Tuesday, August 5, 2008

A Lesson from High Energy Prices

This blog is mostly focused on government itself, rather than specific policies. However, this particular op-ed on energy prices is worth a read because it contains many basics that are endemic to sound policy making:
High prices, painful as they may be, do more to encourage energy conservation than replaying every one of President Carter's sweater-clad exhortations to turn down the heat... Politicians seem to have an irresistible urge to intervene whenever voters start suffering from higher prices, but usually those interventions do more harm than good.
The author, economist Ed Glaeser, singles out several congressional proposals for critique.

(1) A tax credit to offset high energy prices:
Tax credits for home energy use reward people for using more fuel. If anything, the environmental consequences of carbon emissions and the strategic repercussions of importing Middle Eastern oil, suggest that lawmakers should be raising, not lowering, taxes on energy. Standard economic analysis suggests that oil companies would be a primary beneficiary of lower energy taxes
(2) Price caps:
Energy price controls were the clever idea of the 1970s, which only managed to give economists more evidence that you can't repeal the laws of supply and demand. Fixing prices below the market level, whether on oil or apartments, only produces shortages and long lines.
One idea he mentions without further analysis is limits on speculation. Others have noted the many problems that such curbs have, though.

More important than any particular aspect of energy policy, though, is Glaeser's conclusion:
High prices may be painful, but they convey a key nugget of information: Energy is scarce; use it wisely. If the government uses tax policy to artificially reduce energy prices, then the government will only deter private individuals from appropriate conservation.
In short, prices are a signal of what's happening in a given marketplace. When government policy targets prices, it's attacking a symptom while doing nothing to address the underlying fundamentals. When evaluating government policy, it's always worth asking whether it truly addresses the true long term problem (in this case, too little production to meet demand or too much demand given our limits on supply, given your perspective) or whether it's a quick fix to turn down the heat on politicians.

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