TCS Daily


Bell Bottom Blues

By Nick Schulz - September 21, 2005 12:00 AM

If you closed your eyes tight -- to ignore the fashion differences -- and merely listened to news broadcasts, you'd swear you were in the 1970s.

On Capitol Hill last week, debate swirled around the Supreme Court and a woman's constitutional right to abortion. Anti-war protesters continue to bleat about U.S. soldiers being mired in a "quagmire." And just this summer, George Lucas once again saw a "Star Wars" film go boffo at the box office.

What's more -- and more troubling -- economic policies from the disco era are being raised from the dead.

In response to recent increased prices at the pump, the Hawaii legislature imposed caps on the wholesale cost of gasoline. Say aloha to an economic disaster. Energy price controls, embraced in the 1970s by Presidents Nixon and Carter, were a bipartisan failure. The Maui News editorialized against its state legislature's decision, remarking, "In the early 1970s, President Richard M. Nixon pushed a program of price controls. Economists credit the effort as the reason for nearly a decade of nationwide stagflation." Despite this history, Massachusetts is also considering such a move, as is Utah.

Adding economic insult to the injury of higher prices, Sen. Byron Dorgan, D-ND, is calling for, of all things, a tax increase. The tax would apply to what he dubs "windfall profits" for the energy industry. The windfall profits tax is another brainchild of the 1970s fever for micromanaging energy markets. It was implemented back in 1980, partly as a political trade-off to get rid of the price controls. The respected Congressional Research Service concluded the tax simply replaced one harmful economic policy with another and increased American dependence on foreign oil. Congress had the good sense to jettison the tax in the late 1980s. And yet Sen. Dorgan joins the chorus of enthusiasts for '70s-era energy policy by calling for its reinstatement.

Let's be clear: consumer concerns over energy prices are real and understandable, so much so that firewood is back en vogue as a fuel source in New England. According to the Washington Post, wood-burning stoves are the hottest thing throughout the Northeast since this season's Patriots' tickets went on sale. "The last heyday of the New England firewood market," the Post reports, "was in the late 1970s, when oil shortages drove up the price of oil for home furnaces."

Policymakers should pay close attention. What's happening with the wood market in New England provides lessons for other markets.

Peter Lammert is an official with the Maine Forest Service. According to Lammert, who was interviewed by the Post, the price of wood is skyrocketing. Why? Demand in New England and elsewhere outpaces supply.

What's happening with the wood market is precisely what's happening with other fuels like oil and gas. Increased global demand, most notably in China and India, is driving energy prices higher. Prices for gasoline have been driven higher still as Katrina disrupted its supply by laying waste to the Gulf Coast, a major shipping and refining region.

It would be absurd to accuse lumberjacks of "price gouging" or insist on timber price controls or a tax on "windfall profits" for timber producers as prices rise due to increased demand. The same principle should go for other energy products as well.

Contrary to the rhetoric of some politicians -- including President Bush -- rising prices are not a sign of "price gouging." It's the market that sets the price for fuel, be it wood or coal or gasoline.

Despite the pain caused by rising costs, there's a potential silver lining in the price spikes.

The Post reported that rising wood prices are "causing a lot more interest in the introductory classes offered by the New Hampshire timberland association." In other words, the overall market is responding to the price signals, just as we should expect. A profitable industry will attract talent and interest to generate new supply and meet rising demand.

We can expect the same thing to happen when it comes to other fuel sources. As profits rise along with prices -- assuming no price controls or more taxes -- fuel providers will respond with greater incentive to expand research and development of human capital and technology in order to extract and develop products and deliver them to customers.

The best way to combat rising prices is to permit the market to increase supply. And recently rising prices place in stark relief what's really been preventing that increased supply: our political class.

For example, energy market analysts predict this winter will see steep rises in home heating bills as the demand for natural gas grows and supply remains tight. And yet, for years politicians have known of the need to bolster supply and yet obstructed efforts to help do so.

Consider the Bay State, where politicians are considering energy price controls. Massachusetts Sens. Kerry and Kennedy have opposed siting LNG terminals in their region. They also recently voted against an energy bill that would help get more natural gas to market. The Bay State political class has been blocking the surest way to decrease energy costs for their constituents by opposing measures to ease supply. And now it wants price controls? This makes no sense.

In the past 30 years, most people have learned critical lessons. The knee-jerk reaction of capping prices is seen as deeply imprudent by nearly every serious economist and by most political leaders. The basics of free-market dynamics are now pretty well engrained in the culture... but there are holdouts in bell bottoms.

Nick Schulz is editor of TechCentralStation.com

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