November 6 2009
IWF in the News: Politicians Set Their Prices
Carrie L. Lukas
Apparently some lessons we must relearn. One might assume our disastrous economic flirtation with socialism in the 1970s - never mind the sorry record of command-and-control economics in the former Soviet bloc - would have buried the concept of government wage- and price-controls for at least a generation. Yet this Congress appears intent on resurrecting the worst policies of the past.
Price controls have superficial appeal. The average gas-price rose more than 10 percent last month, allowing pandering politicians to promise relief. They don't say that consumers will suffer worse consequences if the government begins dictating how much oil companies and refiners can charge. And they ignore that government regulations and taxes already are largely responsible for high fuel prices. Instead they offer fantasy.
Take Rep. Bart Stupak's (D., Mich.) "Federal Price Gouging Prevention Act." This legislation would empower the Federal Trade Commission to crack down on anyone in the energy supply and distribution chain who "artificially inflates the price of energy." Those found guilty would be subject to multi-million dollar fines and possible jail time. Overlooking the distasteful Stalinist flavor of this bill - locking up people for trying to sell at the best possible prices - this is economic ignorance on steroids.
Harsh penalties might discourage companies from raising prices, but also would convince many not to do business at all, particularly in times of crisis. In dire circumstances it costs more to deliver products, and companies have to charge more. Business owners who fear that raising prices will expose them to criminal penalties may simply close up shop.
This would have been a disaster, for example, during Hurricane Katrina. Suppliers would have been reluctant to ship fuel into devastated areas, and fuel would become even scarcer there. According to a study by the American Council for Capital Formation, if this legislation had been in effect during that tragic 2005 hurricane season, it would have imposed .9 billion in economic costs.
Thoughtful consumers understand the role prices play in the marketplace. We've all faced the dilemma of either paying more at the conveniently located gas station or going out of the way to someplace cheaper. Forcing both establishments to charge the same means the better-located store would have trouble keeping up with demand, perhaps running out of gas, while the less convenient store would fold.
Prices play an equally important role on the national level. If they rise significantly, individuals change their behavior. We can't eliminate all driving, but we may rethink a long, summer road-trip or explore the possibility of carpooling. Some may forego a gas-guzzling SUV for smaller, more efficient vehicles or hybrids. And if a business "artificially" inflates prices, people turn to other sellers. Competition, not Congress, is the only effective way to keep prices down.
Prices also signal to the rest of the world that the United States needs fuel and is willing to pay for it. If prices aren't allowed to rise, exporters will take their supplies elsewhere.
While price controls in the energy sector would create big problems, they're nothing compared to the potential nightmare of the government meddling in setting wages. Yet that's the direction many Democrats are heading.
Senator Tom Harkin (D., Iowa) has revived the 1970s idea of "comparable worth" in his "Fair Pay Act," which he claims will "address the historic pattern of undervaluing and underpaying so-called ‘women's' jobs." Senator Harkin thinks he and likeminded politicos have a better understanding of the value created by a given job. For example, the male-dominated profession of probation officers and the female-dominated field of social workers are rough equivalent in terms of level of skill and responsibility, according to Harkin, and therefore deserve the same pay.
Such hubris is astounding, even by Washington standards. Individuals consider countless factors when evaluating jobs: co-workers, clients, level of danger, dress code, commute, hours, flexibility, and opportunities for advancement, to name but a few. Wages are one factor that allows employers to attract enough qualified employees. If they offer too little, they won't get sufficient help. They'll have to increase the salary or do something else to make the job more attractive.
Outlaw this flexibility and there will be over-supply of labor in some professions and shortages in others. Imagine the political maneuvering that would determine the respective value of each job. Who's more valuable: an elementary school teacher, nurse practitioner, sanitation worker, prison guard, public defender, or computer programmer? Who should we trust to make that determination: "experts" in Washington or the cumulative judgments of millions of free individuals?
The answer should be obvious. If it's not, then America faces grim days ahead.