Message-ID: <19845392.1075851970370.JavaMail.evans@thyme> Date: Tue, 26 Jun 2001 01:32:00 -0700 (PDT) From: aleck.dadson@enron.com To: richard.shapiro@enron.com Subject: Economics 90210 Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Aleck Dadson X-To: Richard Shapiro X-cc: X-bcc: X-Folder: \Richard_Shapiro_Nov2001\Notes Folders\All documents X-Origin: SHAPIRO-R X-FileName: rshapiro.nsf 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.