The price of oil is soaring worldwide, a “crisis” that has dominated the past
week’s front pages. Meanwhile, the price of housing is plummeting, a crisis
that dominated the previous week’s front pages and in terms no less
apocalyptic. Prices rising, prices falling, all bad news ... I wonder what
good news would look like.
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”.
At the same time Brown is promising to do something about the converse
“housing crisis”. Here there is only one thing he can do and that is to make
houses more expensive by stoking demand. Having behaved for years as if
rising houses prices were a disaster, he now does a U-turn and behaves as if
falling ones were the very devil. He wants to “ease young people onto the
housing ladder”, thus increasing demand and making houses more expensive.
Amazing things are happening to prices round the world, largely as a result of
a long period of sustained growth produced by ever freer trade. The price of
wheat, corn and other food has been rising fast. The price of travel has
been plummeting. Live entertainment and domestic labour have become more
expensive while electronic gadgets are astonishingly cheap. Gold is more
costly than ever.
The truth is that 99% of the population has no clue what these phenomena mean.
It treats prices like earthquakes or tsunamis, nature acting beyond the
power of mankind. Last year we were cruising along. Good old Brown, we said,
good old Bank of England and Alan Greenspan and the world economy and
western democracy. We can’t put a foot wrong.
Then, bang, stuff happens. The screen is covered in static and none of the
knobs work. A British public that can do algebraic equations, draw an amoeba
and recite On Westminster Bridge is illiterate when it comes to economics.
The conceptual basis on which modern democracy is constructed remains
unknown territory, barely taught in any school. This ignorance extends to
the top. We let ministers take economic decisions off the tops of their
heads with no idea of consequence or impact. Imagine our letting them fly
jumbo jets or perform heart surgery.
The boom/bust in oil and house prices is, quite simply, good news, whatever
the tangential pain. It shows that the good ship Gaia, planet Earth, is
traumatising its passengers into husbanding its scarce resources. Above all
they must ration living space, for which the West has been appallingly
greedy, and carbon fuel, of which the same is true.
The fall in house prices follows a classic inflationary bubble induced by
cheap borrowing. Prices soared not (as the government claimed) because of an
excess of “need”. Need is not an economic concept, only demand. Prices
soared because the lowest interest rates in a generation made houses,
however expensive on paper, cheap to buy. Millions who could not
realistically afford to borrow did so and prices soared in consequence of
their unsustainable debts. The bubble duly burst. House sales in Britain are
down on a year ago by some 35%, prices by almost 4%.
The market has delivered in a matter of months what the Treasury and its
pundit, Kate Barker, claimed that only flooding the market with “new land”
could achieve, a surplus of housing supply for both sale and rent, signified
by a fall in price. With no loss of green belt and no “eco-towns”,
house-buying has been brought within the range of millions of new buyers,
albeit under a more disciplined mortgage regime. Only builders and estate
agents get hurt.
This would be good news all round were it not for the consequent crash in
banking confidence. The banking system, inflated by British homeowning
fetishism and dodgy American loans, has experienced a trauma. This is
because a secondary failure of regulation impeded inter-bank lending and
caused the bizarre collapse and extravagant rescue of Northern Rock.
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 same laws of economics apply to the price of oil – and, for that matter,
wheat. These are scarce resources. The fact that more people want them is
why they are more expensive. When a Labour MP last week cried that petrol
should be made cheaper by the government “because it is a necessity”, he
might as well have said two plus two equals five. When will these fools be
sent for compulsory re-education before they do more damage?
Average family spending on petrol is expected to increase by £250 this year
and energy bills by another £400. That should concentrate minds. With oil
being consumed in most of Asia still at America’s 1905 level per head, the
market has cried halt to see where the world is really going. Crude oil
traded at $10 a barrel 10 years ago. It is $135 today, with predictions
(albeit by speculators) that it may go as high as $200 – or down to $60.
At this point in any trade cycle, economics tells us that market imperfection
leads to speculative overshoot. Crude oil sits idle in Asian ports and
outside refineries, waiting to benefit from further price hikes, in much the
same way as dodgy mortgages are traded at the fringes of a bank’s balance
sheet. Prices eventually fall for no other reason than that speculation has
driven them too far up. Oil withheld from sale is released and price brings
demand and supply back towards equilibrium.
As with houses, these wild gyrations in price are partly the result of
government intervention. Britain’s political encouragement of cheap housing
and cheap travel in the 1990s and 2000s stimulated demand, flooded the
market with buyers and duly drove up price.
The Major and Blair governments promoted sprawling car-reliant estates on the
land-lavish pattern of Milton Keynes. A network of distribution warehouses
and fleets of lightly taxed (half-empty) lorries promoted a carbon-rich
retail sector. Cheap air fares induced families to take two or three foreign
holidays a year, holidays that BAA and BA sold to gullible ministers as an
“urgent need”.
This was all stupid, yet it continues. Hazel Blears’s latest capitulation to
the construction lobby has her building another generation of gas-guzzling
rural new towns rather than insist on the “densification” of existing
settlements. Ruth Kelly wants to continue the explosion in leisure travel by
indulging it with new airports and untaxed fuel. She dare not admit that
travel must one day revert to being a luxury.
A lesson here is offered by the recent experience of wheat prices, caused by a
price hysteria in March. The French demanded that the European Union throw
more subsidy at their farmers – confirming my view that a French economist
is a contradiction in terms. As it is, the market has proved
self-correcting. Stocks have been released, marginal land has entered use
and price has fallen (by as much as a third in two months). We will
doubtless soon hear of another “crisis” as plummeting wheat prices
impoverish African farmers.
It is idiotic to wail crisis whenever a boom is inflating or whenever it is
bursting. Price always tends to bring supply and demand into equilibrium, if
left free to do so within an intelligent regulatory framework. Subtleties
and complications surround this principle but, for starters, “That is all
you know, and all ye need to know,” said the poet.
You can abuse the market, distort it, subsidise it or tax it, but it is rooted
in human nature and will prove your master in the end. Far better to add
economics to the core curriculum in every school and make it a qualification
for any who would dare to embark on the profession of government.
simon.jenkins@sunday-times.co.uk
