There is big news this morning. At the New York Times, David Kocieniewski has written an article about how Goldman Sachs has used its effective control of aluminum warehouses to increase prices on the metal by an estimated 7%. Now I understand that 7% doesn’t sound like that much. And in the grander scheme of the economy, it isn’t very much. But it is like how oil companies are always screaming about drilling on national parks in Alaska: not much oil for us, but huge profits for them.
In talking about the article, Dean Baker noted that this is on the order of what he always though more generally. “The piece suggests that the impact on price is limited, but worth a huge amount given the volumes involved. This is what I had always assumed about the extent to which this sort of speculation can affect the price of products. Speculation might add 20-30 cents to the price of gas, but it can’t explain why we are paying $4.00 a gallon rather than $1.50 a gallon.” But the huge profits are not the whole story. After all, why stop at huge when you can go for huger?
I thought about this because of Matt Yglesias’ head scratching article this morning, How Does This Commodities Scam Work? It is frustrating, because Yglesias is such a smart guy. But he allows a certain kind of “everyone knows” blindness that really hurts his analysis at times. It is the typical kind of upper-middle class belief in supposedly free markets. In this case, he couldn’t understand how Goldman Sachs could add a price premium to aluminum storage. He was making a classic libertarian mistake (even though he isn’t a libertarian) when he wrote, “The story is entirely missing a clear explanation of why this doesn’t just lead someone else to open aluminum warehouses and undercut them.” Oh, Grasshopper!
The reason is the 7%. Goldman Sachs isn’t causing prices to go up by 300%. What is the point of another company coming into the market just to deprive Goldman Sachs of this small marginal profit? Remember: Goldman Sachs is already in this business. A new competitor would have to invest to start doing it. What’s more, if they did, Goldman Sachs could just lower its prices and drive them out of the market. The delays and costs that Goldman Sachs adds to the process just don’t offer great market opportunities. And in this way, we could say that the market is working. Goldman Sachs knows they can only screw people so much before they will cause other businesses to see an opportunity.
None of this takes away from the outrage factor of this story. But then, like most people, I believe in antitrust laws. I think that capitalism is a useful tool that can help everyone. But allowed free reign, it will do great damage. Allowing Goldman Sachs to gain this extra profit is like pretending that stealing is not wrong. Unfortunately, if recent American history is any gauge, nothing will be done to Goldman Sachs because, you know, stealing is only wrong if the thief is poor.