Why does bad policy seem to get worse

A little learning is a dangerous thing they say. But it can be fun.

Take history for example.  Followers of Herodotus get to admire the elegance of different theories of historiography.  One of which, surely, is that error is not necessarily self-correcting.  

Or, put in another context, bad policy seems to breed worse policy, until finally disaster brings forth reformation.

If you’re looking for examples, consider what is still (for historical reasons one hopes) referred to as Britain’s energy market.

For a longish spell at the end of the last century, there was a burst of market-led reformism.  Prices were normalised, assets and investment decisions moved to the private sector in a market framework.  Productivity benefited.

A less-obvious benefit was that long-standing issues buried in the framework of regulation – coal mining subsidies and the costs of nuclear decommissioning for example – were surfaced transparently and to some degree even dealt with.

But all good (or even mediocre) things come to an end. Often without a formal announcement.

Still, you don’t need the most acute historical understanding to see how signing up to far-reaching and un-costed decarbonisation targets might open the door to government seeking to dictate more and more energy market outcomes, with less and less regard for the long-term cost.

The long-term costs of turning the UK’s energy producers, buyers and distributors into cost-plus contractors are now emerging.

But in their concern for short-term micro-management, Britain’s politicians and bureaucrats perhaps neglected the one thing which everyone agrees they are responsible for: long-term energy security.  

As is so often the case, it’s the more baroque consumer-facing policy disasters which get the most visibility. The European energy market has a rich crop of those just now, from dependence on Russia to self-induced nuclear shut down.

But the UK’s stands out for the beauty with which consumer policy achieved all the goals it was designed to avoid.

First, a market-loving Conservative government decided to encourage market competition with lots of new suppliers selling energy bought cheap without the bother of long-term contracts.  Because customers might conceivably worry about the security of supply from these dodgy modestly-capitalised outfits, the regulators built in moral hazard by requiring customers to be bailed out by everyone but themselves.

The result, oddly enough in a competitive market, was significant variation in prices. 

That was not to be tolerated so another Conservative government brought in a price cap, to stop suppliers charging more than the market rate.

Funny thing those market rates.  As global prices went up, the new suppliers went bust and the cost of subsidising their customers pushed up the price cap.  

Which had steadily marched from £1200 annually for an average household at the beginning of the year to around £2000 now.  And it is expected to be lifted by the regulator to around £3500 at the end of the week.

We all know what the textbook answer is to market disruption of this kind: free up prices to choke off demand and increase supply; identify and compensate the vulnerable with cash (and be happy when they spend it on something other than heating their home at 22 degrees); and remove the constraints on domestic energy production (avoiding those badly-designed windfall profit taxes).  All of which is most compatible with a moderate – and stable – carbon tax.

But surprisingly few of the serious folk are saying the obvious.

Students of history might observe that growth in the pool of nuttiness does not have a restraining effect.  

Indeed recent coverage in the Financial Times suggest that the nuts are finding encouragement to go further.

So we are not surprised to find that the failings of the contemporary price cap lead to calls for full price control, or better still state allocation of energy to the needy (the Soviet Union developed a working model for this).  Even more wacky, that Britain’s last reliable energy supplier (Norway since you ask) should be morally browbeaten into selling gas below the market price because … they are getting too rich.  Well the Norwegians have for some time been saying that they have a preference for long-term contracts.

As she takes up her new post, Britain’s likely new PM might bear in mind that in addition to being the father of history, Herodotus was also dubbed the father of lies. It could help avoid the attraction of making bad policy worse. It might even reverse the trend.