Don’t say price controls. Call it price mitigation. Call it price-hike avoidance mechanisms. Anything but price controls.
In announcing a complex plan to avoid price hikes, the Bush administration, in retreat mode, now backs the Federal Energy Regulatory Commission’s policy to “mitigate any severe price spikes.” Under the old rule, FERC possessed the power to impose price caps during emergencies. Now FERC may impose price caps on a 24-hour basis, should they deem price hikes unjust.
The new order falls short of placing hard price caps on power for California and the West, but call it what you want, the administration now backs away from its previous broad, free-market position.
Why the Bush retreat? California Democrats, led by Gov. Gray Davis, blame the “crisis” on Republicans, the Federal Energy Regulatory Commission, the Bush administration and the Bermuda Triangle.
Against overwhelming evidence, price-control proponents call price controls necessary to restrain greed and corruption. Gov. Davis recently hired Princeton economics Professor Alan Blinder to argue in favor of temporary price controls. Yes, the same Professor Alan Blinder who, in his 1999 economics textbook, “Economics: Principles and Policy,” said the opposite:
An attempt by government regulations to force prices above or below their equilibrium levels is likely to lead to shortages or surpluses, to black markets in which goods are sold at illegal prices, and to a variety of other problems. The market always strikes back at attempts to repeal the law of supply and demand. … Price controls throw a monkey wrench into the market mechanism. Though the market is surely not flawless, and government interferences often have praiseworthy goals, good intentions are not enough. Any government that sets out to repair what it sees as a defect in the market mechanism runs the risk of causing even more serious damage elsewhere.
And when Davis recently met with President George W. Bush, Davis supported his argument for temporary price controls by handing Bush a supportive letter signed by 10 economists. Many call one of the signees, Alfred Kahn, the father of airline deregulation. But under that scheme, the government eliminated the Civil Aeronautics Board. Under California’s alleged “deregulation,” which removed caps on the wholesale but placed limits on the retail price of energy, the state established two more agencies – the Power Exchange and the Independent System Operator.
Governor Davis expected the 10 economists to impress the president. But why listen to 10 economists now, when we consistently ignore how economists think about many issues, whether it’s minimum wage, rent control or energy price controls?
Recall former First Lady Hillary Rodham Clinton’s attempt to nationalize our nation’s health care. Five-hundred sixty economists wrote an open letter to President Clinton, urging him to drop his plans. “Price controls don’t control the true cost of goods. People pay in other ways,” said University of Pennsylvania economist John Lott. Those signing ranged from liberals like John Calfee from the Brookings Institution to Nobel laureate Milton Friedman to William Niskanen, formerly with Reagan’s Council of Economic Advisers, and to William C. Dunkelberg, a member of the National Federation of Independent Business. Nobody cared.
On another form of price controls, the minimum wage, writer James K. Glassman, a fellow at the American Enterprise Institute, says, “Economists aren’t certain about many things, but on the minimum wage, nearly all of them (90 percent, according to one survey) believe that the case is open and shut. All else being equal, if you raise the price of something (for instance, labor), then the demand for it (for instance, by employers) will decline. That’s not just a theory; it’s a law.”
I recently interviewed Pepperdine University economics Professor George Reisman, author of “Capitalism.” Reisman opposes price controls, and calls California’s “crisis” a man-made function of semi-regulation, rather than real deregulation. Moreover, he says that nearly all economists call price controls a bad idea.
Elder: ” … Among your colleagues – forget about them speaking publicly – you got 100 guys or women in a room – and they’ve studied this discipline, what percentage of them would agree that this is a man-made problem, that this is a failed government scheme of semi-deregulation, that the prices need to go where they need to go, everything that you’ve said, what percentage of your colleagues would agree with you?”
Reisman: “If they were going by what they know … ”
Elder: ” … as opposed to politics.”
Reisman: “I would say practically 100 percent.”
Elder: “That’s what I thought.”
Reisman: “That doesn’t mean they will all go by what they know.”
Price controls, no matter how “soft,” inevitably distort the process of supply and demand, creating disincentives to conserve and to supply. Or, as your granddaddy used to say, “Ain’t no problem so bad that the government can’t make worse.”
