Headline News

Thomas Sowell
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Posted: Jul 13, 2001 12:00 AM

The obvious continues to make headlines in California. "Federal price limits backfire" read the big front-page headline in the San Francisco Chronicle. These price limits are the federally imposed "caps" on electricity prices that California Governor Gray Davis has been clamoring for, backed up by Congressional Democrats.

"Some generators withhold power rather than abide by rate caps" the news story said. Where there are high costs of generating or transmitting electricity, the price caps in western states can make selling electricity to these states unprofitable or even create losses for the electricity suppliers.

Although officials in both California and Nevada had urged the Federal Energy Regulatory Commission to impose price controls on electricity, they now concluded that "the newly imposed limits have had the unintended consequence of increasing a threat of blackouts in the two states." In other words, people supply less when you reduce the price they will be paid. This news is literally thousands of years old.

People withheld supplies when price controls were imposed in the days of the Roman Empire. George Washington's troops nearly starved at Valley Forge when price controls were imposed on food. During the French revolution, there were likewise price controls on food, with the result that "as soon as we fixed the price of wheat and rye we saw no more of those grains."

When President Nixon imposed controls on meat prices in 1973, much American cattle began to be exported, mostly to Canada, rather than being supplied to the U.S. market. Price controls on gasoline had motorists waiting in long lines at filling stations, sometimes for hours. But there have been no such gas lines for the past 20 years, since Ronald Reagan got rid of these price controls as one of his first acts after becoming president in 1981.

Price controls have had the same effect around the world, for centuries on end, among people of every race, color and creed, and under governments ranging from the most democratic to the most totalitarian. Why then is everyone so surprised that price controls on electricity in the western states seem to be reducing the supply of electricity there, creating rolling blackouts in Nevada and threatening more of the same in California?

Part of the reason -- aside from widespread ignorance of both economics and history -- is that a very successful political propaganda campaign has depicted opposition to price controls as being based on nothing but "ideology" or "theory." These words were repeated endlessly in the media by Democrats in California and Washington, as they sought to pressure the Federal Energy Regulatory Commission to impose price controls, or at least embarrass President Bush for opposing such controls.

Far from being a theory or an ideology, the effects of price controls on supply have been confirmed by facts as consistently as anything outside the realm of pure science. What the attempt to reduce this to mere ideology is saying is that there couldn't possibly be any real reason to be against price controls, unless you were just a lackey for the power companies.

This whole political game has been played before -- and with disastrous effects for the public. One of the reasons price controls on oil were not repealed when other price controls were ended back in the 1970s was that a political propaganda campaign had demonized oil companies as the cause of the shortage of gasoline.

All sorts of charges and rumors were spread about the nefarious machinations of oil companies as the cause of all our troubles. Extensive government and private investigations failed to substantiate any of these charges and rumors. Nevertheless, the smear stuck and no politician wanted to be seen as caving in to Big Oil by ending price controls on petroleum.

In other words, a wholly needless problem of shortages was created and sustained by the demonizing of those who produced the product that was needed. That is exactly what is now happening with electricity.

Scarcely a day goes by without California Governor Gray Davis making sweeping accusations against electricity suppliers -- "robber barons" he calls them -- and the polls show that these accusations are working. California's attorney general is threatening lawsuits and criminal indictments against power companies. All this is great political theater but none of this will keep the lights on or the machinery of industry running.