Please enable JavaScript to view the comments powered by Disqus.

Markets

No Quick Fix for High Prices

The desired remedy is usually price controls -- a lame idea that the U.S. wisely rejected 30 years ago.


Whenever a widely consumed product or service suddenly gets more expensive, there are inevitable cries for the federal government to "do something" about it. Whether it's the price of gasoline, prescription drugs, private-college tuition, new homes, electricity or airfares, many people look to governmental intervention as an alternative to actions they can take as consumers and citizens.

The desired remedy is usually the quick fix of price controls -- a lame idea that the U.S. wisely rejected in a wave of deregulation that began 30 years ago.

PREVIOUS COLUMNS

What Your Home Is, and Isn't

Why I Say No to Hedge Funds

Can We Afford to Grow Old?

The bad old days

I remember when Uncle Sam required "competing" airlines to charge the same fares for any given route -- fares that were much higher than today's. Ditto for trucking prices, brokerage fees and interest rates on savings (but those were capped at lower rates than today's).

When the price of petroleum soared in the 1970s, the government capped gasoline prices. Motorists enjoyed stable fuel prices but endured the pain of scarcity: being allowed to fill their tanks only on odd or even days and having to suffer long lines at gas stations. Mercifully, the U.S. abandoned price controls on gasoline in 1981.

Advertisement

As consumers, we can help bring down the price of anything -- either by using less of it or by substituting something of similar utility and lower cost. Energy is especially amenable to conservation, through the use of more-efficient cars and home lighting fixtures and appliances.

Substitution works well with other high-priced products. We can, for example, buy generic drugs, send our children to public colleges and fly at off-peak times.

That's the demand side of the issue. Prices also tend to moderate when supply expands. As consumers, we can't do much about supply, but as citizens, we can do plenty, through the governmental policies we support.

That means doing our bit to hold down airfares by supporting the expansion of existing airports (more runways and gates) and the construction of new ones.

Advertisement

To moderate the cost of housing -- driven mostly by the scarcity of building lots in metro areas -- citizens should support higher residential density in both in-fill and green-field developments.

We could help moderate the price of electricity (and ease the threat of global warming) by boosting supply with new nuclear power plants, wind farms and large arrays of photovoltaic cells.

The biggest factor in the high price of gasoline today is inadequate refining capacity in the U.S. As a result, we import some 14% of the gasoline we consume, mostly from Europe. We could help lower prices at the pump if we, as citizens, supported the construction of new oil refineries in the U.S. (the last new one opened in 1976) and the expansion of old facilities, as Marathon Oil is doing in Louisiana.

Sadly, supply-side solutions are hard to achieve in a nation where vocal minorities and arduous government approval can stymie almost any bold project. By default, we're often left with the choice of using less of a high-priced product or petitioning the government for price controls.

Advertisement

The lessons of deregulation

Before we're tempted to try price caps again, remember what happened when gasoline prices were decontrolled in 1981. They soared immediately, but global production surged as Americans went on a fuel-economy binge. Gas prices started to fall by the mid 1980s and stayed low for the next decade and a half.

In today's booming global economy, I don't expect energy prices to plunge. But the chances of gas prices even remaining flat are nil unless Americans play both sides of the supply-and-demand game: They must conserve fuel aggressively and lobby their leaders for crucial increases in production.

Columnist Knight Kiplinger is editor in chief of Kiplinger's Personal Finance and of The Kiplinger Letter and Kiplinger.com.