The Problem With Price Controls

Economists believe underlying inflationary forces can never be arrested through price controls. For instance, after President Nixon imposed price controls in 1971, inflation fell from the 6 percent range to the 3 percent range. But by 1973, as controls broke down, inflation accelerated, hitting more than 12 percent in 1974 (see figure).

Controls break down in part because so many exceptions must be made for the economy to function. Although price caps on electricity in California are just a few weeks old, they are already breaking down.

One problem is that they encourage excessive energy use.

If people can buy any commodity for less than the market price, then by definition they are going to use more of it.

This problem is exacerbated by California's temporary blackouts: at least 10,000 businesses have requested exemptions from blackouts, which means those who must comply may be blacked out more often.

Also, some businesses are encouraged to waste energy, so that when the state forces them to cut back on energy use, they will have power to spare. The problems with price caps will only increase the longer they remain in place.

They will reduce the incentive to produce more energy.

California will forever be viewed as a riskier place to invest in power plants, meaning producers will have to get higher prices permanently to protect them against the risk of new controls.

The price caps will lead to lengthy litigation over compliance -- in 1995, Occidental Petroleum settled a case involving its alleged violation of federal oil price controls in 1979. Temporary controls are likely to last much longer than anyone imagines, because the threat of catch-up price increases will be politically intolerable. But the longer controls last, the more severe their impact.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, July 16, 2001.

http://www.ncpa.org/pd/regulat/pd071601a.html

-- Martin Thompson (mthom1927@aol.com), July 17, 2001

Answers

Relevant Facts:

There are laws on the books, even in America's hypercapitalistic society, that outlaw price gouging in emergency situations. For example, hardware stores are not to raise the price of lumber by a factor of ten when a hurricaine watch hits, and everyone rushes out to buy some.

Temporary price controls during emergency situations have been used with success in the past, such as during World War Two. In January, a genuine technological emergency struck the electricity infrastructure, although it has not been widely publicized in the media. This emergency shortage was caused by the second variant of the "Leap Year Date Bug" in computerized embedded chips, the third variant of the "Y2K" computer bug. Commonly referred to now as the so called "Y2K+1" Bug, it is caused by the failure of some embedded systems to recognize that year "00" has 366 days. This was one variant of "Y2K" that was NOT discussed in 1999, so it was not properly addressed or remediated. The remediators concentrated on fixing the main "Century Date Bug", and did know of and fix the obvious variant of the Leap Year Date Bug, which hit Feb. 29, 2000. And the remediators did an almost miraculously good job. But many failed to test or remediate for the problem date of Dec. 31, 2000. This is why this particular variant of "Y2K" hit the hardest.

Conclusion Opinion:

There is no reason why electrical generators should be allowed to take advantage of this technological emergency, even if publicly undeclared, to increase the price of electricity a hundredfold or more. In an emergency such as this, everyone should share a bit of the pain, so no one gets stuck with all the pain. This should include the electrical generators, as well as the utilities, (and yes, ratepayers also.) No one should be allowed to make windfall profits off a widespread emergency condition.

Once the technological emergency is past, however, (which may already be the case), then emergency price controls should be lifted. From all indications, the markets now appear to be functioning normally, and occasional price "spikes" during peak periods should be expected and tolerated. However, if technological or other emergency recurs, such as earthquake, cyberterrorism, or a cascading outage which damages the grid, then emergency price controls should be reinstated.

A large part of the problem with this particular "Y2K+1" technological emergency is that it is being covered up, and not publicly declared. The author of this article is only augmenting this cover up problem.

-- Robert Riggs (rxr.999@worldnet.att.net), July 17, 2001.