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A crisis of affordability

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Western capitalist economies don’t really do shortages.  There are a few stand alone exceptions such as a music festival or a sporting event, where demand so outstrips supply that queues form.  But for the most part – as we saw last week with the eye-watering rise in wholesale gas prices – when something is in short supply the price increases; and when the price increases enough, the queues disappear. 

In economics, this is the difference between demand and desire.  I might, for example, desire a new sports car or a country mansion.  But since I do not have anything like the discretionary income to buy these things, I do not contribute to the economic demand for them.  And unless someone is going to offer them for sale at a ridiculously low price, I doubt that we are going to see queues forming any time soon.  As Tom Chivers at UnHerd puts it:

“Over the long run, the market normally solves coordination problems like this, reasonably effectively. If lots of people want some resource, then the people selling that resource realise they can make more money if they raise the price. At the higher price, fewer people are willing to buy it, but the seller makes more money per unit sold. And, in theory, they can keep raising the price until the lost sales start to outweigh the gain per unit.”

When we witness queues piling up outside filling stations across the UK then, we might be correct in assuming that something – or most likely some things – are being done to artificially generate a shortage where none previously existed.  Among the suspected culprits are BP managers seeking to lower the cost of employing delivery drivers; representatives of the Road Haulage Association whose members would also benefit from an influx of cheap Eastern European drivers; anti-Brexit political organisations seeking to discredit the Government’s (non)withdrawal deal from the European Union; Media organisations that know that there is nothing like a good crisis to increase audiences; and inadvertently, the Transport Minister himself for taking to the airwaves to tell everyone not to panic.

In economic terms, the demand was real – albeit collectively irrational – but the shortage was in effect a self-fulfilling prophesy, since filling stations have only enough fuel for ordinary levels of demand.  In the same way, filling stations only store a fraction of the fuel we would need if all of us turn up on the same day.  For the same reason, the refineries only produce enough fuel to meet ordinary demand, and only employ enough drivers to get the fuel from the refinery to the filling station.

Drivers – or rather the lack of them – is what we have been led to believe to be the cause of the shortage.  But the UK doesn’t have a shortage of lorry drivers.  Indeed, Britain has more than double the number of lorry drivers needed to fill the current vacancies.  As Harry Holmes at The Grocer pointed out last week:

“There are now more than 230,000 HGV licence holders under the age of 45 alone in the UK deciding not to work in the commercial haulage sector. For whatever reason, these people have spent around £3,000 acquiring an HGV license only to later opt out of driving commercial vehicles for a living.

“To put that in perspective, there are more 30 to 34-year-olds that fall into this category than there were total EU drivers in the UK before the pandemic.”

 

We don’t have a shortage of lorry drivers; we have a shortage of employers prepared to offer decent enough wages and conditions to persuade enough qualified drivers to seek employment in the industry.  But while the gut response might be to blame exploitative money-grubbing corporations, they too are only operating within the terms of the neoliberal political-economic system.  The neoliberal system developed under Thatcher, Reagan and Mitterrand in the 1980s, was designed to crush workers’ wages in order to keep inflation within an acceptable range.  In part this involved the so-called “gender dividend” – bringing women into full-time employment – in part the crushing of the trade union movement, and in part the offshoring of jobs to countries with lower wages and fewer regulations.

The benefits of neoliberalism were on the consumer side of the equation, in the shape of lower prices for a raft of new consumer goods.  But the largely hidden cost came in the shape of a growing precariat which increasingly struggled to participate in the consumer economy.  And as prosperity began to retreat from ex-industrial, rundown-seaside and small-town rural Britain, credit became the means by which consumption growth was maintained… at least prior to 2008.

While, officially, the years between the Crash and the Covid are counted as among the longest periods of economic growth in history, those in the bottom half of the income distribution saw their incomes fall.  And while those at the top have enjoyed rising prosperity during the pandemic, the expectation is that receding prosperity will have eaten its way even further up the income ladder by the time it is all over.

And this is why the less sensational aspects of the emerging energy crisis are more worrying in the long-term.  The faux fuel shortage will be over by the end of the week because the public will have run out of places to store any more petrol.  Indeed, with the refineries refilling the filling stations far faster than normal, we will likely have a slight petrol surplus next week.  The ease with which the Brent Crude price slipped above $80 per barrel yesterday – a 100 percent increase since October 2020 – partially as a result of UK refineries having to import additional oil, is far more worrying because it confirms warnings from oil industry insiders last year; that we would face supply shortages as we emerge from the pandemic.

The global price of oil already translates into petrol and diesel prices level with their historical peak in 2013.  And if expectations of $90 oil by the end of the year prove correct, don’t be surprised to be paying £1.50 per litre or more when you go to fill up.

Nor are rising oil prices solely a problem for motorists.  Because almost everything we consume is either made from or with oil, and transported on vehicles powered by oil, a rising oil price means rising prices across the economy.  And that means that all of us are going to be restructuring our budgets in the weeks to come, with far less being spent on discretionary items and far more on essentials.

Exactly how this plays out will vary from person to person and from business to business depending on their circumstances.  But the collective result is that the larger, non-essential sectors of the economy are about to be crushed to death by a combination of rising costs and falling sales.  And that is merely the result of rising oil prices. 

Now add in the stupidity of an entire continent – and especially the UK – powering its electricity system with gas, despite beginning to run out of gas decades ago, and you have the makings of a serious depression.  The wholesale price of gas has risen by more than 400 percent since the start of the year and is already filtering through into eye-watering charges this winter.  Since there are limits on how far people will go to save on heating and lighting, rising energy bills will also have to be paid for by diverting spending which would have otherwise gone to discretionary sectors of the economy.

If our woes ended there, we might, just, avoid a major economic crisis.  But the wide boys in the City of London are desperate for yield and are using the myth of monetary inflation to cajole the central bank into raising interest rates.  This is Maslow’s Hammer in action – when the only tool you have is a hammer, every problem starts to look like a nail.  As Richard Murphy explains:

“Increasing interest rates will not produce lorry drivers.  It will not address food shortages.  It won’t change fundamental market failure due to Brexit.  It cannot correct the Northern Ireland protocol.  It can’t tackle the uncertainty from Covid that persists.  It will not recreate free movement.  It will not end the cost of shipping goods through ports where many checks now have to take place…”

Indeed, as happened just prior to the 2008 crash, increased interest rates will only result in even more spending being diverted from the discretionary sectors of the economy.  This is because debt is itself an essential spending item.  And once debt becomes unserviceable, people rapidly spiral toward bankruptcy.

This though, is only the private sector side of the unfolding crisis.  On the public sector side, central and local government have decided that the pandemic is over, and it is now time to start paying for the mess they created.  And so, at the same time the various pandemic support measures are being removed, government has imposed an extra tax on employment by raising National Insurance for both workers and employers.  More austerity is anticipated in November’s budget too.  And at local level, councils are set to raise business rates and council tax in an attempt to claw back some of the losses incurred by the response to the pandemic.  And since taxes – national and local – are enforced by criminal law, they are perhaps the most essential payments of all.

What all of this adds up to is an amplification of the trend we were experiencing prior to the pandemic of inflation at the top and stagnation at the bottom.  And the perception of this will shape policy for the immediate future.  Cushioned from the realities of life for the majority of the population, central bankers, City spivs, politicians (which, in the case of the current government, is often the same thing) and establishment media editors will continue to believe that the economy is in good health.  Meanwhile, with rising prices across the board, many more of us will be cutting our discretionary spending while the bottom 20 to 25 percent of us continue to curb spending on those things currently thought to be “essentials.”  For close to a million recipients of in-work benefits, for example, the removal of the £20 per week pandemic payment coupled to increased energy bills means making a hard choice between food and heating this winter.  Many more will be learning a hard lesson about such things as keeping oneself warm rather than trying to heat an entire house, and about bulk cooking low-cost ingredients to keep food costs to a minimum.

This cannot go on forever of course.  But it won’t be temporary media circuses like the current fake fuel shortage in the UK which bring matters to a head.  Rather, it will be the slow grind of declining energy supplies – and the lack of viable alternatives – as fossil fuel extraction peaks even as extracting economies such as Russia and Saudi Arabia require more of what is left for domestic consumption.

Fourteen years of central bank stimulus and low interest rates, together with the temporary US fracking bubble they largely helped to inflate, allowed the false narrative that rising stock and bond prices meant we were out of the woods.  Between 2015 and 2017, the fall in oil prices had even ushered in a tiny sliver of growth in the real economy – although not enough to halt the retail apocalypse.  But the rise in oil prices from 2018 as global oil production peaked for the last time reversed the process.  And, ironically, had it not been for the huge crash in real economy activity brought about by the pandemic, the headwinds which we are now experiencing would probably have hit us in 2020.

The temptation is to rush out and predict the end of industrial civilisation immediately.  But it is worth heeding John Maynard Keynes’ lament that: “The stock market can remain irrational longer than you can remain solvent.”  As Tim Morgan at Surplus Energy Economics cautions, we should be careful not to mistake inevitability for imminence.  This whole shitshow is going down sooner rather than later; but rather like the game of musical chairs, we will only discover who the winners and losers are when the music stops playing.

As you made it to the end…

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