July 1, 2008
Price Controls Wreaking Havoc in Iraq
Motorists are facing lines miles long trying to fill up their tanks in Baghdad. The Iraqi Oil Minister blames pipeline sabotage. The real reason lies burried halfway through this AP article on the shortages:
The official price for a liter of gasoline in Iraq is the equivalent of about 38 cents, or about $1.44 a gallon. But the black market price, which has risen significantly in recent days, can be almost three times that amount.
As Thomas Sowell famously put it: "As an economist, whenever I hear the word 'shortage' I wait for the other shoe to drop. That other shoe is usually 'price control.' "
For more on price controls click here. For an unpublished letter to the editor on the the effect of price controls in Iraq click here.
Posted by Peter Mork at 10:13 AM | Comments | TrackBack
February 1, 2008
It's Not Just Bad Weather
Loss of power in Southern China has stranded millions of Chinese workers trying to return to their villages for their yearly trip home. While the crisis in Guangzhou is being blamed for the most part on bad weather, there is another cause: price controls.
Here are the details from the Finanical Times:
The widespread price controls instituted by Beijing to combat inflation, the number one economic priority of the central government at the moment, have in fact helped worsen the present crisis. On top of the snow storms, the root of the coal and power shortages is a partially deregulated pricing system that has pitted the two industries against each other in a game of chicken.
Coal prices have been largely deregulated in recent years. Power prices remain controlled. As coal prices have soared in recent months and weeks, mines have held back supplies to try to cash in, while the generators have reduced their power output rather than pay up.
Posted by Peter Mork at 9:17 AM | Comments | TrackBack
December 13, 2004
A Reason Behind Every Shortage
"As an economist, whenever I hear the word 'shortage' I wait for the other shoe to drop. That other shoe is usually 'price control.' " --Dr. Thomas Sowell
This morning NPR had a segment on a major fuel shortage in Iraq. Currently, lines at some gas stations are up to 4 miles long. One man interviewed, who had been waiting in line for three days, bluntly stated "How do you explain this? I don't know."
NPR tried to offer some explanations itself but Mike Shuster, who authored the segment, was for the most part clueless about the causes. Searching for an answer he blamed the insurgency's targeting of the oil infrastructure along with corruption by state officials who have been moving their families and friends to the front of the lines. He even quoted an army official who had the gall to blame the Iraqis themselves for hoarding fuel (here's a hint... that's an effect, not the cause of the problem).
For a brief moment Shuster got close to the true source of the crisis by noting that the price on the black market was 10 times the price that Iraqis "preferred" to pay at the government stations. Unfortunately, the insight stopped there. The words "price control" were never mentioned.
Having the quote from Sowell in the back of my head, I was certain some sort of price controls had to be involved. With a little research I found this article from the The Future of Freedom Foundation. While it is dated a year ago, it states that at the time the price of gasoline was set by the U.S. at around 5 cents a gallon. I assume the price is now controlled by the interim Iraqi government but the evidence suggests that not much has changed.
In the 1970's when the U.S. government set price controls on gasoline, shortages and lines at the pump followed. This happened for the simple reason that incentives got out of whack. Consumers had no incentive to conserve at the artificially low prices, while producers had no incentive to search out new supplies as they would not reap the reward of their efforts. But once the price controls were lifted in one of the first acts of the Reagan administration, prices soon fell to below the former government regulated price. Aligning incentives apparently does matter.
Tragically, it looks like the situation in Iraq might not be that easy to solve. The same article from FFF states:
Of course, the gasoline-shortage crisis in Iraq is not as simple as it was in the United States, given that the oil industry in Iraq is government-owned. When the federal government finally lifted its price controls here in the United States, the price quickly rose to the free-market level and the lines disappeared. In Iraq, simply lifting the price controls would not solve the problem because the central planners would still be faced with the problem of constantly guessing what the free-market price should be in all the government-owned gas stations. There would still be, in the words of Ludwig von Mises, “planned chaos.”
You would think that with all the problems the Bush administration has bringing order to Afghanistan and Iraq, applying basic economic principles to the fledgling economies would be a given... but apparently not. Where is Ludwig Erhard when you need him?
update: Marginal Revolution has a similiar post here.
Posted by Peter Mork at 10:33 PM | Comments | TrackBack
October 8, 2004
Political and Economic Freedom in Afghanistan
Afghanistan may be heading in the right direction in terms of political freedom as their first elections are set for tomorrow. Yet political freedom is only half the picture. Economic freedom is the other half, and without it a higher level of prosperity will be impossible.
In the international section of the WSJ, Philip Shishkin has an article: "Afghans Are Free, Market Isn't". The article begins:
Kabul, Afghanistan -- SOAKED IN SWEAT and squinting from smoke in his soot-covered shop, Abdul Ahad was having a normal day until Nizar Habibi emerged from the bazaar crowd and fined him $20 -- almost twice the average Afghan weekly wage. The baker's crime: charging slightly more for bread than the price set by the government....
...Every month -- after browsing markets to check how much vendors pay for raw materials -- Mr. Habibi invites industry representatives for an exercise in central planning. Loud arguments are common as businessmen plead to be allowed to charge more. When the prices are set, the inspectors print 7,000 price lists for distribution to vendors. On the bottom of the form, which must be visibly posted, is Mr. Habibi's telephone number for customer complaints.
Habibi stresses throughout the article that while free markets are a great idea, "we aren't ready for a completely free market yet." But as economics will tell you, and history has demonstrated, price controls have disastrous effects. If the price by the government is set too low then shortages will exist.
The situation in Afghanistan is astonishingly similar to the situation in the areas of post-war Germany under Allied control. Luckily, Germany's minister of economic affairs, Ludwig Erhard, defied his U.S. commanders and lifted all price controls. This despite their protests that Germany was not ready for the free market. Accordingly, the German economy boomed despite its other shortcomings. Watch the 4 minute clip of this story from PBS with a broadband or dial-up connection.