At face value, Rishi Sunak’s £350 handout to help with rising energy bills is a lot better than a poke in the eye with a sharp stick. The devil, of course, is in the detail. Only £150 is coming in April, when the average energy bill will increase by £693. And the £150, which will be paid as a rebate on Council Tax, will be given to houses in the lower bands A to D. Meanwhile, the £200 cut from energy bills does not come in until October, when the average bill is expected to rise by a further £300. To add insult to injury, the £200 is not a handout, it is a government-backed loan to be paid back via a £40 levy on energy bills over the following five years – the assumption being that gas prices will have fallen by then, even though there is no real-world evidence to support this.
Importantly, the energy price cap – the upper limit that can be charged on energy companies’ standard tariffs – which rises to £1,971 from April is not, of course, a measure of fuel poverty. It is merely an arbitrary upper limit set by the regulator to account for rising wholesale energy prices and – usually over-generous – energy company profits. An average household in the bottom decile of the UK income distribution paid just £940 for energy last year (my own combined electricity and gas bill – much to my energy-provider’s annoyance – was just £620 for the year). Indeed, UK energy use has been declining steadily over the past decade – in part because of improved energy efficiency and in part because falling real incomes have forced households to make savings. Clearly, there is scope for more affluent consumers to rein-in their spending on energy in the face of rising prices – if the poor can do it, so too can the affluent classes. Indeed, in terms of the government’s flagship net zero policy, such price increases – other than their impact on the very poorest, who would be best supported via the benefits system – are to be welcomed by forcing the affluent to curb their carbon footprint… think of it as a form of carbon tax.
So why start handing out loans and grants to supposedly cushion the blow? Two answers spring to mind. First, the “energy death spiral” has been gathering pace since the 2008 crash. Put simply, the Grid infrastructure is extremely expensive to maintain and to expand to accommodate the inclusion of non-renewable renewable energy-harvesting technologies (NRREHTs) and the various electrified technologies and processes which are expected to use them. There are only two ways in which this cost can be kept affordable – either it must be spread across millions of business and household bills, or it would have to be funded out of general taxation; something a neoliberal government would never willingly do. As the cost of the system has increased – in part because fuel prices are rising but primarily because of the new low-carbon infrastructure (including the new nuclear power plants) consumers and businesses have engaged in tighter energy management to keep bills as low as possible. Moreover, although less of an issue today, some businesses and affluent households took advantage of generous grants, subsidies and feed-in tariffs to install small-scale NRREHTs generation of their own – in effect, taking a large part of their consumption off-grid. This means that, in practice the increasing cost of the Grid infrastructure falls onto a shrinking “squeezed middle,” who themselves are obliged to curb their consumption as prices rise. The early result is that energy supply companies have been failing in droves – so much so that Forbes now maintains an ongoing list of UK energy company failures – which included 28 in 2021, 11 in November alone! The big fear though, is that one of the giant vertically-integrated (fuel, infrastructure and supply) corporations will fail.
The second, indirect, reason to want to subsidise energy consumption, is to manage the impact on the wider economy. At the same time as energy prices are rising, the price of oil is creeping up toward $100 per barrel, while food prices have risen by an average of more than five percent with further increases expected. Incomes, in contrast, have only risen by 3.5 percent, and are not expected to keep up with rising prices. What this signals is a major shift away from discretionary spending across the economy. This is a particular problem for import-dependent, services-based economies such as the UK, where the discretionary sectors provide the majority of our employment. Subsidising the energy sector – albeit indirectly via your and my bank account – is as much a way of bolstering discretionary spending as it is a means of propping up energy companies.
Given the rise of populist movements following the 2008 crash, governments are less keen to be seen to bail out failing corporations directly – although this was done very quietly during the pandemic. Bailouts done indirectly through supported consumption have more of a faux-populist appeal, without obliging the government to do the one thing which would take people out of fuel poverty – raising the amount paid to older, disabled, unemployed and under-employed people.
The broader question though, is will supported consumption work? The short answer is no! Unless the natural gas fairy arrives to unveil some massive North Sea gas deposit that we somehow overlooked, the North Sea reserves will continue to deplete. Russia, which is now entering deals to supply oil and gas to China, is under no obligation to bailout Europe’s energy supply. Liquified natural gas is too expensive to put downward pressure on prices, as is UK fracking. With more countries competing for depleting supplies of gas, the direction of prices is ever upward. Similar global depletion and competition for supply is driving oil prices up too. And oil, far more than gas, drives prices across the economy since every good and service we consume depends upon oil in its manufacture and supply.
Rising prices of essentials are not – as government spokespeople would have you believe – a temporary consequence of the pandemic lockdowns. Rather, they are structural and irreversible. Far from the wage-price spiral that so many economists and central bankers fear, we are entering a phase of de-consumption as we are obliged to forgo discretionary items in order to meet the rising cost of essentials.
Sometimes it is the things you don’t say which prove to be the most damning. And having increased interest rates just at the point when price rises and tax increases are hitting households and businesses across the UK, Andrew Bailey – £575,538-a-year Governor of the Bank of England – didn’t call on corporations to hold down prices. Nor did he suggest that shareholders and CEOs forego their dividends and bonuses for the greater good. He remained reticent about whether the national review boards which set such things as MPs pay might want to implement a pay freeze for the next two years to aid the war against inflation. Indeed, the only group of people Bailey seemed exercised about were the ordinary workers in the bottom half of the income distribution – those whose incomes have fallen in real terms since the 2008 crash. According to Bailey, it is this group which must put up with even more real wage cuts if we are to bring inflation under control.
Notice that in Bailey’s world, price rises are natural – as costs rise, corporations have no choice but to raise prices – but pay is voluntary – low paid workers are being selfish when they ask for a rise. The economic theory behind this revolves around the Phillips Curve – the erroneous idea that inflation and employment are inversely related. High unemployment leads to lower wages which leads to lower pay. Conversely, low unemployment generates high pay which forces prices up. It follows that if – as is happening now – prices are rising, the solution is to create unemployment in order to force prices down… which is precisely what rising interest rates are intended to achieve.
Arguably, of course, employment has been kept artificially high over the last two years as a result of the state borrowing some £300bn to furlough a large part of the workforce. This meant that as the economy opened up, there was far greater demand for goods and services than would have been the case if the economy had been allowed to continue with the greatest recession since 1709. Then again, while nobody in government was thinking about the longer-term consequences of lockdowns back in March 2020, they could hardly claim that lockdowns were about saving lives if millions of people ended up starving for lack of food.
The problem with this view of the pandemic restrictions is that most of the money ended up in the hands of the usual corporate interests. Those in the bottom half of the income distribution – the ones that Bailey wants to take a pay cut – saw their incomes continue to decline even as their debts rose – ordinary people don’t get to borrow at below inflation interest rates. And insofar as people started spending when the economy opened up, it was on haircuts, new and mostly larger clothing and a meal down the pub. They most certainly didn’t use the money to crank up their electricity and gas consumption. Nor did they go out of their way to spend on imported goods to such an extent that they caused global supply chains to crash.
Collapsing wages and rising unemployment will no doubt achieve Bailey’s aim… but not in a good way. It is, after all, the same play that was made in 1979 and again in 2006. And viewed solely in terms of inflation, it was successful. Wages were driven down, businesses driven to the wall, and as demand fell, so too did prices. On the other side of the balance sheet though, between 1979 and 1981, when Thatcher adopted the high unemployment recipe, the UK economy lost five million jobs; most of them in well paying manufacturing sectors. War saved Thatcher politically, and North Sea oil saved her from the consequences of her economic shock doctrine. But the jobs never came back. Instead they were replaced by low-paid, low-skilled hospitality, retail and social care work together with expanded education and training to hide youth unemployment. By 2006, when the debt-based bubble boom set in chain by the Thatcher government finally came to an end, jacking up interest rates led to the bursting of the housing bubble and a global wave of debt defaults which came close to unwinding the entire global banking and finance sector. And the consequence of bailing out the banks, and the ongoing support of the stock and bond markets, is that ordinary workers have experienced declining wages even as the price of essentials has been rocketing for more than a decade.
The point is not that Bailey’s approach to inflation won’t – in the narrowest terms – succeed. It is whether it is the only or even the best way of achieving stable prices. Not least because the supply-side factors causing the current price increases are not monetary in origin. Energy is treated almost as an externality by most economists – no more than one of many cheap inputs to the economy. Until recently a litre of petrol (gasoline) cost less than a litre of cola – indeed, remove the Fuel Duty and it still would. Gas, too, has been so plentiful that for decades energy companies have flared it rather than captured it for sale. In the real world though – and contrary to the economic theories of right and left alike – energy is the animating force behind the economy. As Steve Keen famously put it, “capital without energy is a statue, labour without energy is a corpse.”
What economists like Bailey miss is that the explosion of growth and trade since the eighteenth century – and especially since the world entered the oil age during the Second World War – was the result of extracting and burning millions of years’ worth of solar energy locked up in fossil fuels. But we didn’t extract and burn any old fossil fuels, we burned our way through the (energy) cheap and easy ones first. By the beginning of the century, we had depleted most of the good deposits. Increasingly we were obliged to turn to the expensive and difficult remainder in the hope that this would keep economic growth alive. But it didn’t. Almost all of the “growth” since 2008 has been no more than the moving around of debt-based currency underwritten by the central banks – the creation of activity rather than value. Meanwhile, in the real economy wages have gone backward and political tempers have risen beyond boiling point.
The crisis which is overtaking us is not caused by greedy workers seeking enough income so as not to have to choose between food and warmth. It is caused by the energy cost of the energy which drives the economy beyond the point at which we can sustain the complex social superstructure which we built upon it. As ever more energy has to be devoted to producing energy, ever less is able to fund the debt, the corporate profits, CEO salaries and workers’ wages of a by-gone age.
It used to be that we could claim that “a rising tide raises all boats.” We did not have to worry about the obscene levels of inequality because all of us were gaining. That world though, came to an end sometime around the turn of the century. As rising energy costs force the global economy into reverse, and as energy-importing and import-dependent states like the UK can no longer support the complex social structures built on the now depleted oil and gas deposits of the North Sea, we are in a zero-sum game. When Bailey says that ordinary workers must take another cut in living standards, he is leaving out the other half of the sentence… “so that billionaires and corporate CEOs can continue to gain.”
As you made it to the end…
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