Sometimes we notice anomalies in our relatively well functioning economic system, and we wonder how they could exist.
For instance, how is it possible that fully 25% of all airline flights were either delayed or canceled last year? How can California be having electricity shortages and rolling blackouts when their electricity market was supposedly deregulated three years ago? And why is it a complete certainty that every summer I will be stuck in traffic on the interstate on every trip I take due to roadwork and construction?
As I pondered questions such as these I invariably came to the same conclusion every time. The answer is government.
Today in California the electricity situation is a complete disaster. The two largest utilities in the state, Pacific Gas & Electric and Southern California Edison are on the verge of bankruptcy and have already defaulted on loans to banks and bondholders. The two utilities cannot buy enough power to supply California residents and businesses because power providers don’t trust them to pay, due to their financial woes.
In the meantime you have California governor Gray Davis declaring, in his best Stalinist impression, that power providers are “pirates” and “marauders” and that if they are found to be “withholding” energy from California they should be punished as criminals while their plants are seized by the state. So much for private property rights in California.
Despite Davis’s ignorant assessment of why California’s power market is such a mess, there is actually a sound economic reason for what has happened. First and foremost, the power market in California was never totally deregulated. It was only partially deregulated. The price of wholesale power to the utilities in California is now allowed to move freely and the utilities can buy power from whomever they choose. However, the price charged to consumers is capped at a fixed rate. When oil prices and natural gas prices skyrocketed over the last year, the cost of wholesale power to the utilities also increased dramatically.
Adding to the problem, power providers from Washington and Oregon decreased their supply to California due to their own problems with low water levels at their hydroelectric dams. Normally, these supply disruptions would lead to an increase in prices to the consumer. But the price that California utilities can charge consumers is set by law.
At this point it becomes simple economics. The utilities’ marginal costs are now greater than the price they can charge, which means they lose money every day. To make matters worse, since consumers still pay their artificially low price for power, they have no incentive to turn off the lights and TV when they leave. There is no market force compelling them to conserve electricity. All they have is the local government begging them to turn off the lights, put away the hair dryer, and, in the most comical of requests, watch the Super Bowl in groups.
Now the governor, state congressmen, and even the federal government are getting involved to try and figure out what to do. There is really only one solution and that is to allow consumer prices to rise to their true market level. But, given that Davis is up for reelection soon, this probably won’t happen, which means that the people of California can expect many more days of blackouts to come.
As for the issue of flight delays, who hasn’t sat in an airport waiting for their delayed flight, finally getting on board, sitting on the runway for another hour, then waiting longer for their bags at their final destination? It’s an every day act that’s played out in almost every airport in this country.
Several years ago, when I was much younger and much more ignorant as to the ways of the world, I again pondered the reason for this seemingly un-free market industry as I waited for my delayed flight in the overcrowded airport. Why doesn’t competition make things better, I asked myself. Why don’t the really late airlines simply lose customers and go bankrupt?
Once again I realized that the answer is government. The local government runs the airport. They’re the ones who determine when to expand. They’re the ones who build the terminals and baggage claim systems. They’re the ones who manage the entire operation of nearly every airport in this country. Do you think they fear going out of business? Do they have any real incentive to provide good service to their “customers”?
Of course, the local government only controls the local airport. That doesn’t necessarily explain all of the flight delays. Again I asked myself, why are so many flights delayed and cancelled? Then I discovered an agency called the Federal Aviation Administration with a branch called Air Traffic Control.
Instead of the airlines, who have to most incentive to keep their planes running smoothly and safely, determining flight routes and when to delay or cancel flights, a gigantic federal bureaucracy with no incentive to do a good job takes up the task. With their decades-old systems and complete monopoly on air traffic control, they are the reason for almost every flight delay and cancellation that doesn’t occur due to bad weather.
How do we fix the airline industry? It’s simple. Let the airlines build the airports and privatize air traffic control.
As we sit stuck in traffic watching the men and women in hard hats lean on their shovels, it doesn’t take long to figure out the answer again. The federal and state governments have a 100% monopoly on interstates. There is no competition and no reason for the government to make sure road repairs are done quickly or that the roads are built correctly the first time.
Every state clamors for federal money for their interstates every year. They beg for the feds to give them money from a farmer in Indiana to pay for a road in Oregon through federal tax dollars. The feds in turn blackmail the states into doing their bidding by dangling the tax dollars in front of them. The latest example of this is the Clinton administration’s extortion scheme that will withhold federal road funds from any state that doesn’t lower its blood-alcohol limit for driving under the influence to .08%.
So, as I now frequently take notice of situations that seem so unlikely in a free market system, it doesn’t take me long to come up with a first guess as to the reason why it is that way. Government is the answer.
