Extraordinary measures in extraordinary times

This picture makes the obvious point that if we got an extremely large person to put on extremely large rubber gloves and gave them an extremely large scalpel, there is no end to the good they could do, starting with fixing up our crumbling political system

One measure of the success of a social movement is the extent to which it creates a ‘commonsense’ that even its ideological opponents get roped into. That was the great triumph of neoliberalism — bringing the moderate progressive left into its fold. In fact it was the left — fancying itself the less stupid party and full of people who think about policy — who were the original entrepreneurs of deregulation in Australia, New Zealand and even the US — Jimmy Carter set off a lot of deregulation in transport and some other stuff in infrastructure. (One can even include Jim Callighan’s Government in the UK if you include his now canonical proposition that you can’t spend your way out of a recession — which is wrong by the way, but in context it probably wasn’t.)

And before neoliberalism, it was Nixon who embraced the New Deal consensus — and helped extend it to the environment and who said “we’re all Keynesians now”. Anyway, remember how they hated profiteers and got into all kinds of government intervention including rationing in WWII. Well that made good economic sense. And some government intervention in the presence of commodity price spikes makes sense today. Such interventions include domestic price caps and windfall taxes.

In the piece below Isabella Webber explores the case. It’s a pity that these discussions don’t simultaneously discuss institutional developments that might make government intervention safer and more likely to be unwound through time. Even if one has established that they’re good policy, there remain good reasons for neoliberal hesitancy on price controls based on the prospect of those policies being deployed on behalf of powerful interests — or political expediency — rather than the public interest.

The kinds of institutions one needs, require some insulation of the policy from day-to-day politics. We’ve traditionally dealt with that with independent agencies — like the RBA and the ACCC, though I’m increasingly persuaded that citizens’ juries can more effectively internalise the issues and arrive at the right answers.

The history of price stabilization goes back centuries, from the mists of classical China (my own research focus) to the major crises of the past century: World War II, the Korean War, and the stagflation of the 1970s in the United States. In each case, price-stabilization policies served as emergency measures aimed not just at “fighting inflation,” but at doing so in a fair and socially stabilizing manner. Their primary purpose was to attack profiteering (from wars, famines, and disasters) head-on. They have tended to work in highly concentrated markets, and when implemented before inflation spirals out of control, while performing poorly otherwise. And when carried out in democratic societies, through a mobilization of the population behind a common project of price restraint, they have been massively popular – especially when weighed against the alternative of austerity.

But by late 2021, that history had dropped out of the common sense of economics.

In February 2022, my colleague, Sebastian Dullien, and I set out to establish that there are indeed feasible alternatives to macroeconomic tightening. We proposed a fiscally financed price cap on basic household consumption that would preserve market prices at the margins. This led to another round of criticism from economists. But our proposal also received strong endorsements from a wide range of interest groups.

Fast forward to September 2022, when I found myself appointed to a German government commission charged with designing a price-stabilization policy to address the energy crisis following Russia’s invasion of Ukraine. There, we developed the so-called “gas-price brake,” and the key principles that I had been advocating were subsequently enshrined in German law.

Germany is not alone in implementing a price policy. Across Europe (and in the United Kingdom), governments have implemented various forms of price controls to contain the war’s fallout in global energy markets. The European Union has enacted a gas-price cap, the G7 has imposed a price ceiling on imported Russian oil, and the US government has leaned on the price of oil by releasing supply from its Strategic Petroleum Reserve.

Moreover, leading economists have rushed to endorse selective, targeted price controls. By January of this year, Paul Krugman of the New York Times, for example, was suggesting that it might not be so foolish after all to respond to price explosions with price policies, even though he had criticized this approach earlier.

I wrote this piece before I discovered that my normal subscription didn’t cover it — they wanted a ‘Premium’ contribution. I found a way to access it and reproduced the extract above, but just a warning. If you press the “More Here” button below, you may be able to read the rest of the piece, but save it because, if my experience is anything to go by, you’ll get locked out.

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conrad
conrad
1 year ago

Given the good job the RBA has done (including under heavy political pressure like now), it’s hard to see how citizen’s juries would have been better.
It’s also not clear to me that presenting evidence of price controls working like you have is very fair — at least for temporary controls, in many cases, there is not much anyone can do about it, but in the longer term presumably people are less likely to invest in things likely to be controlled, like gas. Given things like the US oil stock pile and releases from it now seem semi-permanent, they are not exactly short-term measures. Thus what seems like a good short-term idea ends up as an entrenched situation.
Price controls also potentially stop innovation and alternatives. For example, if the EU thinks they can get cheap gas using price-capping, it would essentially work like a subsidy against the expedient development other sources of energy like renewables (at both the consumer and other levels — if I can get cheap gas, why bother sticking solar panels on my roof?). So the price of such a policy needs take the effect on other behavior into account, not just making citizens happy because they get cheaper gas for a while.

conrad
conrad
1 year ago
Reply to  Nicholas Gruen

I agree windfall taxes are better than price controls (although Australian politicians don’t seem to be believe that), but I think they are different things — windfall taxes are inherently short term and cannot be dragged on easily compared to price controls, the latter of which should be run with apriori termination dates. As an example of when don’t work, telecommunications has had price controls for years and is a very concentrated market, but our telecommunications infrastructure is pretty average compared to many countries.
In terms of your jury, at least for people like me, I think what you really need is more empirical evidence (which I imagine would be pretty easy to get if you didn’t care about actual pressure based on the outcome they come to). You have two control groups you can compare to: politicians in particular and bodies like the RBA (or for that matter ‘procedural’ decisions made by government agencies that people never hear about). I know you have some evidence already on this from some places.
As a guess, your juries are probably likely to do a better job on many issues than current day politicians. Whether they are better than independent bodies like the RBA which have expert knowledge and less political pressure is a different matter. Other government agencies would fall in between. For example, in hindsight, it appears the RBA like most other countries set interest rates too low for too long, which is now in part responsible for the current mess. Would juries have thought differently? I don’t know, but if you had mock juries discussing issues and coming to conclusions over various issues across a decent time span that would allow their decisions to be evaluated in hindsight, that would be very convincing evidence.

conrad
conrad
1 year ago
Reply to  Nicholas Gruen

The standard way people make things that rely on outcomes work is to pay people. This happens in endless studies in psychology and economics and there is good evidence it works if you pay enough (which is usually not that much). The other way is to turn things into a competition which works for some things and some groups. For example, even if people know their deliberations don’t matter in terms of what they are supposed to be used for, if you gave people, say, $1000, if their decisions met some criteria in the future, then this works well for everything else. If you had 10 people that would be $10,000 — plus, say, $5,000 to run each study.
As a comparison, the average Australian Research Council grant I think is now about 350K, so you could run some 23 committees with that. They could be on different issues or you could use sets where you ran, say, 5 juries on the same decision to get an idea of how reliable they actually are (and then given $5000 to each person in the jury that won of one of the 5 juries so you would have payment and competition).
So I think if any economist/social psychologist/political scientist was motivated and had the track record in the area, it wouldn’t be too expensive. There are also probably sources of philanthropic money where people wouldn’t care as much about the background too.

victor yodaiken
9 months ago

Jimmy Carter was “the left”? The guy who not only deregulated but appointed Paul Volker to run the FRB and let him crush unions and domestic manufacturing (not to mention most of Latin America) with an aggressive hard money policy? That guy? What’s really odd is how the Carter administration apparently didn’t even talk to JK Galbraith.

victor yodaiken
9 months ago
Reply to  Nicholas Gruen

The most interesting part of Delong’s Slouching book was on the chaotic mismanagement of the Carter administration and the self-awareness of the Chicago guys who definitely wanted to see Pinochetism win worldwide.