Investor’s Business Daily, June 13, 2001

Crises have a way of revealing the quality of leadership. The current energy crisis marks a stark contrast in leadership styles and underscores the differences between politics and economics.

Sacramento, the California state capitol where Democrat Gray Davis now holds forth, and where his party also controls the Assembly and Senate, showcases the political style of leadership. State leaders have paid more attention to fundraising and polls than the law of supply and demand, and it shows. They did not prevent the crisis. Instead they reacted to it.

In California, the prosperous high-tech sector and a steady influx of immigrants, retirees, and job seekers from other states have sharply increased demand, also boosted by the increasing use of computers. But while demand has been increasing, new power plants have not been built, nor brought on line. The inevitable result is shortages.

As Nobel laureate Milton Friedman has often noted, and as former President Richard Nixon and former Canadian Prime Minister Pierre Elliot Trudeau learned by experience in the early seventies, price controls don’t work.

In California a price-control scheme for electricity was sold as deregulation. The result has been debt and bankruptcy for utilities, forced to buy high and sell low, and a lower bond rate for the entire state. That is a significant development because Gov. Davis’s remedies for the crisis rely on massive bond issues to pay for past and future purchases of electricity. He also wants the state to purchase the transmission lines of Southern California Edison.

The response in Sacramento has been reactionary, and strong on demonology. The crisis, blackout victims are told, is the result of price gouging by greedy utility companies, most of them based in Texas. This party line is advanced with a dogmatism and ferocity that is truly breathtaking.

Gov. Davis and his appointees on the California Public Utilities Commission (PUC) want to take the bad guys to court, and force the Federal Energy Regulatory Commission (FERC) to impose wholesale price caps.

Democratic legislators have composed legislation that would punish utility companies under the state’s three-strikes laws, designed for violent criminals.

One of those companies is Enron, headed by Kenneth Lay. State Attorney General Bill Lockyer recently said “I would love to personally escort Lay to an 8-by-10 cell that he could share with a tattooed dude who says, ‘Hi my name is Spike, honey’.”

In a recent meeting with Gov. Davis in Los Angeles, President Bush observed that this sort of blame game amounted to a waste of energy. Bush’s response to the crisis is less political and more along economic lines.

Oil and natural gas, while still in abundance, must be retrieved from the ground, and the President wants to encourage that practice in the United States. He doubtless recalls the embargoes of oil-rich countries against the United States.

The wholesale price caps that Governor Gray Davis wants are opposed by Bush, who notes that “price caps do nothing to reduce demand. And they do nothing to increase supply.” Neither will the state purchase of transmission lines. While that may seem obvious, the crisis has made restatement of the obvious a public duty.

President Bush also favors conservation, which would also receive a boost from market conditions. The current retail price controls give little incentive for conservation. Meanwhile, major California newspapers publish recipes suitable for blackout conditions.

“Energy outages will provide Californians with a great opportunity to rediscover one of the more versatile and joyous staples of the American diet, the sandwich,” says the Sacramento Bee. That journal also runs a daily “power watch,” which monitors blackouts. This could easily become the equivalent of Jimmy Carter’s “Misery Index.”

Indeed, with his highly political, regulatory, and accusatory response to an economic issue, the governor is shaping up as a Carter re-run. As economist Thomas Sowell has observed, there is no Standard and Poor’s rating for politics. The ultimate test will not be any electoral contest between Davis and Bush. Rather, it will be which leader’s approach, political or economic, will provide for a better supply of energy and the elimination of blackouts.

Unreliable power is a badge of Third World status. No leadership worthy of the name will leave us stuck in elevators or munching sandwiches in the dark.

Sally Pipes is the President and CEO of the Pacific Research Institute, a California-based think tank. She can be reached via email at spipes@pacificresearch.org.