This week, Nick and Goldy are joined by Fordham Law professor Zephyr Teachout, who explains the urgent need for federal action on corporate price-gouging. Professor Teachout identifies misconceptions about price controls and highlights the failure of mainstream economists to recognize that price-gouging is a common practice, especially in light of skyrocketing corporate profit margins during the pandemic. Their conversation also unpacks the need for stronger antitrust enforcement, decreased market concentration, and more regulations aimed at protecting consumers in times of crisis.
Zephyr Teachout is a Professor of Law at Fordham Law School, where she focuses on the intersection of corporate and political power. She is also the author of multiple books, including Corruption in America: From Benjamin Franklin’s Snuff Box to Citizens United and Break ‘Em Up: Recovering Our Freedom from Big Ag, Big Tech, and Big Money.
Twitter: @ZephyrTeachout
Further reading:
The Atlantic – Sometimes You Just Have to Ignore the Economists
More Perfect Union – Why Are Diaper Prices Up 184 Percent? Two Corporations are Preying on Parents
The New Republic – A Very Good Sign: Kamala Harris Is Going Right at Corporate Greed
Find out if your state has a price gouging law here: NCSL Price Gouging State Statutes
Books By Professor Teachout:
Break ‘Em Up: Recovering Our Freedom from Big Ag, Big Tech, and Big Money
Corruption in America: From Benjamin Franklin’s Snuff Box to Citizens United
Website: https://pitchforkeconomics.com
Twitter: @PitchforkEcon, @NickHanauer, @civicaction
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Threads: pitchforkeconomics
YouTube: @pitchforkeconomics
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Nick Hanauer:
The rising inequality and growing political instability that we see today are the direct result of decades of bad economic theory.
President Joe Biden:
It’s time to build our economy from the bottom up and from the middle out, not the top down.
Nick Hanauer:
Middle-out economics is the answer.
President Joe Biden:
Because Wall Street didn’t build this country. The great middle class built this country.
Nick Hanauer:
The more the middle class thrives, the better the economy is for everyone, even rich people like me.
Speaker 3:
This is Pitchfork Economics with Nick Hanauer, a podcast about how to build the economy from the middle out. Welcome to the show.
Goldy:
I was watching a clip of a recent Trump rally, Nick, and I learned something that I never knew before. Did you know that Kamala Harris is a communist because she wants to enforce price controls on the American economy?
Nick Hanauer:
Yeah. I think here Trump is confused as always.
Goldy:
Yeah.
Nick Hanauer:
I think what he’s trying to refer to is some control over price gouging.
Goldy:
Right. Some price gouging laws, anti-price gouging laws.
Nick Hanauer:
Yes. Yeah.
Goldy:
As opposed to him, he’d probably be pro-price gouging Harris’s, anti-price gouging.
Nick Hanauer:
Anti-price gouging. And to be clear, price gouging laws are on the books in a lot of places, and they simply attempt to prevent companies from taking unfair advantage of consumers during specified events, hurricanes, floods, snowstorms, pandemics, whatever it is.
Goldy:
Earthquakes.
Nick Hanauer:
Yes.
Goldy:
Right. When there’s some sort of natural disaster or economic disruption of some sorts, like we had during the pandemic. And suddenly it’s not just that, and this is the thing we’ve talked about. It wasn’t just that prices went up, there was a supply chain crisis. There were these artificial shortages and prices went up. It was that profit margins went up extraordinarily during the pandemic.
Nick Hanauer:
Yes, yes.
Goldy:
It wasn’t just that there was a shortage of product to sell, it’s that these giant corporations were taking advantage to dramatically increase their profit margins and thus their profits during the pandemic. And I think I saw a statistic, it was something like Walmart and Amazon combined, saw their profits increase by $10 billion in the first year of the pandemic due to higher margins.
Nick Hanauer:
Yeah, yeah. And the thing is that the conventional economic view, the Econ 101 neoliberal, neoclassical view, is that anything you do to control prices in any circumstances is going to be terrible for everybody because it will kill the market and create disincentives for people to make more products and all this other nonsense.
Goldy:
Invisible hand, Nick…
Nick Hanauer:
Yeah, yeah.
Goldy:
You don’t want to get in the way of the invisible hand slapping consumers around because…
Nick Hanauer:
That’s right.
Goldy:
It’s only for their own good.
Nick Hanauer:
Exactly. But what caught our eye was this really wonderful article that our friend, Zephyr Teachout, who’s a law professor at Fordham’s Law School and an expert on corporate power, wrote in the Atlantic where she explores why those arguments are all total nonsense, and it was very clearly written and thoughtful. And we just thought it’d be really fun to have her on to talk through these issues because it’s a super important and timely issue, and one that I think most Americans should be thinking about.
Zephyr Teachout:
My name is Zephyr Teachout. I’m a Fordham law professor. I’ve also worked in government. Most recently, I worked for New York Attorney General Tish James, and I’ve also been fairly active in the policy realm in antitrust corporate law and anti-corruption law.
Nick Hanauer:
So, Zephyr, thanks so much for being with us. Your recent article in the Atlantic that addressed the issue of price gouging really caught our attention because I think that you really clearly articulated why it makes sense to hold corporations accountable for price gouging, particularly during pandemics and stuff like that. But why do you think this issue hasn’t been central to the economic conversation thus far?
Zephyr Teachout:
Yeah, I mean, the last four years deeply shooked up Americans. The radical increase in prices, the instability in prices, I think put pricing back front and center for a lot of people. And that was after 40 years in which there was a consensus that when it came to retail consumer pricing, things were working okay. There were a lot of dissenters in that consensus, of course. But I guess, I often say that the Chicago School of Economics, which really dominated the thinking around economic policy centered itself as price champions. They worked hard to say there’s not a lot of other purposes. For instance, in antitrust law, the only purpose is low prices. And in effect, they set themselves up by saying, “We have one job and our job is to keep consumer prices low.”
And with the twin major disruptions of the COVID-19 pandemic and then the Russian invasion of Ukraine, it became quite clear that that model was failing to keep prices low and not just keep prices low in absolute terms. But what we saw was increased prices and increased profit margins and really substantially increased profit margins. If you look at Walmart… So, with Walmart, you saw a really massive increase in their profit margins, in the profit margins of the largest grocer in America during a pandemic where people were having absolute sticker shock at the grocery store. So clearly, the model had failed. It straight up failed, the prices were going up while profit margins were going up. So, something was deeply wrong.
Nick Hanauer:
Just to remind our listeners what the conventional economic, the Econ 101 wisdom is on this.
Goldy:
Because it can’t happen.
Nick Hanauer:
Yeah, because we have perfect competition. That’s what I was taught.
Zephyr Teachout:
Yeah. So, the Econ 101 story is that the minute you see the price signal of an increased price, a competitor will say, “Hey, there’s profit margins to be had over there. Look at all the money they’re raking in. Let’s quickly invest and ourselves set up a rival grocer and slightly undersell what say Walmart is selling at, gain a market share and get a piece of that profit.” The profit margin would then come down and the consumer would have lots of options of fair, inexpensive consumer goods.
And what we saw instead was the same big players were using their dominant position to not only rake in extra profits, but they were scaring away competitors. Competitors did not come in and try to eat away at those profits because they saw ways in which those competitors used their power and their contractual relationships with counterparties to keep out potential new big entrance.
Goldy:
Even if Walmart was welcoming new competitors, it’s not like somebody could spin up a competing Walmart in a matter of months.
Zephyr Teachout:
Exactly, exactly.
Nick Hanauer:
Yeah. Or introduce a competing product in a category in a matter of months.
Zephyr Teachout:
Yeah.
Nick Hanauer:
I think that one of the things that really sang for me about the piece that you wrote was highlighting just the practicalities or impracticalities of how this stuff actually works. Because of course, in theory, it’s true that if profits go up, there will be more entrance into a market, but not if you only have a year or two years or to say nothing of three months, that there will never be enough time for a competitor to enter a market to take advantage of that if there’s some disruption like a pandemic which pushes supply down and therefore prices up, that enables people to take advantage of that. I think that’s so right.
Zephyr Teachout:
No, I think that’s right. It’s really important. And the article I wrote was about price gouging laws and frankly how normal they are at the state level. And it’s great that Vice President Harris is pushing a national price gouging agenda. So, I think I want to then combine these two important insights. There are two conditions in which, more than two, but at least two conditions in which you are less likely to see those new entrants that Econ 101 would tell you are going to rush in when profit margins go up. One is when there’s an abnormal market disruption. So, in fact, the price gouging laws that are active in almost all the states, either explicitly or through the unfair trade practices laws of the states rely on the, I think correct intuition that when there’s an emergency like a snowstorm, you’re going to see the potential for prices to go up. But then, the snowstorm ends and everybody knows the snowstorm is going to end. By definition, it’s an abnormal market situation. It’s an unexpected disruption. So, those potential investors aren’t going to rush in because they know that the disruption is going to end. So, you’re less likely to see new entrants there.
And the other condition is the one that is increasingly, or really since the ’90s, increasingly became the condition of so many industries, which is that if a few big companies dominate the industries and use their power to discourage, to put it politely, to make it very difficult for new entrants to come in. So, when you have a combination, what we had with both COVID-19, and again, the Russian invasion of Ukraine is you had both highly concentrated markets and two massive disruptions. And so, you had the conditions for extraordinary profit-making, but the anti-conditions for new investors coming in.
Nick Hanauer:
Yeah. And then there’s the other issue, which is that, again, in theory, higher prices simply are another signal that encourage the people who value whatever it is the most to buy and other people not to, but of course…
Goldy:
Right. It’s the perfectly efficient allocation. The Orthodox Economics would teach you that the market will allocate these scarce resources to those who value the most.
Zephyr Teachout:
Yeah.
Goldy:
But we’re living in an era of extreme inequality, you point out. So, in reality, it just goes to who can afford it.
Zephyr Teachout:
Well, I think a lot about diapers in part because I had a young child during the pandemic, but also because the price of diapers really shot up between 2020 and this year, frankly. And to say that those who are willing to pay three times as much for diapers value them more, is not only absurd, it’s cruel.
Nick Hanauer:
Yeah.
Zephyr Teachout:
And the cost of basically allocating vital and necessary goods by ability to pay is based on a really dangerous understanding of value. The idea that those with wealth value things more and therefore should get them, is really problematic.
Goldy:
I’ve tried to explain this to people in the past using insulin as an example.
Zephyr Teachout:
Yeah, yeah.
Goldy:
That if there’s a hurricane and there’s a disruption in the supply, and of course it needs to be refrigerated, if you rely on the market to distribute it, it’s just going to go to the wealthiest people because they’re the ones who can pay the higher prices and the other and the poorer people will die.
Zephyr Teachout:
Yes. And do. And so, the idea of rationing necessary medical services based on the ability to pay, rationing diapers based on the ability to pay. If you don’t have sensible economic regulations in place, you do end up with a rationing system, but it’s rationing in a really frankly immoral way.
Nick Hanauer:
Did diaper prices really triple? I’m many years past that, past needing to know about that.
Goldy:
Oh, come on, Nick. Did you ever look at the price of diapers?
Nick Hanauer:
I probably did at one point. It’s been a while.
Zephyr Teachout:
The diaper prices went up 90% in the first year.
Nick Hanauer:
Wow.
Zephyr Teachout:
I looked into it at one point. I know More Perfect Union did it, and I’m going to fact check this. I know we’re not supposed to do this., but I am…
Nick Hanauer:
You can fact check it.
Zephyr Teachout:
Yeah, yeah.
Nick Hanauer:
You can do anything you want because we’re in charge.
Zephyr Teachout:
Yes, exactly.
Goldy:
You should try, there’s this huge online monopolist for searching that might help you.
Nick Hanauer:
Yeah, yeah.
Zephyr Teachout:
Yeah. Okay, I’m sorry. So, I shouldn’t say diaper prices have gone up by 50%. So yeah, please fact-check me. This is where I need my little fact check. It’s still an outrageous amount.
Nick Hanauer:
Yeah, yeah, yeah.
Goldy:
And something that some families just…
Zephyr Teachout:
So maybe the thing that tripled was the margin.
Nick Hanauer:
Yeah, right.
Goldy:
And what’s important is that you just can’t budget for that. And for people living on the edge, having the price of diapers increased by half is a huge blow to the budget.
Zephyr Teachout:
It is. And sometimes, you talk to people and you look at the numbers here and say, “Okay, well, the price of diapers went up by 20% in one year.” Okay, so maybe on a per unit basis, we’re talking pennies. But on a per unit basis, you’re also seeing pennies increase in bread and eggs and grocery meat and other vital and necessary goods. And those per unit basis really, really add up. And what you saw again was this increase in profit margins in grocery stores in the big meat packers, in a Procter & Gamble, other big toiletries companies. So, their profit margins are increasing, and then the penny increases are spread out across a lot of different consumer goods. But over a week, a month, a year, it’s actually a really substantial part of your budget.
And we really saw the incredible human cost of poor and working-class people’s huge, huge budget challenges, both because the costs were volatile and because they were high. And I mean, what we saw is, and it wasn’t all pennies, but what I mean is that when you see parties in a supply chain take advantage of disruptions by hiking up costs in ways that may look tiny in the individual unit level, in the aggregate, it really, really hurt the pocket bucks and the savings of the people who could at least afford it.
Goldy:
Can we talk a little bit about how this specific policy would work, the anti-price gouging laws? I know Donald Trump is out there at his rallies calling Kamala a communist and accusing her of price controls.
Zephyr Teachout:
Yeah.
Goldy:
These are not price controls. It’s actually, as you mentioned, it’s very common at the state level. Specifically, how do these laws work?
Zephyr Teachout:
Yeah. Price gouging claims have essentially four elements, and different states have different models, but as I said before, almost all states recognize price gouging as illegal, and this is very much a red state and blue state. This is a law that’s not only in all red and blue states price gouging laws, but is actively used by attorneys general in those states. One of the things that’s a little perplexing about what Trump is doing is that Texas, Missouri, Florida, the Republican AGs in those states, and in every Republican state with strong price gouging laws, aggressively uses those laws to go after, for instance, in Texas, it was going after LA Quinta for tripling hotel prices during the winter storm of 2021. So, price gouging is not at all, it doesn’t tend at all to be associated with one political party or another. It’s been part of American law for almost 50 years. And the structure of the claims go like this.
First, there has to be a triggering event. Often, it’s called an abnormal market disruption, something that by definition we don’t expect, not the daily traffic jam on the way home from work, but a natural disaster, a power outage, a military action, a labor strike. Most states very specifically outline a set of emergencies and then either require or quite frequently allow additionally a declaration of a state of emergency as an additional trigger. So, once we’re in the triggering mode, then a set of rules come into place. You think of it as emergency rules, and in all price gouging statutes, they only apply to vital and necessary goods and services, so they don’t apply to luxury goods.
Third, all the laws then create a structure under which merchants can shift their prices. Typically, you can increase prices up to 10%. In some states, it’s 25%. Without getting in trouble with the price gouging laws in a few states, it’s actually 0%. You can’t increase it at all. Saying under an emergency, you can’t increase prices. But then, if the seller can show that the price increase was due to increased costs, it’s not price gouging. It’s only when there is substantial increased price that is not due to increased costs, that it counts as price gouging. So, the real heart of it is, it’s really a profit margin law. You can’t increase profit margins during emergencies.
In every state, you can maintain your profit margins. You could be sitting on 19% profit margins and keep sitting on them throughout a massive supply chain disruption. But what you can’t do is take that 19% profit margin and say, “Now, we’re going to hike our prices up 20% more because we aren’t going to get any new entrance right now and people are desperate.”
Nick Hanauer:
Yeah. Although that is what they did, in fairness.
Zephyr Teachout:
Yeah, right.
Goldy:
And, that’s because we don’t have a national price gouging law.
Zephyr Teachout:
Yeah.
Nick Hanauer:
And to be clear, I mean, the story of neoliberalism from the ’70s on is the story of both expanding corporate power and concomitant expansion of corporate profit margins from 5, 6% of GDPD to 11 or 12% of GDP. Right? Which by the way, is a trillion and a half dollars extra that could be either wages or lower prices.
Zephyr Teachout:
Right. Right.
Nick Hanauer:
Right?
Zephyr Teachout:
Right, right. It’s taking from workers or consumers. Take your pick.
Nick Hanauer:
Exactly. You need to take-
Zephyr Teachout:
But it’s not … Right.
Nick Hanauer:
Yeah, but…
Goldy:
Usually both.
Nick Hanauer:
Usually both, but 6% of GDP is, that’s a trillion and a half dollars. And that’s why the stock market is so high, and that’s why people are so poor.
Zephyr Teachout:
Yes. Yeah. So, you can say, we have an economy based on this thing that is illegal in many states.
Nick Hanauer:
Yeah, yeah.
Zephyr Teachout:
But I think what’s so striking is that you have here though almost 50 years, it was really the late ’70s that most states put in place their price gouging loss. So, it’s 45 years. But you have 45 years of evidence that if you police one sector of our economy, because what in practice happens is state AGs police, the local retailers, that’s what happens, right?
Nick Hanauer:
Mm-hmm.
Zephyr Teachout:
So, one gas station says, “I’m going to take advantage of a storm and hike my prices”, or five do, and consumers rightly complain, and the AG goes after them and gives them a fine as they should. But by and large, most gas station owners, and there’s been good studies that back this up, they’re not the ones that are actually price gouging because they know the rules. The rules are, you better not hike your prices over cost during a major weather event or you’re going to be in the bullseye. So, we’ve had 40 years of experience and the world hasn’t fallen apart. So, what’s nice is that we can take that experience and price gouging is not a solution, it’s not a full solution to the radical distortions in our economy that you described, but it’s part of one, right?
Nick Hanauer:
Right.
Goldy:
The extreme market concentration and the extreme inequality that we’ve built up over the past 50 years, but it makes these price gouging laws all the more important.
Zephyr Teachout:
It does. It does. I often call price gouging poor man’s antitrust. After we failed at market concentration, after we failed at having a free and open market where consumers and workers are fairly and freely negotiating with big corporations, we say, “Well, at least in radical emergencies around vital and necessary goods, you can’t steal from people.” So, it’s more important now than it should be, because what we need to do is take it upstream. So, what we saw during the pandemic is people were crying out about these increased prices. And if you talk to any AG, they were getting swamped with complaints. The complaints, if you then talk to the Mom and Pop Deli, they’d show you, “Look, here’s my costs. My costs have gone way up.”
But most a AGs are not well suited to take on big multinational corporations, not just as a matter of resources, but whether you’re talking about Walmart or Procter and Gamble, they can use the accounting supply chain to hide their markup somewhere far away from a state AG.
Goldy:
And there’s jurisdictional issues there as you point in the piece that if you just have got the, I think you said, if the distributor is in Minnesota and the retailer is based in some other say than they sell into Oregon, who is the Oregon AG going to go after here?
Zephyr Teachout:
Absolutely. And I want to give a lot of credit to my former boss, New York Attorney General Tish James, who is currently investigating Tyson Foods for price gouging meat sold into New York in the COVID-19 pandemic. Tyson fought that investigation tooth and nail saying, “You don’t have the right to look into the prices that we sold in New York.” They lost that fight at the state level. State court said, “No, we do.” And so, that’s an ongoing investigation. But the New York AG is one of few offices with little more resources, and frankly, the meat supply chain is a lot clearer than a lot of the other supply chains, because the nature of meat means that it needs to be sold fairly quickly after leaving the slaughterhouse.
Again, we’ll see what happens with that investigation, but it’s a massive undertaking for a state AG to try to figure out where, “Okay, what were the actual costs and what were non-cost-based markups in the supply chain of vital goods and services?” That’s a federal job. It has to be a federal job. And frankly, I think Harris is really well suited to do it just because she’s a prosecutor’s prosecutor. I mean, I think she’s mostly offended by what’s happening at the grocery store and what this does to people who can’t afford the increased costs. But there’s also something so offensive about literally having two sets of rules because of state AG’s jurisdiction. So, Mom & Pops have price gouging laws and the big multinationals effectively don’t.
Nick Hanauer:
Yeah. So, what should we do?
Goldy:
Is this the benevolent dictator question?
Nick Hanauer:
Well, one form of it, that’s for sure. What should we do?
Zephyr Teachout:
Well, I think the Federal Trade Commission is actually well positioned. It’s doing so much right now. So, of course, I’d love to have more resources to the FTC, but to use Section Five of the FTC Act, to issue a proposed rule around federal price gouging, it has in the last four years become a much more salient issue as the FTC did, as you know well, when it issued its regulation on non-compete clauses, it did so in part based on state experience. In this case, when it comes to federal price gouging, the potential of treating federal price gouging as an unfair trade practice, you have decades of state experience, and frankly, decades of those states that don’t have the price gouging laws. Treating price gouging is an unfair trade practice.
So, it feels like it’s in the bullseye of the kind of thing that the Federal Trade Commission could do. It could also do it in an individual case, but I think there’s some real power in going through the rulemaking, going through notice and comment, really hearing from different participants in the supply chain and effectively pushing through a federal regulation, clarifying, clarifying that during abnormal market disruptions, really significant non-cost-based price increases for vital and necessary goods and services is an unfair trade practice.
Goldy:
So, you’re suggesting this can be done via rulemaking as opposed to requiring legislation?
Zephyr Teachout:
Yes.
Goldy:
Now, that’s a legal opinion based on the law. What about a legal opinion based on Trump appointed judges just throwing out regulations that were passed via rulemaking?
Zephyr Teachout:
No. I mean, that’s a real issue, and I am glad that the FTC has not looked at that and stopped doing its job, but it’s a real challenge. So, I think the parallel track, to answer your question, I don’t think that means then you stop with lawmaking. And I think that Harris’s proposal for a federal law makes a lot of sense, and I can imagine a law that is based on the plurality of state laws. A lot of the challenges, as you mentioned, in state laws have to do with jurisdiction, especially nowadays.
So, in some ways, it’s a cleaner law because the jurisdictional issues aren’t there that says during an abnormal market disruption triggered by, and then list a series of triggering events, no party in a supply chain may increase its prices more than take a percentage. I’d like 10, but say it’s 20, that still would matter, no more than 10%. And those price increases, however, are wholly justified if they’re based on cost. So really simple, straightforward modeling on state law. I think that’s the way to go, and I think it would immediately find its way into boardrooms. And so, instead of automatically increasing prices, anytime there’s an emergency, which is basically what both the C-suite and AI is telling them to do, you would have compliance there saying, “Okay, during one of these triggering events, can’t do that. Here’s the rules of the road.”
Nick Hanauer:
Well, it’s a complicated issue, and obviously the broader problem is that we let all these things go way too long. Right?
Zephyr Teachout:
It is. I know.
Nick Hanauer:
That’s the big problem is that you don’t have truly competitive markets.
Zephyr Teachout:
Right. So, when you ask what we really should do?
Nick Hanauer:
Yeah, yeah, yeah.
Zephyr Teachout:
Right. So, what we should do on price gouging is one part of it, but…
Nick Hanauer:
We have 50 years of wrong-hitted policy to fix, and that it’s take a while.
Zephyr Teachout:
I know. It’s so exciting to see the FTC so active on mergers, but stopping more concentration and…
Nick Hanauer:
It doesn’t reduce the existing concentration.
Zephyr Teachout:
Yes
Nick Hanauer:
No. Right. No.
Zephyr Teachout:
It starts to over time and gradually, but I also think we need, I mean, tell me where you are now. I’ve seen your writing and speaking on this. If you’re waving a magic wand, no, if you had your top three policy proposals on…
Goldy:
Oh, no, Nick.
Nick Hanauer:
Yeah. Well, I think definitely preventing more mergers. I also think that we should be imposing many standards, certainly labor standards progressively.
Zephyr Teachout:
Yeah.
Nick Hanauer:
So, the biggest companies are held to the highest standard. So, for example, you would’ve a $25 minimum wage for large companies and a $20 minimum wage for medium-sized companies and a $15 minimum wage for small companies. I think, because what you want to do is you want to create an economy that privileges small and medium-sized businesses and holds the largest companies to the highest standard. And I think that that would make a huge amount of difference because it would decrease the incentive to become…
Zephyr Teachout:
To just grow it, urge to merge and grow at all costs.
Nick Hanauer:
Yeah, yeah, and all that stuff, and there’s a whole bunch of other little things, but anyway.
Zephyr Teachout:
Yeah. Yes.
Goldy:
I think enforcing antitrust law that’s on the books might be a great…
Nick Hanauer:
Yeah, that’s a great start. That’s a great start.
Zephyr Teachout:
Yes.
Goldy:
And split up, just go back to the legal thinking before the law and economics movement and split up some of these companies that have no right to be so large, so consolidated. They have so much market power.
Zephyr Teachout:
Oh, absolutely. And we’ve just gotten started, so there’s so, so much more to do and just basically, and as part of that, then decrease the role of financialization in the economy. But when it comes to price gouging, I do think it matters because when we started with talking about the Chicago school, I think that, and we’re ending talking with it, we’re ending up talking about it as well. It’s really important what Khan and Chopra and Tai and others are doing. It’s great. But they weren’t able to do it in part because reality just hit America in the face. And the Chicago school just lacks credibility. They had one job, to keep prices low, and they couldn’t even do their one job. They failed at all the jobs. They weren’t trying, protecting wages for workers. So, of course they failed there because they weren’t even trying.
But even on the one thing they promised, they failed and I think that creates an incredible opportunity. So, it’s good that price, price gouging isn’t a wholesale answer. It’s important. It’s not a wholesale answer, but it puts front and center that the ridiculous nature of the economic orthodoxy that’s dominated the country and really hurt a lot of people over the last 40 years.
Nick Hanauer:
Well, one final question. Why do you do this work?
Zephyr Teachout:
I guess, I just love people.
Goldy:
Well, obviously you’re not an economist.
Nick Hanauer:
Yeah.
Zephyr Teachout:
No, and I am probably, I hate to see people, not to see but to talk to and just so much unnecessary suffering. But I’m really also drawn by a deep belief in human creativity. I mean, at the smallest level, I don’t mean like DaVinci, but just allowing a society where people are truly free and dignified and free to play and connect with each other, and that feels worth fighting for.
Nick Hanauer:
Well, Zephyr, thank you so much for being with us.
Zephyr Teachout:
Thank you so much for having me.
Nick Hanauer:
Well, Goldie, I came away from that conversation ever more convinced that strong price gouging laws are probably a great idea. And in the absence of them, you’ll just have a bunch of people taking advantage of other people.
Goldy:
What do you have against maximizing shareholder value? You’re a venture capitalist. That’s what you’re in the business.
Nick Hanauer:
Sometimes it works out, sometimes it doesn’t. But definitely, it doesn’t work out for most people. And I think that the insulin example that you used is a great example. If you need insulin, you need insulin.
Goldy:
And I’ve used this in the past trying to explain markets to people and why they’re not perfectly efficient and why they do not necessarily allocate resources to the people who most value them. And the great example, the reason why I use insulin is you either need it or you don’t need it. And if you don’t get it, you die. It’s very simple. Everybody who needs insulin needs insulin equally. And so, if you’re going to allow the market to allocate it to the people with the most money under the theory that they’re the ones who value it most, what you are doing is devaluing the lives of the poor and middle-class people who can’t compete on price. And this is the thing, I’ve used this example a number of times, and I actually got pushback, which was, well, if somebody’s going to die and somebody’s going to survive, it should go to the rich because they have more reason to value life because their lives are so much better.
And that is where market thinking destroys our value system. The idea that this is a very utilitarian argument that somehow if it means the rich survive and the poor die, well, that’s just maximizing utility across the broader market because the rich have more to gain from life than the poor because you give them insulin and you’re just extending their suffering. Their lives are miserable anyway. And what I love about the price gouging argument here is that to me, this is another one of those wedge issues that exposes clearly for everybody to see the fundamental flaws in Neoclassical Orthodox, right?
Nick Hanauer:
Yeah.
Goldy:
We’ve talked about this with the minimum wage. The minimum wage is not just a policy, it’s not just good for people and it’s not just good politics. It’s a wedge. Because as the Nobel laureate economist, James Buchanan wrote, the inverse relationship between price and demand is the core principle of economic science. And to argue that when you increase the price of something, it doesn’t reduce demand, is to argue that water flows uphill. It’s unscientific, right? And the minimum wage as it has been implemented, the $15 and higher minimum wage throughout, it’s about, it’s almost $20. And now we’re in Seattle now, and we don’t see the inevitable disemployment effect. What it tells you is, it’s not that there’s no such thing as supply and demand, it’s that it’s just not a law like laws of physics. It’s a tendency.
Nick Hanauer:
Yeah, yeah.
Goldy:
It tells you something about the way markets work, but it’s not universal. And labor markets are different from the markets for pencils or for apples.
Nick Hanauer:
Yeah. Well, but also just want to come back to insulin too, because I think one of the things that makes that such a great example is that until the Biden administration got insulin prices under control by capping the price at $35…
Goldy:
Good price. That is a price control.
Nick Hanauer:
That is a price control. It was hundreds for people…
Goldy:
Here
Nick Hanauer:
Not in the world, in the rest of the world, it’s an average of eight to 10 bucks, but…
Goldy:
And here it was like four to 500.
Nick Hanauer:
But here’s the thing is whether you’re making it here or there, it still only costs about two bucks a vial to make, right?
Goldy:
Right.
Nick Hanauer:
So, at 35, it’s still astronomically profitable for the people involved, astronomically profitable. So, the limitation, the insulin price isn’t pressing the people who make insulin into a lack of profitability. If you were charging $1 for insulin, that would be okay. You could start to argue that that may be bad for the market, but anything less than that is just, it’s so…
Goldy:
Right. And so, I just want to finish this point here about this being a wedge issue. This undermines two fundamental assumptions in orthodox economics. One, that the market automatically allocates to the people who value the item most, value the resource most. We know that’s not true. It allocates it to whoever has the most money when you get into one of these situations. And the other, and she very clearly explains this, that the price gouging is good because it’s a signal to the market to increase production, and that will increase supply. And without the price gouging, the shortages will just last longer, when in fact, these are extraordinary events that we know are time limited, and nobody is going to increase the manufacturing of diapers because they know how many babies they are.
They can look at the birth rate, the fertility rate, they know how many babies there are and how many diapers they need. It’s not like suddenly they’re going to double the supply of diapers because after the pandemic passes and these supply chain crises sort themselves out, they’d have an excess inventory of diapers. It was momentary. So, the fact that there’s only a couple of diaper manufacturers that dominate 80% of the market is what allowed them to jack up the prices so high. They had no intention, nor should they of increasing production. There was no need for it.
Nick Hanauer:
Yeah, absolutely.
Goldy:
So yeah, two more things were orthodox economics, I’m not saying they never apply. They’re just not clearly always true in every situation.
Nick Hanauer:
Yeah, yeah. Absolutely.
Goldy:
If you want to read more from Zephyr Teachout, she has a number of books and articles, and we will provide links in the show notes.
Speaker 6:
Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to follow rate and review us wherever you get your podcasts. Find us on other platforms like Twitter, Facebook, Instagram, and Threads, @pitchforkeconomics, Nick’s on Twitter and Facebook as well, @nick.hanauer. For more content from us, you can subscribe to our weekly newsletter, The Pitch, over on Substack. And for links to everything we just mentioned, plus transcripts and more, visit our website, pitchforkeconomics.com. As always, from our team at Civic Ventures, thanks for listening. See you next week.