Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Econamici: The Mother of all Bungles in IraqThe Mother of all Bungles in Iraq Introductory Economics Lesson One: Price controls can backfire. Exhibit A: New York City rent control. Landlords neglect repairs, and harass poor tenants into leaving. Meanwhile, well-to-do renters pay thousands of dollars in "key money" to owners or supers to obtain choice apartments. Exhibit B: Iraqi oil price control. Remember when the Provisional Authority took over in Iraq under the direction of Paul Bremer? In its eagerness to impose free markets, the Authority privatized most public enterprises, throwing thousands out of work. Yet when it came to oil, astoundingly, it retained Saddam Hussein's policy of paying subsidies to hold prices well below market! In "Attacks on Iraq Oil Industry Aid Vast Smuggling Scheme," (Sunday, June 4) The New York Times reports the predictable result:
One assumes the Authority feared repercussions--either rioting by ordinary Iraqis accustomed to low gas prices (after waiting in line for three days), or sabotage by the vast network of local officials and tribal chiefs dependent on oil smuggling. A recent deal with the International Monetary Fund to forgive Iraq's debts includes a provision to end the Saddam-era oil subsidies. But the new Iraqi government, even more than the Provisional Authority, may fear public response--not to mention resistance of corrupt politicians. There could have been--and could still be--an alternative: Issue coupons to Iraqi families in the amount of the average per-family subsidy, and let oil prices rise to market. In effect, give the subsidy to Iraqi families instead of to smugglers. Meanwhile, financed by US taxpayers, insurgents and criminals continue the slaughter. |