Politics VS. Economics in California

Posted: Jun 04, 2001 12:00 AM

Now that President George W. Bush and California Governor Gray Davis have had their meeting over the electricity crisis in the golden state, how much closer are they to producing a solution? Not one millimeter closer.

Nor was there any reason to expect that they would be. Each one had to have this meeting, for political purposes. But Bush cannot solve California's electricity crisis from Washington and Governor Davis is busy trying to solve his own problem -- how to avoid blame for the electricity crisis.

You cannot judge how well someone is solving a problem until you know specifically what problem he is trying to solve. You or I might think that the big problem is how to get more electricity into California, for the benefit of its people and its economy. But that only shows that we don't think like politicians.

Just getting more electricity would be easy, if that was all that was involved. Governor Davis himself has estimated that he could end the electricity crisis in 20 minutes, just by eliminating state-imposed price controls on public utilities. Why not do it then? Because he wouldn't be governor again after next year's election. And his chance for national office would be down the tubes as well.

No matter how fast Governor Davis ended the electricity crisis, California voters are not going to forget the blackouts they have already experienced by the time of next year's elections. Moreover, the speed with which the electricity crisis ended would raise the question of why it wasn't done before -- indeed, why there was a crisis in the first place, if getting rid of price controls was all that was needed.

Unfortunately, virtually everything that would be economically effective in getting more electricity for California would be politically suicidal for Governor Davis. And virtually everything that would be politically beneficial to Governor Davis makes it harder to get more electricity for California.

"Price caps" are the magic words politically and they have become a mantra, repeated incessantly by liberal Democrats in California and in Washington. But if President Bush were foolish enough to impose federal price controls on electricity, that would not provide enough additional electricity for California to light one 30-watt bulb for one minute. On the contrary, price controls reduce supply and increase demand, worsening a shortage.

"Price caps" are being demanded, not because they solve the economic problem, but because such demands solve a political problem by shifting the public's attention from electricity to prices -- and shift the blame from the state's politicians to power companies and the Bush administration. Governor Davis has already hired two Democratic spinmeisters, at $30,000 a month each, to orchestrate a campaign to blame the Bush administration for California's troubles. Expertise at spinning is not cheap.

"Price gouging" is another political mantra that has been repeated again and again. The argument is that federal authorities need to impose prices based on the cost of producing electricity, in order to stop "profiteering." It all sounds good on the surface, but what does it mean?

It means that any price that the state's politicians don't like can be challenged in court, where opposing accountants, economists and lawyers can spend years arguing about what the costs were as of the time when a given amount of electricity was bought. The huge legal costs of fighting such lawsuits means that some electricity suppliers will find it easier to settle out of court than to continue to pour huge legal fees down a bottomless pit.

Politically, that is vindication. Economically, it is madness. What this says to those who supply electricity is that selling electricity to California means not only risking not getting paid or not getting paid on time, it also means a risk of losing big bucks in legal hassles even after you have been paid.

This is likely to reduce the willingness of power companies to sell California the electricity that it needs. It is also likely to increase the price they charge, since they must factor in the increased risks brought on by the demagoguery of California's politicians.

In short, if the problem to be solved is how to get more electricity, then the policies being followed are terrible. But if the problem to be solved is how to get re-elected, then these policies are ideal. It all depends on what your priorities are.