Hawaii has evidently decided that capitalism, while an interesting theory, doesn't really work. As Adam Savage says every week on Mythbusters, "I reject your reality and substitute my own!" (They have also decided that the whole "Constitution" thingie was a bust and are beavering away to institute Bantustans across the state; but that's a subject for a different post.)

Four years ago, the Democratic Hawaii state legislature and Democratic Governor Benjamin Cayetano bowed to the high priests of fundamenalist liberalism and enacted Act 77, which set a "maximum pre-tax wholesale price of gasoline" in the islands, as well as capping the retail price. This applies both to gasoline from Hawaii's two refineries and also gasoline imported directly. (A 2004 amendment, Senate Bill 3193, removed the price controls from the retail side.)

Evidently not wanting Gov. Cayetano to suffer the likely consequences of such price controls, the legislature delayed the original Act 77 going into effect until July 2004; it was subsequently delayed another year by the amendment process and is now slated to take effect a week from today, September 1st, 2005.

After enactment, Cayetano commissioned an independent study of the probable effects. The study was duly prepared by the State of Hawaii Department of Business, Economic Development, and Tourism (DBEDT), and it concluded that not only will the pending price controls not reduce the pump price of gasoline, they will also likely cause significant gasoline shortages (like, duh).

Both the Federal Trade Commission and Stillwater Associates analyzed Act 77 at the request of Cayatano.

Stillwater found that:

An analysis of gasoline price caps in general, and those enacted in certain parts of Canada in particular, shows that these measures generally are ineffective, risky, costly, open to manipulation, and complicated to administer. It is likely that likewise the caps in Act 77 would fail to achieve their objective of protecting the interests of gasoline consumers. Analysis of historical data shows that the statewide average prices for Hawaii gasoline consumers would have been higher with caps than without. Moreover, the current price cap formula would introduce California’s price volatility and seasonality into Hawaii’s gasoline prices.

The FTC studied the American gasoline shortages of 1973, which they concluded were in fact caused to a large extent by Richard Nixon's price controls (enacted as part of his anticapitalist nationwide wage- and price-controls that year). The FTC notes:

Customers queued up at gasoline stations are perhaps the most visible example of the inefficiencies resulting from the shortages created by gasoline price controls, but myriad other examples actually occurred during this period: limited station hours, Sunday station closures, "odd-even" purchasing restrictions based on license plate numbers, and restrictions on the number of gallons the customer could purchase in a single trip to the gasoline station. Also noteworthy are the secondary effects of such inconveniences, which included efforts to hoard gasoline and, in some instances, an increased hazard of car fires because people began storing additional gasoline in containers in their trunks. Some research even shows that the inconvenience and other inefficiencies associated with gasoline station lines cost consumers more than they saved as a result of regulated gas prices.

[Emphasis added in both quotations.]

The relationship between price controls and shortages is clear, at least to everyone except Democrats (who study economics at the feet of that well-known free-marketeer, Paul Krugman). Suppose you're a gasoline wholesaler. You have a choice: either sell your gasoline to another retailer (any other retailer), who will pay you market price for it... or sell it to a retailer in Hawaii, who will only pay the maximum the law allows -- which is distinctly less than the market price.

Given the voracious, even insatiable demand for gasoline everywhere in the world, you will not have trouble finding other buyers. So why would anyone be willing to supply gasoline to gas stations in Hawaii at a deep, government-mandated discount?

Even the refineries in Hawaii will be battered by the same relentless laws of logic: if they can only sell their refined product at price X, less than the normal market price of wholesale gasoline, then they have three choices:

► Buy raw, sweet crude at normal prices, lose money on each transaction, and go out of business;

► Refuse to buy at market prices, and find no sellers;

► Or buy lower quality crude and sell it for whatever they can get under the law.

Sweet dilemma. Crude manipulation by the state. And a raw deal for everyone.

When the law goes into effect, we'll see whether the government actually enforces it. If they do -- and I'm rather hoping so -- then we'll get a chance to test this whole capitalism thing out. If Hawaiians wind up with a solid supply of low-cost gasoline, then I reckon we can conclude that Adam Smith's theory was wrong all along.

But if what we see in Hawaii is either a "book law" that nobody dares enforce, or a real-world, enforced law that leads to massive shortages, economic disruptions, and higher prices in the long run... well, perhaps we ought to consider giving that whole "free market" idea a shot.

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Tracked on August 27, 2005 12:26 PM