Gas Prices Are Up, but We Don’t Have Price Controls

Don Boudreaux’s recent Letter to the Editor of the Atlanta Journal-Constitution (see below) reminds me of our good fortune. Gas prices are up but policymakers have not reacted with their old tools from the 1970s, namely price controls. Instead, market prices are free to reflect the scarcity of oil that currently exists worldwide. Moreover, Congress is trying to reduce some of the barriers that limit supply. Why such a change in 30 years?

Many Americans still have some recollection of the effects of price control and know that it was not a good solution. The public is also more aware today that gas prices are not determined in the US, but on world markets. What price controls would achieve is creating shortages in the US without having any impact on world prices. Americans by and large seem to believe (rightly so) that policies aimed at expanding supply (even just US supply) stand a better chance of reducing gas prices (for everyone, not only Americans) than policies that would control US domestic prices.

Have Americans become more acquainted with economics in the last 30 years? Probably not, however, there is nothing like living through changes in policy to learn something about economics. For instance, many of my fellow friends from New Zealand have become more conservative than they used to be as a result of the reforms in the 1980s and 1990s. In the 1970s, the Berlin Wall was still up and the West still entertained the idea that economic planning was good policy. True, there is still plenty of economic planning in policy today, but there is much less in rhetoric. People have come to realize the limits of price control. What the public saw as good policy in the 1970s is now deemed irrelevant. Really? Well, time will tell. If gas prices continue to climb up, it may come with a rising demand for price control.

Here is Don Boudreaux’s letter:

21 July 2008. Editor, Atlanta Journal-Constitution

Dear Editor:

I disagree with Cynthia Tucker's claim that "Carter deserves credit for his energy smarts" (July 20). The price controls enforced during Jimmy Carter's presidency - ones within his power to lift - were responsible for fuel shortages.

I well remember in July of 1979 my father driving to a gasoline station at midnight only to wait in line. He waited in that line until 6am, when I (having walked the mile and a half from our home) relieved him. The station finally opened at noon. It allowed each motorist in line to buy a maximum of five gallons of gasoline. I bought the five gallons and drove home - without, of course, turning on the air-conditioner, for to do so would have burned too much of the precious elixir. As we lived in New Orleans, these sorry recollections of the consequences of misguided government intervention are seared especially hot into my memory.

Sincerely,

Donald J. Boudreaux

Chairman, Department of Economics - George Mason University

Comments

[spencer]

I think all of you need to get your facts straight.

Jimmy Carter began phased decontrol of oil prices on 5 April 1979, or about 3 months before Don Boudreaux father supposedly wasted his time sitting in line waiting for a gas station to open. During that time the price of west Texas intermediate rose 37%.

It looks like Don is confusing 1979 and 1973 under the Republican price controls.

[Don Boudreaux]

Decontrol of oil prices was not completed until this January 28, 1981 executive order by Reagan:

http://www.reagan.utexas.edu/archives/speeches/1981/12881a.htm

[Prakash TC]

A man eats two eggs each morning for breakfast. When he goes to the Kirana store he pays Rs. 12 a dozen. Since a dozen eggs won't last a week he normally buys two dozens at a time. One day while buying eggs he notices that the price has risen to Rs. 16. The next time he buys groceries, eggs are Rs. 22 a dozen.

When asked to explain the price of eggs the store owner says, "The price has gone up and I have to raise my price accordingly". This store buys 100 dozen eggs a day. He checked around for a better price and all the distributors have raised their prices. The distributors have begun to buy from the huge egg farms. The small egg farms have been driven out of business. The huge egg farms sell 100,000 dozen eggs a day to distributors. With no competition, they can set the price as they see fit. The distributors then have to raise their prices to the grocery stores. And on and on and on.

As the man kept buying eggs the price kept going up. He saw the big egg trucks delivering 100 dozen eggs each day. Nothing changed there. He checked out the huge egg farms and found they were selling 100,000 dozen eggs to the distributors daily. Nothing had changed but the price of eggs.

Then week before Diwali the price of eggs shot up to Rs. 40 a dozen. Again he asked the grocery owner why and was told, "Cakes and baking for the holiday". The huge egg farmers know there will be a lot of baking going on and more eggs will be used. Hence, the price of eggs goes up. Expect the same thing at Christmas and other times when family cooking, baking, etc. happen.

This pattern continues until the price of eggs is Rs. 60 a dozen. The man says, " There must be something we can do about the price of eggs".
He starts talking to all the people in his town and they decide to stop buying eggs. This didn't work because everyone needed eggs.

Finally, the man suggested only buying what you need. He ate 2 eggs a day. On the way home from work he would stop at the grocery and buy two eggs. Everyone in town started buying 2 or 3 eggs a day.

The grocery store owner began complaining that he had too many eggs in his cooler. He told the distributor that he didn't need any eggs. Maybe wouldn't need any all week.

The distributor had eggs piling up at his warehouse. He told the huge egg farms that he didn't have any room for eggs would not need any for at least two weeks.
At the egg farm, the chickens just kept on laying eggs. To relieve the pressure, the huge egg farm told the distributor that they could buy the eggs at a lower price.
The distributor said, " I don't have the room for the eggs even if they were free". The distributor told the grocery store owner that he would lower the price of the eggs if the store would start buying again.

The grocery store owner said, "I don't have room for more eggs. The customers are only buying 2 or 3 eggs at a time. Now if you were to drop the price of eggs back down to the original price, the customers would start buying by the dozen again".

The distributors sent that proposal to the huge egg farmers but the egg farmers liked the price they were getting for their eggs but, those chickens just kept on laying. Finally, the egg farmers lowered the price of their eggs. But only a few paisa.

The customers still bought 2 or 3 eggs at a time. They said, "when the price of eggs gets down to where it was before, we will start buying by the dozen."

Slowly the price of eggs started dropping. The distributors had to slash their prices to make room for the eggs coming from the egg farmers.

The egg farmers cut their prices because the distributors wouldn't buy at a higher price than they were selling eggs for. Anyway, they had full warehouses and wouldn't need eggs for quite a while.

And those chickens kept on laying.

Eventually, the egg farmers cut their prices because they were throwing away eggs they couldn't sell.

The distributors started buying again because the eggs were priced to where the stores could afford to sell them at the lower price.

And the customers starting buying by the dozen again.

Now, transpose this analogy to the gasoline industry.

What if everyone only bought Rs 200.00 worth of Petrol each time they pulled to the pump? The dealer's tanks would stay semi full all the time. The dealers wouldn't have room for the gas coming from the huge tanks. The tank farms wouldn't have room for the petrol coming from the refining plants. And the refining plants wouldn't have room for the oil being off loaded from the huge tankers coming from the oil fiends.

Just Rs 200.00 each time you buy gas. Don't fill up the tank of your car. Don’t drive to places where you can walk. Don’t drive to places where you are just driving because you have a vehicle to spare. You may have to stop for gas twice a week, but the price should come down.

Also, don't buy anything else at the fuel station; don't give them any more of your hard earned money than what you spend on gas, until the prices come down..."

Think about it. Share your views, please.

----------------------------

Thanks & Regards,

Prakash

[Roger Koppl]

I got interested in this today and tried to google my way to the truth. I'm afraid I had trouble sorting out precisely what happened with energy price controls in the 1970s. Don's memory of a second energy crisis in 1979 is correct. Wikipedia has a photo purporting to be from the summer of '79:
http://en.wikipedia.org/wiki/Image:Line_at_a_gas_station%2C_June_15%2C_1979.jpg Clearly, then, there were price controls on gasoline. Don's facts are right, there was a crisis of 1979 and Carter could have improved things by lifting price controls on *gasoline*, which he chose not to do for reasons unknown to me. But where did those gasoline price controls come from? I *think* they were left over from the Nixon administration, but I can't get solid information on that. In any event, what I take to be Spencer's larger point is about right. The big picture is that dear old President Nixon imposed widespread wage and price controls. The much-maligned Jimmy Carter slowly dismantled the byzantine system of energy price controls still in place when he came into office. Reagan, it is true, had the privilege of disposing of the last bit of Nixon's handiwork, but I think we should recognize Carter as the one who put an end to energy price controls.

Carter is also the one who launched deregulation, not Reagan. He entrusted the great Alfred (call it a banana if you want) Kahn to *design* deregulation of air travel and of trucking. Kahn did a great job of it, too.

Carter *also* gets credit for disinflation, because he appointed Paul Volcker. That's another one Reagan is falsely credited with.

Overall, if you like sound money, fiscal responsibility in government, small government, deregulation, and freely adjustable price, then you rank this group of presidents like so:
Carter best,
Reagan not as good,
Nixon the worst by far.

And yet libertarians tend to be more Republican than Democratic. I don't get that.

[Don Boudreaux]

Thanks Roger.

To be clear. My point was not so much to criticize Jimmy Carter or, by implication, to praise Nixon. (I agree with your assessment that Carter was a far, far better president than Nixon.) My larger point was to criticize price controls -- the 1970s' version of which which did indeed originate with Nixon. (Of course, Congress granted him that power -- in late 1970 or 1971 [I'm too lazy now to find which of these dates is correct].)

Cynthia Tucker's article -- to which my letter is a response -- praised Carter's "energy smarts." His refusal to end all price controls was not smart, and that refusal was a key determinant of the summer of 1979's gasoline shortage and the many queues that that shortage engendered. (By the way, Carter's creation of a Department of Energy also is no great sign of "energy smarts.")

[Don Boudreaux]

I'm doing my own googling now on this question of oil price controls in 1979. This article from Time (dated 4 June 1979 indicates clearly that such controls were still in place that summer:

http://www.time.com/time/magazine/article/0,9171,946249-2,00.html

What I don't understand is why (according to this article) President Carter needed Congressional approval to end the price controls. (Reagan did so on 28 January 1981 -- Did Congress give Reagan such power but not Carter? Possible, but unlikely. [I really don't know the answer to this question.]).

[Roger Koppl]

Great point about the department of energy, Don. I didn't think of that. Yes, that's a big one in the minus column for Carter.

My guess is that Carter's need for Congressional approval was political. He was probably trying to build consensus and economizing on his political capital. He did use his power to lift controls without Congressional approval For example:
http://www.presidency.ucsb.edu/ws/index.php?pid=32755

[Frederic Sautet]

Roger, your comments about Carter are fair. It is true that people see Reagan has the architect of the US reforms rather than Carter. Carter should get more credit for starting the reforms, especially for nominating Volker at the Fed and for starting airline deregulation.

This said, I still think Reagan deserves the credit for being the architect of US reforms in the last 4 decades. First, if you look at the regulatory burden in the US as measured in terms of the number of pages in the Federal Register (not a perfect measure, but a good one nonetheless), the number of pages went up under Carter to reach more than 80K by 1981. Then from 1981 to 1989, their number fell down to around 45K at the end of the Reagan tenure. It started going up again after that under Bush and Clinton. Second, Reagan is undoubtedly the architect of the tax reforms, which dramatically changed the tax landscape in the US. While these reforms are far from being ideal (this was not the introduction of a flat tax), they had a very important impact on the long-term health of the US economy. I believe this is something Carter would not have done since it meant cuting the marginal tax rates that apply to the rich, etc.

So for these two reasons alone (and there are others), it is still fair to say that Reagan was the great architect of US reforms and deregulation. It is right to emphasize that Carter initiated this move and paved the way to Reagan, and by doing so, proved to be more aware of good economics than Nixon was.

[Methinks]

Let's also not forget that Reagan put his full support behind Volker's painful measures to reduce inflation, despite the political fall-out for him during the deep recession that followed. Neither Bush nor Clinton would have willingly taken that beating to do the right thing.

Given Jimmy Carter's political beliefs and the endless stream of nonsense that continues to pour from him, I'm not certain that he understood economics any better than Nixon. I just think that central planning had so strangled the economy by the time Jimmy Carter became president, he had no choice but to begin deregulation. Volcker too came only after Ford resorted to desperation with things like "Whip Inflation Now", which immediately became a joke.

Roger wonders why libertarians are usually Republicans and sites Nixon as an example of a terrible Republican president. He was (and Bush is another) but only because he bent to the socialist pressure which, like today, was so overwhelming at the time. He was spineless. Milton Friedman said that he was the most intelligent of the presidents he advised, had a firm understanding of economics and agreed with Friedman's ideas. What Nixon lacked was the integrity and will to do what is better for the economy at the possible cost of his political future. His actions regarding the economy do not represent the economic beliefs of the majority of the Republican party but are more closely aligned with the Democrat party - just like Bush.

[Roger Koppl]

Frederic: You make a reasonable argument, but I don't think I'm convinced. One of my hobby horses is the difficulty of deregulation. You can't just lift obnoxious regulations willy-nilly. You need to design such transitions carefully. I think the early transition experience of Russia is evidence in favor of that claim. Leaving aside Reagan himself, I think the "Republican revolution" of the 90's had ended up reducing our liberties, not enhancing them. It's a judgment call to be sure, but it sure looks that way to me.

I just can't quite see it your way, Methinks. I mean, would you say that the "socialist pressures" were greater on Nixon than on Carter? And, if I may shift over to foreign policy, was it "socialist pressures" that drove Bush unwillingly into Iraq? I don't think we should care about the "economic beliefs of the majority of the Republican party." I think we should care about the fate of liberty under each party. Neither is a defender of liberty, but the Republicans are currently a greater threat by a distinct, if modest, margin. Issues of war and peace completely trump the slight differences between the major parties regarding economic policy IMHO.

[Methinks]

Roger, if removing obnoxious regulation is so difficult, then that alone is a pretty good argument for not implementing them in the first place. I agree with you that lifting them willy-nilly can sometimes be bad. However, lifting regulations was not the problem in Russia. Everything in Russia was state owned. It was suggested to Yeltsin that the Russian economy would benefit from privatization. As was the norm in the communist party, Yeltsin proceeded to hand out assets to his cronies. Voila! We are now privatized. Obviously, this is not what was meant by that suggestion.

By "socialist pressures" I mean the pressure to turn to socialist solutions for real or perceived problems. We arrived in America from the Soviet Union just as Ford left office and we were shocked that so many were seeking solutions that were so destructive in the country from which we had just fled. My perception is that the pressure on Nixon was greater (to what extent, I can't say - but it's not an excuse for his behviour) than on Carter because during Carter's term people were becoming disillusioned with statist solutions. I think both Republicans and Democrats can tend more or less toward socialism - the current administration is leaning so heavily toward statist solutions that we've renamed the president "Bixon". Basically, I feel sick every time Bixon gives another speech or congress is in session. IMO, Carter scores as poorly on foreign policy as Bush.

I don't agree that Democrats fair even marginally better on liberty than Republicans. They simply seek to control by different means. While Democrats tend to favour more personal freedom, they favour less economic freedom and while the Republicans tend to favour more economic freedom, the religious right wants to control personal freedom (although, there are exceptions in both parties). For me, the most important is economic freedom because I believe that the constitution provides more protection for personal than for economic freedom. For example, there are no limits on the 16th Amendment and renouncing citizenship is no way to protest taxation - you owe taxes to the U.S. for ten years after renouncement. IMO, the IRS is one of the most menacing institutions in the United States and there are too few limits on its power. Having lived for a long time in the Democrat controlled Northeast, I have seen them fan the flames of class warfare and lay the bill for their failures at the feet of the "evil rich". No thank you. We came here to get away from that. I view the Republican party as a tiny bit smaller threat to liberty (particularly after the libertarians in the party made their dissatisfaction clear in the last election) than the current Democrat party.

Personally, I don't favour a single party controlling both the legislative and the executive branch. I think that splitting the two branches between the two parties typically brings out the best in each party.

Of course, you may not share my opinions and I'm willing to bet that we don't disagree by that much either, as we both favour the opposite party by a small margin. What I really favour is much much less government. Full stop. And I think you and I can agree that both the Republican president and the Democrat-controlled congress are feverishly passing legislation that will do the exact opposite.

[Roger Koppl]

Methinks: Any reasonable person can plainly see that eating food laced with arsenic is not quite as bad as eating food laced with cyanide. I just can't understand why you foolishly cling to the opposite opinion. :-)

More seriously, I wonder whether you're undervaluing the Iraq war and the invasions on basic rights associated with supposed security issues. Habeas corpus and all that.

[Methinks]

Roger,

LOL. Indeed!

You're asking me if I might be overstating one bad statist thing and understating the other. Who knows. My opinion about this is that Democrats won't change the Patriot Act once they are in control of both branches because it would take power away from them. Politicians are politicians, after all. The economic plans the Democrats are itching to pass will make the whole country poorer. The Patriot Act's footprint is not as wide as economic policies and we still have the constitution, which trumps the Patriot Act. There is nothing in the constitution to stop congress from ruinous taxation and growth of the alphabet soup of government slush funds. Just look at Fannie and Freddie. All the bailouts passing today are either led by Democrats or pandering to Democrats as are the witch hunts of speculators. All this is purely a judgment call. My preference is that neither party control both branches as there is no difference between them when they control both branches (as we can plainly see).