Economics 90210 ,
 This was an article written in response to the piece by Prof Krugman in the 
New York Times several weeks ago. I know that Foster spent some time on the 
phone with Steve and Mark before writing the article. 
----- Forwarded by Aleck Dadson/TOR/ECT on 06/26/2001 08:40 AM -----

	Dan Dorland
	06/08/2001 08:54 AM
		 
		 To: Paul Devries/TOR/ECT@ECT, Jan Wilson/TOR/ECT@ECT, Jeff Borg/TOR/ECT@ECT, 
Dave Ellis/TOR/ECT@ECT, Aleck Dadson/TOR/ECT@ECT, Garrett Tripp/TOR/ECT@ECT
		 cc: 
		 Subject: Economics 90210





Economics 90210

Peter Foster
National Post
Dumb ol' Dubya. President Bush and his administration have been taken to task 
this week by U.S. liberal economists and media sophisticates for being so 
naive as to suggest that California's problems won't be solved by price 
controls. That, sniffed last Sunday's New York Times, was just "Econ 101." 
What the President needed was a lesson in Econ 90210, presented by the 
Department of Sarah Polley-Sci.
The bad news for Californians is that the shift of power to the democrats in 
the federal Senate means that price controls become more likely, and with 
them more blackouts. Meanwhile, the real causes of the California crisis -- a 
screwed-up deregulation process exacerbated by environmentalist opposition to 
new state power plants -- are buried beneath screams about gouging and 
profiteering, and calls for an anti-corporate witch hunt.
The call for price caps has allegedly been boosted by the support of a "gang 
of ten" economists including Alfred Kahn, "the architect of airline 
deregulation under President Carter." But price caps don't work. As President 
Bush noted after meeting California Governor Gray Davis last week, "[P]rice 
caps do nothing to reduce demand and they do nothing to increase supply." 
However, according to another liberal economist, Princeton's Paul Krugman, we 
shouldn't worry about prices because this summer will see blackouts anyway, 
and in the longer term, new supplies are on the way via new plants, whose 
arrival will somehow be magically impervious to the prospect of controls.
Apart from being terrible economics, Mr. Krugman's attitude is even more 
objectionable politics. At least he is frank about the reasoning behind his 
support for price caps. They are intended to keep money out of the hands of 
power suppliers. Meanwhile, he pursues the conceit -- disproven time and time 
again -- that prices can be fine-tuned by bureaucrats to a level that will be 
"just enough" to call forth the right amount of new power. "Nobody," he 
writes, "has proposed capping prices at a level that would prevent power 
producers from making extraordinarily high profits; why should this reduce 
the power supply?"
Mr. Krugman suggests that students who go beyond naive old Econ 101 learn 
that "strictly speaking, the standard argument against price controls applies 
only to competitive industry. A price ceiling imposed on a monopolist need 
not cause a shortage; indeed, price controls on a monopolist can actually 
lead to higher output." This happens when the guy in the top hat throws up 
his hands and says "No point in me holding out for higher prices now that you 
clever wonks have capped them, so just come in and take what you want. And 
which way is it to the airport?"
Professor Krugman does have the good grace to note that "That's not an 
argument you want to use too often." In fact, the argument is dangerous 
nonsense. There is no "monopoly" supplier of energy to California (although 
many state politicians have called for a government takeover of the 
"commanding heights" of electricity generation, . la Lenin). Moreover, both 
the economic and political arguments against price caps remain as valid as 
ever. Price spikes require a buyer as well as a seller. To hold down prices 
means that there will be excess demand and that constrained supply will have 
to be allocated among competing uses by politicians and bureaucrats -- as it 
was under the system of natural gas price and transportation controls that 
brought the United States to crisis back in 1977. Meanwhile, the impact of 
such essentially arbitrary controls goes well beyond their immediate skewing 
of market signals. They damage the entire investment climate by raising the 
spectre of further whimsical intervention, and by establishing an effective 
ceiling to profitability without any corresponding limits to losses, except 
for those with political pull. Professor Krugman asserts that "generating 
capacity is being added so quickly that the industry will soon face a glut." 
If that happens, we may be sure that Mr. Krugman will not be calling for 
price supports.
Mr. Krugman has been a leader among the baying pack that suggests that 
California's problems are all due to market "manipulation" by big energy 
suppliers. He concludes his display of economic obfuscation with the snide 
assertion that President Bush's "knee-jerk ideologue" advisers may be "so 
close personally to energy industry executives that they believe that 
whatever is good for Enron is good for America." The presence in California 
of Enron, the world's largest energy trader, has increased supplies to the 
state, but according to California's attorney general, democrat Bill Lockyer, 
Enron's head, Kenneth Lay, should be sent to jail. After all, he did raise 
campaign funds for George Bush. And price caps and jail for business 
executives somehow go together nicely.
richard.shapiro@enron.com