by Archie M. Richards, Jr., CFP^®
August 29, 2005

Bad economic policies create bad bear markets for stocks. But U.S. economic policies have improved so much that a severe bear market seems highly unlikely.

Take energy, for example. In the last three years, after adjusting for inflation, the price of gasoline has increased twice as fast as it did in the 1970s. One would expect the members of Congress to enact policies similar to those of the 1970s.

But they didn't. The 2005 Energy Bill contains none of the measures that created shortages 30 years ago. Here's a brief comparison:

In the 1970s, Congress imposed price controls on oil and gas. Forcing prices down by fiat is like putting a cork in a boiling tea kettle without turning off the heat. The low price makes the public buy more. The low price also makes companies produce less. The result: too much demand and too little supply. That spells S-H-O-R-T-A-G-E-S, which is exactly what we got 30 years ago, with long lines at the gas pumps.

In 2005, not a single federal legislator proposed price controls. (None of state legislatures have either, except in Hawaii. The Hawaiian legislature is considering price controls on oil and gas - yikes!)

In 1978, because of price controls imposed previously, a shortage of natural gas prevailed. Congress tried to put a cork in that tea kettle by prohibiting utilities from burning natural gas. Presto! The price of oil and coal soared higher than they otherwise would have.

In 2005, Congress enacted no similar requirements.

From 1959 to 1973, Congress imposed strict quotas on how much petroleum the United States could import from abroad. The result? Higher energy costs, a serious depletion of U.S. oil reserves, and distorted decisions by oil companies about where they could explore for and refine oil.

The 2005 bill contained no quotas.

In the 1970s, Congress launched the Synthetic Fuels Corporation, a public-private entity for which Congress conditionally authorized $88 billion in 1980. In relation to the size of the economy at the time, this was a gargantuan sum.

In 2005, Congress expressed plenty of enthusiasm for clean coal, biomass energy, nuclear, and exotic fuel cells. But the amount of money it proposed to spend for these purposes was tiny in comparison.

Finally, in the 1970s, Congress enacted numerous complicated measures to prevent oil companies from profiting from oil price increases. These caused damaging distortions, making the problems worse.

At the time the Energy Bill was passed in August 2005, there was little talk in Congress about "price gouging," "collusion," or "profiteering." (More recently, uninformed members of Congress have spouted such unfortunate sentiments.)

But generally, the government and the people - except in Hawaii, it seems - have learned that free markets work and governmental force doesn't.

Congress still has a long way to go. Both the Energy Bill and the massive Highway Bill of 2005 are riddled with outrageous subsidies. To buy votes, member of Congress dish out gobs of money - other people's money, of course - for thousands of purposes that would be better left to the private sector. But these subsidies are not nearly as damaging as the disruptions of free markets 30 years ago.

Bad economic policies created the severe bear market in stocks in the 1970s. Even worse economic policies created the agonizing Great Depression in the 1930s. The Federal Communications Commission caused the bear market of 2002. (For an explanation, see The Main Cause of the High-Tech Bust: The FCC - 3/3/03.)

The policies of today, despite the subsidies, are far better. Even the Federal Communications Commission is reversing its damaging policies of the 1990s. Both government officials and the people have learned what makes good economics.

Government creates the framework for business. It has improved. For the foreseeable future, the severe bear markets of the 1930s and 1970s, with unemployment rates of 12 percent or more, will not recur.

The stock market will continue fluctuating, of course. But it will not fluctuate as much on the downside as the severe bear markets of the past. Invest with confidence. Things are looking up.