Liz Makes Britons an Offer They Can't Afford or Refuse

The U.K.'s new prime minister, Liz Truss, finds herself in an unenviable position. Britain -- along with the rest of Europe -- is facing out-of-control energy prices with winter fast approaching. Her predecessor, Boris Johnson, by unreservedly embraced his wife's net-zero enthusiasms, left the country's domestic energy industry in a parlous and perilous state. And the Labour Party has risen in the polls in part by proposing a massive windfall tax on what they suggest are the "excess profits" energy companies are pulling in due to the rise in oil and gas prices that have followed Russia's invasion of Ukraine, and using it to fund a "price freeze" on British energy bills.

Hoping to stall Labour's rise, the Johnson government enacted its own (smaller) windfall tax, but Truss has announced her intention to scrap it immediately, arguing that it amounts to a punishment for firms that invest in Britain. Instead she has proposed a plan which might be even more radical -- a "price freeze" funded by all British tax payers. Starting October 1st, British households will pay no more than £2,500 per annum for the next two years.

(Labour's plan, it is worth noting, would also have been largely funded by the taxpayer, because their windfall tax wouldn't have come close to paying for their pricing plan. But it sounds better to say that greedy oil companies are footing the bill.)

Of course, in reality there is no such thing as a "price freeze." What the plan actually amounts to is the government paying the bills that aren't covered by that £2,500 per household. Which is estimated to amount to a lot of money. How much exactly is unclear -- we don't yet know how real energy rates will go this winter or how cold it will get. Though, as Kate Andrews says at The Spectator, "a less generous package... was estimated earlier this week to be approaching £200 billion." It would be surprising to see this proposal cost less than that. Andrews points out one of the great dangers of this plan -- that it makes winter blackouts more likely:

We have a global shortage of energy – an ugly reality that domestic governments can do nothing about overnight. Truss’s decision to lift the fracking moratorium signals that the government wants to increase domestic energy production, but the policy change is unlikely to produce any quick or meaningful uptick in supply as local areas – which get the final say on whether fracking goes ahead – remain deeply opposed. So, we all need to use less energy this winter.... But by covering so much of the cost, Truss’s government has removed a lot of the incentive to cut back energy usage. Indeed, some people will probably increase their energy usage as bills will be so heavily subsidised by the state.

Economics 101 tells us that price increases are, in essence, a response to scarcity. By picking up consumers energy bills beyond a fixed point, said consumers are shielded from the reality of scarcity and consequently have no reason to consume less. This is especially true, Andrews argues, for wealthy Brits, whose bills will be capped at the same semi-arbitrary amount as the poor, despite their being better able to afford higher rates while also having bigger houses to heat and power. Instead of turning down the heat, they and their countrymen are just as likely to turn it up.

Truss's counter to these objections would no doubt be that there are really no good options, which is often the case in a crisis. Her hope is that keeping energy prices lower at the point of consumption will help get inflation under control, off-setting a new round of massive debt accumulation (and so soon after Covid lockdowns necessitated record borrowing of its own), while giving her other pro-energy, pro-free market policies a chance to beef up domestic production and turn the economy around. And, hopefully for her, just in time for the next general election, to be held no later than January, 2025.

Maybe it will work. But it's a hell of an expensive bet.

 

Is Sri Lanka's Disaster Headed Our Way?

Dominic Pino has been following the unfolding crisis in Sri Lanka for some time. He recently described the country's turnaround with great concision:

Sri Lanka’s GDP per capita is about double that of India, and ordinary Sri Lankans have seen a significant increase in their quality of life since the country’s lengthy civil war ended in 2009. And [yet] in nine hours today, the president is missing, the government has collapsed, and the former prime minister’s house is on fire.

In a very short time -- less than a year -- Sri Lanka went from being one of Asia's great success stories and a model for the developing world, to the present situation, where the nation's currency has lost half its value since 2019 (when Gotabaya Rajapaksa came into office), with inflation running at around 112 percent, and president Rajapaksa fleeing the country in fear of his life as protesters breached the walls of his official residence and that of the nation's prime minister. It is, in short, an absolute catastrophe.

But how did this happen? Financial mismanagement is one part of the story -- as Steve Hanke of Capital Matters explains, the Rajapaksa government spent beyond its means and accumulated huge amounts of government debt which it attempted to manage by simply printing more money to pay it off. That's not just an outsider's interpretation, that is the actual language employed by the governor of the Central Bank of Sri Lanka as he assured investors that there was nothing to worry about: "The fears around debt sustainability appear to be unfounded.... [M]oney could be printed to repay them."

Gone, baby, gone.

The other big part of the story might be even more insane. In April of last year, Rajapaksa announced a ban on pesticides and all synthetic fertilizers so that all of the country's crops would be produced by "organic" farming. This was so that his country's agricultural policy might, once again, be “in sync with nature.”

Overnight Rajapaksa became a hero to environmentalists and Sri Lanka was given a nearly perfect (98.1 out of 100) ESG investment score. Legendary environmental activist Vandana Shiva predicted that “This decision will definitely help farmers become more prosperous.”

The reality was quite different, as Michael Shellenberger explains:

One-third of Sri Lanka’s farm lands were dormant in 2021 due to the fertilizer ban. Over 90 percent of Sri Lanka’s farmers had used chemical fertilizers before they were banned. After they were banned, an astonishing 85 percent experienced crop losses. The numbers are shocking. After the fertilizer ban, rice production fell 20 percent and prices skyrocketed 50 percent in just six months.

Sri Lanka had to import $450 million worth of rice despite having been self-sufficient in the grain just months earlier. The price of carrots and tomatoes rose five-fold. While there are just 2 million farmers in Sri Lanka, 15 million of the country’s 22 million people are directly or indirectly dependent on farming....

But the damage to tea was the key to Sri Lanka’s financial failure. Tea production had generated $1.3 billion in exports annually. Tea exports paid for 71 percent of the nation’s food imports before 2021. Then, tea production and exports crashed 18 percent between November 2021 and February 2022, reaching their lowest level in 23 years. The government’s devastating ban on fertilizer thus destroyed the ability of Sri Lanka to pay for food, fuel, and service its debt.

If all of this hadn't occasioned real and serious human suffering, we might have reason to be grateful for this fairly controlled experiment in what not to do. What happens when you hand the keys to a critical sector of a nation's economy to environmentalists? The answer is that they rapidly drive it -- even if it is relatively prosperous -- right off the cliff.

Printing money they don't have, giving environmentalists whatever they want... those policy approaches should sound awfully familiar. Americans should be playing close attention to how things are playing out in Sri Lanka. We could be seeing glimpses of our own future.

Making a Bad Situation Worse

The Left has an unhealthy tendency to treat the economy -- a complex, organic system of human interaction -- as if it were a machine they can easily manipulate by means of a clever regulation or three. We caught a glimpse of this in the early months of the pandemic, when talk about "shutting down" and then "prudently restarting" the economy (once Donald Trump was safely out of office, of course) was ubiquitous in respectable leftist discourse. In fact, the economy never stopped running, lockdown or no. That's because it isn't like a computer which can be flipped off and on again. The economy is more like a human body, and when you seriously disrupt the function of a body, the consequences are dire.

Ordinary people are feeling the economic consequences of those lockdown disruptions right now in the form of soaring inflation and elevated prices for gasoline, consumer goods, and services. And despite their role in bringing these things about -- pumping out trillions of dollars of funny money long after anyone thought it made sense and declaring war on the resource sector as worldwide energy prices were exploding -- the Left is  now openly pondering further destructive interventions with the aim of getting things under control.

We've already reported on the White House's cynical decision to -- once again -- tap into the Strategic Petroleum Reserve, leaving it at its lowest level since 1984 and almost exclusively to combat high gasoline prices. Well, as the Daily Caller reports, things haven't played out exactly as the president hoped:

Oil prices shot up Monday despite President Joe Biden’s plan to curb gasoline prices by releasing a million barrels of emergency oil reserves daily. The Brent crude index, the global oil benchmark, increased to $108.07 per barrel Monday morning, surging more than 3.1 percent overnight. The U.S. WTI index skyrocketed more than 3.4 percent past $103 per barrel Monday.

In response to the White House's announcement, Institute for Energy Research President Tom Pyle said “It’s not a ‘strategic price reserve.’ It was never intended for this and it won’t do anything [for prices]." Thus far, he has been proven exactly right.

But perhaps even more concerning is the increasing openness of prominent Leftists like Elizabeth Warren and Bernie Sanders to attempt to right the ship by enacting 1970s-style price controls. Andy Kessler of the Wall Street Journal compiles several quotes suggesting that even Joe Biden is considering going down that road. He then explains why this would be disastrous:

Prices set by producers are signals, and consumers whisper feedback billions of times a day by buying or not buying products. Mess with prices and the economy has no guide. The Soviets instituted price controls on everything from subsidized “red bread” to meat, often resulting in empty shelves. President Franklin D. Roosevelt’s National Recovery Agency fixed prices, prolonging the Depression, all in the name of “fair competition.” Watch for the resurrection of that phrase to rationalize price controls.

In 1971 President Richard Nixon announced, “I am today ordering a freeze on all prices and wages throughout the United States.” We got new government entities: a Pay Board and a Price Commission. Americans paid for this mistake for another decade. Farmers drowned chickens rather than send them to market. Store shelves emptied. Price controls contributed to long lines at gasoline stations in 1973 during the Arab oil embargo. It’s pretty simple: When you freeze prices too low, producers stop producing. Price controls don’t work. Never have, never will.

Which is to say, the cures these people are proposing are worse than the disease. Even so, look for these hairbrained schemes to multiply until they're out of power. Unfortunately, they are sure to have knock-on effects for years to come, and we are going to be the ones who suffer for it.