price-caps

["Ian Murray" <seamus2001@xxxxxxxx>]

[NYT]
June 20, 2001
News Analysis: Bush Finds Market Is Not Always Free
By DAVID E. SANGER

WASHINGTON, June 19 - Three weeks ago George W. Bush addressed a
sympathetic audience of business executives at the Century Plaza Hotel
in Los Angeles and declared that his administration "will not take any
action that makes California's problems worse, and that's why I oppose
price caps" on electricity.

As he spoke, the Democratic governor of California, Gray Davis, sat
impassively on the dais, preparing to meet Mr. Bush and then denounce
him for failing to protect California consumers from an electricity
market gone wild.

Today, the White House halfheartedly welcomed action by federal
regulators to impose throughout the West a system that looks and
smells a lot like price caps - though the White House said it was
something different.

"This is not a price control," Ari Fleischer, the White House
spokesman, said. "This is a market-based mitigation plan that now will
extend to 11 Western states."

In fact, it bore some resemblance to a proposal made by 10 leading
economists who urged a middle ground between fixed prices and a
deregulated electricity market. Mr. Davis used their proposal to
support his position in favor of limited price restraints when Mr.
Bush visited California.

The White House shift from outright opposition to price controls to
its more nuanced position today exemplifies how Mr. Bush has tempered
his embrace of completely unfettered markets in recent weeks. He
didn't have much choice.

As the threat of blackouts loomed, demands for action rose from
officials of both parties and from consumers in the West. It was
almost possible to hear sighs of relief at the White House today that
the Federal Energy Regulatory Commission - an independent body in the
Energy Department - had moved to turn down the political heat.

In fact, while some House Democrats are still pressing for firmer caps
on prices, Senators Dianne Feinstein, Democrat of California, and
Gordon H. Smith, Republican of Oregon, withdrew a bill that would have
placed strict price controls on electricity sold in Western markets.

Senator Feinstein said the White House could call yesterday's
regulatory action "mitigation" or anything else it pleased.

"A rose is a rose by any other name," she said today.

And a free market is not always free. Two weeks ago the administration
said it would rescue steel companies and steelworkers who have long
complained about unfair competition from South Korea, Taiwan, China,
Brazil, Germany, Russia and Ukraine. The White House defended the
action by saying it was the only way for the industry to adjust to a
new competitive environment.

Last month, with no major announcements at the White House, the Bush
administration voted for International Monetary Fund aid to two
countries, Turkey and Argentina, that (like California) had made some
economically disastrous political decisions.

In each case, Mr. Bush's economic orthodoxies were tempered by
political realities.

The California crisis was one thing when it involved a Democratic
governor in a state Mr. Bush lost by a million votes; it was another,
one of his aides conceded today, when congressional Republicans from
around the West were warning Mr. Bush that blackouts and sky-high
prices could blow up in his first year in office.

"We heard from a lot of members of Congress who feared that
Republicans would be tarred with worsening the problem, even though it
happened on Gray Davis's watch," the political aide said. "The
president took that on board."

Similarly, the steel decision was partly about enforcing laws against
"dumping" foreign products in the market - and partly about Mr. Bush's
desire to convince labor unions not to block his trade agenda. Like
Californians coping with higher energy prices, the steelworkers need
time to adjust to a new world, the administration said.

"Open markets improve the lives of people by increasing opportunity,
choice and economic freedom," Robert B. Zoellick, Mr. Bush's trade
representative, said in an interview today. "But compassionate
conservatism also recognizes the reality that the effects of rapid
change fall harder on some communities and industries," which, he
said, need "vital breathing space to adapt to change."

While Mr. Bush expressed deep reservations about I.M.F. bailouts
during the presidential campaign, the situation seemed a bit more
complicated once he got to Washington. The State and Defense
Departments feared that if Turkey were engulfed in economic chaos, and
blamed the United States for failing to come to its aid, its leaders
might be less inclined to let American fighter jets use its territory
to mount missions over Iraq.

So given the choice between letting the Turkish people pay a high
price for political mistakes - Californians take note - and weakening
American pressure on Saddam Hussein, Mr. Bush decided that economic
niceties were less important than political consistency. Mr. Bush
chose the Pentagon over the Treasury.

Administration officials said these actions did not represent a
retreat from let-the-markets-prevail orthodoxy.

Lawrence B. Lindsey, Mr. Bush's chief economic adviser, said in an
interview today that he opposed price caps at the beginning of the
California crisis and that he opposed them now. But he would not
criticize the federal commission for "mitigating" price spikes in the
market.

"What they are trying to do is achieve two incompatible missions -
preserving what is called `just and reasonable pricing' and assuring
an adaquate supply of electricity," Mr. Lindsey said. Yet the reality,
he added, is that new supplies of electricity will not become
available for a year or more. "FERC is doing its best to square that
circle in the face of the fundamental problem, which is inadequate
supply," he said.

That is the kind of argument that keeps economists happily arguing for
hours. It is not likely to be the kind of argument Mr. Bush himself is
likely to engage in for long. As one of his political advisers said
the other day, "Don't think about this purely in terms of megawatts.
We need to produce more electricity, but we also need to produce some
more seats in the House."