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Quantifying the Mistake Can Only Occur By Doing It

posted in: Weekly Commentary 0
By Lowell L. Kalapa

As officials make the rounds to the various communities in the state seeking public input on the possible implementation of the legislative cap on the wholesale price of gasoline, it has become increasingly obvious that the public doesn’t have a lot of faith in the effectiveness of the legislation as there has been little public participation in those meetings.
Perhaps the motoring public has become resigned to the fact that high gas prices are here to stay as other communities across the country have now encountered sticker shock at the pump. However, the legislation that was approved by the legislature several years ago will go into effect this September. Although lawmakers tried to pass the buck to the governor this session by considering a bill that would have allowed the governor to suspend the cap, that legislation failed. Thus, it appears the cap will go into effect barring some last minute legal shuffle.
While the “gas cap” law is unique to Hawaii, it is not a new concept. In fact, price controls have been around for a long time and in some cases they still are a norm. It is just that no other jurisdiction has tried to control the price of gasoline. However, what most observers acknowledge about price controls is that they tend to skew the natural forces of the marketplace, causing producers and consumers to react differently than they normally would.
In New York City, for example, the amount of rent that can be charged is regulated. Adopted with the intent to keep rentals in the City affordable, those rent controls have had just the opposite effect. Fearing that their rents would be capped for years while the same tenant rented from them, landlords skyrocketed their rents whenever they were allowed to do so under the New York law. So if a tenant died or moved out, rents would jump with no rhyme or reason. Few, if any, new rental units were brought on line as potential landlords weighed the fact that they would not be able to recover their capital and operating costs as long as rents are controlled.
As a result, there have been few, if any, additions to the rental-housing inventory in New York City, forcing the rents on what is in the rental inventory to astronomical levels. Thus, rent or price controls did just the opposite of what they had originally intended to do, that is to keep the cost of rent down.
Price controls – the nation as a whole had a good dose of them during the early 1970’s when the Nixon administration imposed price controls in an attempt to steady the national economy after the energy crisis of that period. However, looking back in hindsight, most observers tend to agree that those price control efforts of the early 1970’s. As a result, there have been few, if any, additions to the rental-housing inventory in New York City, were a major contributor to the double-digit inflation of the late 1970’s and early 1980’s.
Unable to recover costs under the price control edicts, producers cut back on output creating shortages of goods and services in the market place. When price controls were lifted, the pent up demand for what little inventory was available quickly inflated prices which, in turn, caused the federal reserve board to raise interest rates as a means of fighting inflation.
So it appears that lawmakers will need a little experience to realize what damage they have done by adopting price controls on gasoline. What is unfortunate is the people of Hawaii will pay a dear price for this lack of experience and economic illiteracy on the part of public policy makers.
Again, it should be remembered that the cap applies only to the wholesale price of gasoline. The mark up applied by retailers or the gas station owners is not subject to the cap. So while the price of the product sold to the retailers will be subject to the formula set up by the legislation, the retailer will be able to charge a price that is equal to what the market will bear. With profit margins already thread bare with many station owners acknowledging that they are lucky if they can scratch out a 3% profit margin, there would be little cause to knock down the mark up by the retail station owner.
In any case, it appears that the only way to put this argument to bed is to actually let the gas cap go into effect and learn from the consequences. Until then, policymakers will continue to argue and keep consumers in suspense. While it will be a dear price to pay, perhaps voting consumers and lawmakers will learn once and for all a very difficult economic lesson.

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