New York Times columnist Paul Krugman usually writes about how deplorable tax cuts would be. But every so often he takes a break from the fight against tax cuts to write about the energy mess in California.
Krugman has been informing his readers that “deregulation” is the cause of California’s electric power morass. His language has been especially colorful. In one column he wrote, “California’s blind faith in markets has lead to an electricity shortage so severe that the governor has turned off the lights on the official Christmas tree.”1 And just so his readers don’t get the wrong idea, he wrote in a later column, “There’s a myth in the making, one that portrays California as a victim, not of deregulation gone bad, but of quasi-socialist politicians who didn’t give deregulation a chance to work.”2
So deregulation is the cause of California’s power morass. What a blow to the free market! Except that Krugman’s language is not the language of reasoned economic analysis. It is political language—poetic, evocative, authoritative, and calculated for a single purpose: to disguise fraud. The fraud in this case is the assertion that California has deregulated its electric power industry.
For years, California’s utilities were regulated monopolies of the standard type. The state granted each utility the exclusive right to provide electricity to residents in a specified service area at rates set by state regulators to ensure the utility a “normal” rate of return.
Then, on the last day of California’s 1996 legislative session, the state legislature unanimously passed a bill, A.B. 1890, that allegedly deregulated California’s electric power industry.
In plain language, deregulation means decreasing state control over an industry. But political language is different. Under the provisions of A.B. 1890, the government of the state of California:
- forced electricity companies to sell their power plants to independent investors and become power distributors;
- required new owners of the divested power plants to sell their electricity to a state-managed “Power Exchange” at prices set by a daily spot market run by the state;
- assumed control of the electric companies’ power grid through the creation of the Independent System Operator, an oversight board of grid users;
- prohibited electricity retailers from charging consumers more than 6.5¢ per kilowatt hour.
In the world of plain language, A.B. 1890 would not be called “deregulation.” It would be called state planning. But in the political world of Paul Krugman, Governor Gray Davis, and others, A.B. 1890 is called “deregulation.”
What the government of the state of California has managed to do is replace a highly flawed regulatory scheme 3 with a new scheme that’s even worse. By forcing vertical “disintegration,” the government has deprived the power companies of the cost advantages that vertical integration often provides firms with substantial and highly specialized capital.
By requiring power producers and retailers to deal through the Power Exchange’s spot market, the government has deprived the firms of the cost advantages they would gain if they were free to pursue competitive contracts on their own. By prohibiting forward contracting, the government has made the utilities more vulnerable to price volatility.4 And by imposing price controls, the government guaranteed the damage that price controls always do: shortages.5
On top of all that, California’s new regulatory scheme discourages new firms from entering the state’s electricity market, depriving consumers of lower prices and more choice. Entrepreneurs risk their capital and enter markets that they believe offer the best opportunities for profit. How many entrepreneurs will be willing to risk their capital to enter a market whose very structure and retail prices are established by government decree?
But the question at hand is: Why would Paul Krugman and others call California’s new regulatory scheme “deregulation?” Why the utter dishonesty?
In Human Action, Ludwig von Mises described what Murray Rothbard later called “the cumulative nature of intervention.” When people are free to act, as they are in the free market, they take actions and allocate resources in ways that they believe will make them better off. But government intervention overrides those actions, forcing people to act and allocate resources differently than they would if they were free to act on their own. Hence, every intervention by government into the free market causes a distortion, a misallocation of resources. The distortion could be corrected by revoking the intervention, but revoking the intervention runs directly counter to the antimarket doctrine that gave rise to the intervention in the first place.
So the advocates of government intervention resort to wily rhetoric and propaganda. They blame the distortion on the free market and call for a new set of interventions to solve the problem. In time, the new interventions cause further distortions. The wily rhetoric is employed yet again, and the interventions pile up.
California’s electric power morass is a classic illustration of the cumulative nature of intervention. The distortions caused by the original “fair return” regulatory scheme led to A.B. 1890 and a new regulatory scheme which, in the course of a few short years, has brought new, more harmful distortions—the distortions we are now witnessing.
But Paul Krugman and the interventionists are not about to concede that government intervention is to blame for the distortions. Turning reality on its head, they blame “deregulation” and a “blind faith in markets” for the trouble, and call for still more intervention. Governor Davis has even pushed for state ownership of California’s power grid.
The tortured political language of Paul Krugman and other interventionists would not have surprised Mises. In Human Action, Mises wrote:
“The interventionist doctrinaires and their followers explain all these undesired consequences [of government intervention] as the unavoidable features of capitalism. As they see it, it is precisely these disasters that clearly demonstrate the necessity of intensifying interventionism. The failures of the interventionist policies do not in the least impair the popularity of the implied doctrine. They are so interpreted as to strengthen, not to lessen, the prestige of these teachings. As a vicious economic theory cannot be simply refuted by historical experience, the interventionist propagandists have been able to go on in spite of all the havoc they have spread.”6
- 1“California Screaming.” New York Times, December 10, 2000.
- 2“The Unreal Thing.” New York Times, February 18, 2001.
- 3See Thomas J. DiLorenzo, “The Myth of Natural Monopoly,” The Review of Austrian Economics vol. 9, no. 2 (1996): 43-58.
- 4The Federal Energy Regulatory Commission has recently forced California to ease the rules prohibiting forward contracting. But the damage has been done.
- 5See George Reisman, “Avoid Blackouts Now”
- 6Scholar’s Edition, p. 850.
