As they struggle to keep the lights on in California, there are important
lessons that the rest of the nation can learn from this deregulatory disaster
To set the scene, five years ago California led the nation with a bill that
deregulated its electricity system. The promise was that the wonders of
competition would give consumers a vast array of choices at much lower prices.

To ensure the latter, the legislature actually wrote a rate cut into the law.
As things stand now, the state's two biggest utilities are standing on the
brink of bankruptcy. Residents in many parts of the state are living in
constant fear of blackouts, which have occurred sporadically over the last
three weeks. And, virtually everyone agrees that consumers will have to pay
more (i.e. not less) in coming years for their electricity.

What went wrong? The short answer is that the electricity market is not
quite as competitive as the proponents of deregulation led people to believe.
It turns out that there is much more money to be made by supplying a small
amount of electricity at a high price, than a large amount of electricity at
a low price. Therefore, in the interest of generating profits for its
shareholders, the power companies in the area are not generating enough
electricity for California's economy.

Of course the whole story is more complex than this, and the deregulators
will claim that the problem was not really deregulation, just that California
didn't deregulate in the right way. But this is like saying that central planning is
the way to run an economy, the Soviet Union just didn't get it right. That one won't fly.

The basic fact is that people of California got suckered into supporting a
policy that was driven by an ideology which says deregulation and markets are
always good, and the government is bad. There were plenty of economists who
could have easily explained why California's deregulation plan was doomed to
fail, but these people were ignored. Instead, at the urging of the power
companies that stood profit, and the prophets of the free market, the state
puts its power system at risk.

Now it is paying the price. In addition to dealing with this disaster, the nation
should also try to learn from it. The most important lesson to learn is that an
unregulated market does not always do things best. This is often going to be the
case in an industry where there are a relatively small number of competitors,
like the electricity generation market, and possibly also the airline industry.

California's regulated electricity system surely was not perfect, but it did
its job, providing the population with a secure source of electricity at a
reasonable price for most of a century. It would have been more reasonable to
modernize the system of regulation, to take advantage of possibilities
offered by new technologies, rather than discard the system in its entirety.

But electricity deregulation isn't the only place where policy is being
driven by free market ideology rather than common sense. The push to
privatize Social Security similarly defies logic. Every serious analysis
shows that replacing Social Security with individual accounts will lead to
administrative costs running into tens of billions of dollars annually. This
money is taken directly out of workers' retirement nest eggs. The experience
of nations like Britain also suggests that many account holders are likely to
fall victim to deceptive sales people and end up taking a bath on their
holdings. Individual accounts are a bad substitute for a system which, all
experts agree, can pay every penny of scheduled for nearly forty years, and
will always pay a larger real benefit than that received by current retirees,
with no changes ever.

Similarly, the plan to replace Medicare with vouchers would have been long
dead if anyone looked at the evidence. More than one-third of the Medicare
beneficiaries who have signed up with H.M.O.'s have already been dropped. The
H.M.O.'s claim that they can't make a profit with the prices paid by
Medicare. Let's take them at their word. They are apparently less efficient
than the government in providing health care to the elderly.

Anyone can make a mistake, but only a fool repeats the same mistake twice.
The free market ideologues got the people of California to put their economy
and even their safety at risk in a foolish deregulatory scheme. The nation
should learn from this failure. We can't afford to jeopardize the retirement
security of our workers and the health care system for the elderly. The
proven success of Social Security and Medicare is better than the predictable
failure of the privatization of these two programs.

Dean Baker is the Co-Director of the Center for Economic and Policy Research
in Washington DC. His email address is baker@cepr.net