IT was only a passing news item when the financial information service Standard & Poor's lowered the rating it gave to bonds issued by the state of California. But it has big implications and it also shows the big difference between economics and politics.
At the heart of all this is the electricity crisis in California. With the state's public utility companies being forced by law to sell electricity to the public at lower prices than were paid to buy it, it was only a matter of time before these companies were heading toward bankruptcy. Since somebody has to buy electricity from those who generate it, and the public utilities no longer had either the money or the credit to do so, California's state government has had to step in and buy electricity, or else see the lights go out and the state's whole economy collapse.
Although the state government has not run out of money or had to default on its bonds, financial experts like Standard & Poor's can see big bills, big debts and big taxes just over the horizon. That is why S & P is warning investors that California's state bonds are not as safe as they were. Those who buy these bonds face greater risk of default or delayed payments, which amount to a partial default.
Ironically, this whole predicament arose because political decision-makers did not look ahead, as economic decision-makers are forced to do. It is not rocket science to figure out that no business can buy high and sell low for very long. But it is always politically expedient to impose price controls on business, in order to look like you are protecting consumers.
If you don't understand the economics of price controls, just look at the history of it. Price controls created a gasoline shortage in the United States in the 1970s, food shortages in France in the 1790s, and housing shortages under rent control in cities around the world at various times in between. Why should anyone be surprised that price controls caused a shortage of electricity in California today when price controls have been causing shortages as far back as the days of the Roman Empire?
Yet what is the cry of the hour? A demand for federal price controls to rescue California! In other words, the same short-sighted politics that created an electricity crisis for California can now be followed to create a more widespread shortage of electricity around the country. Politicians know better. They just are not likely to do better. As California's governor Gray Davis said, in one of his rare candid and rational statements, "Believe me, if I wanted to raise rates, I could have solved this problem in 20 minutes."
In other words, the economic problem is simple. It is the political problem that gets complicated. The economic problem is how to keep electricity flowing to California consumers and the California economy. The answer is ridiculously easy: Pay for it! That is how we get other things that we want.
But it is not that easy for politicians to admit to the voting public that this whole disastrous farce was brought on by them, when they tried to look like knights in shining armor, rescuing the distressed consumers from the greedy electric companies. Such a devastating admission would not be the way for Gray Davis to get re-elected governor, much less remain viable as a prospect for the Democrats' presidential nomination in 2004.
Instead, we get a flurry of activities and a blizzard of rhetoric and regulations. If you cannot follow all the new government policies in response to the electricity crisis, then that shows that these policies are a great political success. If the public understood, it would be a political catastrophe.
There is no Standard & Poor's for politics. Investors may be warned about economic realities ahead but voters are told political fairy tales that blame electricity companies' "greed" -- greed apparently directed solely at California, but not at any of the other 49 states.
As an economist, I wish that everyone understood the economics and politics of the electricity crisis. On the other hand, as a humanitarian I shudder to think of what they would do if they did.
Do we really want to see blood flowing in the streets of Sacramento? Do we want to see mobs rampaging through the state capital, carrying torchlights and pitchforks, and displaying on pikes the heads of Governor Gray Davis and members of the state public utility commission? No. Ignorance may not be bliss but it may be more