Monday, 30 September 2013

The answer to Mr Miliband's prayer

Why freeze energy prices? Why not halve them?

Gas and electricity prices rising fast? More and more people having to choose between keeping warm and eating?

Freeze 'em! (The prices, that is, not the people.)

That's the solution recommended by Ed Miliband, the leader of her Majesty's loyal opposition here in the UK.

Everyone knows that this solution won't work. Not if that's all there is to it. You just need to look at what's happening in Venezuela today to see that.

But that isn't all there is to it. Mr Miliband's recommendation in full is to freeze energy prices for 20 months, during which he would do something, if he was in government, to solve the fuel poverty problem sustainably. He's not relying exclusively on a price freeze.

What is that something? What is his sustainable solution?

He hasn't told us.

Look again at the problem. There are at least three elements:
  • Energy consumers have no autonomy when it comes to prices. We are in no position to negotiate with the suppliers. If that's the price they set, that's the price we pay. Either that, or we freeze.
  • Prices are rising fast despite the existence of the Department for Energy and Climate Change, the Department for Business Innovation and Skills and OFGEM.
  • The economy is suffering at the moment from high energy prices. If prices are frozen, the economy will  still suffer, Venezuela-style. Either way, the economy suffers.
What options are available to Mr Miliband? What values of something are available?

The energy sector is currently privatised. Competition doesn't seem to be keeping prices down. Not even with regulation. Mr Miliband could instigate an antitrust investigation by the Competition and Markets Authority or maybe by the EU. That's one option. Or the sector could be re-nationalised. That's another. And there are intermediate states in addition, the energy sector could be part-nationalised and part-privatised.

20 months might just be long enough to complete the investigation or to complete the partial or complete re-nationalisation.

Would any of these options work?

It would be a political decision. Ministers would be advised by officials but it would be their decision – the ministers'. They would face a number of awkward questions:
  • Why wait until 2015 to start tackling the problem?
  • Why have the price freeze at all? That is, why not go straight for the proposed solution, the something?
  • Why freeze prices? Why not halve them?
  • If the proposed solution involves re-nationalisation, what happens to the national debt? We are led to believe that the national debt will stand at £1.5 trillion by the time of the next election. Nationalisation of the energy sector can only increase it. At some point, people are going to stop lending to us at today's low rates. Higher interest payments, allied to quantitative easing, are going to send inflation through the roof and the exchange rate through the floor.
  • And what happens to the budget deficit? The present government is trying to reduce it by 1% p.a. at the moment. That microscopic reduction will be reversed if the state takes the energy sector onto its books.
  • Trickiest of all, politically, Mr Miliband happens to be the Energy Secretary who, in the last government, saddled us all with levies to pay for alternative energy and with carbon taxes. Why would anyone believe that he now knows how to reduce the bills that he increased?
The option that ministers choose would have to have economic support. Government economists would provide some supporting arguments and the think tanks would provide a few more.

That risks being unconvincing. After all, there were economic arguments in favour of nationalisation after the war and there were economic arguments in favour of privatisation during the 1980s – ask enough economists, and you'll always find one in the end who will provide the supporting arguments you need for whatever bee there is in your bonnet.

Sometimes that will be a very senior economist indeed, with a global reputation. Sir-Gus-now-Lord O'Donnell, for example:
In 2002, he co-edited a book with Ed Balls, congratulating Gordon Brown on eliminating boom and bust, Reforming Britain's Economic and Financial Policy: Towards Greater Economic Stability. A year later saw another book edited by the two of them and Joe Grice, again congratulating Gordon Brown, this time for Microeconomic Reform in Britain: Delivering Opportunities for All.
As we now know, Sir Gus was spectacularly wrong. Following the 2008 bust Sir Gus claimed to have abolished everyone has become their own economist. Instant economists are a dime a dozen.

And some of these instant economists talk a good enough game to catch the eye of government.

midata, for example, will empower consumers, or so we are told. midata, we are told, will cause the economy to grow and will succeed where the regulators have failed. So will open data/PSI (public sector information), which will boost the EU economy by €140 billion – according to economists – please see Economics made simple 13 July 2013.

midata and PSI between them address the three elements of the energy problem identified above. The perfect solution. Just what Mr Miliband is looking for. And yet we haven't heard much from the midata/ODI (Open Data Institute) pundits recently:
  • Have they lost their confidence?
  • Are they keeping their heads down, in the face of a real problem?
  • Their bluff is being called, do they have nothing to say?
  • Don't they believe their own publicity?
  • Or are they all too busy advising Mr Miliband? Perhaps they don't have time these days to publish any more of their entertaining economics essays.
  • How long before we are told that midata and PSI will make energy affordable?
  • And if they can't make energy affordable, then just what problems are midata and PSI capable of solving?

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