic history.

-MC

As some of my students are about to take exams covering the minimum wage, among other topics, I thought I would point them to some old, but still relevant columns I wrote in the late 1990s on the topic.

Why the minimum wage should not be increased (1998)

Minimum-wage increases and high school dropout rates  (1999)

And here are some of my prior posts on this blog:

http://www.nicholls.edu/bastiatsbastions/2013/03/05/obamas-own-former-adviser-gives-thumbs-down-on-pushing-up-the-minimum-wage/

http://www.nicholls.edu/bastiatsbastions/2013/03/01/presidents-proposal-to-raise-the-minimum-wage-sounds-good-but-could-there-be-unintended-consequences/

http://www.nicholls.edu/bastiatsbastions/2007/02/13/the-minimum-wage-hike-causes-fumbled-teen-jobs/

-MC

 

The shortages in Venezuela, as I have discussed in previous posts, are due to price ceilings which suppress the quantity offered on the market while encouraging extra consumption. Low prices also encourage exports of those price controlled items and discourage imports.  As a result, people in Venezuela are continuously frustrated in their basic attempts to buy groceries.   A country with perhaps the most oil reserves in the world, cannot seem to feed its people.

You may have noticed that there has been quite a bit of violence in the streets in Venezuela.  Opposition media has been shut down so that only the government’s side gets out in regular media.  Many opposition leaders have been jailed sending others into hiding.  Here is an article from the U.K.’s The Telegraph, that will give you a sense of the street conflicts.

Mentioned in the article is one of the opposition leaders who has been jailed, the Harvard trained Venezuelan economist, Leopoldo Lopez with trumped up charges.

A peculiar fact mentioned in this article is that Venezuela has been supplying Cuba, the sponsor of the Venezuelan regime (the puppet masters?), with low-priced crude oil in exchange for thousands of military consultants and doctors.  You should ask yourself “why does Venezuela needs to import doctors? Why don’t people in Venezuela train to be doctors?”  I am sure they do.  I am sure the problem is the same we see with food.  Prices for doctors are held low by decree, making doctor’s incomes in Venezuela lower than in other countries, leading them to seek better lives elsewhere.  What keeps Cuban doctors from fleeing, too?  The families of the Cuban doctors are still in Cuba.

-MC

Here is another news story on the problem of price controls, rationing and what economists call “transactions costs,” this time from the U.K.’s “The Guardian.”

In a recent post, I linked to an A.P. story on the food shortages in Venezuela, where it was noted that shoppers would wait from morning to late afternoon for one grocery trip and would have to go back the next day, perhaps to another store to buy items missing at the first store.  There is a high cost of waiting in line, what one could do or make in the next best use of their time.   Think how much more they would be able to buy if grocery trips took less time (no long “queues” or waiting lines) if there were no shortages.

The price controls, by holding prices below their market prices that prevail in neighboring countries, create a situation where people are given an incentive to buy as much as they can to sell it in neighboring countries.  The Guardian article mentions that about 40% of Venezuela’s groceries are smuggled to neighboring countries.  The article also mentions how the shortages, by creating uncertainty of supply, lead people to hoard groceries, fearing they won’t be able to get it later.  Some also buy groceries up at the price controlled rates and profit by reselling them on the street to those who cannot buy it in the store (remember, there is a shortage).

In the summer of 1777, the colonial legislature of Pennsylvania set low price ceilings on food and supplies for the revolutionary forces.  These low prices in Pennsylvania created incentives to buy up in Pennsylvania and sell outside of that colony.  Also, the price ceilings gave would-be suppliers from outside of Pennsylvania to send their goods anyplace but Pennsylvania.  The result, of course, was one that a good economist would expect, shortages in Pennsylvania.  Washington’s decision to winter his army at Valley Forge, Pennsylvania was a disastrous one, with many troops dying from starvation and the cold winter temperatures.

Surely prices are another way to ration scarce goods and resources, but with price rationing, incentives are created for suppliers to step up their production.  Prices of goods that can be transported across borders will tend to equalize across those borders, stemming outflows of goods and encouraging inflows (relative to a price-ceiling scenario).

-MC

In my blog posts here, I usually provide links to news articles concerning the topic at hand.  Not this time.  Instead, I will just suggest that reader search news.google.com for water shortages.  What should be noted is that there is no shortage of news articles on water shortages.  Articles on climate change and business location decisions, as well as the drought in California and even water shortages in Brazil, home of Amazon River.

Anytime prices are held below the equilibrium price, shortages are the natural result.  What is especially troubling about water shortages is that governments often control the price of water and have very little incentive to raise water prices in the face of shortages, as a private owner would normally do.  Instead, they do what is politically popular and ration water, of supplying their friends and supporters and denying it to their enemies.

There are many ways to deal with scarcity.  rationing by any way other than price takes away the incentive to find alternatives and to produce more.

And for those in my classes, be sure to go back and read the introductory section of my “Course Notes” on the chapter on supply and demand.  It is about dealing with water shortages and the role prices play.

-MC

 

It looks like the grocery and basic goods shortage hitting Venezuela has gone to the next obvious step, rationing cards and blaming the rich for hoarding–and arbitrage with Colombia.  A regular reader of this blog will note that I have pointed out the troubles in Venezuela and their price controls on many other occasions.  for instance, recently, I have posted about the medical shortages and even the toilet paper shortage in the Latin American country.

Now, take a look at this article by Hannah Drier of the Associated Press on how Venezuelan price ceilings have led to disastrous food shortages.

She notes that the prices held down below market prices have led to people smuggling gr0ceries out of Venezuela to sell in Colombia.

“Venezuelans can make a killing by buying goods at below-market prices and smuggling them into Colombia for sale at much higher prices.

“Defenders of Venezuela’s socialist government say price controls imposed by the late President Hugo Chavez help poor people lead more dignified lives, and the United Nations has recognized Venezuela’s success in eradicating hunger.

“So complaints aren’t heard in the long lines at government supermarkets. One young mother shielded her eyes against the afternoon sun as she approached a cashier with sugar, flour and Frosted Flakes cereal. She arrived at 10 a.m., but didn’t blame the government or its opponents for the long wait….

“She planned another five-hour run to another supermarket Tuesday to get everything the downtown store was out of.”

Price controls will do it every time.

-MC

In my previous post, “Smuggling cigarettes into New York,” I pointed out how higher cigarette taxes push people to buying their cigarettes elsewhere.  Increases in cigarette taxes in New York was estimated to cause huge increases in cigarettes smuggled into New York.  In New York and California, as well as in France, high tax rates on the very rich, especially the much malligned “one percenters,” have led the very rich to leave those areas.

In this Breit Bart story by Joel b. Pollak, Michael Madigan, Speaker of the Illinois House of Representatives is pushing a bill to increase the tax rate on the very rich, claiming that it will not push the rich out of the state, as it has everywhere in the country and everywhere in the world when politicians go after the rich, “Occupy” style. “Well, if they’re in Illinois today, they’re probably so much in love with Illinois that they’re not going to leave,” he said.   Over and over, the rich move rather than face exploitive taxation.  But Illinois will be different.  Does Madigan think the rich in Illinois are just not so bright?

-MC

On CBS’s Money Watch, Jonather Berr reports here that cigarette smuggling in New York is the highest in the country, with over half (estimated to be 56.9%) of cigarettes sold in the state are illegally smuggled there, according to this report by the Tax Foundation.  The Tax Foundation report is based on a study by my colleague and friend, Todd Nesbit along with Michael LaFaive with the Mackinac Center for Public Policy.

The study notes that cigarette smuggling in New York has jumped 70% since 2006, while the tax rate there, and prices, have jumped 190% (Economic students: note, this provides information for a cross-elasticity of demand, %change in cigarettes purchased outside of NY versus % price change of cigarettes in New York).  All of this should come as no surprise, especially since New York has the highest state tax rate on cigarettes, at $4.35 per pack, making the tax rate and prices there about $4.00 per pack higher than here in Louisiana.

When price of something in two locations is different by more than the shipping costs, it is obvious that some will try to buy the good at the cheaper location to sell it at the pricier location.  When there is a law against doing just that, the act becomes smuggling.

In 1995, I published this paper where I had developed a method for estimating the cross-border cross-elasticity of demand for cigarettes, while also estimating the price elasticity of demand for cigarettes.  I estimated then that the elasticity of demand for cigarettes, looking at the price differences across states, appeared to be about 1 (unit elastic), but that the price elasticity was really only .2, while the remaining 80% was due to cross-border sales (both smuggling and casual cross-border sales).

People often accuse economists of making too many assumptions, but it is really non-economists who make too many assumptions, especially wrong ones.  For instance, too many think that people will not react at all to small changes in the price of cigarettes.  The estimates that I and others have made on cigarette demand since 1995 show that such an assumption is just not correct.

But even those who want to raise cigarette prices usually want to get people to reduce their smoking and recognize the incentive effects of prices.  The problem is that they then go on to deny the incentive effects of prices in causing cross-border activity.   The reality is that people do respond to incentives.  Sure, smaller changes in incentives have proportionally smaller responses than larger changes in incentives, but the changes still occur.

-MC

The news agency, AFP, reports here on protests staged by doctors and medical students over the shortages of various medicines and critical supplies in hospitals in the oil-rich South American country of Venezuela.

If you search through Bastiat’s Bastions you will find that I have mentioned Venezuela’s shortage-plagued economy several times, such as here, here and here.  Chad Turner, a former professor at Nicholls and former contributor to Bastiat’s Bastions, also wrote about Venezuelan price controls here.  The Marxist regime in Venezuela tries to keep prices down by imposing price ceilings on many of its goods and services supplied to its people.  As we see learn in economics, price ceilings produce shortages.  The lower the natural price the price ceiling is placed, the more severe the shortage.

But before we start getting all “American Exceptionalism” about this, we should note that we have some of the same problems here, just perhaps not to the same extent.  I have discussed our own critical drug shortage problem here  and here.  Our problem with price controls might be different in scope and severity, but they have the same root, price controls.  The more we adopt Marxist-style price controls in playing to the mobs, the more we are afflicted with Marxists’ problems of an economy that just does a poor job of coordinating capabilities with wants.

-MC

 

Well, I am not going to answer that question.  What I am going to do, though, is to point out some work by Benjamin  Powell, the director of the Free Market Institute at Texas Tech, which he discusses in this article in Forbes and in this earlier article at the Library of Economics and Liberty.

One case Powell points out was in 1993 when U.S. Senator Tom Harkin pushed a bill that would ban imports from countries that employed children in sweatshops, prompting one of these in Bangladesh to shut down that had employed 50,000 children.  It is reported that, in seeking their next best alternative, once their best option was eliminated, led many of these children into lives of prostitution.

Yes, the conditions in these factories are horrible and the wages are pathetic, compared to U.S. standards, but Powell argues that the working conditions and wages in these factories are better than these workers’ alternatives, and that should be obvious, because if it were not true, the workers would be employed at these better jobs.  The problem is that these are the best these workers can find at the moment.  Workers will always take their best alternative, unless somehow forced to do otherwise.

However, sometimes workers are promised one thing and then find themselves in situation to which they did not agree, and find that they cannot get out of.  Sometimes sailors found themselves in such a situation.

The Huffington Post published this story that depicts the conditions for workers from India and Nepal who are in Qatar for the construction of a uniquely designed future World Cup Soccer stadium.  There, the working and living conditions for these guest workers are so horrible, that it is believed 900 have already died and another 4000 are expected to die on the job before the stadium’s 2022 World Cup.  But what makes this sort of exploitation possible is a legal  institution practiced in some Persian Gulf nations known as kafala.  In this legal arrangement, other potential employers cannot compete for these workers once they arrive and the employer holds their passports, preventing them from returning home until the employer is ready for them to do so.  Workers are left with no alternatives.  If these foreign workers had really known the horrible  working conditions and the abusiveness of their employers before agreeing to the job would be one matter, but it is unlikely those recruiting the workers were completely forthcoming.

Perhaps, we should worry much about instances where workers are forced into employment against their will, such as the workers at the Qatar soccer stadium, victims of human trafficking and conscripts, young people who are forced to take up arms for governments they may disapprove.

Should we stop doing business with sweatshops? What happens to those workers then?  What do you think?

(By the way, just as uninterested as the architect was to the plight of the foreign workers, I am uninterested in comments on her design and will not post such comments.)

-MC

 

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