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Painful Economics

By Robert Robb

In economics, pain is a message.

Rising gas prices are a signal to stop consuming so much of the stuff. Foreclosures are a message to borrowers and lenders to be more prudent. In politics, economic pain is a problem. Those experiencing the pain want government to do something to make the pain go away. And politicians, being politicians, endeavor to please.

Rarely, however, can politicians do anything about the market imbalances causing the pain. In the short run, politicians cannot increase the supply of gasoline. They cannot make houses worth more.

Yet, the political imperative is to do something. So, they attempt palliatives. If the body politic is lucky, the palliatives serve as a relatively harmless political distraction. If the body politic is unlucky, they interfere with the behavioral changes market prices are trying to induce.

The discussion among politicians about gas prices is about as silly as it can get.

The market reasons for high gas prices are readily apparent. Gas prices track pretty faithfully the price of crude. Internationally, the supply of crude has not kept up with the increase in demand, in significant part because production is increasingly controlled by inefficient state-owned enterprises.

In the United States, rising gas prices are also in significant part a result of the Fed devaluing the currency. The U.S. imports approximately 60 percent of its oil. The devaluation of the dollar over the course of this decade accounts for at least a third of the current cost of oil imports.

The American people are responding appropriately to the message of rising gas prices. New cars sales have shifted to more fuel-efficient vehicles. Americans are consuming less gasoline and driving fewer miles. Transit usage is up.

Now, these are behavioral changes politicians have lectured in favor of for years. In fact, the harsh reality is that virtually all politicians either favor higher gas prices or seek to mandate through regulation the behavioral changes higher gas prices induce.

Virtually all Democrats and many Republicans favor a cap-and-trade program for carbon emissions to alleviate the effects of global warming. Cap-and-trade puts a price on something, carbon emissions, that is currently cost-free. It will result in an increase in the price of all carbon-based energy, including gasoline.

Nevertheless, the American people don't like higher gas prices and so Democrats in particular are playing the blame game, hauling oil company executives before congressional committees to be excoriated for high prices and profits.

Now, the question of whether the oil companies exercise undue market power is probably the most studied economic question of our time. Every time gas prices spike, Democratic attorneys general across the country launch investigations. Nearly every Democrat with a congressional subcommittee holds hearings. Federal and state agencies have conducted investigations and studies.

Nothing is ever found. The prosaic conclusion of all these investigations and studies is that the price of gas is set by supply and demand.

The only short-term policy the Democrats are advancing is to increase taxes on oil companies. Regardless of whether oil companies have disproportionate market power, the only effect of higher taxes will be even higher gas prices.

The American people are buying into the blame game on gas prices. They like seeing oil companies pummeled by politicians.

On housing, that might not be the case. Polls indicate a surprising skepticism about government bailouts, even for borrowers.

Congress is on the verge of passing taxpayer guarantees to refinance mortgages for those who owe more than their homes are now worth.

Negative equity, however, isn't necessarily a problem for those who bought a home to live in, not as a financial play. Negative equity is only a problem for those who took on more debt than they could afford, counting on refinancing it as the home appreciated.

Perhaps some borrowers were tricked or deceived into such loans. But the number is surely small. The big problem has been borrowers who overreached and lenders who imprudently gave them the money. If the government steps in to reduce the losses, the market message about the need for prudent borrowing and lending will be muffled.

This disconnect between economic signals and political imperatives is a serious problem, particularly on energy.

The politicians are promising a pain-free transition to alternative fuels. The American people want to believe in that fairy tale.

But it isn't going to happen. The prince and princess might live happily ever after. But they will be paying more to make things go.

Robert Robb is a columnist for the Arizona Republic and a RealClearPolitics contributor. Reach him at robert.robb@arizonarepublic.com. Read more of his work at robertrobb.com.

Copyright 2008, Real Clear Politics


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