Mr. Biden, "shrinkflation" is a response to inflation not a cause of it
In the president's speech tonight he is hoping most Americans are as economically ignorant as his argument
Tonight is the State of the Union address, and behind the newly re-erected fences surrounding the Capitol (give us a break) the president will explain to us that the reason things are more expensive is because of “corporate greed”. He may even use the word “gouging”.
When one hears a pundit or a politician use the word “gouging” one can rest almost totally assured that this pundit or politician doesn’t understand basic economics. Like the kind of economics most middle schoolers in theory should be able to understand.
There is no such thing as “gouging”, at least in a reasonably free market. There is one example of actual real gouging however and that is when a company has a government granted monopoly and one is compelled by law to pay a certain price. But “gouging” in a reasonably free market does not exist.
What DO exist are fluctuations in prices and these prices can vary wildly in certain circumstances. But these higher (or lower) prices are not because of “greed” for greed’s sake. The prices change because markets change.
Take the post-hurricane/water example. Often after a hurricane or some other large natural disaster there is a shortage of water. Politicians often take to the airwaves to warn that retailers “gouging” their customers will be penalized. But this is counter productive.
In an instance where water suddenly demands a premium the wisest thing is to let the market sort things out. In the short term if water is dear prices will spike. This means that for some, in the short term, water will be harder to get. However, if the price of water is held down arbitrarily (with threats from politicians) that water will immediately disappear from the shelves. (Because it is being sold below the market price.) Additionally water would be slow to find its way back to the shelves because retailers and suppliers would have to sell water below what the market can bare and maybe even below their cost. There is no incentive to get water to thirsty customers after all the pre-hurricane water disappears.
Contrast this with a free market in water post-hurricane where the water price spikes initially but remains available (in the market) because the price is high. This high price then incentivizes water suppliers (formal and informal) to enter the market, to take on the hassle of doing business post natural disaster, because there is money to be made. In a relatively short time water returns to the shelves, prices come back down, and there is water in abundance.
OK. That’s “gouging”. But what about shrinkflation?
Those evil companies are charging the same amount for less. Oh no! I mean it’s not like the price of making everything has gone up and people are not inclined to swallow price increases or anything.
If I make a loaf of bread and it costs me $1 I might charge $2 per loaf. (We don’t really know how much it costs to make a loaf of bread but we think you see where we are coming from.) For years I charge you $2 for the loaves I make. You’re happy. I’m happy. But then inflation comes created by policy makers in Washington DC (which is what we have now). Suddenly it costs me $1.30 to make a loaf of bread. But you my customer are not inclined to pay an extra 30 cents per loaf. In fact you may not even be able to pay 30 cents more per loaf. I the baker have a problem. I can either take a 30% hit on my profit margin, or I can make that loaf of bread smaller but still sell it at the same price that you are used to. I make a decision. I sell smaller loaves because that is marginally more palatable to you than charging an additional 30 cents.
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