Economics

That ‘70s Show

Proposed solutions to today's high gas prices are a bit short-sighted. Do we really want to voluntarily relive the 1970s?

Story Highlights:

  • To combat high gas prices, some groups propose the US institute a lower national speed limit, while China is using price controls.
  • Both are examples of varying degrees of government manipulation of markets—a historically dangerous phenomenon.
  • As always, government intervention should give way to market-driven solutions.

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Gas is pricey today. And unless you are a Luddite living in a forest cabin with no car and no cable-TIVO hookup, you've probably noticed too. Pain at the pump is weighing on drivers, and people worry high gas prices lead directly to inflation, stagnation, and other unpleasantness. Under the guise of "going green," governments and interest groups are proposing some—shall we say—interesting solutions to higher prices.

Can't Drive 55? How About 65 Instead
By Peter Valdes-Dapena, CNNMoney.com
http://money.cnn.com/2008/04/02/autos/65_mph_speed_limit/index.htm

Paulson Calls for Green Cooperation With China
By Associated Press, via CNNMoney.com
http://money.cnn.com/2008/04/03/news/international/paulson_china.ap/index.htm

Some groups believe imposing a 65 mph national speed limit would improve fuel efficiency, decreasing the amount of gas used, lowering prices and decreasing emissions. It sounds great on paper! Who wouldn't like lower prices and emissions? But capping the energy drivers may use is effectively a mild form of rationing. Meanwhile, China is capping fuel prices, believing the caps will combat inflation and pollution. We find all of this a bit baffling because we've seen that ‘70s show before, and it wasn't pretty (though we think the sitcom by the same name is plenty entertaining. Where the heck is that guy Fez from anyway?).

Both of these proposals—yes, even the one from free market-loving America—amount to government manipulation of supply and demand, which pretty much always has disastrous results. Capping prices won't curb demand—just the reverse! People always want more of something at a lower price. And rationing how much energy drivers may use, even by lowering speed limits, aims to cap demand. And while we view price caps as the greater evil, we don't relish the thought of increased speeding regulations. Both tactics results in disequilibrium.

And when facing disequilibrium the market wants to right itself. You can't artificially tweak prices and expect nothing else gets disturbed. Remember, companies want to make a profit! Often, suppliers will simply cut supply to justify reduced prices. The US government tried both price caps and national speed limits to combat rising fuel costs in the 1970s. (Those higher prices were a result of embargoes, i.e., more market manipulation, elsewhere!) The result? Huge supply shortages and rationing of both gasoline and home heating fuel. The 1970s weren't all fun and bell-bottoms—there were sky-high gas prices and long lines on "your day" to buy gasoline.

From Cuba to Moscow to the US, price caps and rationing have never worked—production stalls, growth stalls, economies stall. Markets hate it too—judging from stocks' lackluster performance during much of the 1970s. But it doesn't stop there—at worst such tactics can also lead to smuggling, corruption, and worse…

Costly Fuel Is Never Far From a Match
By Jad Mouawad, The New York Times
http://www.nytimes.com/2007/09/30/weekinreview/30mouad.html?_r=1&oref=slogin

…Including riots, as were seen in Tehran last summer. Imagine that—a nation as rich in oil as Iran must ration because of price caps—leading to rioting mobs.

As much as you may dislike higher prices, aggressive government intervention won't solve anything and usually make things much worse. Besides, in our view, today's high oil prices are symptomatic of a growing global economy. We shouldn't try to artificially curb prices. What we should fear is prices dropping, signaling lower demand from a stalling world. Even dim-but-lovable Kelso from That ‘70s Show would agree governments should get out of the way of economic growth instead of forcing regression (as long as it didn't mess up his ‘70's shaggy ‘do). Instead of mandating we "go green" to help lower prices, why not see higher prices as a premium for enjoying a faster ride? Speeding is way more fun than rioting.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.