President Bush (White House comments can be found here) recently signed into law the Energy Independence and Security Act of 2007. If we lived in a world where titles have meaning, this would be a positive occasion. Sadly, this bill provides neither security nor independence. Rather, it forces on consumers a product they do not want, subsidizes a number of pipe-dream “alternative fuel” projects that, if they were truly sources of potential fuel, would be funded by the market, and adds a $1.4 billion tax burden on businesses and workers.

Ranking member of the Environment and Public Works Committee, Senator James Inhofe, finds much to fault in this legislation:

“I simply could not support an ‘energy bill’ that will further drive up the already high price of gas at the pump or the cost of energy in our homes,” Senator Inhofe said. “Absent from this ‘energy’ bill are domestic energy resources – such as oil, natural gas, nuclear and clean coal technologies – that are essential to securing an American energy supply that is stable, diverse, and affordable.”

“Further, I am disappointed that this bill significantly increases the renewable fuels mandate in an irresponsible manner. Through my leadership position on the EPW Committee in 2005, I successfully worked with my colleagues to create a comprehensive program to increase the use of renewable fuels in a measured way that makes economic sense. This bill, however, contains a nearly five-fold expansion in the bio-fuels mandate. The fact is there are a growing number of questions surrounding ethanol’s effect on feed prices and our agricultural community, its economic sustainability, its transportation and infrastructure needs, and its water usage. As a result, I believe it’s just too early to significantly increase the mandate. The fuels industry needs more time to adapt and catch-up with the many developing challenges facing corn-based ethanol.”

“Unfortunately, this bill raises $1.4 billion by extending the ‘temporary’ Federal Unemployment Tax Act (FUTA) surtax on businesses which was first established in 1976 to repay loans from the federal unemployment trust fund. Even though this money was fully repaid in 1987, Congress has extended this temporary tax five times, imposing an annual $1.4 billion tax burden on America’s workers and employers.”

“This bill could have been even worse. Fortunately, however, I was able to work with my Senate colleagues to ensure major sections of the bill were stripped out. Democrat attempts to include a tax increase of $21 billion dollars, mostly aimed at the oil and natural gas industry, were defeated, as well as the attempt to include a Renewable Portfolio Standard that would have significantly increased the cost of electricity in Oklahoma and across the country.”

Representative Barton said this of the bill on the House floor:

Let’s take the issue of fuel economy standards. If there is a crown jewel in this bill, it apparently is that we’re going to raise CAFE standards significantly for the first time in 30 years. On the surface, that may appear to be a good thing, but let me point out a few things.

There are over 350 models of automobiles and trucks that are currently available for sale to the American public. There are only eight vehicles that get 35 miles to the gallon. They are the Honda Fit, the Honda Civic, the Honda Civic Hybrid, the Toyota Yaris, both manual and automatic, Toyota Corolla, Toyota Camry Hybrid, and the Toyota Prius. That’s it.

Now, let’s look at the top eight selling vehicles that the American public have bought so far this year. Number one is the Ford F-series pickup. Number two is the Chevrolet Silverado pickup. Number three is the Toyota Camry, not the Camry Hybrid. Number four is the Dodge Ram pickup. Number five is the Honda Accord. Number six is the Toyota Corolla. Number seven is the Honda Civic. Number eight is the Nissan Altima. Only two or three of those get 35 miles to the gallon.

I will stipulate, as smart as our engineers in Detroit are, it is going to be very, very difficult, if not impossible, for the Ford F-series pickups, the Chevy Silverado and the Dodge Ram pickup to get 35 miles to the gallon by the year 2020.

Of course you won’t have any Ford F-series pickups getting 35 MPG, nor do the bill’s proponents care. They don’t believe in choice and freedom. They’d mandate everyone putz around in a Prius if they didn’t have that pesky problem of elections to deal with. He goes on to say:

What the bill before us is is a mandatory conservation bill. Now, conservation in and of itself is a good thing. I won’t deny that. But conservation without some supply is a bad thing, and that’s what this bill is. We’re preempting State and local building codes with Federal building standards for so-called “green buildings.” We’re mandating 35 billion gallons of alternative fuels that right now the technology simply doesn’t exist. Hopefully our engineers and scientists can make that happen, but what if they don’t?

We are also basically just changing the way that we operate in a market economy for energy in this country to the government knows the best and the government is going to tell the American people what’s best for them, whether the American people like it or not. I think that’s a mistake, Mr. Speaker. And for that reason, I would hope we vote against the bill.

There is no energy independence in this bill. There is no exploration of domestic fuel sources that we can make substantial use of now or in the immediate future. There is no new call for nuclear power. There is absolutely nothing tangible in terms of new energy sources from this legislation. We cannot merely conserve our way into energy independence, not if we expect to grow our economy at the same time.

In addition to these issues, that old socialist boogey-man of “price gouging” is yet again attacked. According to Project Vote Smart the bill includes the following on “price gouging”:

– Establishes that in times of energy emergency as declared by the President, price gouging and market manipulation is prohibited and punishable by a civil penalty up to $1,000,000 fine or a criminal penalty of up to a $5,000,000 fine or up to 5 years in prison (Title 1(Subtitle B(Sec. 609))).

– Defines “price gouging” as charging an unconscionably excessive price charged by a supplier. Defines “unconscionably excessive price” as a price that has a gross disparity from the average price at which the item was offered for sale in the usual course of the supplier’s business prior to the President’s declaration of an energy emergency, a price that grossly exceeds the prices at which similar crude oil gasoline or petroleum that is obtainable from other purchasers, represents an unfair leverage on the part of the supplier, or if the price cannot be attributable to increased wholesale or operational costs (Title 1(Subtitle B(Sec. 602))).

I’ve written on price gouging before (here, here and here), but the sheer folly of this idea compels me to challenge it yet again.

Price gouging, the argument goes, is when evil business operators raise prices in the midst of some crisis, emergency or other sudden event. This takes advantage of consumer’s extraordinary need of some good and shouldn’t be allowed. Or should it?

Let’s put this another way and do a little economics 101. What purpose do prices serve? Prices are a means to signal where goods and resources should be utilized. Rather than having some central planner direct scarce resources, the price system (in conjunction with the profit motive) works to get the right amount of resources into the right places to satisfy consumer preferences. So, when demand for certain goods increases during an emergency, the subsequent rise in its price serves to signal the need for more of that resource in a given area. Removing these signals has consequences. Price controls enacted to prohibit “price gouging” exacerbate shortages.

Take for example the case of a Miami man who responded to a shortage of generators by traveling to North Carolina and returning with 35 generators much desired by the area struck by Hurricane Wilma. That’s 35 generators that would not have been available to the people of Miami had this man not acted. If government had its way, he never would have. Miami-Dade County sued him for “price-gouging”. Never mind the fact that any purchase is voluntary and that his customers obviously found his prices reasonable (the act of purchasing says so). Never mind that without being able to charge those prices he wouldn’t have spent his time and energy bringing those goods where they were needed. This is the folly of “price-gouging” legislation. It harms economic activity and thus does a disservice to those it claims to protect. One estimate finds that, had price controls such as those proposed by anti-price-gougers been in place following hurricanes Katrina and Rita, an additional $1.5-$2.9 billion in economic damage would have been caused.^[1]

Though President Bush ignored their findings in signing this energy bill, the White House Council of Economic Advisers, finding that such a law “contradicts standard economic principles” and thus that “‘price gouging’ legislation should be opposed,” sternly warned against the consequences of such legislation just 6 months ago:

Such legislation is harmful for primarily two reasons:

* “Price gouging” legislation that effectively places controls on prices exacerbates shortages and potentially increases lines at gasoline stations.

* The difficulty in defining “price gouging” would create an unnecessary regulatory regime with potentially high litigation costs and great uncertainty for sellers, enforcement agencies, and the courts. These added costs and uncertainties would deter investment in new supply, increasing prices in the long run.

“Price gouging” legislation would reduce incentives to supply areas facing a fuel shortage. For example, in the days after natural disasters, such as hurricanes, price increases induce domestic refineries outside the affected region and foreign suppliers to rapidly ship additional gasoline to affected areas. If this legislation were implemented, it could deter retailers from increasing prices and it might not be worthwhile for suppliers to divert their shipments. Retailers in the affected region would have even less gasoline and drivers would face additional hardship. With gasoline prices kept below market levels, there would be shortages. Consumers would be forced to line up at gas stations, but gasoline would run out before satisfying demand and many would be forced to do without.

Without the flexibility for prices to increase, supply disruptions last longer than they would otherwise. By disrupting the price mechanism, price controls make lines longer during emergencies, misallocate the available supply, and prevent those with the greatest need for gasoline from getting access. Also, by making it illegal for prices to increase when supplies are tight, price gouging legislation makes retailers reluctant to lower prices when supplies are readily available, for fear of not being able to adjust to future supply changes.

The White Paper also notes that law already prevents anticompetitive behavior, and that firms may not use disasters as an opportunity to collude. Real price fluctuations, however, are to be expected following a disaster and serve a vital role. Politicians can make easy sound-bytes out of attacking such price spikes, but they do nothing but harm by attempting to legislate them out of existence. So not only does this bill provide nothing to help with energy independence, it provides real and tangible harm to the functioning of the economy.

^[1]Montgomery, W. David, Robert A. Baron, and Mary K. Weisskopf. 2007. POTENTIAL EFFECTS OF PROPOSED PRICE GOUGING LEGISLATION ON THE COST AND SEVERITY OF GASOLINE SUPPLY INTERRUPTIONS. Journal of Competition Law and Economics 3, no. 3 (September 1): 357-397. http://jcle.oxfordjournals.org/cgi/content/abstract/3/3/357.