Eric's Beijing Diary

Interesting piece in the Wall Street Journal on the long gas lines in China:

China Does Carternomics

We don't know if the Chinese have suddenly appointed Jimmy Carter as their energy czar, or whether it just seems that way. The two- and three-hour long gas lines now stretching down city blocks in many provinces in China are certainly an unwelcome reminder of the 1970's when U.S. policies caused a similar energy panic.

So let's think of this as a teaching moment. In China today, many of the same Carter-era policy prescriptions for high energy prices have incited the unprecedented gas lines. The government has imposed price controls on oil and gas for some time now in an effort to fight inflation, just as the U.S. did back then, and in the last few weeks it has even resurrected another Carter-era gem, a "windfall petroleum profits tax" on oil and gas producers. Perhaps Chinese President Hu Jintao will soon deliver a televised speech to the nation wearing a cardigan.

By holding domestic prices to about $10 a barrel below the world price, according to the International Energy Agency, Chinese oil firms have discovered they can make more money selling energy abroad than at home, thus lengthening the gas lines.

Gasoline shortages in recent days have become so severe that Hong Kong's South China Morning Post reports that the waiting lines have infuriated "everyone from taxi drivers to farmers across the country, and could threaten social stability." Two other Asian nations, Indonesia and the Philippines, have also been toying with oil price controls and gasoline rationing--so they might want to watch and learn from the Chinese mistake.

Price controls that are set below the market price always exacerbate shortages, because the artificially low price causes demand to rise and supply to fall. With the price no longer permitted to equilibrate supply and demand, consumers wind up paying not with dollars, but worse, through waiting lines and lost hours in the day. That's what beleaguered Russians learned many times over when they waited in grocery lines for price-controlled bread and chicken and chocolates during the Soviet era.

And it is what enraged Americans learned when parked in gas service station lines at 7 a.m. during the 1970's, which, since it included both the Nixon and Carter years, was arguably the worst period for U.S. economic policy during the last century, Herbert Hoover excluded. A windfall profits tax only discourages increases in supply by disincentivizing further production. High profits are precisely the desirable signal that a market sends to firms to find and produce more oil and gas.

The good news for the Chinese is that they can look to history for a way out. When Ronald Reagan became President in 1981, two if his first official acts were to immediately repeal all Carter-era oil and gas price controls and to repeal the oil windfall profits tax. Oil prices soon rose to their natural market level, and through the invisible hand of the market, production rose, consumption fell and prices began a steady decade-long decline. The U.S. energy "crisis" was over.

Neither Nixon nor Carter seemed to be able to implement an effective economic policy. Nixon tended to be Keynesian, and Carter was all over the map--I don't think he ever quite knew what he believed. I remember when Carter was president, and the prime rate went up to twenty-one percent. Reagan was not a professional economist, but he did have a degree in economics, and his entire approach to economic policy was characterized by a clear, well-defined philosophy. Reagan always knew what he believed, and he was good at articulating it. The Chinese would be well advised to follow Reagan rather than Carter or Nixon.