July 3, 2001 | Commentary on Energy and Environment

The Folly of Price Controls

Sometimes, all you can do is warn them -- and hope they do the right thing.

Because if lawmakers in Congress who favor stringent price caps on energy costs in California and other Western states don't heed the Department of Energy's latest report on such controls, the summer's going to get longer and hotter for a lot of Americans living west of the Rockies.

Not surprisingly, the study found that price caps -- which, let's not forget, are what got California into this mess in the first place -- won't improve the energy situation. In fact, they'll likely make it worse.

The study concluded that a $150 "hard cap" on electricity bills -- like the one proposed by California Gov. Gray Davis -- will make it much more costly to produce power, leading some companies to shut down. This could wipe out as much as 3,600 megawatts of generating capacity in the state. That's enough power to keep the lights burning in more than 300,000 homes.

And the most popular alternate price-fixing scheme -- a "Cost-Plus-$25" proposal -- would discourage "only" 1,300 megawatts from being added to the state's capacity. Reasonable people may disagree on how to solve California's crisis, but surely no one would argue for less capacity.

Price caps also "could double the number of rolling blackouts from 113 to 235 hours and increase the number of households in the dark to about 1.575 million," the study says.

Mere guesswork, critics may respond. Fine, but they can't shrug off what history teaches us about price caps. It's all laid out in a book published more than 20 years ago by The Heritage Foundation titled "Forty Centuries of Wage and Price Controls: How Not to Fight Inflation," by Robert Schuettinger and Eamonn Butler.

The book outlines the unqualified failure of price controls from ancient Egypt forward. Consider what happened when the Pharaohs, under the guise of preventing famine, tried to control the wheat supply. Over time, control gave way to direction and direction to outright government ownership. Farmers, with no profit motive left, produced less and less wheat until -- surprise! -- famine set in. The economy collapsed, workers abandoned the cities and, finally, in about 3000 B.C., the reign of the Pharaohs ended.

Hammurabi's legacy to the world is that he authored the first-ever formal written law codes. But his legacy to the Babylonian empire is the extensive wage and price controls he included in that first code. They weakened the economy so much they eventually brought down the empire itself.

The Roman emperor Diocletian tried wage and price controls in an effort to right the market after earlier price controls had failed. In the fourth century B.C., the Roman government bought corn and, in times of shortage, re-sold it at a low fixed price. In 58 B.C., it went further and granted every citizen free wheat. Farmers began streaming into Rome because they could live and eat without working. By the time of Julius Ceasar, one in three Romans was receiving government wheat.

The government tried to fix things by coining more money. But that just added skyrocketing inflation to the mix. Diocletian imposed wage and price controls and ordered that anyone who violated the controls or withheld goods from the market be killed.

The result, in the words of one historian: "The people brought provisions no more to market, since they could not get a reasonable price for them, and this increased the dearth so much that … the law itself was set aside." Soon thereafter, Diocletian found himself set aside --forced from the throne after just four years.

Then there was the former British colony of Bengal. In 1770, its rice crop failed, and the government imposed price controls. A third of the population died in the ensuing famine. Nearly a century later, Bengal again faced famine. This time, the government encouraged speculation in rice. Merchants went elsewhere to buy rice, brought it back to Bengal, sold it at a profit and averted the famine.

Americans haven't been able to resist the lure of price controls, either. From the time of the Continental Army, when price controls nearly brought a ruinous end to the American Revolution, to the 1970s, when President Nixon attempted to overcome creeping inflation with wage and price freezes, American consumers have taken their lumps from these failed policies.

So will Congress listen to the Department of Energy and to history? Or do we again have to learn this lesson the hard way?

Charli Coon is an energy policy analyst at The Heritage Foundation (www.heritage.org) , a Washington-based public policy research institute.

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