Life hasn’t returned to normal yet in the northeastern US, as many continue the recovery efforts in Superstorm Sandy’s wake. The disaster has impacted a huge swath of the region. Some have been uprooted entirely. Business has been disrupted. Many are without power. Some are scrambling for supplies. In general, there are many needs, requiring big adjustments to daily behavior. Some adjustments are highly publicized—like the much-debated cancellation of the NYC marathon or the Pittsburgh Steelers’ altering their typical travel plans to avoid occupying hotel space. But these are only two very visible attempts to overcome scarcity—a central issue in economics. And in the Northeast today, one can contrast two approaches to dealing with scarce resources: one government directed and the other market oriented.
Gasoline scarcity seems to garner the most headlines associated with the storm. Refining capacity was temporarily reduced by the storm; deliveries via pipeline, ship and truck disrupted; and power outages and damage have affected some service stations. The question arising is: How is it best to allocate the gasoline that does exist to New York and New Jersey?
In a market economy, severe supply shortages (assuming relatively constant demand) will drive higher prices—in some cases, vastly higher prices. These higher prices, overall and on average, simply reflect the changing supply situation. But the higher prices are also a signal—one to consumers, suggesting they drive less and use only what’s absolutely necessary to fuel generators, etc. They simultaneously prod producers to push ahead with deliveries, despite the increased difficulty brought by damaged infrastructure—higher prices make it worth the risk and trouble. Prices efficiently allocate resources to overcome scarcity, though efficiently may not necessarily mean painlessly. There are trade-offs, of course, and here, one is trading more dollars for relatively more rare gasoline.
Of course, this system is not without problems. Consider medicine—if supply of medicine was disrupted, is it necessarily ideal to allocate based on price, or should medical necessity gain in primacy? We’d argue the latter, but this is also the exception to the rule. The real trouble arises not in these areas, but more often when many see increased prices on goods like gas as a deplorable soaking of the public for gain. Perhaps there are those who do engage in gouging, but we’re betting there are also many folks just responding to changing supply/demand dynamics lumping in for criticism (or worse). And so alternative means to allocate resources are conjured. The intention is noble, primarily motivated by fears the invisible hand won’t be even-handed. But the execution by politicians who have little to no experience allocating resources efficiently often makes a big problem even bigger (recall, even in our medicine example, we doubt Governors ability to determine the best order of distribution).
To many, higher prices are something to be stopped, averted or otherwise thwarted. And that seems to be at work in New Jersey and New York today. New Jersey Governor Chris Christie’s attempt to alleviate the shortages (and associated gas lines) was to mandate a rotation of who’s eligible to fill up. Drivers whose license plates end with even numbers can fill up on even days, and vice versa. (No word on when those with vanity plates can fill.) The rule, issued under New Jersey’s current “State of Energy Emergency” declaration can also ban pedestrians from filling containers. So if your car, truck, van or motorcycle with odd-numbered plates runs out of gas today, don’t bother walking to the gas station. Just sit and wait—which really doesn’t seem like a great solution to the problem.
The idea here is regulating demand will alleviate gas lines and lower prices. Except this isn’t the first time this exact plan’s been tried. In the late 1970s, even/odd rotations were common and failed to allocate gasoline very efficiently. We see little reason to expect wildly different results in this go-round. But New Jersey’s government hasn’t stopped there, instead targeting folks they’ve labeled price gougers. Dozens of subpoenas have been issued for folks whose crimes range from charging about $1 per gallon more after the storm than before, doubling the price of scarce and highly desirable power generators and increasing food and hotel room costs. Perhaps all these subpoenas are justified, but we’re skeptical.
Neighboring New York’s Governor Andrew Cuomo had an altogether different plan to meddle with supply and demand. And the results are arguably even worse. While imploring the public to “not panic” over gasoline shortages—because that could cause long lines and burn through existing supplies—Cuomo announced a plan to distribute 10 free gallons of gas to New York drivers. Almost upon announcement, lines grew, supplies became exhausted and, as The Wall Street Journal reported, “Created the very panic he (Cuomo) deplored.” In addition, this free distribution also means those who didn’t need the gas were likely in line to get it—exacerbating the overall shortage and making the pain more acute. In fact, the free distribution virtually assured long lines and quick consumption of available supply.
Thankfully, it appears the gasoline market disruptions in New Jersey and New York won’t last. Pipelines and refineries are coming back online, which should alleviate the supply issues. But in the long run, it seems a stretch to suggest we’ve seen the last of political profiteering—elected officials seeking to garner popular support through “doing something,” whether there’s any real reason to think that something will help or not. There are things that, in times of disaster, need some external smoothing from government. But the list is shorter than many seem to believe, which all too often results in blanket demonization of higher prices and supposed profiteers.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.