Demagoging the Gas Price Issue

Jeff Jacoby’s column in the Boston Globe yesterday was not only a sound lesson in economics, but a good trip to the woodshed for several politicians, including quite a few Republicans.

Soaring gas prices have produced yelps and whines from politicians, who have fussed and fumed bout “profiteering” on the part of the oil companies and retailers.

But Jacoby explains some simple facts:

When Jill puts her house on the market for $450,000 — triple what she paid 10 years ago, but the going price in her neighborhood today — the politicos understand that the 200 percent markup is the result of supply and demand in the real estate market. Senators don’t call press conferences to denounce Jill as a profiteer. Attorneys general don’t threaten to prosecute her. Governors don’t compare her to looters.

But when Joe’s service station ups the price of gasoline by $1 a gallon, the political world freaks out. Never mind that a Category 4 hurricane has devastated oil production throughout the Gulf Coast, depleting the nation’s refining capacity by 2 million barrels a day and driving up the price Joe’s wholesaler is now charging him. For some reason, politicians forget everything they learned in Economics 101 and rush to savage Joe for “gouging” his customers.

The Role of Dishonor among politicians, unfortunately, includes a bunch of Republicans.

• Republican Governor Sonny Perdue of Georgia
• Massachusetts Governor Mitt Romney
• Missouri’s GOP governor Matt Blunt
• And even President Bush who denounced “price gouging at the gasoline pump.”

Of course, a rogues’ gallery of Democrats has engaged in similar demagogery, but one of the people who hasn’t is former President Clinton, who observed “If there’s not enough fuel and you put a cap on, then what you might do is just drop the supply even quicker, imposing greater hardship on people.”

Jacoby goes on to explain some basic economics:

Painful as they are, price spikes are invaluable — especially after a disaster, when critical goods and services are at a premium. At $3 or $4 a gallon, post-Katrina gasoline prices are transmitting two urgent messages. To consumers they say: “Conserve! Buy only as much as you really need, and look for ways to use even less.” To the energy industry they say: “Produce! Get those refineries back online and supply more gasoline ASAP.” Aren’t those exactly the behaviors we want to encourage?

Jacoby could go much further in condemning price controls. The shortages they produce are a tremendous dead weight on the economy, as people become radically unsure about all their plans (can I drive to make this sales call? Will I be able to commute to work?). Supplies are rationed by queuing as people wait in line whenever some station happens to have a supply.

We don’t even have to look to the old Soviet economy to see this in operation. The gas lines of the 1970s were a vivid example.

Happily, politicians and the public have learned some things since the 70s. In spite of all the rhetoric, the market has been left free to operate, and gas prices are now headed downward. The politicians appear to know better.

Which makes their demagoguery all the more morally culpable.