Daily Telegraph29 Jun 2022 00:17
The dismal truth is that Putin is winning the economic war
There is bad policy, and then there is really bad policy. I was wondering when the idea of imposing price controls as a means of countering resurgent inflation was going to make a reappearance, and then sure enough, up it pops at the latest summit of G7 political leaders in the Bavarian mountain resort of Schloss Elmau.
It sounds so simple, doesn’t it? Confronted with out of control inflation, all you have to do is limit the prices that producers are allowed to charge, and the problem goes away.
Only it doesn’t. Price and wage controls were extensively tried in both Britain and the US during the 1970s; they didn’t work then, and they won’t work now.
Here’s the US economist Milton Friedman explaining why: “We economists don’t know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can’t sell tomatoes for more than two cents per pound. Instantly you’ll have a tomato shortage. It’s the same with oil or gas.” There is not much point in making high prices illegal if the end result is closed petrol forecourts and empty supermarket shelves.
But if you bear with the inflationary shock, eventually it creates more supply and prices come down again.
This most basic of lessons in economics does not appear to have had much impact on the thinking of France’s Emmanuel Macron. What began as a proposed cap on the price of Russian oil and gas, leaving other producers unaffected, all of sudden - and to the astonishment of the world’s largest producer, the US - transmogrified in the mind of the French President into price controls for all oil and gas production.
This is never going to fly, but somehow or other, the idea seems to have crept into the G7’s final communique, which reads; “We will take immediate action to secure energy supply and reduce price surges driven by extraordinary market conditions, including by exploring additional measures such as price caps.”
Presumably, the communique meant just Russian exports, for it is hard to see how even this might be made to work, let alone a blanket cap. We don’t yet have a world government, however fondly G7 leaders might imagine they amount to one, so imposing such a regime across borders would be well nigh impossible.
Some countries do indeed control the retail price of energy - notably in the Middle East, Latin America and the subcontinent. But to say we won’t allow fuel to be sold above a certain price level is not only exceptionally costly to governments and retailers when wholesale prices are high, but also quite different from the current suggestion of refusing to buy at any more than a defined price.
The response from the producer may well be that of simply refusing to sell, as is all too possible with Russian supplies to Europe if buyers are banned from paying the going rate. If that were to be the response, it would send prices higher still.
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