Political Hay

Price Control Politics

For reasons best known to their pollsters, Democrats (and Republicans) are happily overthrowing the laws of supply and demand.

By 9.20.05

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WASHINGTON -- Some folks are ignorant about economics but know some history. Others know some economics, but lack historical memory. Then there are politicians.

In response to rising gasoline prices induced by Hurricane Katrina, Rep. Louise Slaughter (D-N.Y.) has proposed "the Emergency Petroleum Allocation Act." The letter begins:

In response to the energy crisis in the seventies, Congress passed legislation in 1973 that directed the President to establish temporary measures to stabilize the price and allocation of gasoline. With gas prices soaring, due in large part to the aftermath of Hurricane Katrina, it is time for Congress to act once again.

Uh, oh. Anytime someone urges a return to the 1970s, sound the alarm. Slaughter goes on:

This legislation will give the President the authority to temporarily cap gas prices, and sets the maximum price at $2.50 per gallon. In addition, the legislation directs the Secretary of the Energy [sic] to develop criteria for determining the duration of the temporary price controls, and establish procedures for declaring fuel emergencies in the future. The bill requires the President to take into account environmental and energy measures when making his price and allocation decisions. [Emphasis added.]

As any first-year economics student could tell you, price controls do not solve emergencies -- they create new ones. When demand for a good rises, the price for that good will also rise. The rise in price is a signal to suppliers to put more resources into supplying that good. Price controls limit the ability of suppliers to do so, but do nothing to stem the rise in demand. With the demand unchanged, but the supply restricted, the result is a shortage of that good. That's exactly what happened with gasoline in the 1970s. Or so I thought before reading Congresswoman Slaughter's letter:

This approach worked in the 1974 -- and it will work today.

So were those gas lines just a figment of our imagination? When I asked Slaughter's spokesperson Eric Burns about the price controls, he assured me that "use of this regulation would have to be judicious." He noted that there are checks on the regulation, such as a one-year time limit.

When asked about the role of markets, Burns responded that markets "in the real world are infinitely more complex. Various factors influence them, such as the recent disaster." But it seemed that Slaughter's proposal involves a lot more than Hurricane Katrina relief. Burns claimed that gas prices had been "spiraling out of control for some time, hurting families and local businesses," that there is an "excessive amount of profit in the oil industry," and that Slaughter's measure was "by no means a long-term solution."

Burns is correct that markets are infinitely complex -- too complex to be managed by government and political opportunists. Markets function on the basis of enormous amounts of information, which includes responding to changes in such information, as we are witnessing with the slow decline in gas prices now that the worst of Katrina has passed. Government intervention like that envisioned by Slaughter would only hurt those it most intended to help: long gas lines would slow the trucks moving supplies into New Orleans and elsewhere. Have we forgotten the lessons of the 1970s?

THE ANSWER APPEARS to be yes, if the Washington, D.C. Council is any indication. The council has wanted to stick it to the pharmaceutical companies for some time now, and thanks to efforts by Social Do-Gooder-cum-Councilman David Catania, it is very close to doing so. Catania's bill would allow any D.C. resident (read "trial lawyers") to sue drug manufacturers for "excessive pricing." Excessive pricing is defined as the wholesale price of a drug being more than 30% over the price of the drug in Germany, Australia, Canada, or the United Kingdom. The bill seems to be little more than a back door to imposing price controls on prescription drugs. According to an article in the Washington Examiner, Catania maintains that the legislation wouldn't be necessary "if the drug manufacturers would stop their price gouging."

Of course, Catania doesn't define "price gouging." D.C. residents will soon find that the drugs they need will be in short supply at the local pharmacy, since the price control will undoubtedly induce pharmaceutical companies to limit what they supply to D.C.

In the wake of the absurd recent Vioxx liability ruling, perhaps they won't want to subject themselves to another trail lawyer feeding frenzy. They can stop selling to D.C. pharmacies, safe in the knowledge that most D.C. residents can hop on the Metro to buy their drugs in the suburbs of Virginia or Maryland.

Perhaps none of this is anything to worry about. Slaughter's proposal is going nowhere, and Catania's damage won't spread much beyond D.C. On the other hand, free markets and limited government don't seem to be winning a popularity contest even among Republicans these days.

If there was ever any doubt, after President Bush's speech last Thursday we know for a fact what "Compassionate Conservatism" means: spend lots of government money when you think you are in a political pinch. Two days earlier, Majority Leader Tom DeLay declared "ongoing victory" against government waste, suggesting that there was no fat left to trim in the federal budget. Thus, it's not hard to imagine a point in the future when price controls are included in the definition of Compassionate Conservatism, and a member of the House declares victory in the GOP war against deregulation.

That gurgling sound you hear is the lessons of economics and history over the last 30-plus years going right down the drain.

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David Hogberg is a senior fellow at the National Center for Public Policy Research.  Follow David Hogberg on Twitter.