Ben Stein dusts off the usual conservative talking points:
All this comes to mind because I read that something called “the Stupak bill” just passed in Congress. This bill, named for a representative from the great state of Michigan, basically gives us a socialized energy industry. (As of this writing, President Bush has threatened to veto the bill.) Of course the bill doesn’t come right out and say that, because Americans are wary of socialism. But the Stupak bill allows the Federal Trade Commission (FTC) to issue findings of price gouging against energy companies based on the slenderest of assumptions rather than real evidence, leading to severe punishment for the companies. This regulation could be triggered by actions that are basic to the free market – for instance, when an oil company raises prices because there’s a shortage of oil due to a revolution in Nigeria that shuts down production in the Niger Delta, or a hurricane that closes refineries in Louisiana. In the most elemental terms, then, the Stupak bill punishes oil companies when the free market is working as it should, allocating supply by means of the price system. When I say punishing the oil companies, I mean that the Stupak bill allows compulsory lowering of fuel prices. That will mean service stations running out of gas, long lines at the pump, and people unable to get to work or school or the hospital.
Really? So why is James Hamilton saying a few nice things about this bill?
The third good thing about this bill is that it leaves enforcement up to the Federal Trade Commission. I am quite certain that, under any administration, FTC staff are going to be vastly more economically literate than the typical judge, jury, or politician, and will approach the analysis of what is actually going on with supply and demand in a given situation with some degree of basic understanding.
In other words – if markets are working according to the perfectly competitive view held by Ben Stein, the FTC will not impose rigid price ceilings. Just because Ben’s father was an economist does not suggest we should listen to the son as he plays economist on TV.
Update: Maybe I owe Ben Stein an apology in light of the latest from Thomas Sowell:
Whatever the hopes that may have inspired price controls, economists have studied their actual consequences, which have been remarkably similar from one place to another and from one time to another – and almost invariably bad … In the United States, liberals have made it virtually impossible, by banning drilling in all sorts of places and preventing any new refinery from being built anywhere in the country in the last 30 years.
I’m rather stunned by these two sentences coming from a Ph.D. in economics. Yes, price controls applied to perfectly competitive markets will lead to shortages, but Thomas Sowell is saying that he has never seen examples of monopoly power. The other sentence is suggesting that we have an incredible shortage of refinery capacity and that the refinery companies are just itching to increase capacity. Our friend Bill Polley offered a somewhat different view as he linked to a discussion that featured Akshay Rao. My thoughts on this alleged shortage of refinery capacity can be found here and here:
Dr. Rao starts with the declining number of refineries canard but then notes their output is up AND we can address shortages with imports. Bill Polley notes that the decision to make a new refinery is a long-term investment decision so even if refinery margins have temporarily spiked, that’s not going to necessarily induce a surge in refinery investment … Much of the rise in gasoline prices from January 2000 to March 2007 is attributable to higher oil prices. Refinery margins have been quite volatile but there does not appear to be a clear upward trend. Now the current high prices might be to another jump in refinery margins, but I’m willing to bet that this is just another transitory event. Which would mean that the incentives to do a lot of refinery investment just won’t be there … Certainly, the dip in refinery capacity and rise in refinery margins after Katrina should be seen as inward shift of the supply curve. But did Katrina and Hurricane lead to such a decline in refinery supply that we still are feeling the effects? Or is the fall in output and the rise in prices due to some cartel behavior? If the latter is the case, price controls might be a means of lowering prices and increasing production.