Thursday, 26 September 2013

Reducing costs or simply all gas!

Ed Miliband’s announcement that, if he is elected to Downing Street in 2015, his government will freeze energy prices for twenty months.  It was one of several statements over the past few days such as cancelling the ‘bedroom tax’ and compulsory purchase of unused land held by business that are indicative, some suggest, of a shift to the left by the Labour Party.  Today, we have had the predictable response from the energy companies, whose shares dropped drastically, that it could lead to the ‘lights going out’ and Miliband’s worrying tone that he would not ‘tolerate’ any obstruction from the energy industry.  The critical question is whether the Labour Party wants to not simply rein in what it sees as the worst excesses of the free market or whether it’s a case of back to the future, what one former Labour minister says marks a return to ‘tribal socialism’.One of the country's biggest investors - Neil Woodford of Invesco Perpetual - today called Labour's plan ‘economic vandalism..insane’ and warned that ‘the lights will go off, the economy will shut down.’  While Lord Mandelson, a former business secretary, said that he believed that Labour had moved on from the days of having to choose ‘between state control and laissez-faire’. 
The strategy the current opposition has developed to counter the government—the question of people’s falling living standards—is high risk especially so far from the General Election.  With the economy at least in the early stages of recovery and with falling levels of unemployment, there is still ample scope for the Coalition to counter the strategy with some effect.  But has Labour hit the right tone with its pronouncement about energy prices?  Polling data suggests that people are very concerned by energy prices but offering people £120 (the estimated gain from an energy freeze per household) is, I suspect, too low to persuade sufficient people to change their vote to Labour for it to hit the 35 per cent of the vote they need to be the largest party in the next parliament.  The electorate is sufficiently sophisticated not to be bribed into accepting what could be a disastrous business decision.  Prices in energy, as elsewhere, are determined by the law of supply and demand not by government regulation and control.  The energy companies are, like the banks, easy targets for the opposition since many people believe, not without some justification, that they put profits before social justice. 
But in government, you have to work with both and punitive raids on profits, though they may have political justification, make little economic sense—they have the potential for weakening the economy and reduce business confidence and may well increase living standards not reduce them.  Controlled economies have never been particularly effective economies since government is rarely the right organisation to run the economy on a day-to-day basis.  Yes it should provide the framework for fiscal and economic strategy but running the economy is best left to business and we need to recognise that business will always put profit before social justice.  The proper balance between profits and social justice is the role of regulation and we certainly need to strengthen this in several branches of economic life.  What Ed Miliband did yesterday, though it appealed to the socialist tendencies of some in his party, was to lay down a strategy for electoral failure not electoral success.  This is not, as he would have it, ‘standing up for the British people’.

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