September 19, 2016 4:00 PM
Editor’s Note: The following guest post was written by Slade Mendenhall, a PhD student and research assistant in economics at George Mason University. He is a graduate of the University of Georgia and the London School of Economics and a former aide at the Georgia State Capitol. He hails from Alpharetta, Georgia and blogs at TheMendenhall.com.
In 1973, the United States, wrought with numerous economic ailments including high unemployment, high inflation, and the burden of a costly and unpopular war in Vietnam could have used a reprieve. Instead, its economic nightmare was just beginning. In response to an oil embargo imposed by the newly formed OPEC, which set gas prices rising, President Richard Nixon took things from bad to worse by imposing price ceilings on gasoline along with various forms of non-price rationing. Those who lived the experience vividly remember the seemingly endless gas lines and bizarre rules dictating what day of the week one could buy gas based on whether your license plate ended in an odd or even number.
Maintained in various forms through the Ford and Carter administrations, price controls ensured that about five percent less gas was available on the market than before the controls were applied. It was an unmitigated failure, and economists of all stripes today generally recognize it as such.
Fade into the present. It’s 2016, and with economists forty years wiser it seems that politicians are still living in 1973. In response to a gas shortage brought about by a pipeline spill in Alabama, Governor Nathan Deal has signed an executive order effectively imposing price controls on Georgia gas stations. Sure, the governor’s order allegedly just applies to price “gouging”, but as the history of that term shows, “gouging” only amounts to whatever price politicians arbitrarily don’t like. No, Governor Deal, a bit of basic economics shows that price controls only make a bad situation worse.
Economics defines a price floor as a law or regulation that holds the prevailing price above the true market price where supply meets demand. At the true market price, even when we face an adverse supply shock such as the spill in Alabama, prices allocate a resource (in this case gas) to its most highly valued uses. When a price ceiling is imposed, though, there is no way to ration what gas is left to those highly valued uses. With supply diminished, everyone still pays the same controlled price: people going to the emergency room, going to work, going to a Braves game, seeing a concert, running an errand, etc. Nothing has changed on their end, so they keep using up the dwindling gas supply at the same rate as ever. That is, until it runs out.
If only there were a way to channel gas usage to the most highly valued purposes while at the same time bidding more gas into our state from neighboring states and regions. But there is: the price system. By letting prices rise, gas is not only rationed on some practical, economic basis; the supply of it increases when importers and suppliers start diverting their stocks to Georgia to take advantage of the new, higher prices, thereby increasing the supply and bringing the price back down! When prices are kept low by executive order, though, the problem is only aggravated and prolonged.
But Mendenhall, you might object, Governor Deal’s order only prohibits abusive gouging, not reasonably rising market prices. Nonsense! As I said, “gouging” is an ambiguous, arbitrary term applied whenever politicians want to be heroes in the face of rising market prices and pretend to save the day. Contrary to the myths your political science professor might have told you, in a highly competitive market like gasoline, where most buyers don’t care as much about brand names as they do about low prices, your local gas station owner generally can’t arbitrarily raise his price without his competitor (often literally) right across the street undercutting him and getting all of his business. That’s why the difference in gas prices from one station to another is usually a matter of just a few cents per gallon. And if the two should try to collude, the payoff to one of them cheating the other is huge: he gets almost all of the local business! So much for gouging.
Then there are the holdout defenders of price controls who will say “But there’s a shortage already! Why not ease the pain to those who really need to fill up?” It doesn’t work that way. See, economists can’t measure “need,” and when two people say “Gas man, I need to fill my tank more than the next guy,” neither the gas station owner nor an economist can speak to the importance of each person’s use of gas, nor can they track and verify whether it will be used for important or frivolous purposes once obtained. Whereas politicians can show favoritism to competing “needs,” economists have to accept that each person’s uses are the most important to him and focus on the socially optimal approach, which can only be objectively determined through a price system. And as America’s experience in the 1970s showed, holding prices arbitrarily low doesn’t bring more gas to the market; it only allocates it to those who have the most time to sit around in gas lines all day.
So will Governor Deal’s executive order be a 1970s-style disaster? Doubtful. But is it the answer to this or any shortage? Absolutely not. Fortunately, this will likely be a short-lived episode ended by the hard-working people trying to end the spill in Alabama and get production back in order. In the meantime, though, Georgia will be best served by politicians stepping back and allowing the market to function. Republicans have been touting their free market bona fides for years, but talking points are easy. Whether they can apply those principles when it counts is another question. Please, Governor Deal, adhere to those principles and end these price controls before they start.