Supply, Demand and Prices

The Washington Times (Washington, DC), April 8, 2008 | Go to article overview

Supply, Demand and Prices


Byline: David W. Kreutzer, SPECIAL TO THE WASHINGTON TIMES

During the summer, television networks don't seem to discriminate in airing reruns. The miserable shows get re-aired along with the good ones.

Washington seems to have the same mindset on policy reruns. Failed policies are as likely to be reinstituted as successful ones. Case in point: petroleum regulation and the "windfall profits" tax.

In a ritual as predictable as Donald Trump firing an eager go-getter, Congress demands testimony from oil executives and threatens additional taxes and price regulations whenever petroleum prices rise. It's an old tradition and one based on economic ignorance.

Bowing to flawed thinking and the popular will, President Nixon (with Congress) instituted general price controls in 1973. It was a vain attempt to control inflation. After the predictable shortages arose, price controls were eliminated on everything except petroleum products and natural gas. Not eliminating those price controls created the energy crisis of the 1970s and the memorable gas lines.

Yes, the Arab oil embargo reduced world petroleum supply, and worldwide economic growth increased demand. However, rising demand and shrinking supply cause higher prices, not gas lines.

This isn't a mystery. Around Chapter 5 in every "principles of economics" class, the impacts of price ceilings are explained. They lead to shortages. The logic is clear, and the evidence is consistent and overwhelming. When Reagan eliminated petroleum price controls in 1981, the shortages and the gas lines disappeared.

Why would politicians use such tried-and-failed policies? Maybe because the public rarely understands who is actually at fault. Surveys in the 1970s about the energy crisis bear this out. Who did the respondents blame? Not Washington for its Byzantine price and allocation controls, nor even OPEC. They blamed "Big Oil."

In "The Myth of the Rational Voter," economics professor Bryan Caplan exposes the discouraging gap between popular conceptions of economics and economic reality. So it isn't surprising that the same 1970s-era surveys showing the energy crisis to be the biggest problem also showed the most popular solutions would amplify the very things causing the crisis. A large majority wanted more stringent price controls. A near majority even wanted to issue ration coupons.

Then as now, a weakening dollar and strong economies overseas led to higher petroleum prices. …

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