According to a Wall Street Journal story of June 29 (“Masks Could Help Stop Coronavirus. So Why Are They Still Controversial?”), Dr. Anthony Fauci confirmed a hypothesis I proposed in an Econlog post of the same day: the long-lasting detrimental advice by the US government against ordinary people wearing masks was motivated by their shortage. This shortage was itself created by the governments’ own price-controls and their efforts to commandeer the consequently insufficient quantity supplied. The WSJ writes:
White House adviser Dr. Anthony Fauci said this month that he initially dismissed masks because medical workers were facing a shortage in supplies.
The link in the quote above points to a June 16 WSJ story that does not in fact mention anything like that—but the story might have been modified (as happens often) and I missed a previous version.
One example of the (obvious) usefulness of masks given by the Wall Street Journal:
In Asia, the majority of people voluntarily use face coverings and it is mainly Western expatriates who are reluctant to adopt them, said Prof. Yuen Kwok-Yung, a leading coronavirus expert who advises the Hong Kong government.
Hong Kong, with 7.5 million residents, is one of the most densely populated places on earth, but recorded only six deaths from Covid-19 despite having no lockdown and receiving nearly 350,000, [sic] travelers a day from abroad until authorities started reducing cross-border travel on January 30. Around half of the arrivals were from mainland China, where the virus originated.
The key secret of Hong Kong’s success, Prof. Yuen said, is that the mask compliance rate during morning rush hour is 97%.
Export controls by foreign governments (remember that the US government also restricted exports) have worsened the problem created by price controls and the Defense Production Act. As usual, more government dirigisme does not improve production and allocation.
READER COMMENTS
Jens
Jul 2 2020 at 7:18am
Text about nothing. There has never been a shortage, smurfage or whatever of masks relevant to the public in any way. Every household in the northern hemisphere has enough resources to create effective, reusable masks in short time. What exists is a shortage of willingness to wear masks. No market can fix that.
Jon Murphy
Jul 3 2020 at 11:11am
Oh good. I am glad my inability to get a mask for neigh on 4 months doesn’t exist.
Pierre Lemieux
Jul 3 2020 at 2:36pm
@Jon: It must be an illusion created by the fake-news media, the fake-news drugstores, and the fake-news Amazon! In fact, as you know, for a couple of months, the only way for ordinary prols to get masks (especially but not only N95) was to order them directly from China or from American middlemen who ordered them from China. And even then, there was a delay of several weeks (literally a shortage: you took your place in the queue) before they could be delivered.
Ray
Jul 2 2020 at 9:00am
It’s all revisionist.
The truth is, most studies and informed commentary in recent history[1][2][3] show that masks make no real statistical difference. These studies have been largely around transmission of influenza or other infections, but the mechanism by which these spread is the same as with SARS-CoV-2. The droplets on which the viruses ride behave the same as they have for millennia. In a perfect setting where they’re worn properly, maintained properly, not touched, and have proper filtration capabilities can masks add value? Of course, particularly for an asymptomatic transmitter. But in practice, mask wearing ‘technique’ varies, and if any patterns of homogeneity are to be found, it’s skewed towards the ‘really poorly’ side of the scale.
At best they’re a tiny part of a much larger “defense in depth” portfolio which does no harm relative to things like hand washing. At worst they’re a virtue signalling placebo for our most common interactions in public.
Your best bet to keep safe is to keep your distance, avoid touching your face and wash your hands frequently — if trying to hide from the virus forever is your thing, that is. If you see someone without a mask, don’t freak out. Unless you’re going to try and breathe their air for 15 minutes straight, you’re at very low risk.
[1] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5779801/
[2] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4420971/
[3] https://www.city-journal.org/reality-of-wearing-masks
Pierre Lemieux
Jul 3 2020 at 2:39pm
Do you think that doctors or TSA agents wear them to show off?
Tom DeMeo
Jul 2 2020 at 9:13am
Dr. Fauci confirmed the more obvious part of your hypothesis concerning the motives behind the advisory. The less clear part is whether the price controls had any significant impact on supply.
When things change dramatically in a market, it takes some time for any market to figure out a new reality and adjust. Early price signals in a crisis are mostly nonsense. There were huge incentives to come up with additional supply right away. I doubt the price controls did much at all. The legitimate government and institutional rush in demand had a much more distortive effect than the prices did.
Jon Murphy
Jul 2 2020 at 9:49am
Price controls affect quantity supplied not supply (that is, price controls cause movement along the supply and demand curves, not a shift in the curves themselves). I assume this is what you meant and the rest of my comment proceeds from this point. If you did mean that price controls have any significant effect on supply, then we know they did not since prices do not affect supply; supply affects price.
…
True, but shortages always signal that the price is too low. Price controls prevent prices from rising, thus preventing the shortages from disappearing. So, while any given price of X is incorrect, the resulting shortage tells us that prices must rise.
Except with the price controls, there weren’t. When prices cannot rise, manufacturers cannot cover the marginal cost of increasing production. If they were to increase production, they would lose profit (depending on how competitive the industry is, they might even go out of business). They faced huge incentives to not increase quantity supplied. Case in point, there was a blog post here not too long ago on the production of masks. It recounted a Texas PPE manufacturer who could produce an extra 1.7 million masks per week if he could raise prices. The federal government refused. Quantity supplied is 1.7m masks per week lower because of that choice.
That is confusing cause and effect. The massive increase in demand would normally raise prices, allowing for an increase in quantity supplied to match the increased quantity demanded resulting from the increase in demand. If prices could rise, there would have been no distorting effect. But since prices couldn’t rise, we do have the persistent shortages.
Tom DeMeo
Jul 2 2020 at 10:45am
Jon,
I’m not defending the government’s actions. They were a mess. I’m only pushing back on the notion that short term shortages in March were caused by the limited price controls that surfaced.
Your last comment about confusing cause and effect is particularly confusing. There would have been essentially the same shortage no matter what. Over a matter of a few weeks, world wide demand exploded. That change was simply too fast to match quantity supplied, no matter what the price signal is.
Everything you say that was needed did happen. Immediate price spikes in a crisis do nothing. Prices did rise instantly. Now three months later, you can choose between dozens of suppliers on Amazon that will get you masks by tomorrow. That wasn’t going to happen in March just because prices rose more quickly.
Jon Murphy
Jul 2 2020 at 11:03am
Shortages can happen in the near term, but they last for short periods of time (typically less than a week. This is true even during disasters; shortages typically last less than a day). They are transient. The government price controls are why 6 months into the pandemic we still have shortages.
Jon Murphy
Jul 2 2020 at 11:04am
NB: the article I link to shows this guy could have increased N95 production in January.
Tom DeMeo
Jul 2 2020 at 1:19pm
“Shortages can happen in the near term, but they last for short periods of time (typically less than a week. This is true even during disasters; shortages typically last less than a day).”
This depends on the scope of the disaster, doesn’t it? And… in this particular case, the scope was global. You couldn’t fix things by shifting existing inventories around. Are you seriously arguing that mask demand could have been satisfied in March if the prices were higher?
Yes, prices convey certain information. They are not the only way to see which way the wind is blowing. All of those signals were blatantly obvious. All of the responses you would have expected by high prices were triggered anyway. The market responded.
Jon Murphy
Jul 2 2020 at 1:51pm
Yes
Obviously not given the persistent shortages. See my point below about quantity demanded
Pierre Lemieux
Jul 2 2020 at 11:04am
@Tom DeMeo: I happened to order new masks on Amazon two days ago. I ordered some I have ordered before because I am satisfied with their quality. Delivery is “August 18 – September 9.” This is what a shortage is (as opposed to a “smurfage“): you can get it when your turn comes in the line. In Soviet Russia, you could get a car: you just needed to order it 10 years in advance.
Tom DeMeo
Jul 2 2020 at 12:52pm
Really? That’s your argument? There are soviet style shortages because the particular SKU you prefer was out of stock? There are lots of masks available on Amazon for immediate delivery.
Please try to argue in good faith.
Craig
Jul 2 2020 at 1:11pm
@Professor I bought N95 Made in China for $4 in FL last week which I used to get a haircut. Other than that I typically stay close to home or use the cheapies to shop local. Which ones did you order, Professor? The 3M Made in USA N95? (Apparently they are considered the best)
@Jon “When prices cannot rise, manufacturers cannot cover the marginal cost of increasing production. ”
I discussed this with the Professor as well. I’m not advocating price ceilings, frankly I really don’t care, but I don’t think the price caps materially impacted quantity supplied.
First off, the government price caps weren’t an issue at Big Box retailers like Public, Walgreens, CVS, Walmart, etc. They didn’t raise their prices to the cap ANYWAY. The big boys had too much goodwill on the line to even WANT to. So they didn’t.
Secondly, 3M ramped up production, but aside from that if you’re sitting on a plant at say 75%, which is absolutely normal and something like this comes around, you’ll increase capacity for the indefinite short term even if the RETAIL price is capped because the cost to produce isn’t really close to the retail price. And odds are if you go from 75% capacity (costs + labor) to 100% capacity (same costs + overtime labor), I’ll make more money
In other words if I’m operating at 75% capacity and a 50% gross profit margin, would I be willing to operate that additional 25% capacity at a 25% gross margin? Absolutely and I would do that seasonally of course. The pandemic is causing awful suffering of course, but from a production point of view the additional demand is ‘surprise demand’
Sure, the price is capped, its not capped ANYWHERE close to your cost to produce.
Even if my inputs DOUBLED in price I can’t fathom NOT increasing production up to 100% of capacity even if I couldn’t increase my price.
If it was toilet paper or masks, basically whoever was making these things was essentially making as much as they could.
Jon Murphy
Jul 2 2020 at 1:13pm
This is an example, not the argument. The argument is the post above
Jon Murphy
Jul 2 2020 at 1:17pm
So, why didn’t they?
Jon Murphy
Jul 2 2020 at 1:17pm
Also, see my point below about quantity demanded
Pierre Lemieux
Jul 2 2020 at 10:56am
@Jon: Thanks for linking to Scott’s good post, which I had missed.
Pierre Lemieux
Jul 2 2020 at 10:54am
@Tom DeMeo: Jon said everything better than I could have. You are not the only one to confuse supply and quantity supplied (or demand and quantity demanded) but clearing the confusion is essential to understanding how markets work. In a different context, I explain the problem with simple graphical analysis: see my Econlog post at “A Frequent Confusion and the Yo-Yo Economic Model.” You might also like to read another post of mine: “Toilet Paper: Increasing Marginal Cost.“
Jon Murphy
Jul 2 2020 at 12:41pm
One other quick point to make:
Prices do not affect just quantity supplied but quantity demanded as well. Higher prices in times of increased demand not only encourage increased quantity supplied, but lower quantity demanded as well. So, even if we have a situation where quantity supplied simply cannot increase production, higher prices are still beneficial because they send the signal that people need to search out alternatives: use cloth masks, stay at home, etc., so that the people who value the masks higher can have access to them.
The price controls send the signal “there is no shortage of masks. In fact, there is an abundance!” Price controls encourage waste (that is, resources not going to where they are most highly valued).
Both supply and demand matter here. Even if quantity supplied cannot adjust, quantity demand can and will in response to higher prices.
Pierre Lemieux
Jul 2 2020 at 6:14pm
Your point on supply is a good point, @Jon. I neglected it because the conversation seemed to revolve around supply. As you say, even if supply is fixed–at an auction, for example–the price will adjust to balance supply and demand; there will be no shortage. Prices provide a signal not only to producers but also to consumers. If middlemen (and middlewomen!) had been free to hoard when the coronavirus crisis appeared or just before, prices would have increase smoothly, discouraging consumer hoarding, and then, as more production and de-hoarding occurred, prices would have decreased smoothly. What many non-economists, and some economists too, don’t seem to understand is that this is not unusual: a free market is a continuous auction and there is always some urgency or emergency in demand and always some hoarding, thank God. (The market as a continuous auction will be the topic of a future post, although I have rapidly mentioned the point a couple of times.)
Thomas Hutcheson
Jul 2 2020 at 11:09am
Dr. Fauci’s statements are still very puzzling. While they might be an explanation of why he wanted to discourage individuals from purchasing PPP gear-type masks with which to protect themselves (good advice then and now), they do not explain why public officials appeared to discourage people from wearing simple cloth masks to protect others.
Pierre Lemieux
Jul 3 2020 at 2:52pm
Good question, @Thomas Hutcheson. I think the answer is two-fold. First, ordinary fabric, especially with only one layer, seems very ineffective at stopping infection. The virus, which is a piece of genetic code, is one-thousandth of the width of a hair; and apparently many copies have to get in your lungs for a good probability of infection. Second, some government bureaucrats might have realized that, if they recommended home-made masks, some prols might wonder why doctors, nurses, and government bureaucrats (think about the TSA) were bidding for, and sometimes commandeering, the low supply of the real thing.
Pajser
Jul 2 2020 at 12:11pm
Term “shortage” in common use doesn’t mean that there are no goods on the market. If there is a famine and the price of bread is $1000, everyone would say there is a shortage of food. Google gives me this definition of shortage: “a state or situation in which something needed cannot be obtained in sufficient amounts.”
Jon Murphy
Jul 2 2020 at 12:23pm
Fine, but irrelevant. We are using it in the precise economic manner: that the quantity demanded is greater than the quantity supplied.
Craig
Jul 2 2020 at 1:42pm
Or as the Professor is wont to describe, a smurfage? 😉
https://www.npr.org/sections/health-shots/2020/03/05/811387424/face-masks-not-enough-are-made-in-america-to-deal-with-coronavirus
Prestige Ameritech, for example, owns a limited number of machines that assemble, sew and shape the masks. A decade ago, it ramped up production in response to the swine flu outbreak by buying more machines and hiring 150 new workers.
“We made a really big mistake,” Bowen says of that decision. It took about four months to build the new machines, which are as long as a school bus and cost as much as $1 million.
By the time they were ready, the swine flu crisis had ended, demand vaporized, and Prestige Ameritech almost went bankrupt. “One day — and it is literally almost like one day — it just quits. The demand is over, the phones stop ringing,” Bowen says.
In the face of the spike you go to 100%….price caps on retail pricing in that situation isn’t very relevant to the producer.
Jon Murphy
Jul 2 2020 at 1:53pm
But it is relevant to the retailer who then makes purchasing decisions. The analysis is identical: they face increasing marginal costs as well (more self-space must be dedicated to the new products in demand. If they cannot get higher prices, they do not stock.
Craig
Jul 2 2020 at 1:58pm
They didn’t charge the cap though. The retailers say, “Hey, I need X” (toilet paper, face masks, whatever), the purchase order goes out, they can charge $4, they’re still charging $1.99. There’s too much goodwill on the line and the profit at what we will call the equilibrium price just isn’t worth your weekly business where you spend $1,000 per month every month until you die.
Right now, they’d sell it at no profit. They don’t want to be THAT guy, Jon.
Craig
Jul 2 2020 at 2:04pm
Businesses will almost always (gasoline is a good exception here and that becomes relevant when hurricane season becomes more relevant) sacrifice margin to meet ‘spike demand’ — its a no brainer decision actually.
Jon Murphy
Jul 2 2020 at 3:57pm
If there’s a shortage, there are no sales. So I don’t see your logic
Robc
Jul 2 2020 at 7:23pm
There is always someone willing to be that guy though, and the law prevented it.
Craig
Jul 2 2020 at 9:10pm
Publix could’ve increased prices on toilet paper and didn’t. Then you’d still find it after going to a couple of stores. You’d still find it. But the profit of selling toilet paper at the maximum possible price in the midst of the pandemic isn’t worth the hit to goodwill to them. They just WON’T do it. Hurricanes, Home Depot WON’T gouge, PERIOD. They want to be here for the next hundred years. Publix changes two things, they said you can’t return it and you can only buy 36 rolls at a time. And suddenly there was toilet paper everywhere. The law said they could charge $4. Publix didn’t do that. Other stores found out they could sell the janitorial versions and they would charge more for that on a one off roll, but the police didn’t care.
But none of these price ceilings impacted the toilet paper producers who were making it a fraction of that. People weren’t saying, “I’d supply toilet paper if the price were higher” — the people who were making toilet paper jacked up production at prices far, far below the theoretical cap.
Craig
Jul 2 2020 at 9:57pm
“There is always someone willing to be that guy though, and the law prevented it.”
The prohibitions against the Drug Trade are far, far harsher of course and there are still illicity drugs, right? There ARE still people willing to be that guy of course, but the law is actually mostly NOT enforced. There’s no ‘black market’ to find, there’s no secret sign. Its sold right at regular stores right in front of the police who have no interest in being 6′ away from you.
robc
Jul 5 2020 at 11:24am
Tell the guy that had the storage unit full of toilet paper or sanitizer ot whatever that it isnt enforced.
Pierre Lemieux
Jul 2 2020 at 5:51pm
Craig: (1) A smurfage is not a shortage. There is a smurfage of Ferraris because they are too expensive for many people to buy. But there is no shortage: if you want one at the market price, you can have one very rapidly–I haven’t tried but, I suppose, within the week if not tomorrow. (This is assuming that the Florida Attorney General does not believe that the Ferrari dealers are not price-gouging and threaten them with prosecution.)
(2) One can indeed imagine a case where a producer would have excess capacity (over and above spare capacity for seasonal peaks or emergencies or machinery breakdown): when the producer is large enough to exert some influence on the market price (including imports in the market, of course). In most cases, this does not happen, especially for a standard good like masks.
Craig
Jul 2 2020 at 9:51pm
Average capacity utilization today is 79.9%
https://marketrealist.com/2017/12/look-capacity-utilization-across-us-industries-november/
My point is kind’ve how one should expect a business to react to a temporary spike in demand when they are at 80% capacity. Are they willing to go to 100% capacity at the pre-spike price? Almost assuredly. To me, that’s Christmas. Trust me, I have problems, but this is a problem I want.
Dylan
Jul 3 2020 at 2:52pm
Would you say the same thing about Morgans? Particularly when there was a 10 year waiting list and you had to sign a statement that you wouldn’t resell at a higher price than you purchased? No government intervention which, IIRC, you said was mandatory for there to be a shortage of anything.
Pierre Lemieux
Jul 3 2020 at 2:58pm
@Dylan: Your question is the same of why fashionable restaurants sometimes let queues form every day instead of increasing prices, or why theaters prefer scalpers to make the additional profits. That’s a well-analyzed case in economics: buzz and advertising is the answer. For standards goods such as masks and toilet paper, it does not work, for obvious reasons.
Dylan
Jul 3 2020 at 10:09pm
@Pierre
I think you are answering a different question, I’m just trying to get at your definition of shortage, which I think you’ve explicitly defined as only being something that can come about because of government intervention, a definition that has been pointed out is quite at odds with the conventional usage?
With respect to Morgan, if you look at the company in the 80s and early 90s, they were quite close to going out of business, even though they had such high demand for their cars that it would take 10 years to meet it. Yet they were resistant both to raising prices or changing production methods in minor ways that would have allowed them to become more efficient and produce more cars at a lower cost of production. Which is again something I think you’ve suggested doesn’t happen, since all producers must produce where MR=MC.
On toilet paper and masks, we’ve been over this before, but I think the market isn’t nearly as commoditized as you seem to believe. Before the rushes on TP, we used to only buy Charmin Ultra Rolls, something that was ~3x the price of the lowest priced rolls on a per package level (the rolls were bigger and thicker so it wasn’t easy to do a direct cost comparison per sheet). There are also rolls made of bamboo, and recycled paper, and unbleached, among other differences, all which charge different prices.
Pierre Lemieux
Jul 6 2020 at 10:46pm
@Dylan: You write:
If they had raised prices, quantity demanded would have decreased and they would have produced less, not more. (Just like raising prices in a restaurant will decrease quantity demanded and shorten or eliminate the queue.)
Pajser
Jul 2 2020 at 2:01pm
Maybe. But it is difficult to be consistent with two similar, yet different meanings of the same term. The original comment of Pierre Lemieux was
“For example, public health agencies long claimed that wearing masks was useless for the general public. We may hypothesize that this detrimental advice was motivated by the shortage of masks (and other personal protective equipment) …”
In that comment, the common meaning of the “shortage” fits better. The motivation of the health agencies was to calm people down in the time there was no enough masks, this way or another. They would claim the same if there were no masks at all on the market, or there were masks on the market – but only the rich minority could satisfy their needs. Maybe the second alternative is even more disturbing for the majority which cannot get the masks they need.
I believe Pierre Lemieux understood that and used “common meaning”.
Jon Murphy
Jul 2 2020 at 3:58pm
Not really. The economic definition fits better, which is what Pierre meant (see his responses and his links)
Pierre Lemieux
Jul 2 2020 at 5:57pm
@Pajser: I always use “shortage” in its technical meaning. Otherwise, the confusion with “smurfage” makes analysis–and just clear thinking–impossible. Please refer to the posts I linked to in this conversation.
Pajser
Jul 3 2020 at 8:31am
Do you agree that the government has the same motive to say to people that masks are useless if
(a) there are no masks on the market at all
(b) there are only a few extremely expensive masks on the market?
I assume you agree. In which case, it is shortage (“common use”) that causes the problem, and not shortage (“economist use”).
Jon Murphy
Jul 3 2020 at 9:12am
Not really. If there are no masks on the market, then the government’s behavior makes no sense; there isn’t a shortage either in the technical or “common” sense since the product doesn’t exist at all. It would be like saying there’s a shortage of cold fusion reactors so the public shouldn’t use cold fusion reactors to power their homes. It’s an incomprehensible sentence.
In other words, there’s no motive to conserve things that do not exist.
To lie and say masks are useless only makes sense in your (b) situation, which may or may not mean a shortage (depends on what you mean by “expensive”).
Pajser
Jul 4 2020 at 7:12am
@Jon Murphy
“Not really. If there are no masks on the market, then the government’s behavior makes no sense; there isn’t a shortage either in the technical or “common” sense since the product doesn’t exist at all.”
The claim that if a product is not on the market then it doesn’t exist is obviously wrong.
Jon Murphy
Jul 4 2020 at 8:24am
Oh? If it doesn’t exist, then it doesn’t exist. I thought I was merely making a tautology. I’m surprised you object to the tautology.
Craig
Jul 2 2020 at 1:31pm
Another thing I might add here is that price caps are price caps, but at the end of the day, enforcement is enforcement. For the most part, as I noted, the big boys self-capped unwilling even to raise the price to the theoretical lawful cap.
Beyond that though, yes, there WERE certain high profile news stories where law enforcement would make some attempt to enforce this, but for the most part the police basically stopped enforcing ANY law, much less price laws. The police didn’t want to come 6′ near anybody. I saw some minor black market at the, wait for it, the Chicken Kitchen and they were selling sanitizer, face shields, N95 masks, gloves, bleach, toilet paper…..you name it and the Broward County sheriffs were there — eating chicken.
Price caps most retailers don’t want to charge and the police could mostly care less about enforcing. I mean, c’mon guys!
Jon Murphy
Jul 2 2020 at 1:54pm
If there was no enforcement, then why was the government going after eBay, Amazon, and others for price gouging?
Remember, oftentimes the threat of something is enough.
Craig
Jul 2 2020 at 2:06pm
There was high profile enforcement to create the illusion of a threat.
You’ll see rioters arrested too, but really the cops are NOT interested in being 6′ away from you.
PPE was/is being sold openly and notoriously IN FRONT of police who DON’T care.
Jon Murphy
Jul 2 2020 at 3:58pm
Thus there was enforcement, QED.
Craig
Jul 2 2020 at 4:07pm
Yeah, sure, just the kind of enforcement where you can freely do it right in front of the police with impunity. THAT kind of enforcement.
Craig
Jul 2 2020 at 4:12pm
FL has arrested nobody for price gouging. NOT one person. They have sent out some friendly letters requesting partial refunds for people who are third party sellers on Amazon in case somebody sent in a complaint.
Here’s a good question? What’s the price cap on bleach? Toilet paper? Masks?
Jon Murphy
Jul 2 2020 at 5:45pm
Dude-
I’m wicked confused. One minute, you’re saying there is enforcement and the threat of enforcement, the next you’re saying there is no enforcement.
Craig
Jul 2 2020 at 7:48pm
I’m saying there is very little threat of enforcement and even if they do enforce it, who cares? So you give some money back to the one person who does complain and pocket the rest. 99.999999% of the time.
If summonses are down 92% in FL does that mean you still MIGHT get a ticket? Yeah, sure, of course, but people are going right through red lights, right in front of cops. They’re not going to pull you over for that. They MIGHT.
Want to go for a race down Military Trail? No problem….
But don’t charge $4.10 for Clorox?
People are looped and shooting bullets at the moon over here.
Jon Murphy
Jul 3 2020 at 9:44am
eBay, Amazon, Walmart, Target, etc all care. That’s why they’ve been shutting down anyone suspected of price gouging, holding back quantity supplied.
Pierre Lemieux
Jul 2 2020 at 5:39pm
Craig: I am not sure you are doing anything else in Florida than passing cops at 100 mph on the freeway. 🙂 Just ask Google “”florida “price gouging””. You’ll get things like:
“Floridians have received more than $240,000 in refunds from businesses because of inflated prices during the COVID-19 pandemic, Attorney General Ashley Moody said Tuesday.” https://www.sun-sentinel.com/coronavirus/fl-ne-price-gouging-refunds-20200421-pkulpkx7uvc7rn5js6vdnpjqua-story.html
“Attorney General Ashley Moody’s office has issued 70 subpoenas as part of investigations into price gouging on high-demand items such as masks, sanitizing supplies, personal protective equipment and COVID-19 test kits. … ‘We’ll come for them.'” https://miami.cbslocal.com/2020/05/06/florida-price-gouging-complaints-pandemic-refunds/
Lawyers have taken notice of a juicy opportunity: https://www.mindingyourbusinesslitigation.com/2020/04/florida-man-fined-for-price-gouging/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+mindingyourbusinesslitigation%2FdXJP+%28Minding+Your+Business%29 or https://www.terrellhogan.com/coronavirus-floridas-price-gouging-law-in-effect/.
““Members of my Rapid Response Team, Consumer Protection Division and Price Gouging Hotline are working with a sense of urgency to address consumer concerns in real time,” Moody said in a statement.” https://www.local10.com/news/local/2020/04/07/about-2000-reports-made-about-price-gouging-in-florida-amid-coronavirus-pandemic/
“While the app was originally designed to collect price gouging complaints associated with hurricanes, Attorney General Moody quickly updated No Scam to allow users to report suspected COVID-19 price gouging incidents after a health and safety state of emergency was issued earlier this year. Consumers should know that the statewide COVID-19 emergency declaration is still in effect—and price gouging on essential commodities related to COVID-19 remains illegal.” http://www.myfloridalegal.com/newsrel.nsf/newsreleases/F7464C68A7EB8C538525857C004FABDD
“the Florida Attorney General’s Office … Issued 82 subpoenas to further price gouging investigations.” https://www.positivelyosceola.com/florida-recovers-more-than-700000-from-coronavirus-related-scams/
Etc.
As a lawyer, you can probably uncover more pointed information about that. Keep me in the loop.
Craig
Jul 2 2020 at 7:38pm
“Floridians have received more than $240,000 in refunds from businesses because of inflated prices during the COVID-19 pandemic, Attorney General Ashley Moody said Tuesday”
I had googled before posting about FL of course.
$240k in refunds. I believe it. What does that tell you in a state of 20mn?
So you go do it and the state tells you to send Ethel a refund on her Poligrip, who cares? MAYBE….Almost assuredly not actually.
There is enforcement and there is lip service. They are paying lip service to this.
Right now if I said to you that they were selling cocaine at the gas station in full view of the police, that would untrue of course, but it wouldn’t surprise you if it were being sold surreptitiously? Of course not.
This stuff is being sold, April, May, June and now OPENLY and NOTORIOUSLY right in front of the police. It is not being hidden from the police AT ALL.
Craig
Jul 2 2020 at 2:18pm
If you came to FL right now and you crossed the line and wanted to speed, sure, you could get caught. Tickets are down 92% though. For you to get a speeding ticket you pretty much have to throw a bottle of Smirnoff on the cops car windshield to aggravate him to even THINK about pulling you over right now.
People get cooped up, right. I go out for a drive, I’m gonna go down the FL Turnpike, over to I75 and up US27 into Belle Glade and then come back. Nice road trip. I am on 27 going N, 2 lanes going, 2 lanes coming. I’m doing 80mph and a car blows by me like I am standing still. So, I’ curious how fast he was going so I step on it and I’m climbing up (I don’t have a fast car). I hit 100mph, the car in front of me was still gaining distance on me and we pass a Broward County sheriff and he just did not give a hoot.
The law enforcement is there, they’re just not very interested in interacting AT ALL.
john hare
Jul 2 2020 at 8:47pm
Polk county cops are still doing their jobs. See cars pulled over fairly often.
Craig
Jul 2 2020 at 9:40pm
Could be now….
https://www.tampabay.com/news/health/2020/04/09/traffic-tickets-down-92-percent-as-florida-cops-focus-on-coronavirus/
JFA
Jul 2 2020 at 2:00pm
I am a little confused as to how some commenters think price controls didn’t affect quantity supplied. Here are a few articles that I linked to back in May on another Econlog article discussing price gouging in Canada and the US:
Here’s an example of why this isn’t a social norms induced problem: https://www.google.com/amp/s/www.voanews.com/science-health/coronavirus-outbreak/experts-warn-new-round-price-gouging-masks%3Famp.
“If you’re sitting on a warehouse with masks, surgical masks, you’ll be hearing a knock on your door,” Attorney General William Barr said at a White House press briefing on March 23.
On March 26, Texas Attorney General Ken Paxton sued Auctions Unlimited for price gouging after the auctioneer listed more than 750,000 masks for auction, allowing bidding to rise as high as $180 for a pack of 16 masks — or $11.25 per mask.
Here’s another article that suggests there was lots of pressure for 3M to crack down on accurate price signals from distributors: https://theintercept.com/2020/04/01/coronavirus-3m-n95-masks-price-gouging/
Regarding export markets: “Although the 1860 N95 masks should cost $1.27 each, according to a price list 3M issued yesterday, the Canadian dealer was charging more than $7 per mask. But the jacked-up price isn’t what killed the deal. Even the major hospital chains were desperate enough to spend the money. Instead, the group’s purchase began to fall apart when the dealer said that the Canadian military had seized 10 million of the masks and then insisted that the group not only commit to buying the remaining 20 million masks but also to five additional monthly purchases of 20 million masks, totaling $140 million.”
If the other governments in the world won’t allow accurate price signals, export markets are not a solution. There has also been the all hoopla over the ban on mask exports, which has somewhat subsided but certainly doesn’t inspire one to pay a huge fixed cost to get manufacturing lines running again.
Here’s another article describing the seizure of masks in California after the business provided an accurate price signal: https://www.redding.com/story/news/local/2020/04/01/da-1-000-n-95-masks-priced-5-each-seized-red-bluff-store/5108313002/
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If the supply will get confiscated or if the company will get sued by the state because of “too high” prices (apparently the government prefers the price to be infinite rather than $10), there is less incentive for current producers to open up a new line of mask production or for potential producers to come in to fill the void.
Scott Sumner
Jul 2 2020 at 4:30pm
Everyone, At least as late as May, there were still US manufacturers with mask assembly lines available but still not running, which were capable of being used. So it’s simply false that there cannot be a strong short run supply response given enough incentive.
Regulations, price controls, trade barriers and other constraints were a huge factor in the mask shortage.
Craig
Jul 2 2020 at 4:40pm
In the blogpost linked to above which is your article, Mr. Sumner, you are linking to a January ’20 story about Ameritech. Pre-US-pandemic where he discussed his then-ability to expand supply but …. government. Fair enough, I’m no government apologist, but by March, there’s a story in NPR about Ameritech and again we revisit Mr. Bowen’s facility in Fort Worth where he has more orders than he can fill:
https://www.npr.org/sections/health-shots/2020/03/05/811387424/face-masks-not-enough-are-made-in-america-to-deal-with-coronavirus
He’s at 100% of capacity in March.
Honestly, I’m not sure what your source is for May, but by May I do know this, my daughter was buying rhinestone studded facemasks. They had already started to become a fashion accessory. The N95 masks are everywhere now.
Jon Murphy
Jul 2 2020 at 5:44pm
Craig, the story at hand does not support your argument; it says nowhere that the machines he discussed in January are running. In fact, it heavily implies the latter:
Prices need to rise but the government forbids it.
Craig
Jul 2 2020 at 6:20pm
I was holding back on purpose. Before the pandemic he was making 250k masks per day. In the face of price controls that aren’t anywhere close to the cost of producing his products, he has QUADRUPLED production.
It doesn’t matter if the government places a price control of $2.50 on a product a retailer is only willing to sell for $2 and which costs you $.20 to manufacture. (#s are rhetorical)
“In an attempt to keep up with demand, Prestige Ameritech’s management team is working 80-hour weeks, bringing previously idle machines online, and hiring and training dozens of new employees to augment its staff of around 100. Back in what Bowen calls the “peacetime,” before the pandemic, Prestige Ameritech made roughly 250,000 masks a day. Now the company has ramped production up to 1 million masks a day.
But even that isn’t enough. “Since February 1, we’ve had to turn down orders for 100 million masks or more a day on average,” Bowen says. “Sometimes, we turn down 200 million or 300 million [masks] a day. It’s kind of surreal.”
The theory is fine if the price control actually imposes a price you’re unwilling to take. Bottom line when you’re in business demand spikes are wet dreams. Yes, in this case, the demand spike is human misery and thats not something anybody would hope for, I wasn’t in that business.
100% capacity is like shan-gri-la.
Tell me, “Hey, Craig, here’s the deal, you’re going to have more demand that you can possibly ever meet with your existing capacity”
But—the product can’t sell at retail at 15x your manufacturing cost.
My name is Money Galore.
I must be dreaming.
US capacity utilization per quick google is 78.60.
Offer me a trip to 100% with the caveat I can’t increase price, I’ll take you up on that offer ALL DAY ANY DAY.
Craig
Jul 2 2020 at 6:31pm
The reason Bowen was at such low capacity utilization, he tells you, he explains how swine flu hit, he bought machines, he bought capacity to meet demand, the demand went away and he ALMOST went bankrupt. But he didn’t. So now, yes, he can quadruple. If you’re sitting at 78.6 capacity, you’re not going to be able to do that, but you can go up to 100% (some companies define 100% as not quite what we would call 100% and they can go into overdrive and produce at 120% capacity, thats semantics of course).
Pierre Lemieux
Jul 2 2020 at 6:48pm
@Craig: Why didn’t the company quadruple its production before the pandemic? Because his production would push down the world price? (See my previous post.) Unlikely. Perhaps there is something we are missing here but remember that businessmen often can’t explain the economics of what they are doing because they don’t understand the relations between the facts (and don’t know which facts are relevant), that is, because they don’t have a theory to explain them.
Craig
Jul 2 2020 at 7:16pm
Well if we’re talking late January the article from January discusses US government equivocation, right? But if we’re discussing pre-pre-pandemic, ie before even that he alludes to it. China, right? He even unabashedly advocates national security protectionism in the articles no less. But why can’t he quadruple? Because he can’t sell a million masks per day at $.23 per mask profitably, he can sell 250,000 per day at that price. At $.20 (he notes that all he needs is a ‘few cents’ right?) he says the problem of foreign reliance would be solved.
But that’s really not what we’re discussing, we’re discussing the retail price cap of $2.50 per mask.
Now, sure if the government said, “the price cap is $.225 per mask” then I think you guys have a point, but at $2.50 per mask. Sorry, Bowen doesn’t care, he quadruples because he was sitting on capacity he mistakenly bought during swine flu back in the day.
I really can’t fathom any situation where, sitting at 70-80% utilization, I am going to be unwilling to go to 100% utilization at the same price I was at at 70-80% utilization.
Send me a Mercedes catalogue and a one way ticket to Kiev for a Ukrainian side biddy.
Robc
Jul 2 2020 at 8:08pm
At $3 per mask, someone would have converted to a short term factory to sell 100MM masks.
There was a shortage. At a high enough price, the shortage would gave gone away, one way or another.
john hare
Jul 2 2020 at 8:53pm
More realistically the company might be making 10% profit in normal times if very fortunate. Normally business profit margins are lower because high profits attract high competition which lowers margins. And at 10% profit, raising costs by 15% is a losing proposition.
Anytime people speak of 50% or more profit, it is normally the case that they are ignoring vast amounts of hidden costs that they are unaware of. There’s a whole list of business costs beyond labor and raw materials. .
Craig
Jul 2 2020 at 9:39pm
@robc “At $3 per mask, someone would have converted to a short term factory to sell 100MM masks”
The law doesn’t prevent you from doing that though. You can make RobC masks for $3.
Nothing prevents the existing manufacturers from charging $.30, $.40, $50
@john hare – GROSS profit margin of 50% is very normal. 10% is a normal operating profit.
“raising [OPERATING] costs by 15% is a losing proposition.”
If I got from 75% capacity to 100% capacity my RENT is the same.
MY Cost of Goods Sold CAN increase though from 75% — 100% (my gross margin on THOSE sales DECREASES), but my operating profit WILL increase AT THE SAME PRICE.
https://finance.yahoo.com/quote/MMM/financials/
3M has a 50% gross margin +/-
32,136,000 Gross Sales
17,136,000 COGS (includes direct labor)
15,000,000 (GROSS PROFIT) – 46.6%
8,940,000 Operating Expenses (SG&A/R&D)
Operating income: 6,060,000
Now we will stop at operating income for simplicity.
We will assume I was at 75% capacity and I can go to 100% capacity.
40,170,000 Gross Revenue (same price +25%)
22,062,600 (COGS, 25% higher + presume 15% premium)
18,107,400 (GROSS PROFIT) — 45%
11,175,000 Operating Expenses (SG&A/R&D) +25%*
6,932,400 Operating Profit (Lower Operating Margin Percentage, nominally higher operating profit)
But the trick is that R&D doesn’t actually increase, its not driven by sales and neither is Selling, General & Administrative DON’T increase by 25% here. The HR department doesn’t spend 25% more on salaries because workers are working overtime.
Also as you increase utilization there are also parts of COGS that go DOWN per unit because maybe you buy more inputs and get a better price.
Jon Murphy
Jul 3 2020 at 9:13am
Yeah it matters a whole lot as your article states.
Jon Murphy
Jul 3 2020 at 9:42am
Here’s what I don’t understand, Craig:
Mr Bowman has stated explicitly twice and implicitly a third time that he needs higher prices in order to produce more. He states it explicitly in the January article and implicitly and explicitly in your more recent article. You also show that he is burning through his capital like no tomorrow, meaning his current increase in production is not sustainable unless prices rise.
By all accounts, we must see higher prices in order to get higher production.
I don’t see how you see otherwise.
Craig
Jul 3 2020 at 12:59pm
“Mr Bowman has stated explicitly twice and implicitly a third time that he needs higher prices in order to produce more”
Pre-pandemic when he was making 250k/d he was charging, let’s say $.58 per mask (making his manufacturing cost about $.24 per mask) and the Chinese manufacturers were charging about $.50 +/-
https://www.newsweek.com/supplier-charging-7-per-face-mask-that-typically-costs-58-cents-hospital-ceo-says-1493106
So that makes him a high cost/niche/stop-gap/high quality producer. Nothing wrong with that. For him to make more he said he needed a few cents more per mask. He was kind’ve making the national security exception to national security argument if you ask me, but that’s another topic.
Now the pandemic comes around and he’s able to quadruple production because he had that capacity that he made a mistake on during swine flu AND he CAN charge those ‘few cents now’
But he’s still not charging ANYWHERE NEAR the government cap.
Right now TODAY he could more than triple his price LAWFULLY.
He doesn’t do that. You can buy his N95 masks for between $6-$8 a piece because its US made and at the moment that is perceived as higher quality than the Chinese made N95 masks which sell for $4
That’s LEGAL.
If the government sets a price ceiling and you’re not willing to take that amount. You won’t supply the item. If the government sets a price ceiling and you’re willing to take less than 1/10th of that, you’re still going to supply the item.
Jon Murphy
Jul 3 2020 at 3:02pm
Ok, so he needs higher prices, QED.
Pierre Lemieux
Jul 3 2020 at 3:18pm
@Craig: You can’t ask an accountant to make a few calculations and determine if a price cap is binding or not. You can’t ask a regulatory agency’s kangaroo court either. The only way to know is to observe what happens after it is imposed: if nothing changes, the cap was not binding; if there is a shortage, the price control was binding.
This is especially obvious–although it would also be true otherwise–when the cap is vague and left to the arbitrary judgment of some bureaucrats (or to the cries of the mob), as it is in many price-gouging laws, and even in the Defense Production Act. If a “government of men” (as opposed to a “government of laws”) says, “Don’t be nasty or we will come after you,” many will go out of their way to be as nice as the most totalitarian politician or bureaucrat defines the term.
Jon Murphy
Jul 3 2020 at 3:36pm
By the way, here is some more enforcement of price gouging.
Mark Brady
Jul 3 2020 at 2:39pm
Jon Murphy writes, “Price controls affect quantity supplied not supply (that is, price controls cause movement along the supply and demand curves, not a shift in the curves themselves). I assume this is what you meant and the rest of my comment proceeds from this point. If you did mean that price controls have any significant effect on supply, then we know they did not since prices do not affect supply; supply affects price.”
But, price controls can affect people’s expectations of future prices, and when those expectations shift, supply shifts.
Jon Murphy
Jul 3 2020 at 3:01pm
That’s possible, but requires a long chain of reasoning. Supply would shift depending on expectations of future input prices. Why would imposing price controls shift expectations of input prices?
Craig
Jul 3 2020 at 3:56pm
By the way, here is some more enforcement of price gouging.
That case is a federal court enjoining the seller from infringing on 3M’s trademark, the underlying price gouging lawsuit is actually 3m ITSELF going after its own reseller for selling the product for more than 3M allowed, not the government.
This is a manufacturer’s ‘Colgate’ rights and its perfectly lawful, although I don’t personally think they should be allowed to do that. Its how Amazon rips off the American consumer by ensuring people cannot UNDERCUT Amazon.
Jon Murphy
Jul 4 2020 at 8:22am
They are being prosecuted under price gouging laws, bud
Craig
Jul 3 2020 at 4:06pm
@Professor “The only way to know is to observe what happens after it is imposed: if nothing changes, the cap was not binding; if there is a shortage, the price control was binding.”
Yes, we did, manufacturers of N95 masks, quadrupled production.
We also saw retailers simply not desirous of charging the cap. They just weren’t gonna do it. That was voluntary.
Now we did see jobbers out there, right?
You know I would suggest this can be a world of nuance, you can have a government price ceiling that is below retail equilibrium, but which is still above what the vast majority of the retail industry itself is charging causing a retail shortage but still well over the manufacturer’s sale price.
So what do you get? You get the manufacturers cranking this stuff out AS MUCH as they can. That’s exactly what 3M and Ameritech did. They made as many as they could.
And then at the retail level we see sporadic shortages caused by the self imposition of maximum retail prices either by the Publix of the world or the 3Ms of the world that told their distributors to simply NOT do that.
And then you had the jobbers trying to grab supply to those willing to pay a premium.
But the manufacturers DID NOT LIMIT SUPPLY. No. The evidence on that is unequivocal, they jacked up production as much as humanly possible.
Pierre Lemieux
Jul 3 2020 at 8:31pm
@Craig: They did not “jack up production as much as humanly possible,” assuming this makes sense (if nothing else than masks and beans were produced, perhaps trillion of masks could be produced.) They jacked up production as much as was in their interest to do so given the price they could get for their production, which depends on the price retailers are willing to pay, which depends on the capped prices retailers are allowed to charge. Demand for inputs–and therefore input prices–depends on output prices; as we say in economics, demand for inputs is a derived demand. Example: The price of bread is not high because millers’ labor is expensive; miller’s labor is expensive because the price of bread is high.
Craig
Jul 3 2020 at 9:39pm
” as much as was in their interest to do so given the price they could get for their production”
Fair enough, but the government didn’t tell Ameritech and 3M they could only get $.02 per mask, did they? The reason I explained the accounting above is that most businesses, if you say to them, “I will buy all you can make over and above what you’re currently making at the same price you’re currently selling” <–for most businesses, that’s Christmas. They might sacrifice some margin, maybe not, but in most circumstances those businesses will make MORE money to increase production to 100% of capacity. That’s where most businesses would love to be.
I think you can make a good case that the existing price cap, AS APPLIED, caused the items produced not to go to some users who would have valued the masks more.
All of the articles I read ALL say the manufacturers increased production and there are real short term physical constraints there that take time, labor and capital to sort out. 3M boosted production in the short term, is expanding production in the long term, and is contractually restricting the resale price of the masks at a price much lower than the government cap (which is, itself a moving target).
robc
Jul 6 2020 at 7:47am
I think you can make a good case that the existing price cap, AS APPLIED, caused the items produced not to go to some users who would have valued the masks more.
That is exactly what a shortage is!!!! The cap decreases “efficiency” by failing to allow them to go to the highest value users. Those highest value users can’t get them, hence a shortage.
Jon Murphy
Jul 4 2020 at 10:35am
One thing I want to reiterate:
Even if we assume that it is impossible for quantity supplied to increase, or that it can increase without prices rising, you still need higher prices to fix a shortage because higher prices also reduce quantity demanded.
In other words, a demand shock with limited supply capacity cannot explain shortages.
robc
Jul 6 2020 at 7:49am
That is the point I tried, poorly, to make upthread, where I said a rising price would fix the shortage one way or another. You explained it better.
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