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Government and High Prices

June 27, 2000

The U.S. Congress is holding hearings on why gasoline prices have risen; pundits are beginning to repeat the anti-capitalist oil company bashing of the 1970s; and the U.S. Department of Housing and Urban Development (HUD) recently issued a report blaming prosperity for rising housing prices and self-servingly calling for more HUD subsidies for "the poor."

The Washington establishment has been quick to blame "greedy oil companies" and American prosperity for higher gas and housing prices, but the government itself is at fault with its policies of government-mandated price increases.

Urged on by American environmentalists' hate affair with the automobile, the U.S. government has employed every possible means to restrict the supply and drive up the price of gasoline. Regulation places over 90 percent of the outercontinental shelf off the California coast off limits to oil exploration; there are massive oil deposits in Alaska which are also off limits for exploration despite the fact that the existing oil wells there are being bled dry; and myriad other environmental regulations imposed on the oil industry drive up the costs of oil production.

For example, the government recently mandated that "reformulated" gasoline be sold in many areas of the U.S., which caused an immediate 10 cents per gallon price increase. American motorists have also been paying at least another 10 cents more per gallon of gas because of another Environmental Protection Agency (EPA) mandate for "oxygenated fuel," which the EPA itself claimed even before it issued the mandate contains Methyl Tertiary Butyl Ether, a water contaminant and potential health hazard. Gasoline taxes add as much as another 75 cents per gallon in some states.

Tax cuts and deregulation are the obvious means to deal with rising gasoline prices, but that would diminish the power and influence of the state, so it is not likely be achieved.

Housing prices have gone up sharply in some American markets because of increased demand for housing fueled by rising prosperity. Normally, after a short lag, housing supply increases will follow, which would moderate the price increases. But zoning, building code, and environmental regulations have made it more difficult and costly to build houses. More ominously, there is currently a nationwide governmental movement to dramatically reduce the supply and increase the cost of housing under the rubric of "smart-growth" regulation, one of the dumbest ideas to be hatched by the state in many years.

Motivated in part by the environmentalist hatred of the automobile, so-called smart-growth proponents, which include dozens of governors, hundreds of local government officials, and Vice President Al Gore, want to force much of the population back into the cities (and presumably out of their automobiles an into mass transit) by using regulation to drive up the costs of housing in the suburbs.

Consequently, they have proposed or adopted extra real estate development taxes; urban "growth boundaries," beyond which development simply cannot take place; regulatory pressures on banks to get them to make fewer suburban and more urban real estate loans; revision of zoning laws to make suburban development more costly; state and federal land purchases which place more and more land off limits for residential use; prohibitions on the sale of farmland to developers; minimum-lot zoning regulation, including "superzoning" in such places as Marin County, California, where 60-acre lots are required in some parts of the county; utility hook-up "moratoria"; and endangered species lawsuits which stop development.

If such policies succeed in driving up suburban housing prices and causing a migration to the cities, housing prices will rise there, too, because of the increased demand and a supply that is even more restricted by regulation that in suburban housing markets.

Such policies were championed by the California state and local governments in the 1970s, with the result being a 500 percent increase in lot prices from 1972 to 1978. More recently, Portland, Oregon has become the "Mecca" of "smart-growth" regulation; lot prices there doubled from 1990 to 1995, and the increase in housing prices during that period was three times the rate of housing price increases of a decade earlier. Of the 50 largest metropolitan areas in the U.S., Portland experienced the fifth-highest rate of housing price appreciation from 1990 to 1995.

The politicians who are now acting indignant over rising housing and gasoline prices are, as usual, playing American citizens for suckers by offering even more intervention as the "solution." It is their own out-of-control regulations, coupled with the Fed’s expansionist monetary policies, that are the real culprits. While persecuting companies like Microsoft for cutting prices, the government itself is the dominant cause of higher or "monopolistic" prices. Naturally, it exempts itself from antitrust prosecution.


Thomas J. DiLorenzo, adjunct scholar of the Mises Institute, is Professor of Economics
at Loyola College in Maryland. Send him MAIL.


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