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Jewish World Review March 23, 2001 / 28 Adar, 5761

Thomas Sowell

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Consumer Reports


An old problem returns

http://www.jewishworldreview.com -- THE last time so many people were as bedeviled as the people of California are today by electrical blackouts was back in 1979, when motorists in cities across the country were lined up for hours at filling stations, waiting to get gas. Both shortages had the same cause -- and the same refusal to acknowledge the cause.

Both crises were wholly unnecessary and produced by similar actions of politicians. The amount of gasoline sold in 1979 was higher than in any previous year in the history of the country, except for the record-breaking year of 1978. So it was not a lack of gasoline that had Americans desperate to find a filling station that was open. It was price control.

Artificially low prices cause the public to demand more than they would otherwise and suppliers to supply less. Therefore there is a shortage. This is straight out of Economics 1.

After Ronald Reagan became president in 1981, one of the first things he did was get rid of price controls on petroleum. There were great outcries that this would lead to skyrocketing prices for gasoline. But, with price controls gone, suppliers supplied more and we have not had to wait in gasoline lines stretching around the block in the two decades since then. With more petroleum being supplied after price controls were abolished, the price of gas fell within a few months and eventually reached an all-time low in real terms. But we have learned nothing from this episode -- or from similar episodes in countries around the world.

The end of rent control in Melbourne in the 1950s led to housing being built for the first time since World War II. Similarly later in Sweden and still later in Massachusetts.

Price controls have a record of causing shortages going back at least as far as the days of the Roman Empire. Price controls on food have produced shortages, malnutrition and even starvation. Rent control has produced housing shortages from New York to Paris to Hong Kong. But no politician wants to admit that price controls have produced an electricity shortage in California.

When the price of electricity rose to 21 cents per kilowatt hour in southern California last year, the state's Public Utilities Commission voted unanimously to reduce that to less than 7 cents per kilowatt hour. The state legislature then stepped in to control prices charged consumers throughout California -- at rates lower than the utility companies were paying to buy electricity.

It would not take an economic genius to figure out that, when the companies that were supplying electricity to the public were collecting less money than the electricity cost them, it would be only a matter of time before they would run out of money and the electricity-generating companies would be unwilling to sell to people who were unlikely to be able to pay them.

While this is a relatively simple economic problem, it is a very complicated political problem. It was one thing for Ronald Reagan to get rid of the price controls that he had inherited from his predecessors. It is a very different political problem for the California state legislature -- controlled then and now by the same Democratic party -- to admit that its own actions had brought on this debacle.

Still less could they admit that decades of their pandering to the environmental extremists, who abound in California, had led to a jungle of laws and regulations that made it impossible to get any sane investors to risk millions of dollars building electricity-generating plants, when there were a zillion hoops to jump through -- and no assurance that they would ever be allowed to finish building it, much less make any money from it.

California Governor Gray Davis is no Ronald Reagan, but even he admitted: "Believe me, if I wanted to raise rates, I could have solved this problem in 20 minutes." In other words, price controls have caused this shortage and these blackouts. Now Governor Davis is suspending some of the costly and time-consuming procedures which have prevented any power plants from being built in California for more than a decade.

However, the need to find someone else as a scapegoat means that there are dark mutterings about the "greed" of electricity suppliers who have "gouged" California consumers with "unconscionable" prices. If you were in charge of an electricity-generating plant outside of California, would such talk make you want to sell electricity to California -- or to some other state where you were more likely to get paid what you were promised, without having the money held up for political investigations?

JWR contributor Thomas Sowell, a fellow at the Hoover Institution, is author of several books, including his latest, Basic Economics: A Citizen's Guide to the Economy.

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© 2001, Creators Syndicate