Gasoline prices are on the rise so unsurprisingly politicians are eagerly pushing legislation to “solve” this problem for consumers. Two former Members of Congress, Bill Archer (R-TX) and Charles Stenholm (D-TX) have an excellent oped in The Wall Street Journal today explaining the folly of price caps and highlighting what the consequences of such policies would have been during Hurricane Katrina if they had been in effect. Since this article is available for subscribers only, I’ll quote it at length:
…in anticipation of the summer months when more Americans take to the road, Congress is set to consider proposed federal legislation to make “price gouging” illegal. (A cynic might note that such efforts were not as politically attractive when gas prices were decreasing in the latter half of 2006.)
If enacted, proposals such as the Federal Price Gouging Prevention Act recently unveiled by Rep. Bart Stupak (D., Mich.), would function like controls on gasoline prices, according to a recent study by the American Council for Capital Formation. The study, “Effects of Proposed Price Gouging Legislation on the Cost and Severity of Supply Interruptions,” reviewed investigations of past gasoline price increases, and the results of previous efforts to control prices. Key results:
- The estimated costs associated with price controls, had they been implemented as defined under current legislative proposals during the supply disruptions that occurred during the 2005 hurricanes, would have totaled $1.9 billion.
- In every case, price increases were due to the market operation of supply and demand — not withholding supplies.
- Imposing criminal charges for price increases would discourage suppliers from obtaining higher-priced replacement supplies, therefore limiting consumers’ access to gasoline supply.
- The expectation of price controls could discourage refinery investment, resulting in tighter capacity at all times.
History and basic economics teach us that price caps result in shortages in the market and hardships for consumers. Anyone who remembers the gas shortages and inflation from the 1970s knows that this is not a legacy to fall back on. The reality is that fluctuations in fuel prices serve as basic signals to producers to either increase or decrease supplies. This holds true in times of crisis as well.
Even when price controls have been designed carefully and included very specific rules defining legal prices and specific enforcement mechanisms, they have proven to be failures of enormous consequence. In contrast, current legislative proposals rely completely on extremely vague terms, placing retail and wholesale fuel providers in a position to act in ways that would discourage re-supply out of fear of prosecution. This would likely cause increased shortages, impeding residents in emergencies from getting the fuel they need to evacuate and potentially hindering recovery efforts of first responders.
Price controls are the classic example of how government “solutions” to problems often make things worse, not better. Americans should urge their Representatives not to pander to them by passing this harmful legislation and instead let the market work.