I’ve mostly enjoyed watching the Netflix series House of Cards. Especially in its first season, the show did a good job, whether intentionally or not, of showing the kind of people who seek and thrive in positions of political power.
One of the best lines from the early seasons comes from Frank Underwood, the main character, who offers the following shut-up argument to an ultra-rich businessman who’s trying to mess up Underwood’s plans to grab the presidency: “You may have all the money, but I have all the men with guns.” Exactly!
But it’s not all good. Last season’s flirtation with creating a massive welfare state — America Works — is one case in point. Intended to “create” 10 million jobs, the writers didn’t worry about the program’s impact on incentives, efficiency, or indeed any public-choice considerations. Apparently, you can pull-off an enormous redistribution scheme on willpower, alone.
But the economic faux pas this time around, in Season 4, is subtler.
We’re told that there’s an oil crisis — something having to do with the Russians and the Chinese. Anyway, there are no price controls and gas prices are soaring to historic levels — approaching $7 a gallon.
There are scenes of immensely long lines of angry drivers in their cars waiting at gas stations, and those gas stations are shown running out, long before everyone is served. The camera zooms in on a digital read-out of the price per gallon, the numbers ticking inexorably upward, even as disappointed drivers turn away, their gas gauges pointing toward “E.”
What's wrong with this picture?
To an astute first-year econ student, the answer is straightforward: As long as buyers and sellers in the gasoline market are free to adjust prices, i.e. in the absence of price controls, then the quantity demanded and supplied will tend to be equal. Markets will clear, which means no surpluses (unexpected inventory accumulation) and no shortages (no people willing to pay turned away emptyhanded).
In fact, the only thing that will cause the kind of chronic shortages depicted in House of Cards is a price ceiling, which would make it illegal to buy or sell above a certain price — much like the chronic housing shortages we see in cities that impose rent control.
The imagery of long gas lines, of course, comes from the bad old days of the “oil crisis” of the 1970s when OPEC exercised its monopolistic muscle and managed pushed oil prices up three-fold. But the rationing and long lines were not caused by the oil embargo or the increase in crude prices, but by price controls on gasoline and diesel fuel. A few years earlier, Richard Nixon had imposed wage and price controls on the entire American economy, which produced chronic shortages everywhere, including the labor market.
What we don’t learn from history, we are doomed to repeat. In the aftermath of Hurricane Sandy, laws against “price gouging” went into effect and made it illegal to charge market prices for gas. As a result, taxis, delivery trucks, and other drivers had to wait hours, sometimes days, in the hopes of getting some gasoline.
What’s the solution? Bluntly, the solution to high prices is, well, high prices. The higher prices get, the greater the incentive for sellers to provide more of the product that is in short supply, and in the meantime, high prices encourage buyers to conserve or delay consumption unless their demand for it is exceptionally high. As long as there are no artificial barriers to entry, in a fairly short time prices will fall back to normal levels, often even lower.
When the writers for House of Cards depict both long lines and sky-rocketing prices, they are making a basic economic blunder. If movies like The Martian and Gravity got basic Newtonian physics wrong, it would ruin the audience’s suspension of disbelief. Economics can sometimes be harder than physics, in that some gross fallacies are harder to see, which is one reason why a solid economics education is so important.
If House of Cards wants to hire an economic consultant, I’m available.