Top Economic Adviser To Al Gore And Gray Davis Wrote The Book On Why Price Caps Are Bad Policy
 

Former Gore Campaign Adviser And Current Davis Adviser Alan Blinder,One-Time Vice Chairman Of The Federal Reserve And A Member Of President
Clinton's Council Of Economic Advisers, Slams Price Caps In His Economics Textbook:

*       Blinder Claims Price Caps Are Subject To Political Influence And Are Hard To Rescind.  "Virtually every price ceiling or floor creates a class of people that benefits from the regulations.  These people use their political influence to protect their gains by preserving that status quo, which is one reason why it is so hard to eliminate price ceilings or floors."  (William J. Baumol and Alan S. Blinder, Economics: Principles And Policy, 1999, p. 87) (emphasis added)

*       Blinder Warns That Price Caps Could Lead To Even Further Damage To The Energy Market.  "Price controls throw a monkey wrench into the market mechanism.  Though the market is surely not flawless, and government interferences often have praiseworthy goals, good intentions are not enough. Any government that sets out to repair what it sees as a defect in the market mechanism runs the risk of causing even more serious damage elsewhere."  (William J. Baumol and Alan S. Blinder, Economics: Principles And Policy, 1999, p. 87) (emphasis added)

*       Blinder Advises Against Excessive Government Interference, Saying Price Caps Could Produce A Variety Of Harmful Consequences.  "An attempt by government regulations to force prices above or below their equilibrium levels is likely to lead to shortages or surpluses, to black markets in which goods are sold at illegal prices, and to a variety of other problems.  The market always strikes back at attempts to repeal the law of supply and demand."  (William J. Baumol and Alan S. Blinder, Economics: Principles And Policy, 1999, p. 87) (emphasis added)

*       Blinder Says Price Caps Have A History Of Choking Off Investment In The Affected Industry.  "In case after case where legal price ceilings are imposed, virtually the same series of consequences ensues. . . . A persistent shortage develops because quantity demanded exceeds quantity supplied. . . . An illegal, or 'black,' market often arises to supply the commodity. . . . Investment in the industry generally dries up.  Because price ceilings reduce the monetary returns that investors can legally earn, less capital will be invested in industries that are subject to price controls."  (William J. Baumol and Alan S. Blinder, Economics: Principles
And Policy, 1999, p. 83) (emphasis added)

*       President Clinton Called Blinder A Brilliant And Distinguished Economist.  "[Blinder] was a distinguished member of the Council of Economic Advisors and the Vice Chairman of the Federal Reserve, and a brilliant contributor to our efforts to improve the economy.  I want to thank Alan Blinder here among his colleagues and these students for what he has done." (President Bill Clinton, Princeton University Commencement Address, June 4, 1996) (emphasis added)
 

Been There, Done That: Price Caps Didn't Work In The 1970's And They Won't Work Now:

*       In 1979, President Carter Refused To Eliminate Federal Price Caps - Against The Advice Of His Own Energy Secretary.  "Energy Secretary
James R. Schlesinger, in particular, had argued that lifting Federal price caps and abolishing the government's Byzantine allocation system would go a
long way toward spurring conservation, allocating scarce fuel more efficiently and eliminating lines at the gas pump.  But Carter vetoed the idea."  (Merrill Sheils, "The Energy Plan," Newsweek, July 23, 1979) (emphasis added)

*       America's Past Experiences Demonstrate That Price Caps Discourage Development And Postpone Tough Choices.  "The nation's recent experience with price controls on oil and gas strongly suggests that price caps discourage domestic production, subsidize costly imports and postpone development of alternative energy sources."  (Merrill Sheils, "Battling Big Oil," Newsweek, October 1, 1979) (emphasis added)

*       Carter's Increased Government Intervention And His Failure To Remove Price Caps Drew Protests From American Business - Described As A "Vote Of No Confidence" By Alan Greenspan.  "[B]y failing to promote domestic production of conventional oil and natural gas and barring prompt decontrol of the price of gasoline, the plan made it difficult to meet America's near-term energy needs.  'All in all, it was a very weak, pallid performance,' said M.I.T. energy economist Morris Adelman.  'The failure to decontrol will cost us a good deal.' . . . 'It's a vote of no confidence,' said economist Alan Greenspan.  'The rest of the world has interpreted the President's speech as rhetorical, a waste of time.' . . . [American businessmen] protested that the President had sought to correct past policy
errors with more of the same.  Instead of lifting government controls in order to encourage conservation, spur new domestic production and hasten development of alternate energy sources, Carter has proposed more government intervention."  (Merrill Sheils, "Carter's Energy Plan," Newsweek, July 30, 1979) (emphasis added)

*       Carter's Energy And Economic Experts Argued For Lifting Price Caps - But His Political Gurus Said No.  "Perhaps most important, Carter could have lifted price controls on gasoline and abolished the government's inefficient allocation system.  According to many energy experts and environmentalists, allowing the market to ration supply by price would have put a quick end to gas lines and service-station closings, and spurred conservation.  Carter's chief energy and economic advisers, in fact, urged him to take the step; his political counselors argued against it. M.I.T.'s [Morris] Adelman, for one, thinks Carter made a serious mistake. .
. . 'You can easily see a scenario in which foreign exchange markets become disillusioned with our further plunge into the thickets of controls and regulations,' says [a Carter economic adviser].  'You could get the President boxed in so that he has to decontrol everything just to save the dollar.'  That, of course, is what many energy experts have been recommending from the start."  (Merrill Sheils, "Carter's Energy Plan," Newsweek, July 30, 1979) (emphasis added)

*       Price Caps Didn't Work When President Nixon Was Forced To Enact Them.  "President Richard Nixon, with a re-election campaign in the offing in 1971, imposed wage and price controls to help keep inflation at bay.  While hailed as politically expedient, the system got low marks from many economists.  Federal price controls on oil resulting from the 1973 Arab embargo and controls on natural gas were also eventually deemed ineffective and scrapped."  (Martha McNeil Hamilton and Greg Schneider, "Price Caps Have Questionable Record," The Washington Post, May 31, 2001) (emphasis added)

The Director Of Economic Studies At The Brookings Institution And A California Economist Warn America Not To Repeat The Price Cap Mistake Of The
1970's:

*       Price Caps Create Further Energy Shortages And Led To A Surge In Crude Prices During The 1970's.  "Price caps also generate artificial shortages, either electricity blackouts or lines at gas stations. We should keep in mind that we've been here before.  In 1979 crude oil prices surged while the nation was saddled with a Byzantine system of oil price controls inherited from the Nixon administration.  We should learn from the solution adopted then: removal of price controls, coupled with a windfall profits tax on producers and a recycling of the proceeds to consumers."  (Robert Litan and Philip Verleger, "We've Tried Price Caps Before And They Don't Work," The Houston Chronicle, May 30, 2001) (emphasis added)

*       Today's Price Caps Would Discourage Conservation And Increase Prices, Just Like They Did For Oil In The 1970's.  "In 1979, U.S. allies called for the removal of price controls to bring down the price of oil.  The critics asserted that the controls raised the world's demand for oil while depressing production by those outside the Organization of Petroleum Exporting Countries cartel.  The consequence was a higher price for oil.  Today, electricity price controls have the same effect.
Conservation is discouraged and low-cost production is shut down.  The gap between supply and demand is filled with output from very high-cost facilities."  (Robert Litan and Philip Verleger, "We've Tried Price Caps Before And They Don't Work," The Houston Chronicle, May 30, 2001) (emphasis added)

*       A Wise Short-Term Policy Avoids The Pain Caused By Price Caps.  "Bush is right that the current energy crisis can be solved only in the long run.  But wise policy can help all of us in the short run, too -- to avoid shortages, to preserve the benefits of price signals and to minimize the pain that short-term price increases can cause."  (Robert Litan and Philip Verleger, "We've Tried Price Caps Before And They Don't Work," The Houston Chronicle, May 30, 2001) (emphasis added)
 

Senator John Breaux, A Democrat, Agrees With President Bush - Price Caps Will Do Nothing To Produce More Energy:

*       "There's no short-term way of getting out of this problem.  Price caps, in my opinion, does [sic] not produce any more energy.  Not one drop, or not one kilowatt, or not any more natural gas. . . .  There are no short-term solutions to this problem."  (Fox's "Fox News Sunday," May 20, 2001) (emphasis added)
 

Clinton-Appointed Commissioner Of The Federal Energy Regulatory Commission Warned Of The Dangers Posed By Federal Price Caps:

*       FERC Commissioner James Hoecker, A Democrat And A Clinton Appointee, Warns Against Price Caps.  "Price caps have a lot of problems
associated with them.  They don't tend to be effective, and they deter some companies from participating in the market."  (Ricardo Alonso-Zaldivar,
"U.S. Agency To Consider Limits On Power Costs," Los Angeles Times, April 23, 2001)

*       Commissioner Hoecker Called Price Caps "Arbitrary" And Warned They Could Lead To More Blackouts.  ". . . [T]he head of the federal agency that oversees part of California's power system has said that his panel would avoid the 'facile, short-term fix' of federal price caps on wholesale electricity, the solution being sought by [Governor Gray] Davis. [FERC Commissioner James] Hoecker said in his statement that the kind of price caps sought by Davis 'tend to be arbitrary and potentially confiscatory.'  Caps, he said, 'create uncertainty for investors, discourage entry into the market or even drive resources elsewhere . . . and they could lead to outages.'"  (Robert A. Rosenblatt and Peter G. Gosselin, "U.S. Unwilling to Impose Power Price Caps, Officials Say," Los Angeles Times,
January 9, 2001) (emphasis added)

*       Price Caps Will Do Nothing To Remedy A Supply Shortage. "'As disappointing as it may seem to some, we cannot 'price cap' California out of a supply shortage,' [FERC Commissioner James] Hoecker wrote in outlining his views on what should be done to address California's power problems."  (H. Josef Hebert, "Federal Energy Regulatory Commission Chief Resigns," The Associated Press, January 10, 2001) (emphasis added)
 

The Chairman Of The FERC Agrees That Price Caps Are Bad Policy And Do Not Solve The Problem:

*       FERC Chairman Curt Hebert Insists Competitive Markets, Not Price Caps, Will End The California Blackouts.  Spencer Michels, of PBS: "[Governor Gray] Davis and others lobbied the Federal Energy Regulatory commission, FERC, to put a cap on wholesale prices and to authorize refunds to San Diego.  But FERC commissioners said they wanted to let the market set the prices."  Hebert: "The solution to the suffering is to promote the evolution of truly competitive markets."  (PBS' "The NewsHour With Jim Lehrer," December 22, 2000) (emphasis added)

*       Chairman Hebert Declares That Price Caps Are Not A Good Solution.  "At a Federal Energy Regulatory Commission hearing in Boise, Idaho, Western states continued to be divided on what the federal government should do to ease the region's crisis of short supply and high prices.  Some states -- notably California, Washington and Oregon -- continue to beat the drums for price caps of some kind, while others oppose them.  And FERC Chairman Curt Hebert renewed his declarations that caps are not a good solution and will not be part of any federal offering."  ("Battle For Price Controls Continues To Hold Center Stage In Western States," Electric Utility Week, April 16, 2001) (emphasis added)

*       Chairman Hebert Insists Price Caps Would Worsen The Existing Power Shortage.  Hebert: "If you put [in] a price cap, what you're saying is, you're suggesting to the people in California and the West that there's a price at which no longer will we allow electricity to be delivered. Anything above that will not be delivered.  Fox's Brit Hume: "So in other words . . . your sense would be that it would just simply dry up the supply."  Hebert: "Absolutely it would.  You'd continue to have shortage." (Fox's "Special Report With Brit Hume," May 29, 2001) (emphasis added)
 

House Commerce Committee Chairman Tauzin Highlights The Problem With Price Caps:

*       California's Energy Purchasing Authority Warns That Price Caps Will Lead To More Blackouts And Greater Shortages.  Rep. Billy Tauzin (R-La.): ". . . [P]rice controls by government give you shortages. California tried it.  They controlled prices at the retail level, they controlled prices at the wholesale level, there were price caps in California which they ignored themselves, because they couldn't buy energy at those prices.  They've got shortages, they've got higher prices, and why?  Because they didn't deregulate, they only regulated.  They regulated with price freezes.  We tried that in America.  Jimmy Carter gave us price controls on natural gas.  Remember what it gave us?  Shortages, shutdowns, a horrible situation in parts of the country where factories couldn't operate and people went unemployed.  Price caps?  Prices caps mean shortages, less energy.  Guess who says so?  The head of the California ISO, the purchasing authority, said price caps will mean more blackouts, not less blackouts for California."  (CNN's "Crossfire," May 17, 2001) (emphasis added)
 

Three Strikes And You're Out - Governor Gray Davis Is Pointing Fingers And Playing Politics:

*       Strike One:

                *       Davis Claims The FERC Has A Legal Obligation To Impose Price Caps . . . "Under the Federal Power Act of 1935, only the Federal Energy Regulatory Commission has the power to ensure a just and reasonable wholesale electricity market in California.  This is not a matter of discretion for federal regulators; it is an obligation.  The law requires the F.E.R.C. to ensure that rates are just and reasonable."  (Governor Gray Davis, "Bush's Mistake In California," The New York Times, May 31, 2001) (emphasis added)

                *       . . . But FERC Chairman Hebert Says The Commission Is Doing What It Is Supposed To Do By Law.  Fox's Brit Hume: "The governor argues - we've heard him make the argument, you heard it again . . . that legally . . . requires you, by his way of looking at things, to do something about these astronomical prices . . . What about that?"  Hebert: "Well, actually, under the Federal Power Act, which is what you're speaking of, there is a section in there that goes into the justness and reasonable of rates.  The controlling case on that is the Farmland decision.  What the Farmland decision does prefer is it requires us basically to provide a balance, to make sure, on one side, we're looking at the justness and reasonableness of rates to make it available to consumers at a reasonable level and, at the same time, making sure that we have got adequate opportunity out there to get infrastructure and to get supply so we can keep long-term issues out there.  That is exactly what the commission has done." (Fox's "Special Report With Brit Hume," May 29, 2001) (emphasis added)

*       Strike Two:

                *       Davis Declares He Can Do Nothing About High Energy Prices . . . "California itself can do nothing about the unconscionable wholesale electricity prices that are often more than 700 percent higher than they were just a year ago."  (Governor Gray Davis, "Bush's Mistake In California," The New York Times, May 31, 2001) (emphasis added)

                *       . . . But Chairman Hebert Says That All Davis Has To Do Is Act.  Hebert: "[I] know Governor Davis continues to say that he wants price caps.  He's the governor.  He could say there's a cap, there's a price at which we're not going to pay. . . . But he's not done that." . . . Fox's Brit Hume: "So he could unilaterally, in effect, impose controls on the -- on the price of energy purchased by California."  Hebert: "Absolutely he could."  (Fox's "Special Report With Brit Hume," May 29, 2001) (emphasis added)

*       Strike Three:

                *       Davis, Still Pointing Fingers, Says The President Can Order The FERC To Impose Price Caps . . .  "President Bush must direct the commission to exercise its authority under the law."  (Governor Gray Davis, "Bush's Mistake In California," The New York Times, May 31, 2001) (emphasis added)

                *       . . . But The Decision Lies With The FERC, Not The President.  Fox's Brit Hume: "[F]irst of all, you're saying that if the president decided he wanted to [impose price caps], it's by no means clear it would happen.  He'd have to convince the commission that it was a good idea, which the commission does not now feel is the case, correct?  Hebert: "That's correct."  (Fox's "Special Report With Brit Hume," May 29, 2001) (emphasis added)

                *       . . . And Davis Himself Has Admitted President Bush Has No Power To Order Price Caps On His Own.  CNN's Larry King: "Can a president price cap, as an executive order?"  Davis: "No, he doesn't -- he cannot do that.  What I want him to do is to send a message to his two new appointees who are taking their seat today on this regulatory body, and say, hey, look seriously about giving California relief."  (CNN's "Larry King Live," May 29, 2001) (emphasis added)
 

While Governor Davis Was Inventing A Legal Right To Price Caps, The 9th U.S. Circuit Court Of Appeals Disagreed:

*       A Federal Court Rejected California Lawmakers' Claims That They Are Legally Entitled To Price Caps.  "A federal appeals court rejected Tuesday an emergency request by California's legislature to force U.S. regulators to cap wholesale energy prices.  The legislature failed to show the situation warranted emergency action, a panel of the 9th U.S. Circuit Court of Appeals said. . . . One [utility] analyst said caps sought by politicians may not be in utility customers' best interests.  'It looks like a lot of politicians are trying to save their butts with price controls, even though they know they won't work,' said Chris Ellinghaus, an analyst
with Williams Capital Group.  'Prices would be higher in the long run. Price caps won't solve the long term problem.'"  ("U.S. Court Rejects Energy Price Cap," Bloomberg News, May 30, 2001) (emphasis added)

        *       FERC Chairman Hebert Affirms The Decision Of The 9th Circuit Appeals Court.  "As a matter of fact, the governor was clearly wrong in what he was speaking of earlier as to [a legal entitlement to] price caps because what he indicated, actually, was just shot down by the Ninth Circuit, which is three federal judges right there in California, who said, quite frankly, that FERC is right . . . that we have done right, that we don't have to issue price caps.  It is within our discretion . . ."  (Fox's "Special Report With Brit Hume," May 29, 2001) (emphasis added)
 

Editorial Boards And Newspapers Across The Country Agree - Price Caps Are Ineffective And Lead To Even Greater Problems:

*       The Economist Praises President Bush For Rejecting Price Caps And Focusing On The Long-Term Energy Needs Of The Nation.  "More awkward for Mr. Bush is the fact that his [energy] plan will do nothing whatsoever to prevent either blackouts in California or soaring gasoline prices this summer.  That too is laudable.  Only heavy-handed market intervention or populist pandering would provide such short-term relief. Mr. Bush, by contrast, has loftily refused price caps on electricity prices or rollbacks on the federal gasoline tax, and presented instead an energy plan focused on longer-term issues.  Which is praiseworthy -- but will it
play in Peoria when the air conditioning fails?"  ("Not Half Bad," The Economist, May 19, 2001) (emphasis added)

*       The New York Times Recognizes The Ineffectiveness Of Price Caps.  "Price caps, which Congressional Democrats endorsed yesterday as part of a broader energy strategy, will not by themselves rectify the imbalance between supply and demand that lies at the root of the California crisis. Only conservation and more generating capacity can do that."  ("Indifference To California," The New York Times, May 16, 2001) (emphasis added)

*       Energy Analysts Claim Price Caps Would Discourage Future Investment.  "But even 'temporary' price caps, because of uncertainty over their duration and effect, would slow rather than encourage new investment. Unfortunately, the state's current plans and proposals divert attention from ways of fixing the problem and have California on the path to an expensive and expansive public power authority."  (Lawrence Makovich and Daniel Yergin, "California In The Dark," The Washington Post, March 16, 2001) (emphasis added)

*       The Press-Enterprise Of Riverside, California, Says Artificial Price Controls Could Cause More Power Shortages And More Blackouts.  "[E]ven a price cap might not work.  What the [California] Senate is proposing is the solution of a regulated economy: Determine what a product's price should be, absent a market, and permit no increases beyond that.  Electricity generation, however, is no longer a controlled economic enterprise.  Producers are free to sell their product wherever they can get the most for it (although the thinking when free-market electricity was conceived four years ago was that lots more generators would be attracted to
the market and prices would come down, not go up).  In any case, conditions have changed, and now if a power generator doesn't like a fixed price in California, it can lay off the power to a higher bidder, perhaps in another state.  In fact, despite high prices in the state and a power shortage, that has already happened.  So, the state action could actually cause more power shortages and more rolling blackouts. . . . Mixing features of the 'old' and 'new' market economies is not a solution.  That still must be found." ("Stopgap Electricity," The Press-Enterprise [Riverside, CA], August 17, 2000) (emphasis added)

*       The Detroit News Praises President Bush For Putting The Country's Best Interests Over Politics As Usual.  "[President Bush] must resist the temptation to score political points by temporarily driving down prices through price caps, tax rollbacks and government subsidies. Artificial price controls actually mask the true cost of energy, encouraging more consumption, not less.  That's the danger in the opposition plan proposed by congressional Democrats."  ("Grow The Energy Supply," The Detroit News, May 18, 2001) (emphasis added)

*       The Atlanta Journal & Constitution Agrees That Price Caps Bring More Problems, Not Solutions.  "Look at California.  It has the toughest environmental and conservation policies of all the states -- it could be the model for the Democrats' plan -- and yet it is home to the worst energy crisis in the nation.  Its rigid  regulations and its staunch opposition to new power plants are the root of the shortages that caused rolling blackouts during the winter and are expected to get worse in the summer heat.  Then, state-imposed price caps on electric rates turned shortages into a crisis; when wholesale prices for fuel and electricity produced elsewhere went up, California's utilities plunged toward bankruptcy, and suppliers were reluctant to sell to them, fearing they wouldn't get paid.  This episode shows again that artificial price caps never produce solutions; they only make things worse."  ("Energy Plans Must Target The Long Run," The Atlanta Journal & Constitution, May 17, 2001) (emphasis added)

*       The Pittsburgh Post-Gazette Lauds The President For Avoiding Risky Price Controls.  "To his credit, Bush has ruled out what California hungers for -- price controls on wholesale electricity."  ("Back To The Future On Energy," The Pittsburgh Post-Gazette, May 20, 2001) (emphasis added)

*       The Rocky Mountain News Says Price Caps Are Counterproductive And Cripple Energy Supplies.  "As part of an energy plan they improvised to counter President Bush's, Democrats proposed price controls on electricity in California and other Western states.  Yet price controls are counterproductive on two fronts: They leave demand raging at whatever level it's been because there is no incentive to conserve.  And they cripple supply because there is no incentive for greater production, either.  When controls are finally lifted, prices are likely to go right back to where they had been.  If they are not lifted, the shortage may never
go away."  ("Price Whine," Rocky Mountain News, May 19, 2001) (emphasis added)

*       The Indianapolis Star Concurs With The President On Price Controls.  "[White House press secretary Ari] Fleischer specifically rejected price controls (we concur) . . ."  ("Rising Gas Prices Demand Some Action," The Indianapolis Star, May 8, 2001) (emphasis added)

*       The Boston Herald Applauds The Bush Energy Plan, Adding That Price Caps Have Always Made Things Worse.  "President Bush's report on energy policy holds much of value.  It refuses any truck with that all-purpose economic heroin embraced by congressional Democrats again this week, price controls. . . . Price (or quantity) controls have always made things worse.  The energy crises of the 1970s did not end until controls did, a process begun under President Carter and completed by President Reagan. . . . One principle will be useful in navigating in the policy din: Markets always work in the long run; government controls often don't." ("Bush Energy Plan Gets Much Right," The Boston Herald, May 18, 2001) (emphasis added)

*       The Omaha World-Herald Calls Price Capping An Artificial Solution.  "There are limits to how much a president can do about prices. Or, if the president is able to ram price-control legislation through Congress, it amounts only to a short-term, artificial solution.  As Richard Nixon learned in the 1970s, such price controls must eventually be lifted lest production and supply be crippled.  And when the lid is lifted, the problem returns with a vengeance."  ("Let The Marketplace Work," Omaha World-Herald, May 14, 2001) (emphasis added)