CommentaryCalifornia: The Free-Lunch StateBy Bradley R. Schiller, an economics professor at American University's School of Public Affairs and author of "The Economy Today" (McGraw-Hill, 2000). Economists have long argued that "there's no such thing as a free lunch." Even if the lunch is on the house, somebody had to pay for the resources used to grow, prepare and serve the food. But Californians have never fully embraced the "no free lunch" maxim. Although the Golden State's residents are among the richest inhabitants of this planet, among the many things they demand are free college, low rents and cheap electricity. To get them, they have elected politicians who defy the economic laws of supply and demand with regulations that keep prices low, below market-clearing levels. Now Californians are paying the price for that defiance. Rolling blackouts have darkened homes, shut down offices, and turned intersections into demolition derbies.
There was one fatal flaw in California's plan: Retail electricity prices remained under state control. Alas, a resurgent economy and unseasonable weather increased the demand for electricity faster than supply could respond. At one point last summer spot wholesale electricity prices were 10 times higher than the year before. Suddenly, California's utility companies were in the position of having to buy power at very high prices, then sell it to consumers at state-controlled low prices. California's power crisis is clearly a government failure, not a market failure. Without controls, electricity prices would rise until supply and demand came into balance and the crisis would pass quickly. Consumers and businesses would respond to the higher prices by shutting off lights, setting thermostats lower, and reorganizing production -- all voluntarily. The state's utilities would avert bankruptcy by closing the gap between wholesale and retail prices. And power plants would more readily divert electricity to the state once the prospects for getting paid improved. Power companies might even start building new plants in California again. The downside of this market solution is that it violates the political promise of cheap electricity. So instead of stepping back from regulation, Gov. Gray Davis is pushing the state further into the regulatory morass.
As a result of the state's largess, nearly every California resident now gets free or nearly free college. The only high-school graduates who don't get a subsidy are the ones who are both rich and stupid. Yet despite the intent of the state legislature, there's still no free college. The first hint of the cost of "free" tuition is the line item for higher education in the state's budget. Last year, the $9.4 billion the state spent on higher education absorbed 12% of the state's budget. That was before the new law took effect. Now the state is projecting a 30% increase in enrollments over the next eight years. The state expects the new tuition grant program alone to add at least $1 billion a year to the state's budget. But budget outlays are only part of the tab for the state's "free" colleges. The state's campuses are already filled to capacity. Entering students are not assured access to their campus of choice. Once enrolled, they find it difficult to enroll in the classes they want. There simply isn't enough supply of college courses to satisfy the demand for a free education. Available classroom seats have to be rationed according to priorities established by individual departments. As a result, thousands of California students must stay in college longer, just to complete required courses. That additional time is a real cost, to both the students and the economy. To relieve these bottlenecks, the state is building more campuses, hiring more faculty, and investing heavily in distant learning and other communications technology. These add further to the real cost of California's "free" education. Ultimately, these costs will be visible in the form of higher taxes or reductions in the state's non-college services like health care or freeway construction.
Californians have come to view free college, cheap electricity and cheap rents as birthrights. They are no more willing to give up the proverbial free lunch than to forsake beautiful Pacific Ocean sunsets. The state's current energy crisis is just one symptom of this intransigence. As college, electricity and housing crises multiply, however, more and more Californians may come to realize what all that education hasn't taught them: There really is no free lunch. |
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