Like Starting Over
Price controls are new again.
On January 28, 1981, when freshly sworn-in President Ronald Reagan abruptly lifted federal price controls on gasoline, the No. 1 song in the country was the late John Lennon's "(Just Like) Starting Over." On September 1, 2005, it was just like starting over all over again, when the state of Hawaii became the first American jurisdiction in a quarter century to adopt the long-discredited policy of placing bureaucrats in charge of petroleum prices.
This wasn't just an isolated case of Island Fever. With Hurricane Katrina disrupting oil flows along the refinery-rich Gulf Coast, unrest in the Middle East throwing access to future reserves in doubt, and demand in the developing world continuing to outpace supply, prices at the pump topped $3 a gallon nationwide, giving politicians a unique opportunity to demonstrate their economic ignorance or cynical opportunism.
Legislators in at least four other states are mulling bills like Hawaii's; attorneys general in at least 30 states have made preliminary noises about investigating gas "profiteering"; governors from both major parties have promised to prosecute what Massachusetts Republican Mitt Romney calls "white collar looting"; and President George W. Bush himself has condemned "price gouging." Sen. Byron Dorgan (D-N.D.) called for a windfall profits tax on oil companies; the Department of Energy placed a Gas Price Hotline link prominently on its homepage; and Sen. Maria Cantwell (D-Wash.) proposed building a bridge to the 1970s by reintroducing Richard Nixon's dreaded price controls.
Severin Borenste, director of the University of California Energy Institute, says he and other resource economists have been fielding calls from reporters all summer. Still, he says, "It's not stopping politicians from doing stupid things on both sides of the aisle."
That's at least partly because price controls never stopped being popular. The Pew Research Center released a study in mid-September showing that "Almost seven in 10 want the government to establish price controls" on gasoline, despite the fact that price controls caused shortages in the '70s. "I don't think the public as a whole ever made the connection," Borenste says.
So is central planning making a comeback in academia as well? "Where there's a true scarcity and you control prices, you cause shortages," he says. "Among economists who are not rabid right-wing or rabid left-wing guys, everyone understands."
Behind the Boom
Engineering the housing bubble
As market watchers puzzle over the current housing boom, a recent study suggests government may be fueling price increases.
In a paper to be published in the American Economic Review, two Harvard economists, Edward L. Glaeser and Raven E. Saks, and Joseph Gyourko, a professor of finance and real estate at the University of Pennsylvania, note that housing prices have been rising at a brisk clip since 1950. Until about 1970, they increased more or less in tandem with construction costs. But in recent decades, the gap between house prices and construction costs has been increasing in many metropolitan areas, especially in the highest-priced markets. Normally, rising prices lead to a corresponding construction boom, yet new building seems to have lagged behind ballooning price tags. Evidence points to manmade scarcity, in the form of government regulations on new housing, as the culprit.
One factor, Glaeser and his co-authors note, is a trend toward court decisions hostile to new development. But what explains that change? One intriguing possibility is that media scrutiny has made it more difficult for developers to grease the regulatory wheels by means of under-the-table payments to local politicians. But the most plausible explanation is the increasing organization, sophistication, and political participation of homeowners' groups and neighborhood associations, which have become adept at using political pressure, courts, and the media to block new construction.
Aside from the aesthetic benefits of a low-density neighborhood, people who already own homes benefit from less competition when it comes time to put their houses on the market. If the paper's explanation is right, the American dream of home ownership may have matured into a cartel.