Tuesday, May 13, 2008

Shooting the messenger

Thomas Sowell has a column today's that mirrors some thoughts of my own recently -- essentially that politicians either have no grasp of the laws of supply and demand or willfully ignore them:
With all the commotion in the media and in politics about the high price of gasoline, is there really some terribly complex explanation?

Is there anything complex about the fact that with two countries-- India and China-- having rapid economic growth, and with combined populations 8 times that of the United States, they are creating an increased demand for the world's oil supply.

The problem is not that supply and demand is such a complex explanation. The problem is that supply and demand is not an emotionally satisfying explanation. For that, you need melodrama, heroes and villains.

It is clear that many people prefer to blame President Bush. Others prefer to blame the oil companies, who have long been the favorite villains of the left.
There has been much ranting and raving from a variety of politicians lately about the high prices at the gas pump, with much of the blame placed at the feet of oil companies. But prices themselves are not the problem, they merely convey information. What the prices are telling us is that demand is exceeding supply so the cost is rising. To deny this fact is to deny reality. Beyond this, prices also help prescribe certain courses of action. High prices tell companies that there is a high demand for a certain product and produce incentive to produce more of it, which will then lead to lower prices.

They also tell consumers that they may want to consider using less of it, leaving more supply to those who really desire it (that desire being expressed in their willingness to pay a high price). A great example of this is that in the days prior to a hurricane that the price of lumber shoots up in the affected area as people use the lumber to board up and protect their property. This tells suppliers of lumber to send more to the area and informs consumers that they should use it wisely -- few people will decide it is an opportune time to build a tree house (besides the fact that it may be knocked down by the wind).

The solution, therefore, when confronted by high prices is to either expand supply or reduce demand. So, really, what should be on the table right now is measures to increase supply such as opening up more land to drilling, which curiously seems to be absent from the discussion. Demand, meanwhile, will automatically be reduced as prices continue to climb, thus inducing consumers to either drive less, carpool or purchase more fuel efficient vehicles.

This discussion goes far beyond gas, however. Back in 1992 Congress voted to use price controls to reduce the cost of cable bills, ignoring President Bush's position that the path to lowered prices was to be found in increased competition (i.e. supply). Such ignorance of basic economic principles is sadly too commonplace to truly be shocking and is seen in most public policy discussions. In the health care debate there is far more discussion about use of government controls to counter rising costs than expanding supply and promoting more competition. Anyone with even a basic understand of economics should be puzzled at the need for government support of the farm industry.

Maybe I should follow Scott Adams' advice and join the Economics Party.

Update: Great minds think alike evidently. Martin Wolf:
So what should be the response to these simple realities? Here are some obvious “do nots” and “dos”. First, do not blame conspiracies by speculators, oil companies or even Opec. These are the messengers.

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