Government Wastes Energy on Energy Prices

The historic high prices for gas, gold, and a wide range of raw materials are only partially the fault of the government, and that only to the extent that a relatively weak dollar has made a bad situation worse. In fact, natural resource prices are high in all currencies, not just dollars. A stronger dollar would do a world of good, but it wouldn’t bring back $2-a-gallon gasoline.So, while government may not be the cause of high energy and resource prices, can it do anything to reduce those prices? A great many pundits believe so, particularly with respect to energy prices. History reaches a different conclusion. Indeed, the harder Washington tries to reduce energy prices, the higher they seem to go.For the past 35 years, Washington has consistently had but six policy prescriptions, though packaged in many different ways: (1) have the government make America less dependent on energy; (2) have the government intervene in energy markets to keep prices temporarily low; (3) have the government promote alternative forms of energy; (4) have the government punish anyone related to oil companies for being profitable; (5) have the government restrict international trade, and (6) have the government allow greater production and refinery capacity of petroleum resources in America. It is not difficult to see that Washington looks primarily to itself, not to ordinary Americans, to solve economic problems.With the exception of promoting more oil production and refining, none of these ideas would likely reduce energy prices. All of the other policies were tried when oil prices rose precipitously in the 1970s, with disastrous results.Consider efforts to make America less energy dependent. Washington created the Department of Energy in the 1970s with a special emphasis on conservation and renewable energy. These were admirable programs, and Americans conserve more energy and use more renewable energy than ever before. But these are far more the natural and cumulative response of consumers to higher prices over the past 35 years than to special governmental programs.America’s economy is far less energy-intensive today than in the 1970s. According to the Department of Energy, today we need on average only half the energy that we needed in the 1970s to generate a dollar of economic activity. Given that we generate far more income today than in the 1970s, the incremental dollar of activity in our economy requires relatively little energy. Moreover, although energy prices have risen rapidly in the past year, energy is still a much smaller share of consumer expenditures than other costs. That is why energy prices can double and consumer price increases remain less than 5%.A less energy-intensive America is not entirely beneficial. In 1972, manufacturing, much of it energy-intensive, accounted for 22% of the national economy. By 2007, the share dropped almost in half, to little more than 11%. In roughly a generation, manufacturing moved from the primary engine of the American economy to an important but secondary force.American manufacturing tends to be less energy-intensive than industry 35 years ago. Computer and electronic manufacturing, for example, are capital- but not energy-intensive. The growth sectors in the economy over the past generation — financial services, health care, finance, and insurance — are not energy-intensive.In the 1970s, our energy policy generated a series of ideas that were tried and were demonstrably harmful: price caps, windfall-profits taxes, artificially subsidizing alternative forms of energy, and rhetorical attacks on international trade. If anything, these policies only succeeded in raising energy and other prices. Other than removing failed energy policies, Washington can point to few if any policies that have lowered energy prices.Ordinary Americans put up with higher energy prices as best they can — grudgingly. In the 1970s, President Carter, ensconced in a taxpayer-provided mansion, preached the virtues of asceticism: Lower the thermostat, avoid elevators, and wear sweaters. Americans don’t need a government to lecture them about what they already painfully do out of financial necessity. Americans need a government that understands the limits of its power to control market outcomes. Today, that understanding is as elusive as ever.A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He can be reached at hfr@furchtgott-roth.com.

Government Wastes Energy on Energy Prices

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