A Stitch in Haste

Hawaii implements price controls on gasoline:

The caps apply as of next week, when a new law goes into effect. It lets Hawaii set a maximum wholesale price at which gasoline can be sold. The limit is based on the weekly average of spot prices in Los Angeles and New York, and on the U-S Gulf Coast. The law doesn't put a cap on retail prices.

Robert Kaminsky observes:

I'm sure Hawaiians would rather have a plentiful supply of gasoline at $3/gallon than have the price be $2.50/gallon but not actually have any available.

That's certainly true, assuming that politics stays out of the rationing. But of course, if certain people are able to invoke the Politics of Pull, based on, say, their occupation (police officers, firefighters and schoolteachers have to get to work, no?), then the egalitarian nature of these government-created shortages suddenly evaporates — everyone suffers equally, but some suffer more equally than others.

(For the record, since the cap is at the wholesale level rather than the retail level, there won't be any visible shortages — gas stations won't run out of gas, they'll simply raise their prices to reflect their now-reduced price-controlled inventories. That's right — a wholesale price ceiling can actually lead to higher retail prices. Ain't central planning grand?)

More thoughts at Eclectic Econoclast, Knowledge Problem, Coyote Blog.

More on Hawaii's gasoline market from the Federal Trade Commission. See also my previous post on a related Supreme Court case, Chevron v. Lingle, No. 04-163 (2005).

UPDATE: OpinionJournal has more --

Made up primarily of liberal Democrats with no economics training, no business background, an open disdain for the free market, and a lust for price caps (except on state taxes), lawmakers say they have to "do something" about the high price of gasoline. Never mind that oil prices have skyrocketed everywhere thanks to increasing demand in the world market and rapid growth in China and India.

In other words, the Politics of the Warm Fuzzy Feeling.

So why bring back price controls more than 30 years after Nixon tried them and failed miserably, causing shortages, rationing, inflation and an economic crisis? It's hard to find a reason, other than to retaliate against the big oil companies, namely Chevron, which many Democrats tried to punish unsuccessfully in court.

In other words, the Politics of Pull.

Explain to me again why "activist legislators" are so much better than "activist judges"?

After less than one year, Hawaii is scrapping its absurd price controls on wholesale gasoline:

Under the price control legislation, Hawaii set weekly caps on wholesale gas prices. Those caps were based on the average of prices in Los Angeles and New York and on the Gulf Coast. Then allowances were added for what it costs wholesalers to ship to Hawaii and distribute gas to more remote islands. But there was no cap on the markup added by gas stations.

When the plan was announced, I promptly analyzed the politics of the proposal. Now let's perform an autopsy on the economics:

Price ceilings lead to shortages.
Oh, you want more? Okay:

Price ceilings at the wholesale level lead to shortages at the wholesale level. Meanwhile, the lack of any ceiling at the retail level simply transferred profits from the wholesalers (who could not charge a market-clearing price) to the retailers (who could). The net effects would therefore simply be: (1) lower quantities of gasoline sold at wholesale and, derivatively, at retail. (2) No reduction in the retail price of gasoline -- and perhaps even an increase. (3) A government-imposed wealth transfer from gasoline wholesalers to gasoline retailers.

There were no surprises here; no one is entitled to scratch their heads over this failed experiment. The laws of economics are akin to the laws of physics. Any college junior economics major could have seen how this would have played out.

Politicians are another matter.