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The Gas-Line Quagmire in Iraq

Mises Daily: Monday, February 06, 2006 by

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It's not easy being an economist. To get your degree nowadays, you have to first become a (second rate) mathematician. Then you start teaching and half of your students require artificial stimulants during the lecture on price elasticity. Even at social gatherings, the burden follows you: The moment your occupation becomes known, someone inevitably asks for a stock tip, even if your specialty is 19th-century capital theory.

But for me at least, the single most frustrating thing about being an economist is that, 200+ years after its official birth, the field of economics hasn't convinced the rest of the world about even its most elementary propositions. That is, most people still think that tariffs make a country richer, and most people still don't see the connection between price controls and shortages. I've beaten the former topic to death lately (1, 2, 3), so let's look at a recent USA Today story illustrating the latter.

The article (by Steven Komarow) is entitled, "New trial for Iraqis: Soaring gas prices, long lines." Komarow first paints a bleak picture of the plight of Iraqi motorists:

At the al-Hurriya gas station in Baghdad recently, the line was advancing so slowly that some drivers just pushed their cars along instead of running the engine and wasting fuel.

Taxi driver Mohammed Khlaif Auwaid, 32, said he had been in line for four hours and guessed it would be another three hours before he reached the pumps. By then, he feared, the station will be out of fuel and closed.

"I'm afraid I will not get gas today," he said.

Anyone who has taken a principles of economics class — and I don't mean that figuratively, I mean it quite literally — knows the cause of gas lines, or shortages of any good: the price is being held artificially low.

MARKET PRICE EQUATES SUPPLY AND DEMAND

Laissez-faire economists are often accused of "worshipping" market (or what can be called "equilibrium" in the present context, though the two are different) prices. But this is rather misleading. If I oppose murder, it's not because I worship other people's lives. Or, if I don't let my ten-year-old neighbor tinker with my car engine, it's not because I worship its current state. The former case is simply an implication of my views of justice, and the latter case follows from my knowledge that the car works fine right now, and my neighbor's tinkering will only mess it up.

Both aspects lie behind the (natural rights) libertarian's defense of freely floating market prices. On the one hand, if one believes in property rights, then it automatically follows that price controls are immoral. After all, a price control involves the government using its guns to prevent owners from swapping their property at a mutually agreeable price.

But beyond the issue of property rights, there is also the pragmatic aspect. Simply put, if the government sets the legal price below the market level, there will be a shortage; customers will want to buy more units of the good than suppliers will want to sell. There's no way around this: The equilibrium price is that which equates the quantity supplied with the quantity demanded. Left to its own devices, there is every reason to expect a market will tend toward the equilibrium price, although of course it will always be disrupted by changes in the data (supplies, tastes, etc.).

Now one can imagine hypothetical scenarios where the equilibrium price is indeterminate, i.e., cases where there are multiple prices at which quantity supplied equals quantity demanded. But in the real world it is safe to say that market prices settle in a zone where (to put it into economics jargon) demand curves slope downward and supply curves slope upward. In plain English, I'm saying that if you believe (a) consumers in the aggregate would buy more total units and (b) producers would sell fewer total units when the good is cheaper, then you have just agreed with me that a price ceiling will cause a shortage in that good.

As I say, this isn't some controversial point in theoretical economics. The failure of price controls has been documented (literally) for a period of thousands of years. For an anecdotal bit of evidence, my colleague (who worked at a gas station in the 1970s) said that the gas lines disappeared within one week of the abandonment of price controls. And when I asked what took so long, he said that the owner didn't immediately raise prices because of feared public backlash.

IRAQIS GET THE DOUBLE WHAMMY

Now let us return to the article. After explaining the truly terrible plight of the motorists, will the USA Today writer wonder why (as Lew Rockwell did) the allegedly pro-market US occupation hasn't lifted the price controls? Not exactly:

Iraqi motorists have been struggling with long lines for years. But now they face a new indignity when they finally reach the pump: skyrocketing prices.

For years, Iraqis have enjoyed subsidized fuel prices, with gasoline costing about 5 cents a gallon. Last month, prices increased to 27 cents a gallon as part of a phased plan to remove subsidies and bring prices into line with other Persian Gulf countries.

It's still cheap, even by Middle East standards, but not to people who for generations have grown accustomed to nearly free petrol.

This is rather amusing, unless you're an economist, in which case it's infuriating. For an analogy, imagine a pediatrician reading that Iraqi children are coming down with measles at horrendous rates, and to top it all off they now have to endure vaccinations. (Those needles hurt!)

Now the defender of the news media might object at this point and say, "Give me a break, Murphy, it's not the job of the reporter to speculate on causes. He's just reporting the condition of the Iraqis, and many of them really are upset about the gas lines, and now the price hikes."

This possible objection wouldn't really wash — since no news story would ever write about my fictitious measles example without alluding to the generally accepted view among doctors that vaccinations prevent measles outbreaks — but it's even more untenable because the reporter does offer some analysis:

Nevertheless, motorists here frequently find themselves waiting in line for gas. Part of the problem is an aging infrastructure and regular insurgent attacks on pipelines. Also, cheap cars flooded into Iraq after the U.S.-led invasion and the lifting of sanctions imposed by the United Nations. Few new gas stations have opened to meet the demand.

"The government should build more gas stations," says Ahmad Khalil Ibrahim, 24, an engineer who had been waiting five hours. "Thousands of cars are entering the country."

And now we've come full circle. I just knew that cheap imports were at least part of the problem. Say what you will about the UN sanctions, but at least they kept out the flood of gas-guzzling (and job-destroying) cars! (Of course, if the protectionist logic is right, one wonders why Iraq's economy wasn't booming since the first Gulf War, but let's worry about that another day.)

In fairness, the writer does devote one sentence to the theme of my essay, when he writes, "Increased prices prompted some scattered protests when they first appeared last month, but they haven't slackened demand or shortened lines." The answer to this is pretty simple: the prices haven't risen nearly enough. If Paul McCartney plays in a small stadium, the place would sell out if tickets were priced at $5 each. Doubling the price to $10 each wouldn't change that fact.

CONCLUSION


 
His classic is back $24

Steven Komarow's USA Today piece demonstrates the economic illiteracy of the news media. One needn't be a "right-wing zealot" to recognize the connection between gas lines and price controls. I don't even expect a news story to take a stand one way or the other. But it would be nice if this story had contained a quotation from an economist. Can you imagine if the news coverage of, say, an accident at a nuclear power plant only interviewed concerned residents, and didn't even allude to the opinions of physicists or other relevant scientists?

I understand that (bad) economists are largely to blame for the public perception that their discipline isn't really objective and is ultimately a matter of politics. Nonetheless the public perception is wrong. There are objective laws in economics, including the law that says price ceilings cause shortages. One can't interpret the world very well without a knowledge of such basic principles, and one certainly shouldn't write a story concerning gas lines while suffering from such ignorance.


Robert P. Murphy teaches economics at Hillsdale College. He prepared the Home Study Course in Austrian Economics, which is available for $350. Send him mail. Comment on the blog.