Low Prices or High Prices: We Can’t Have it Both Ways

July 17, 2006

Indiana Writers Group column for July 19 and thereafter
566 words

By T. Norman Van Cott

It seems as if it were only a few weeks ago that Hoosier opinion-makers were obsessing about Wal-Mart’s negative impact on Indiana.

Wal-Mart’s offense? Low prices. Wal-Mart’s marketing technology, including its access to low-cost foreign suppliers, was chipping away at the Hoosier fabric. Nationally it was the same tune. Indeed, Wal-Mart crisis mongering saturated the media culture, college classrooms and mainline church pulpits. Pundits, professors and preachers alike intoned about how Wal-Mart was disfiguring America. Secular and sacred merged to decry those “always low prices.”

Then the drumbeat stopped. The stop coinciding with concern about rising gasoline prices. The new song was one of high gasoline prices sapping national strength. Whereas Wal-Mart selling cheap Chinese shirts hurt Americans, now it’s Exxon selling expensive Arab oil that hurts us.

Is there an alternative interpretation? You bet. It’s that our opinion-makers are knee deep in contradiction. Never mind their seemingly seamless transition between price crises, they can’t have it both ways. Either high gasoline prices or low Wal-Mart prices hurt Americans. One or the other, not both.

It means that if high gasoline prices hurt Americans then those “always low prices” at Wal-Mart help Americans. Alternatively, if Wal-Mart’s low prices hurt Americans, then high gasoline prices help us. Like it or not, two plus two always equals four, not just sometimes.

Only the oil-gasoline price scenario, however, has credibility. Crisis-mongering about Wal-Mart is bogus. Higher gas prices trace to oil’s increased scarcity for Americans. In contrast, Wal-Mart’s lower prices for shirts reflect increased shirt abundance. More scarcity signifies lower living standards. Increased abundance is what higher living standards are all about.

Interestingly, the marketplace uses prices to minimize the reduction in living standards associated with increased scarcity. A higher price of gasoline, for example, encourages Americans to eliminate the lesser-valued consumption uses to which they had put gasoline. Higher valued consumption uses remain. Higher gasoline prices also provide incentives for additional production from suppliers who otherwise would not produce. The effect is to mitigate but not eliminating the increased scarcity.

At the same time, lower prices following upon increased abundance maximize the increase in living standards. Lower prices for those Chinese shirts induce Americans to purchase shirts for uses not deemed economic prior to the increased abundance. Abundance transforms the uneconomic into the economic.

Likewise, American shirt producers with income-earning alternatives that are more lucrative than competing with the Chinese opt out of shirt production. That means, in effect, that Americans get shirts at a smaller sacrifice. And that means higher living standards. A free lunch? No, just bigger helpings.

It should go without saying but I’ll say it anyway that politicians who suggest substituting government price edicts for the marketplace are sacrificing our living standards to the gods of political expediency. Not letting the price of gasoline reflect its increased scarcity prevents price’s ameliorating effects on our living standards. Ditto for not letting the price of shirts reflect Wal-Mart related abundance. The same politicians who would never opt for lower living standards for their own households nevertheless suggest exactly that for the national household.

The only bright spot in this contradiction is that the gasoline scenario trumped Wal-Mart crisis mongering. The accurate swamped the bogus. Nevertheless, the fact that the contradiction has gone unnoted in the public discussion is a sad commentary on our insightfulness. It does little to assure that we’ll get things right next time.

The author, a professor of economics at Ball State University, is an adjunct scholar with the Indiana Policy Review Foundation. Contact him at nvancott@inpolicy.org.




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