Jimmy Akin

A reader writes:

I’ve really been enjoying your series on money and Star Trek, I’m hoping that in the wake of the disaster in LA that you might also touch on the issue of "price gouging" (which I don’t think is going on).

Which comes to my question.  Is there such a thing as price gouging from the standpoint of Catholic ethics?  People think that hotel rooms going from $75 to $200 overnight is wrong, but I don’t think they know the point behind prices.  But are there instances where there could be genuine "gouging?"

First, let me say that the following is NOT an analysis of how things are right now in the areas ravaged by Hurricane Katrina. What I’m about to sketch are some principles, but I am NOT saying that these do or don’t apply to the situation in the Gulf states. What the situation is on the ground there is still unclear. We still don’t even know how many people have been killed, much less could I say anything about the economics of the area–besides urging people to SEND AID (see the bottom of this post for into on how to help the disaster victims).

At the moment there are reports that there is a generalized law and order breakdown that call into question the degree to which the local economy is functioning. We can only do what we can to help and pray that stability will be restored soon.

I am not aware of any magisterial documents that use the term "price gouging." (Googling the Vatican web site doesn’t turn up any.) However, here’s what the Catechism of the Catholic Church has to say:

2409 Even if it does not contradict the provisions of civil law, any form of unjustly taking and keeping the property of others is against the seventh commandment: thus, deliberate retention of goods lent or of objects lost; business fraud; paying unjust wages; forcing up prices by taking advantage of the ignorance or hardship of another.

Though the term "price gouging" is not used here, the same basic idea seems to be present.

Note one element of what the Catechism says, though. It speaks of "forcing up prices." I’m not sure of all the different kinds of circustances that might happen. I suppose that it happens if a manufacturer were to start deliberately making less of something that was in demand due to a hardship. For example, if in a middle of a famine, a farmer decided to grow less food in order to drive up prices then that would be "forcing up prices by taking advantage of the . . . hardship of another."

But that’s not what we’re talking about in the case of a hurricane and hotel rooms. In that case, a hotel owner isn’t forcing up prices. The natural price point for the hotel rooms changes due to factors beyond the hotel owner’s control (i.e., the fact that a hurricane has rendered many homes unusable).

He would be forcing up prices if he decided, for some reason, not to rent all of the rooms he had in order to make more per room. For example, if he said: "Well, I’ve got 200 units I could rent, but I’ll close up 100 of them so that only 100 will be available for rent. Then I’ll make more on those 100 rooms." And he likely would be right: He’s make more per room with only a hundred rooms available for rent since the overall number of rooms available for rent in the city would be less.

It seems to me, though, that what such a manager did would be rather short sighted. First, while he would make more per room by doing this, it is not at all clear that he would make more money overall. In general, the market functions most efficiently and people will make the most money if they don’t do things like this. They may mistakenly think that cutting back production (or refusing to rent certain rooms) in order to cause a price spike will make them more money, but this may not be true.

For example, if the natural price point is $100 per room if the owner has 200 rooms to rent, he would make $20,000 a night for those 200 rooms. But if he closes half his rooms and that pushes the price point up to $120 per room (there still being a lot of other hotels that aren’t arbitrarily closing their rooms, so the natural price point doesn’t rise that much) then he’ll only make $12,000 a night for his 100 rooms in rent. He thus actually stands to make less money by forcing up prices.

Second, the motel owner who refuses to rent half his rooms in the wake of a hurricane is taking an awful risk that people will realize what he is doing. If they find out (and they are quite likely to find out; hotel staff know what rooms they’re not renting or cleaning, and they’re likely to talk) then at a minimum he will earn the severe displeasure of everyone who learns of this. He may find his business harmed for years afterward. He may find it harmed even sooner. He may have people simply force their way into his units and refuse to pay anything for them (and police are not likely to evict them given all the other pressing needs of the crisis). If he handles that situation badly, he may even find himself lynched.

So it seems remarkably foolhardy for someone to try this, but he would at least be trying to force up prices in order to take advantage of the hardship of others, and thus he would be sinning.

Let’s consider the more common situation, though: A hurricane rips through an area causing untold human suffering and in the process it wipes out or otherwise makes temporarily unusable many of the homes in the area. In this circumstances, people have several options: (a) sleep outdoors, (b) sleep in an emergency shelter like a sports stadium or school gym or homeless shelter, (c) stay with friends or relatives, or (e) rent a hotel room.

Obviously having a hotel room is preferable to options (a) and (b), and for many it is also preferable to (c). There is thus increased demand for hotel rooms. But since hotel rooms can’t be built overnight, the increased demand is met with a constant supply. When that happens, prices rise.

But in this case it’s not the hotel owner that is forcing up prices. The hurricane did that by destroying a bunch of homes. It was the hurricane, not the hotel owner, that changed the natural price point for a hotel room.

Could the hotel owner–out of the generosity of his heart–charge less than the new natural price for a room? Sure he could! But note two things:

1) At this point the hotel owner is being generous. It isn’t greed to charge the natural price for something in current market conditions. It’s generosity to charge less than the natural price of a thing. He thus might be generous in order to help out folks who would otherwise have difficulty paying for rooms.

2) It’s not clear that this generosity of the hotel owner would actually help that many people. It might even cause overall harm. Why’s that? Thomas Sowell explains:

Those who got to the hotel first would fill up the rooms and those who got there later would be out of luck — and perhaps out of doors or out of the community. At higher prices, a family that might have rented one room for the parents and another for the children will now double up in just one room because of the "exorbitant" prices. That leaves another room for someone else.

Someone whose home was damaged, but not destroyed, may decide to stay home and make do in less than ideal conditions, rather than pay the higher prices at the local hotel. That too will leave another room for someone whose home was damaged worse or destroyed.

In short, the new prices make as much economic sense under the new conditions as the old prices made under the old conditions.

It is essentially the same story when stores are selling ice, plywood, gasoline, or other things for prices that reflect today’s supply and demand, rather than yesterday’s supply and demand [SOURCE].

This is a situation that I may one day face, personally. California doesn’t have hurricanes, but it does have other disasters (earthquakes, fires, mud slides). A couple of years ago, the fires were closing in on the area where I live, and I came within minutes of evacuating. I had my pickup packed and everything.

At that time, QualComm Stadium was being used as an emergency shelter, and I might well have gone there. It would have been better to sleep on a mat in the stadium than in a building that was burning down around me, but it would have been better yet to sleep in one of the hotels down the road from the stadium. (The stadium is right next to "Hotel Circle" in San Diego.) If I learned that the rooms in Hotel Circle that normally go for $100 a night were now going for $300 dollars a night, I’d have to ask myself: "Is it really worth it to me to pay the money to sleep in one of those rooms, or would I rather keep my money and sleep here in the stadium for a few nights?"

Personally, I’d probably have chosen the latter and roughed it in the stadium, but there are many people who might have special needs that I don’t have (e.g., a person in frail health who needs a room and bed more than me) and who would be willing to pay for it. The jump in prices that deterred me from renting the room thereby opened it up for someone who felt they needed it more than I did and who was willing to pay the price to get it.

Of course, rich people are more able to pay for such rooms than poor people, but then the rich aren’t likely to stay in an area being devastated by fire or hurricane or what have you. If I were rich, I’d probably try to get transport out of the area altogether and stay in a hotel where the prices were lower rather than pay for an expensive one in the city center.

Further, imposing price caps (voluntarily or by government mandate) so that people who aren’t rich can more easily afford the rooms also will prevent people who really need the rooms (as opposed to those who could sleep in the stadium or with friends and family or even out of doors) from being able to get them since they’ll just fill up quicker with people who don’t have that high a need for them.

The market mechanism in most situations is thus still the best method for determining the allocation of goods and resources. It’s not perfect, and in fact the market can break down so much that the ordinary rules regarding property rights are morally suspended. The Catechism notes:

2408 The seventh commandment forbids theft, that is, usurping another’s property against the reasonable will of the owner. There
is no theft if consent can be presumed or if refusal is contrary to
reason and the universal destination of goods. This is the case in
obvious and urgent necessity when the only way to provide for
immediate, essential needs (food, shelter, clothing . . .) is to put at
one’s disposal and use the property of others.

In sufficiently extreme circumstances, the government might even step in and declare marital law and commandeer hotels, prioritizing who gets the rooms on a needs basis. The Catechism also acknowledges:

2406 Political authority has the right and duty to regulate the legitimate exercise of the right to ownership for the sake of the common good.

But much of the time it would be hard for the government to do as good a job as the market in determining the most efficient use of resources. That’s why Communism failed.

One therefore shouldn’t be too quick to seek a government remedy to a difficult situation. It is possible that the government solution may be better than what the market would produce, but usually this is not the case. The market tends to be more efficient than the government.

To sum up:

• While the Church doesn’t seem to use the term "price gouging," it does recognize that one can immorally force up prices to take advantage of others’ hardship.
• This is not the same thing, though, as having the natural price point of a resource change due to a disaster.
• It is not greedy to charge the new natural price of a thing, but it is generous to charge less.
• Doing so may help some but may not help the right ones since it may prevent those who need the resource more from getting it since others may fail to conserve the resource if prices are kept artifically low.
• In certain and extreme circumstances (which we haven’t fully explored) one can simply take what one needs without it being stealing.
• The government has a right to regulate the exercise of private property rights, but there must be caution in this area because the government usually isn’t as efficient as the market.

All that being said, I have no idea what the economic situation is at present in the areas hit by Katrina. I simply hope that people will continue to pray for those harmed by the hurricane and that they will do what they can to help them directly.

SEE HERE FOR INFO ON HOW TO DO THAT!

A piece back I reviewed the book Freakonomics, which is quite an enjoyable read. Today I’d like to talk about Ferengi-nomics, though–the economics that exist (or could exist) on the world of Ferenginar.

There’s an episode very late in DS9 (in fact, it’s the next to last episode, if memory serves) in which taxes have been introduced on Feriginar as part of Grand Nagus Zek’s left-leaning societal reforms.

Quark is horrified when he learns of this, saying that taxes run contrary to the spirit of the free market. “That’s why it’s called free,” he says.

Actually, that’s not why it’s called “free,” at least not on Earth, but it’s a good line, and you can’t expect the Hollywood lefties who write the show to understand economics.

What’s worse (from Quark’s perspective) is that not only have taxes been introduced, a progressive income tax has been created.

For those who may not be aware, a progressive income tax is one in which people who make more money are charged a higher tax rate. They not only pay more tax total, they pay taxes at a higher rate. Thus if a person in a lower income bracket pays 20% of his income in income tax, a person in a higher income range might pay 40% of his income.

The theory behind progressive income taxes is that the more money you have, the more you can afford to pay a higher percentage of your income in taxes.

The problem with progressive income taxes is that they serve as a dis-incentive to make more money. If you have to work harder for each new dollar of (after tax) take-home pay then that unmotivates you to do the work needed to get that dollar, and so at some point you say, “Eh. I’ve got enough. Why should I work harder to get more when the government will only take more of it.”

And thus economic development caps out. That means that there are fewer jobs that exist than would exist if the income tax rate weren’t progressive. The progressiveness of the tax rate serves as a drag on the economy that ends up keeping people jobless and harms them in bunches of different ways related to an absence of money in the economy that would otherwise be there.

What happens if you make the tax rate less progressive? People in the top tax bracket (i.e., the ones with the money) get more motivated to make money since they can now keep more of it. Economic growth is stimulated. Jobs are created. And, in many circumstances, the tax revenue that the government collects actually goes up since the economic stimulus provided by the lower rate more than offsets the fact that the rate has itself gone down.

Which raises a question.

Think for a minute about Ferenginar.

Assuming that they did have taxes there, and assuming that we set aside the Hollywood writers’ progressive income tax on Ferenginar idea, what kind of tax rate would they have there?

Ferengi place a value on economic development above all else. If having a highly progressive tax rate highly hampers the economy, and if a less progressive tax rate hampers the economy less, then I bet on Ferenginar they’d have a negatively progressive tax rate.

In other words, they wouldn’t have a progressive tax rate, they’d have a regressive one.

On this scheme, your tax rate would be higher if you make less money and lower if you make more money. Someone in a lower income range would be paying the 40% (or whatever) and someone in the higher range would be paying 20% (or whatever).

You can just imagine how they’d justify it, too. I can see Quark giving a speech in which he says, “This way it gives the poor an incentive to not be poor any more, to work hard and look for economic opportunities that will let them make enough money that they can get into that next tax bracket. That makes them richer. It makes society richer. It stimulates economic development. It’s better for everybody. Don’t give me your silly Federation ‘morality.’ A progressive income tax rate is positively immoral! How can you be so cruel to your poor as to subsidize their poverty and keep them trapped in it?”

It’s too bad that there aren’t any Trek TV-writing jobs available at the moment. I could probably work a pretty good episode out of that idea, or at least the B story of an episode.

SURPRISINGLY, SOME HU-MONS HAVE EXPERIMENTED WITH REGRESSIVE INCOME TAXES.

They apparently have one in Taiwan.