NC Sentences Citizens to Shortages and Misery

We are all very aware that hurricane Irene is coming to North Carolina.  As we prepare for the coming storm, the NC government has declared a state of emergency.  The effect of this declaration is that law GS 75-38 comes into full effect.

What's GS 75-38? you ask.  Good question.  It is the NC Anti-Price Gouging law.  If "the price charged by the seller exceeds the seller's average price in the preceding 60 days before the triggering event" then the seller can be fined $5,000 per violation and the injured parties can attempt redress.  Additionally, the law stays in effect for another 45 days after the "triggering event" is over.

If the hurricane does hit NC and suppose that it does knock out basic services like electricity, water, etc. then what is the best way to communicate to the rest of the economy that we are in desperate need of water, etc.?  The market uses the price mechanism to alert everyone that we need these supplies.  The price rises and screams to the world that we need water.  It shouts that we need food.  It raises a ruckus that we need generators. 

When these evil laws come into effect they completely shut off this market mechanism.  It not only cuts off the encouraging signal to entrepreneurs to send these vitally needed supplies to NC, but it actively discourages such behavior.  "If you dare go to NC, we will be watching you!"

When the price is not allowed to rise, shortages occur.  That means there is nothing left to buy at any price.  Period.  Some people think that at least the price won't be too high.  SO WHAT!  If there is nothing to buy, then who cares what the price is?  We have to shed this idea that a high price constitutes someone ripping someone else off. 

The price is a signal.  Getting mad at a high price is like getting mad at the thermometer for it being a hot day.  "How dare you get so red, thermometer.  I don't want it to be so hot!"  Ridiculus!  The price is a reflection of the scarcity of the good in question.  When the price goes up, it is because it is more scarce.  Without the high price, the goods are sold out and then there is nothing left.  These Anti-Price Gouging laws are a sentence to shortages and misery. 

Do not be fooled into thinking that the politicians are doing this to protect the "little guy."  In fact the result of this law is to make the government itself (e.g., FEMA) the major supplier of relief.  In other words, I am unable to look forward to my neighbors in Tennessee coming to my aid, instead I will have to rely on FEMA and the other bureaucratic state agencies to relieve my suffering and that of my family and neighbors.  The bottom line is that we become more dependent on the government and less on our neighbors.

The science of political economy is a powerful tool because it demands that we look beyond the stated intentions of the politicians.  It forces us to look at not just what is seen, but we need to imagine the unseen.  We are forced not to be content with looking at the intended consequences, but the unintended consequences need to be considered as well.  It is in this manner that we can find a true path to recovery and protect our liberties as well.

A “Magic Formula” for Eastern NC

With unemployment at 9.9% in Rocky Mount and 7.5% in Greenville (according to the Bureau of Labor Statistics), there is a strong desire for a political solution to a deteriorating economy. The cry of "Do Something; Anything" is what leads to the wasting of taxpayers' money like with the Randy Parton Theater fiasco, or with giveaways to special interest groups like Hollywood production companies to film in Wilmington.

What eastern NC needs is real growth and not some ad hoc, temporary political solution. Those have been tried and still the average annual income in eastern NC is 15% less than the rest of the state. Eastern NC needs widespread, systemic growth, but growth cannot be forced. Farmers know that you can't force crops to grow. You can only set the right conditions: prepare the soil; provide water; control pests; augment the soil; etc., but you certainly cannot force growth.

The same can be said for economic growth—you can't force it. It has to occur naturally and spontaneously. It can be encouraged by setting the right conditions. Luckily those conditions can be discovered and have been discovered by economic science. There is a pattern to economic growth. This pattern has many names, which I tell my students is a magic formula. It seems like magic because without anyone issuing orders, without a central planning board, with individuals acting in their own interests as they best see it, we have achieved, in a very short period of time, living standards that had never been seen in the preceding 5,000 years of recorded human civilization. Fortunately, the magic formula for economic growth is not a secret formula (we're allowed to talk about it), but unfortunately it is seldom heard over the demagogic political voices.

The goal of an economy is not balanced trade, universal health care, or even jobs. Jobs are easy to create. Stalin and Mao created many jobs. The key is to have jobs that create goods and services that people want and desire. The true sovereigns in the economy, the consumers, set the goal of the economy, which is an increase in the standard of living for all. The means by which this is achieved is through the production of more goods and services. But how can more be produced using the same amount of resources? The answer is that it must come through an increase in productivity. Increasing productivity comes from newer and better machines. Economists call this "Capital Accumulation." Capital accumulation comes about through investment, and investment funds come from savings. Thus the magic formula for economic growth is this: savings leads to investment, which leads to capital accumulation, which leads to higher levels of productivity and creates higher living standards. Notice that the magic formula follows the age old wisdom of the pre-20th century American: saving is good; invest and in time it will bear fruit; and you can't get rich by eating the seed corn. By following this formula, America has created a higher standard of living for more people in barely two centuries.

Governments do not make wise choices with investment dollars, just look at the DOT, Randy Parton Theater, or the giveaways to large corporations in the vain hope that they will create jobs. Government has no guiding star by which it knows where to put resources. The current practice of catering to the loudest special interest group is not good enough.

In a market economy, it is the entrepreneurs who make investment decisions. They are self-directed but others-focused. Entrepreneurs follow market signals and direct resources to their highest-valued uses, maybe not perfectly, but better than the governmental alternative.

Eastern NC has great potential for growth, but it will not occur overnight and it cannot be done by some get-rich-quick political scheme. The economic ground has to be prepared. Savings and capital accumulation are currently discouraged. A return to the magic formula is necessary. As such, we must resist the calls for political bail-outs, corporate welfare, business incentives, and the creation of new projects to “jump start” growth. We need to unleash the entrepreneurs. We need to make starting and keeping a business easier. Often the best thing to do is not a government hand-up or hand-out, rather it is to just step out of the way.