Politics Lands Bush in High Price Lane

President Bush’s views on trade and regulation show no sound, consistent economic philosophy. He directed the Federal Energy Regulatory Commission, or FERC, to essentially stay out of the California electricity crisis, where prices are too high, and he asked the International Trade Commission to investigate foreign steel imports because prices are too low. As there is no economic rationale for these diametrically opposed positions, it must be politics, and consumers bear the brunt of this.

Bush has stated that bad regulation is the cause of California’s current electricity problems. He claims that more regulation would get in the way because the market will fix the situation. In the longer term, allowing companies to have the correct incentives to enter the power business is exactly right. They will enter when they think they can make a profit and exit when they think they can’t.

But, in the short term, FERC has already found that California’s electricity prices are “unjust and unreasonable.” And it will take more than a year for adequate supplies of new power to come on line to satisfy demand in the Western states. FERC’s recent regulations are fundamentally flawed and unlikely to reduce California’s rolling blackouts. Nor are they likely to significantly reduce the fortune that California’s ratepayers and taxpayers are sending to power generators.

One could summarize the president’s approach to California’s problem simply: Prices are high right now, but wait for market forces to provide relief.

That position hardly seems shocking coming from a president oriented to the free market. But then Bush announced that he intends to direct the trade commission to investigate foreign steel producers for selling steel at prices that are too low.

Protection for U.S. steel manufacturers--or protection for any domestic product--comes straight from American consumers’ wallets: We pay higher prices for cars and other products made of steel. A true believer in free markets would welcome low-priced imports to reduce the prices for these products. Yet such open competition would hurt domestic steel producers because they would likely lose sales and have to reduce prices.

The difference in response to the two situations is striking, but so are the similarities. Industry wants high prices in both cases; in both cases the president is taking positions that will lead to higher prices. But those positions are based on completely contradictory economic principles. If the president believes in the power of market forces, he should decline to intervene in either case. Yet, if there is a problem that might require government intervention, it is much more likely to be the one in which prices are too high than the one in which they are too low. Unfortunately, the politics of the situation pushes for intervention in the other case.

This schizophrenic belief in the market is likely to play out in many arenas during Bush’s presidency.

The list where special interests want the government to get in the way of the market to give them a break is nearly limitless. A market-oriented president should pay more attention to principles--and economics--and less to politics.