April 29 2008
Spare Consumers the High Costs of Bad Government Policy
Carrie L. Lukas
The news stories appear daily: gas prices inch up from previous record-breaking highs; food costs soar and shortages spread in much of the world. When combined with the souring housing market, it's no wonder that so many Americans are pessimistic about the country's economic future.
These economic reports reflect a glass-half-empty mentality. After all, March's 5.1 percent unemployment rate is still low by historical standards, and the current economic slowdown comes after six years of uninterrupted growth, which means the economy remains bigger than at any other time in history. Yet that doesn't mean that Americans shouldn't worry about our economic future. One real cause for concern should be the policies opportunistic politicians will pass in a rush to "solve" current economic challenges.
Consider what's being pushed by the House Majority in the name of addressing high gas prices. One piece of legislation being championed by Speaker Pelosi is the "Energy Price Gouging Act," which would expand the federal government's power to target anyone in the energy supply chain who "artificially inflates the price of energy." Those found guilty would be subject to fines and possible jail time.
The Federal Trade Commission already has the power to investigate charges of price gouging, and numerous government studies have failed to find any wrongdoing. But this legislation and the threat of harsh penalties against business executive could have a real effect on the marketplace by discouraging companies from doing business.
Consider what this could mean after a big natural disaster. With access to the region disrupted, transportation becomes more costly and supplies are scarcer. In a free market, prices play an important role in ensuring that supply meets demand. Prices jump, sometimes precipitously, which signals suppliers, both domestic and international, that it's worth making the extra investment to get their product to affected areas. High prices also encourage consumers to buy only what is necessary.
Legislation discouraging price adjustments would thwart this important process, which would deter suppliers from coming online, encourage overconsumption--even hording--in affected regions, and could result in shortages. One study examined this legislation's potential impact during the 2005 hurricane season (which included hurricane Katrina) and found it would have imposed $1.9 billion in economic costs.
Another proposal favored by Speaker Pelosi is to raise taxes on "Big Oil." Undoubtedly, there are countless inefficient tax deductions for favored industries that riddle the tax code. These should be scraped as a part of comprehensive tax reform. Yet it's illogical to assume that raising taxes on a company would encourage it to lower prices. Just the opposite should be expected: Taxes raise business costs and companies pass those costs on to consumers. In other words, Speaker Pelosi's tax hike would move gas prices in exactly the wrong direction.
Of course, while the Speaker wants to punish "Big Oil" with higher taxes, she wants to use the tax codes to reward "green" energy sources. The results of previous government efforts to tip the market in favor of politically correct energy industry players should give the public pause.
Republicans and Democrats alike have embraced subsidies for corn-based ethanol fuels, and the results are now being felt across the world. World food prices have risen by 83 percent since 2005, leaving many areas with shortages and relief organizations struggling to meet a rising demand for assistance. Studies have suggested that between a third and a quarter of the rise in prices is due to biofuel production. Ironically, the environment has been another loser in the push for ethanol. As Time Magazine recently detailed in its cover story, "The Clean Energy Scam," forests, wetlands, and grasslands-considered environmental jewels-are being destroyed in a rush to farm crops that can be turned into gasoline.
This history should give politicians some humility. Instead of attempting to micromanage the marketplace, policymakers should roll back unnecessary government intervention. Biofuels, solar, wind, and other alternative energy sources may have a big role to play in our future energy marketplace, but the government also needs to allow for more exploration for oil and the development of additional refining capacity. Instead of trying to pick winners and losers, the government should let the market work.
Speaker Pelosi's grab bag of energy proposals would be more likely to cause gas prices to rise than to bring consumers any relief. Instead of asking the government for help, Americans frustrated with rising prices-whether it's at the gas pump or in the grocery store-should ask politicians to first do no harm.