- AMERICAN INSTITUTE FOR ECONOMIC RESEARCH - Peter C. Earle - SEP 8, 2022 -
Yesterday, EU Commission President Ursula von der Leyen addressed the mounting problems in European energy markets. On Twitter, blaming Russia for “manipulating” energy markets, she recommended a handful of steps to mitigate the rolling blackouts and other shortages plaguing Europe. The first tweet reads as follows:
Smart Savings of Electricity: We need a strategy to flatten the peaks, which drive the price of electricity…
For anyone who has been awake for as little as a few hours during the past thirty months, yes, we have heard this before. There’s something about hills and troughs in time series that creates discomfort, especially when it brings a notable change in circumstances. And in an age where the belief in feasibility of the omnipotent state is prevalent, calls for government action inevitably follow.
If disease infections are rising, everyone should stay at home. If wages are falling, a minimum wage is clearly needed. Should wealth increase rapidly among a small strata of society, it must be taxed away. When suicides skyrocket among combat veterans, they should receive counseling and other services. Stock indices or commodity prices are plummeting? Shut down the markets for a random period of time!
Yet nowhere in these cosmetic reactions are nuanced, let alone enduring, remedies. Who is being struck by disease, and under what circumstances? Why are wages declining? In what professions, and where? What is the effect on employers and the broader job market? If wealth is rising, why? And what effect does it have on individuals who aren’t wealthy? Is it better to hurl hundreds of thousands of young people into war and sloppily patch them up afterwards, or should military forces be deployed far more sparingly? If the prices of financial assets fall, are they not repricing? What new information is spurring that financial realignment? And however painful the decline may be for investors, doesn’t it create new economic information which entrepreneurs and managers can see and use?
Numerals, the symbols developed to represent the mathematical objects we call numbers, came early in human history, permitting the counting and tracking of phenomena. The price system, built on the evolution of money by employing numerals, arose to signal subjective exchange ratios and changes in them over time. The change is not only visible to the immediate consumer, but to other market participants near and far. A massive intellectual edifice surrounds each of us, providing information at varying intervals across uncountable simultaneities.
Political incentives, more and more, are aligned toward imposing temporary, usually illusory, stability upon any corner of the human endeavor that strays from constancy.
Some situations require rapid action. But those should be short-lived holding actions explicitly selected to buy time for deeper analysis, determining root causes, connections, trade offs, and unintended consequences. Clumsy, superficial policies are increasingly the end states of crises or periods of duress. The handful of nations currently on their seventh or eighth failure to impose Zero Covid come immediately to mind, as do the woefully diseconomic choices made by the London Metal Exchange to address the nickel short squeeze in March of this year.
The increasingly popular rule that every curve must be flattened and every dip filled is disconcerting, as every domain touched by human experience exhibits volatility at times. An increasing tendency toward knee-jerk responses from politicians and regulators ignores both the underlying generators of those swings and the harvesting of information embedded within them. The pursuit of nostrums whereby a fragile stability is sought regardless of the consequences is a half step removed from uninhibited superstition, and an abdication of empirical reality.
Thoughtlessly mandating the crushing of trends, in retail electricity prices, unemployment, infections, and beyond, is killing the proverbial messenger. Short-sighted, mechanistic solutions not only solve nothing, but provide creatures that thrive on power a license to intervene again, and again, and again.
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