Price gouging bills miss the mark – Mackinac Center

Michigan lawmakers appear likely to pass legislation that would worsen shortages and hamper emergency response. House Bills 5895, 5896, and 5897, introduced in July by Reps. Laurie Pohutsky, D-Livonia, and Jason Hoskins, D-Southfield, accompany similar Senate legislation that aims to prevent businesses from “excessively” raising prices on essential products such as energy, lodging, or food and drinks during emergencies.

The bills prohibit businesses from selling goods or services deemed to be “grossly in excess of the price at which similar materials, items, goods, services, or supplies are sold” or from “charg[ing] an excessively increased price” for any of those goods.

All three bills arbitrarily classify a price increase greater than 10% over pre-emergency levels as excessive. News coverage outdoes even the bills’ sponsors in using graphic and inflammatory terms, accusing businesses and people of engaging in “predatory behavior…during a time of crisis” and “price gouging.”

These price increases are banned unless a business can “produce the documents or object for inspection and copying” to demonstrate it has incurred higher costs procuring the goods or offering the services. Price controls within the three bills apply to various lodging, food, and drink, as well as energy products such as gasoline and essential services necessary to provide these goods. If they cannot justify price increases to government investigators, violators could face fines of up to $1,000,000 and potential criminal charges.

“There is nothing more sickening than those that look upon our neighbors as they suffer but only see another way to make a quick profit,” Pohutsky argued in 2022. “No one should be put in the impossible position of being deprived of the basic essentials they need to survive during their darkest hours because of unconscionable price gouging.”

Other Democratic legislators and Attorney General Dana Nessel use similar strong language. “Just because they could,” Sen. Jeremy Moss, D-Southfield, said of business owners who responded to COVID-era shutdowns and shortages by increasing prices. “[T]his was their time to swoop in and profit off of human misery.”

Price gouging legislation may garner explosive headlines, but it only harms the people it purports to help. The bills’ definition of price gouging is arbitrary. What makes 10% the approved limit? Why not 5% or 20%? The legislation offers no rationale for this specific threshold.

No similar restrictions have been promoted for Michigan hotels or restaurants during important sporting events or on state universities that have repeatedly raised student tuition rates, notes Lansing-based economist Patrick Anderson.

“Do we really want to tell every grocery store, every gas station, every retailer in the state,” asked Anderson, “that a state government inspector can come in if they raise the price by 10% and they have to go to court to prove their innocence?”

The bills only consider cost changes for providers as valid reasons to increase prices. They do not consider how demand surges during times of crisis, causing limited supplies of some goods, like water, food, and gasoline.

The bills ignore the practice of anticipating shortages by stocking up on items like toilet paper, a source of various panic shortages during the COVID-19 lockdown. If sellers can’t adjust prices to meet shifting demand, buyers hoard items, resulting in shortages. The price caps meant to protect consumers reduce the incentive for businesses to supply goods in high-risk situations, quickly resulting in empty shelves.

President Richard Nixon imposed wage and price controls on August 15, 1971, in response to rising inflation and economic instability. Oil and gas were two of many commodities affected by these controls. Initially intended as a temporary measure, the freeze on prices and wages extended far beyond its original 90-day period, lasting almost three years before being dismantled.

Nixon’s price controls were among the factors that prompted OPEC member countries to impose a production cut. Rather than solving production and supply problems, price controls led to chronic shortages, long gas lines, and reduced oil production. Nor did Nixon achieve his goal of controlling price inflation. Prices surged as soon as the price controls were lifted, and the economy experienced a punishing period of “catch-up inflation.”

While House Bills 5895 to 5897 may be well-intentioned, they represent a misguided attempt to control changing prices during emergencies. Enforcing arbitrary price caps ignores the realities of supply and demand. This legislation will create more problems than it solves.

History shows that price controls often lead to shortages and inefficiencies, undermining the incentives to produce and sell essential goods. Rather than imposing rigid constraints, lawmakers should seek solutions that allow markets to adapt and respond effectively, ensuring that goods remain accessible without stifling supply.

---

Permission to reprint this blog post in whole or in part is hereby granted, provided that the author (or authors) and the Mackinac Center for Public Policy are properly cited.