Price gouging or shortage. Choose one.
Europe is facing far more energy issues than what the US has faced. We moan about increase gasoline prices which still have not reached the height of them in 2008 when inflation is taken into consideration. David touches upon considerations to be taken in determining a solution.
“Price gouging or shortage. Choose one.” – The one-handed economist, David Zetland I’m a political-economist from California who now lives in Amsterdam.
During a weekend in Berlin, I was speaking with a few Germans who spontaneously mentioned their angst at potential blackouts and loss of heating in the months ahead. Their anxiety reflects current discussions over falling supplies of Russian natural gas against a background of the need to burn less coal, an ideological decision (post Fukushima) to shut down functional nuclear stations, and the many impacts of drought (less hydropower, problems with shipping coal on drying rivers, etc).
What bothers me is the government’s waffling around how to deal with these problems (similar to governments all over Europe) in an attempt to avoid the price increases necessary to balance falling supply with demand. These price increases are often condemned as “gouging” by the “eat-your-cake-and-have-it” crowd that cannot stand the real politiek of Dismal Scientists.
Politicians are legitimately worried that poor people will suffer with 200% increases in their energy bills and terrified that voters might punish them for failures that (mostly) have nothing to do with political decisions. (Some politicians are allowing higher prices but sending extra money to the poor; this is my advice. Others are capping price increases or sending money to all energy users, which is counterproductive and stupid.).
But the overall dynamic, it seems, is for politicians to limit price increases in order to “protect” people and hoping that some miracle of supply (Putin dying?) or demand (a majority of people voluntarily reducing use) will close the gap.
It is said that second marriages demonstrate the triumph of hope over experience, and some second marriages work. But many do not — feeding discussions and debates of “I told you so” from various in-laws.
In this case, price controls as a strategy of hope are unlikely to work, which will lead to the blackouts that many fear.
At that point, politicians will throw up their hands and say “we did our best but the world is unfair and you now have to suffer, but don’t blame us.”
This is not just cowardly, but a dereliction of duty.
Not so long ago, politicians were happy to shut down entire economies and lock people at home to stop the spread of Covid (the Chinese are still at it), so why is this different? I’d say it was because politicians were able to borrow huge sums on fighting Covid; when it comes to energy, that strategy won’t work, since more spending would just raise prices in a fight over a fixed quantity of energy. Politicians didn’t ask people to pay more for Covid (those debts come due later), and they cannot will not ask people to pay more for energy, so they close their eyes and hope that the light at the end of the tunnel is not a speeding train.
My one-handed conclusion is that it’s better to allow price gouging scarcity pricing to avoid shortages than holding prices too low and hoping for a miracle. Hope is not a plan; using higher prices to ration energy is.
Price gouging or shortage. Choose one. – The one-handed economist (one-handed-economist.com)
Sorry about the typo in the title! It’s gouging, not gauging!
David
I looked at it and was wondering. Gauging “kinda” fits. Authors do not like me editing. I changed all the gauging and even the lined-out one. The topic is good and you make it interesting too.
The solution of temporary price subsidy is a good one. My one-time German bosses would grit their teeth if I suggested the alternatives they were faced with in the US on supply chain. Doing nothing is never a solution and sometimes one must face the reality. That is a supply chain issue.
For once in the US, someone recognized a forthcoming issue and did something to forestall a more tragic scenario. Maybe we learned a bit from 2008.
How is your healthcare in Amsterdam? Care to put something forward on that topic? It is a topic of interest here also.
David:
You might like Robert Waldman’s post on “means testing.” Similar lines. Prof. Robert teaches in Italy.
‘If you consider inflation, our gasoline price hikes haven’t been so bad.’
Isn’t our inflation due in large part to increased gasoline prices?
How about dropping the sanctions against Russia? It was the US’s idea, knowing that it would hurt Europe a lot more than us – not just their consumers but their industry, and we could export more LNG. It also hurts much more the people in the third world, with not only higher energy prices, but higher food and fertilizer prices, so more will starve. The US’s weapons makers, fossil fuel industry, and food exporters are doing great.
While we’re at it, we could try to negotiate an end to the Ukraine war before it gets a lot more people killed, maybe all of us. Sanctions against Iran and Venezuela could also be dropped. Of course, we have to get off fossil fuels fast, but I don’t see that happening unless the major countries cooperate, which is the opposite of what we’re doing now.
With Russia & Ukraine now seen as permanent adversaries, with US & NATO & Europe on the side of Ukraine. we seem to be inexorably committed to securing Ukraine’s freedom. An astonishing amount of munitions are being sent their way. They are told (apparently) to be very careful not to attack Russia directly. On the whole, a pretty dangerous situation, that could ‘go south’. Very south. Meanwhile, one has to admire those plucky Ukrainians & wish them much luck.
OTOH, look to Trump after regaining the presidency in 2024 to back the US out of Ukraine with much alacrity, at the behest of his fellow autocrat over there.
That will no doubt restore order so deeply needed.
Both global supply chain shortages, for items such as semiconductors, and regional shortages of electricity in resource-rich environments (e.g. California and Australia) have clearly demonstrated that our oligarchs are very happy to ignore price signals to give us both price gouging and shortages.
Price signals only increase production in competitive markets, of which the west has very few examples. Allowing scarcity pricing in the typically-noncompetitive Western market only results in richer oligarchs and a lot of people dying from unmet needs.
Directly spending public money on power plants is the way to deal with electricity shortages. Re-nationalize privatized power infrastructure, seize the past few decades of profits from shareholders, and use the proceeds to build nuclear plants as quickly as possible.