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06.06.2002, 15:37

Did Price Controls Work? / Artikel

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http://www.mises.org/fullstory.asp?control=969
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Did Price Controls Work?
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by William L. Anderson

[Posted June 5, 2002]

[img][/img] One
of the justifications for socialism and interventionism has been that some
commodities simply are"too important to leave to the market." Thus,
the New York Times, certainly no friend to free markets, recently
editorialized about California and the Enron affair: 

<blockquote style="MARGIN-RIGHT: 0px">

It is Washington's duty to find out why (electricity
markets melted down in California), and to devise the necessary safeguards.
Electricity is a public necessity that must be managed wisely, not entrusted
blindly to the market.<a title href="http://www.mises.org/fullstory.asp?control=969&FS=Did+Price+Controls+Work%3F#_edn1" name="_ednref1">[1]</a>

[/i]

Most likely, the person who wrote this editorial thought of
himself as being a rather wise sage, yet the statement, like much of the
editorial that preceded it, was sheer foolishness. A few samplings of what the
writer gave the readers follow:

<blockquote style="MARGIN-RIGHT: 0px">

"To everyone's great relief, the crisis eventually
receded. Federal regulators summoned the courage to impose price controls,
thus reducing incentives for manipulation."  

"Congress and the Federal Energy Regulatory
Commission... are best positioned to do this job (examine what went wrong
in California)."  

"Economists said things would have worked fine had
politicians not meddled with their grand design." (This was
written as part of a group of pejorative statements about the players in the
California"deregulation" system.)

[/i]

These are nonsensical statements that must be discredited
before I go any further. First, had the establishment of price controls
for electricity actually caused the crisis to end, it would have been the
first time in history that price controls actually would have calmed a
volatile market. (The Times’ resident economist, Paul
Krugman, has also made the spurious claim that price controls ended the crisis.)

If anything, price controls set by the Federal Energy
Regulatory Commission (FERC) at best had no effect, and at worst have set a
dangerous precedent. First, the prices set by the FERC were above what
the electricity markets were paying at the time, and conditions that were
causing the price spikes in the first place had abated even before the
government imposed price controls on wholesale electricity. Second, by
intervening into the markets, FERC will be expected to set future wholesale
prices that sooner or later will create the shortages that inevitably follow
when government sets the price of something below what the market is currently
bearing.

Furthermore, one needs to add that the crisis occurred precisely
because the California Legislature imposed price controls on
electricity sold to consumers. Even the Times editorialist
acknowledges that fact, writing:

In deregulating its power system, the state seems to have
made every mistake possible. For starters, it forced utilities to buy power
at market rates while capping what they could charge their retail customers.
This devastated the utilities. It also sent exactly the wrong signal to
consumers, who had no incentive to conserve.

Unfortunately, after having made that statement, the writer
claims that the whole thing seems to be a mystery that the government must
"solve." To say that Congress and its wholly owned subsidiary
FERC are"best positioned" to discover what went wrong in California
is like saying that Osama bin Laden is best positioned to know what went wrong
on September 11. As noted earlier, even the Times editorialist
understood that California’s pricing system was horribly flawed.

No doubt, both congressional and FERC staffers (and even
their superiors) know what went wrong in California and why it happened. For
that matter, even California Gov. Gray Davis declared that the crisis would be
over if he were to permit retail electricity prices to increase, but then he
said that was an unacceptable solution. However, if these folks actually were
to declare publicly that the problem was not with electricity producers and
distributors but rather with the politicians and bureaucrats who hatched the
scheme, then their game would be over. Moreover, if a free market were to
be enacted in both intrastate and interstate markets, then the politicians and
bureaucrats would find themselves in that most terrible (for them) condition:
irrelevance.

While some economists like Krugman, Alfred Kahn, and 2001
Nobel Prize winners Joseph Stiglitz and George Akerlof called for the
establishment of interstate price controls, most economists understood that
California had an unsound re-regulation format that was bound for failure, and
that slapping on interstate price caps to accompany California’s price
controls was folly. Contrary to the pronouncements by the New York
Times, good economists neither create nor worship markets, as the
editorial writer seems to believe; they simply observe the patterns that
markets create and point out what is happening and why things are moving in a
certain direction.

As pointed out earlier, the writer does get the part right
about the disincentives that the California system created when it deregulated
producer prices but capped retail prices. Furthermore, he correctly
criticizes the California Legislature’s refusal to permit private
electricity producers to enter into long-term contracts to purchase
out-of-state power. However, he then discredits himself by assuming that the
perverse incentives created by California’s Rube Goldberg re-regulation
rules (it does violence to the English language to call it a system of"deregulation")
played only a part in the entire fiasco of 2000 and 2001.

In fact, the writer then reverts to the usual conspiracy
theories that have popped up:

<blockquote style="MARGIN-RIGHT: 0px">

"Suspicions that some natural gas companies
deliberately withheld supplies in anticipation of still higher prices have
never been fully explored. Nor has the question of why one-third of
California's available power mysteriously went off line in the winter of
2000-2001. Was it because older plants shut down for repairs? Or was it
simply another instance of power providers gaming the market?"  

"What remains unexplained is why the rise in gas
prices was so much higher in California than it was anywhere else."

[/i]

The specious charge that perhaps electricity producers shut
down their plants in order to deliberately create a crisis is popular in
political circles. It is also illogical. First, power producers in
the state could not hope to get higher prices, since the legislature had
already capped them. Holding power off the market would not have changed
that situation at all.

Second, electricity producers make money by selling
electricity. If holding electric power from the market is such a good
idea, why aren’t power producers across the nation doing it? If it
actually made economic sense for producers not to generate
electricity in California, that points to a problem with the Legislature’s
pricing scheme, not some nefarious schemes by utilities.

(In fact, politicians have been the ones who have insisted
that holding commodities off the market creates wealth. For most of the
20th century and into the 21st, the political classes have crafted
various agricultural policies that are centered on making sure huge amounts of
crops never make it to market. Perhaps the Times had Pacific
Gas and Electric confused with the U.S. Department of Agriculture.) 

The same goes for natural gas producers. These folks
make their money by selling natural gas to customers, especially utilities,
and not by holding back supplies. Of course, natural gas sellers faced
the daunting problem that the crisis the Legislature created was also
affecting the ability of electric utilities to pay for the gas.

The writer asks the rhetorical question of why natural gas
prices were higher in California than elsewhere, expecting someone to reply
that the utilities and gas producers all of a sudden decided to make things
difficult for Californians. This plays into the"California as
victim" nonsense, as though people in the natural gas and electricity
businesses suddenly decided they did not like Californians and wanted to harm
them. Given that California has the nation’s strictest environmental
laws and that its left-wing government is known for its hostility toward
business in general, it is hardly surprising that it is more difficult to get
supplies of natural gas to people in that state.

No, the troubles in California occurred because the
California Legislature decided not to leave the business of
producing and selling electricity to the players in the market. Contrary
to the writings of Paul Krugman, the California crises did not happen because
of some sort of irrational"worship" of markets. Instead, they
occurred because people who should have known better believed that they could
circumvent markets and create their own Byzantine schemes, but those schemes
blew up in their faces.

As noted at the beginning of this article, the Times declares
that electricity is so important that the state should be the major player in
producing and distributing it. This is nonsense.  We don’t
depend upon the government to ensure that the New York Times lands
on the doorsteps of subscribers, nor does the government make sure that the Times news
boxes are filled each morning.

More than two decades ago, many of these same critics were
claiming that oil was too important a commodity to be left to the market. The
1981 removal of price and allocation controls thoroughly discredited that
belief. Likewise, given the awful government failures we have witnessed
in creating energy policies, we can state unequivocally that electricity is so
important that it must be left to the free market to produce and
distribute it.

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William Anderson, an adjunct scholar of the Mises Institute,
teaches economics at Frostburg State University.  Send him MAIL. 
See his Mises.org Articles
Archive.

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<a title href="http://www.mises.org/fullstory.asp?control=969&FS=Did+Price+Controls+Work%3F#_ednref1" name="_edn1">[1]</a>"California
Scheming," unsigned editorial, New York Times, May 27, 2002.


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