What to do about the petrol, food and house price yo-yo
Sheep and goats can readily be told apart by the remedies they propose for the steep rise in petrol and food prices. Sheep demand government action to bring down petrol prices, for example by suspending or even permanently reducing tax and duty on petrol ('gas' in US parlance): examples are the London Sunday Times, and Senators Hillary Clinton and John McCain. Goats recognise the positive benefits of higher petrol/gas prices in their environmental effects, encouraging the search for alternative and cleaner sources of energy, more sparing use of private cars and commercial lorries (trucks), an end to under-priced commercial flying with its appalling pollution, and an acknowledgement that the forces of supply and demand, however much distorted by the OPEC cartel and futures trading speculators, but reflecting the rapidly growing demands of economic development in Asia, will win out in the end; so they advocate government action to help those who are hardest hit by high prices and least able to pay them from their own resources, as urged by the economists, Barack Obama, and Simon Jenkins on the same page as the Sunday Times editorial advocating the opposite —
Record oil prices provide a tax windfall running into billions of pounds. This should be passed back immediately to motorists in cuts in fuel duty. [Sunday Times editorial, 25 May 08]
The government has been pressed for years to increase the cost of petrol and other fuels to cut consumption and help to save life on Earth. That is precisely what the market is now doing. Yet rather than applaud, ministers feel they must do the opposite and make petrol cheaper. The AA and others demand that the autumn increase in petrol duty should be postponed and millions of bank holiday motorists are told that Gordon Brown “feels your hurt”. [Simon Jenkins, Sunday Times, 25 May 08]
Senator Obama is one of many who has pointed out that any reduction in petrol/gas duty or tax is likely to be immediately offset by a corresponding increase in prices set by the big oil companies, thus effecting nothing more than a transfer of resources from government (i.e. the public's) revenues to the billions of dollars of profits accruing to the oil companies. Abolishing stamp duty on house purchases would have the same effect: stamp duty is already factored in to the price asked by the vendor after calculating what the market is likely to bear, so its abolition will simply enable the vendor to increase the asking price and the likely profit accruing to himself, at the expense of the exchequer.
Much the same goes for higher food prices. Those who have been bemoaning the low levels of reward and incentive going to farmers in the poorest countries of Africa and Asia should now be welcoming the more realistic rewards going to food producers world-wide, reflecting the reality of increased demand, especially from China, India and elsewhere in Asia. The remedy lies not in a doomed attempt to hold prices down by artificial interventions in the market, such as scatter-gun subsidies to consumers both rich and poor, but in the encouragement of an expansion of food production, especially in developing countries, by the application of appropriate technology. (Vegetarians are also entitled to point out that the high proportion of global grain production going to feed cattle and other livestock for consumption as meat is incredibly wasteful, when that grain could feed incomparably more people than the resulting meat can ever do. But I'm selfishly too fond of my roast beef and bacon and egg to act accordingly, comforting myself with the self-serving justification that individual eco-gestures are a waste of time in the absence of coordinated collective action on a large scale.)
As petrol and food prices have been going up, they have passed house prices on the way down: house prices are falling both in the UK and the US. Those who have been lamenting the manic house price boom of the last decade or so, giving hundreds of thousands of house-owners the illusion that they have become rich without having had to lift a finger in the process (thus encouraging a huge credit bubble), and making life impossible for would-be first-time house buyers, are now emitting piteous cries bewailing the difficulty of getting a mortgage, the rise in evictions of those who can't any longer keep up their mortgage payments, and the viciously anti-social — and short-sighted — behaviour of the sub-prime mortgage lenders in the US and Europe who have been taking absurd risks and creating predictably bad debts, and then concealing the risks by packaging them up and selling them on to idiots too greedy for instant profit to take the trouble to find out the scale of the risk they are taking on. All these are indeed proper subjects of condemnation, but once again the remedy is not to reduce, suspend or abolish stamp duty or other taxes on house sales, which will merely increase demand for houses (as observed earlier, benefiting those selling houses at the expense of the public purse) without any corresponding increase in their supply, thus driving house prices up again: the remedy should be to use the tax system to transfer money to those in need of houses and least able to afford them, from the richest beneficiaries of higher energy and food prices and of the sub-prime mortgage racket.
Simon Jenkins again, a Conservative writing in a hyper-Conservative newspaper:
The worship of central bankers over the past decade has been shown for what it was, a mere shift of blind faith from one group of fallible tunnel-visionaries to another. They have proved no better defenders of the public interest than their forebears during the great crash of 1929. The sickening spectacle of those responsible walking off with millions of pounds of other people’s money in bonuses has rightly put bankers akin to mafia racketeers in public esteem.
The fall in house prices to a more realistic level, and the end of reckless lending on inadequate security to high-risk borrowers who can't afford to service their loans, are both welcome and beneficial. The object should be to act to help those who are hardest hit by these price movements, both up and down, not to try to work on the prices themselves; and to fund help for the most vulnerable out of the proceeds of much higher taxes on those, companies and individuals, who have paid themselves millions of other people's pounds and dollars through the exploitation of bad risks and market forces, involving absolutely no wealth creation on the part of billionaire profiteers. In Britain this would mean an end to New Labour's shameless schmoozing of big business and the mega-rich. Is Gordon up for it?