Economy

Rick Perry's Explanation of "Supply and Demand" Is Dangerously Off Base

July 6th 2017

By:
Mike Rothschild

Speaking at a coal plant in West Virginia on Thursday, Secretary of Energy Rick Perry said ironclad economics laws will ensure America's return to coal use, as long as more is mined. Unfortunately, the former Texas governor seems to misunderstand both why coal usage in the United States has declined, and how some of the most basic principles in economics function.

According to energy industry reporter Taylor Kuykendal, who was covering Perry's remarks, the former Texas governor told plant workers "here’s a little economics lesson: supply and demand. You put the supply out there and the demand will follow."

Social media users, who have delighted in tormenting Perry for past flubs and questionable statements, immediately pounced on the remarks, pointing out that this is not at all how supply and demand works. And they filled the Internet with both insults and other products whose supply increased to the point where there was no demand, and they had no value anymore.

Supply and demand is a bedrock of economic policy, and while the nuances are complex, the basic principle isn't. Essentially, the more people demand something, the more suppliers will exist to fill that demand. When supply outweighs demand, prices plummet; and when demand outweighs supply, prices become too high and demand drops. In an optimally functioning system, "the quantity of a good supplied by producers equals the quantity demanded by consumers" according to Britannica's definition of the term. 

The principles of supply and demand were articulated most famously by the Scottish economist Adam Smith in his 1776 book "The Wealth of Nations." Smith's ideas of competitive markets, free trade, limited intervention by government, and an "invisible hand" guiding the wealthy to create prosperity for all through self-interested actions became core principles of postwar Republican economics.

Ronald Reagan was an especially ardent advocate of Smith's principles, to the point where prominent Republicans wore neckties featuring Smith's portrait, and Mitt Romney declared in a January 2012 Republican debate "I think Adam Smith was right. And I'm going to stand and defend capitalism across this country throughout this campaign."

But in keeping with Donald Trump's seeming lack of use for Adam Smith's supply and demand principles, Perry seems to advocate something that's the reverse of cherished Republican ideas: flood the market with something, and therefore people will want it. 

Perry also seems to misunderstand why the American coal industry collapsed in the first place. Jobs dried up (and remaining jobs became much safer) with increased mechanization of the industry—which is why experts don't expect those jobs to return despite campaign promises. Demand didn't slow down because of a lack of coal supply, but because better, cheaper options came along and made the supply less attractive. In this case, the better option for power plants around the country was natural gas.

As Travis Hoium wrote for investing website the Motley Fool, "Natural gas is so abundant and so cheap that utilities aren't even thinking about building coal plants. In fact, coal plants are being shut down left and right because the average U.S. coal plant is over 40 years old. Since electricity generation accounts for the vast majority of coal consumption, the rise of natural gas can directly be blamed for the decline of coal."

For coal to see an increased demand, the demand for natural gas would have to plummet. And according to a recent analysis by Forbes, "almost every region of the world saw a decline in coal consumption," while "there is currently no energy source with such a long and consistent track record of demand growth as natural gas."

With dozens of coal plants slated to close in the next few years, and industry experts worried too much coal is already being mined, it's clear that only massive and unfeasible government intervention would increase the demand, and that would only get Republicans farther away from their core economic principles.

Or at least, their pre-Trump core economic principles.