Department of Economic Illiteracy: Special Victim’s Unit

Monday, September 25th, 2006

In Department of Economic Illiteracy: Special Victim’s Unit, Jane Galt calls What If: The Oil Runs Out “possibly the most economically illiterate television programme ever” — despite strong competition from The West Wing:

And what form does that shortage take? It’s exactly like 1979 … long lines, gas stealing, gas stations running out without notice. Terrible rationing.

What doesn’t happen? The price doesn’t increase much above $3.50 … which by 2016 will be about $2.70 in today’s dollars, so apparently the first effect of this terrible shortage is that the price falls. People are queuing for hours, but apparently not one enterprising station manager thinks to raise the price. And since the price doesn’t rise, people spend all their time trying to find stations with gas to sell, rather than looking for ways to cut down their usage.

Is this the result of some strange industry practice? Government action? You wouldn’t know it from the script. Apparently, people in 2016 are very, very stupid.

Actually, the problem is that they assumed that a shortage would be just like the 1970s. Except, of course, that the 1970s were like the 1970s because of Nixon’s wage and price controls, which meant that the price couldn’t rise to adjust for lower supply. Note that after Katrina, shortages lasted a couple of days … and then prices rose, people cut back on labour day travel, and supply and demand came back into balance.

The other economic crime in the show is that the shortage happens all at once. In fact, of course, the supply problems would take years to develop, and would cause a long appreciation in price, accompanied by spikes and falls as supply shocks developed and were resolved by decreased demand. People would move closer to work, get smaller houses, by smaller cars, and so forth, as gas and oil became increasingly expensive … not just wake up one morning and find that there was no gas to power their SUV.

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