Archive » August 31, 2007
IT’S JUST MY OPINION
By Harris R. Sherline, Journal Contributor
Price Gouging and Excess Profits
Should price gouging be a felony? Should it be a crime for someone to take advantage of market conditions and make too much profit? Why does the government let big corporations and rich industrialists get away with making so much money simply because they are in a position to control the supply and manipulate prices? It’s not fair! What about the little guy?
“There ought to be a law” is an old cliché. So, why not pass laws to regulate everything involved in producing and delivering all goods and services in order to prevent opportunistic “price gouging?”
What Is Price Gouging?
Unfortunately, there is one small problem; If we’re going to make “price gouging” a crime, we need to be able to define it first.
So, what is it? You tell me. I haven’t a clue, and I’m a retired CPA.
Should profit be determined solely on the basis of markup? Just how much should businesses be allowed to mark up the cost of their raw materials and labor? Do we need a law against prices that double costs, or more, such as cosmetics, drugs, groceries, restaurants, hardware stores, actually just about anything?
Sounds simple, doesn’t it? But, just how should cost be defined? Does it include labor and materials plus all the other expenses of running the enterprise, such as advertising and distribution, brick and mortar (buildings and equipment), financing costs and taxes? In other words, literally anything and everything that’s necessary to operate a business, and, how about the compensation of the owners or executives who manage them? Should their salaries also be considered part of the cost of doing business?
Is it even possible to create legislation that regulates literally everything involved in the process of operating businesses? And, what about the cost of implementing such laws: defining, regulating and policing them?
How Much Money Do Businesses Make?
A recent commentary circulated on the Internet highlighted the huge markups that drug manufacturers make on the active ingredients in their products. The raw data really seems quite shocking.
Here are some examples of the spread between the selling prices of some popular drugs and the cost of the active ingredients used in manufacturing them, otherwise known as markup: Celebrex - 21,712 percent; Claritin - 30,306 percent; Lipitor – 4,696percent; Prevacid – 34,136 percent; and Prilosec – 69,417 percent. If anything ever seemed excessive, markups of this order certainly seem to qualify, don’t’ they?
However, the problem with this type of information is that it distorts the situation by leaving out the rest of the numbers that are needed to make a judgment, which are the other costs of manufacturing, distributing and marketing products.
Try asking people you know how much profit they think businesses in various industries make. Not how much they mark-up the raw cost of their products, but how much they end up keeping after paying all the costs of doing business, including taxes. The answers can be quite surprising.
Many people think businesses are able to keep as much as 50 or 60percent of the profit their products or services bring. Actually, it may be as little as one or two percent of the total revenue of the enterprise, as in the case of supermarkets, or it may be five to 10 percent of their gross revenues, as with restaurants. Even the pharmaceutical companies with their large margins on the raw cost of their active ingredients end up keeping only about 18 percent of their total profits from sales (after taxes).
And, what about those individuals who make huge profits on investments in public companies, starting their own businesses, or real estate? Many people invested in IBM, Microsoft, Berkshire Hathaway and other enterprises that ultimately became hugely successful, making them rich in the process. Should that also be a crime?
A good example is Google, which made the company’s founders multi-billionaires when they went “public.” Should that kind of profit be allowed?
Or, what about those homeowners whose
properties increased in value by 500percent or 1,000 percent, or more, which has
not been unusual in recent years, especially in
We often hear politicians complain about how much money various businesses make, such as the oil companies, drug manufacturers, hospitals and doctors, Wal-Mart, just about any company or industry that garners public attention. My sense is that most politicians know little or nothing about economics and business, but that doesn’t seem to keep them from getting out in front on issues that attract the public’s attention, especially if they think it will help them get re-elected.
Defining “Excess Profits”
Another issue on the business front that gets people worked up, especially political types, is “excess profits,” whatever that may mean. Just how anyone can determine how much profit is too much, is another puzzler. And, who should be making that decision or deciding what standards should be applied is another major brain twister?
Does it mean some board, commission or agency would decide how much a business should be paying for the raw materials they use in manufacturing or how much they should be spending on advertising or perhaps what wages they should be paying, or how much their rent should be, or what they should pay for any product or service they use, or just how much they should be allowed to mark up their costs?
The entire process of trying to define and regulate profits is a slippery slope, guaranteed to become a nightmare of rules and regulations, much like the tax code. Perhaps worse, it would necessarily involve some type of price controls, which have never worked, dating as far back as the early Romans.
To those who may think they know how to create, implement and administer legislation that can effectively make “price gouging” illegal or tax “excess profits” fair, good luck! I confess it’s above my pay grade.
But, that’s just my opinion.
© 2007 Harris R. Sherline, All Rights Reserved