Category — 1970s price controls

[Editor note: Tomorrow, economist Michael Giberson will critically assess government 'price gouging' laws.]

As an economist, whenever I hear the word “shortage” I wait for the other shoe to drop. That other shoe is usually “price control.”

- Thomas Sowell, “Electricity Shocks California,” January 11, 2001.

Like Bill Murray’s weatherman character in the movie Groundhog Day, the American public is obliged to relive certain bad ideas again and again (and again).

Like the movie the idea of price controls for energy keeps coming back, but will we, like Murray’s weatherman, reexamine what leads us to relive such unworkable concepts? The latest contestant in this march of folly was posted recently in the Atlantic Monthly’s business blog.

The idea–called a buffer fund–is to establish a target price for retail gasoline (diesel, too, though they seem to have forgotten that part of the fuel supply) and use taxes or subsidies to maintain the target price over time.

Price Controls – Back by Popular Demand

The response from the readership was immediate, never mind how any of this would work, whether it has everworked as planned elsewhere, or what would happen to the economy if it were implemented. This is a great idea!  Stick it to Big Oil!  Let somebody else pay for my gasoline!

A sample of some of the comments on the Atlantic article includes the following gems:

· Normal market operations concentrate too much money in the oil industry

· Oil companies never put their earnings back into the economy

· We consume too much oil and only rationing can cure the disease (at least this one acknowledges that price controls accomplish nothing)

· It all stems from allowing (!) people to live in single family houses

· Speculators are behind all the problems!

This time the justification for a buffer fund and price controls is that every time the economy gets rolling, energy prices rise and snuff out the recovery in the crib.

Really, I am not making this up. [Read more →]

[Editor Note: Carter's April 1977 energy speech was also reproduced and commented upon at MasterResource.]

Thirty-two years ago today, President Carter and his energy advisor James Schlesinger got it all wrong in an emergency television address to the nation. Their neo-Malthusian, government-as-engineer moment should never be forgotten but stand as timeless warning about the anti-market, anti-energy mentality.

In the summer of 1979, many Americans were stuck in the gasoline lines. There was a lot of lost time and nervousness. There was fighting and worse. The market as a buffer of civility was gone. Americans were not used to such a predicament and had the common sense to know that something was very abnormal and not to be tolerated. They were mad.

Here is the background of his energy speech, considered as the most important speech of his presidency:

On June 30, 1979, a weary Jimmy Carter was looking forward to a few days’ vacation in Hawaii, as Air Force One sped him away from a grueling economic summit in Tokyo. He had earned it. Two weeks earlier, Carter had successfully concluded the SALT II arms control negotiations with Soviet Premier Leonid Brezhnev in Vienna, the latest in a series of foreign policy achievements since the dramatic Camp David summit the previous September.

Aboard the plane, the phone rang. It was Carter’s pollster, Patrick Caddell. “I remember getting on the phone and saying, ‘You people have got to come home now,’” Caddell recalls. “We were all saying the same thing: ‘You have no idea how bad it is here.’”

The so-called malaise speech and crisis of confidence speech, Carter’s fifth address on energy to the nation, was different from the rest. As explained in the Wikipedia entry on Carter:

When the energy market exploded — an occurrence Carter tried to avoid during his term — he was planning on delivering his fifth major speech on energy; however, he felt that the American people were no longer listening. Carter left for the presidential retreat of Camp David.

For more than a week, a veil of secrecy enveloped the proceedings. Dozens of prominent Democratic Party leaders—members of Congress, governors, labor leaders, academics and clergy—were summoned to the mountaintop retreat to confer with the beleaguered president. His pollster, Pat Caddell, told him that the American people simply faced a crisis of confidence because of the assassinations of John F. Kennedy, Robert F. Kennedy and Martin Luther King, Jr.; the Vietnam War; and Watergate.

Where was Milton Friedman or just about any economist worth his or her salt? The gasoline shortages of early 1974 and the natural gas shortages in the winters of 1971/72 and 1976/77 came from the same cause: federal price and allocation controls that did not let supply and demand mesh.

—————————THE SPEECH————————–

Good evening. This is a special night for me. Exactly three years ago, on July 15, 1976, I accepted the nomination of my party to run for president of the United States. [Read more →]

“The oil and natural gas that we rely on for 75 percent of our energy are simply running out.… World oil production can probably keep going up for another 6 or 8 years. But sometime in the 1980′s, it can’t go up any more. Demand will overtake production. We have no choice about that.”

“To some degree, the sacrifices will be painful—but so is any meaningful sacrifice. It will lead to some higher costs and to some greater inconvenience for everyone. But the sacrifices can be gradual, realistic, and they are necessary.”

“We must not be selfish or timid if we hope to have a decent world for our children and our grandchildren.”

- Jimmy Carter, Energy Address to the Nation, April 18, 1977

Will Obama and his ilk learn the lessons of history?

One such lesson is don’t count conventional energy out. In the 1970s, oil and gas shortages experienced in many parts of the U.S. were erroneously blamed on resource exhaustion rather than government price and allocation controls.

These shortages can be traced back to two presidents who made damning decisions that cost their country plenty. President Eisenhower fathered the natural gas crises of the 1970s when he unexpectedly vetoed a natural gas wellhead decontrol bill in 1956 (1); President Richard Nixon fathered the oil crisis with his wage and price control order of August 1971.

Peak oil, peak gas? The speech below is just another data point of warning against those who are wed to the fixity/depletion view of minerals rather than open-ended resourceship.

——————————————THE SPEECH————————————–

Tonight I want to have an unpleasant talk with you about a problem that is unprecedented in our history. With the exception of preventing war, this is the greatest challenge that our country will face during our lifetime.

The energy crisis has not yet overwhelmed us, but it will if we do not act quickly. It’s a problem that we will not be able to solve in the next few years, and it’s likely to get progressively worse through the rest of this century. [Read more →]

Richard Nixon (1913–94) got on the wrong side of economic law three years before his Watergate-related resignation from the U.S. presidency. In August 1971, in a surprise decision, Nixon imposed the first peacetime wage-and-price controls in American history.

Businessmen reined in their surprise to pragmatically offer support. John Kenneth Galbraith and Paul Samuelson offered quick congratulations. There was public approval of the ‘temporary’ action that was intended to just quell inflationary expectations (as if the problem was psychological and not the inherent consequence of expansionary money). The inflation rate was then running at about 4 percent per year.

Free-market economist Milton Friedman, knowing that shortages lay ahead, lambasted the move. So did Ayn Rand in the Ayn Rand Letter. Murray Rothbard was fiercely critical (“on August 15, 1971, fascism came to America,” he wrote); he had seen price controls and shortages before.

Nixon’s edict disabled the market process responsible for coordinating supply with demand and allocating resources to their most profitable use. Predictably, oil shortages developed, which resurrected long dormant depletionist thinking and pointed policymakers toward conservationism. After all, if price controls did not allow prices to rise and “regulate” demand to available supply, then government had to—at least according to the majority of policymakers and neo-Malthusians whose worldview dovetailed nicely with public sentiment against the energy industry.

Birth of Peacetime Conservationism

The oil crisis, contrary to popular remembrance, did not begin with the Arab Embargo of October 1973. It began with petroleum product shortages that arose in late 1972 when price controls became constraining. In February 1973, Senate hearings on fuel shortages demonstrated, in the opinion of committee chair Henry Jackson (D-Wash),

One, there has been an unprecedented breakdown in our energy supply and distribution system;

Two, the fuel shortages now being experienced are far more extensive than anticipated;

Three, more severe shortages of fuels, particularly gasoline, are in the offing. [Read more →]

For decades I have enjoyed the opinion-page editorials of the Wall Street Journal, both the unsigned editorials and the guest opinions. During the 1970s energy crisis, and today amid climate alarmism and the futile crusade to regulate carbon dioxide, the Journal has been a bastion of sound thought.

I was recently reminded of perhaps my favorite WSJ energy editorial of all, “Buffer of Civility,” published during the dark days of energy rioting in summer 1979 (yes, the U.S. experienced fuel riots from federal price controls that caused energy shortages). What brought this to mind was another WSJ editorial, “Sebelius’s Price Controls,” which reported on a 136-page price-regulating rule under ObamaCare–and this message to state governors from HHS Secretary Kathleen Sebelius

urging them “to prevent unjustified and excessive health insurance premium growth.” Apparently, “unreasonable” means rate increases that exceed 10% next year, except when it doesn’t. If an insurer crosses this arbitrary threshold, “The review process would then determine if the increase is, in fact, unreasonable.” So that’s cleared up.

The Journal added:

This discretion is typical of the vast ad hoc powers that ObamaCare handed to regulators, though Ms. Sebelius’s true goal is to punish the insurance industry for rising health costs that the new entitlement is already turbocharging. Like so much else in U.S. health care, no one seems to find it odd that the government is decreeing how much businesses are allowed to charge for a product that consumers want to buy, regardless of the economic reality.

Economic reality: maximum price controls cause shortages, and shortages cause social strife, even violence. This brings us back to June 1979 and a plea to recognize the real virtue of the free market,  our buffer for civility.

Here is the classic editorial. [Read more →]