Australian Politics
Wednesday, January 04, 2023
Price caps: It’s the seductive solution that almost always goes badly
It's brainless in fact. It rapidly WORSENS the cost problem by restricting supply
It clearly came as something of a surprise to Anthony Albanese that one coal-fired power plant in Queensland could receive close to $450m in compensation for the coal price cap. And that’s just for starters. At this rate, taxpayers could end up paying as much to power plants as the financial compensation to low-income households hit by higher electricity prices.
Mind you, economists won’t be surprised because schemes designed to cap prices have a habit of going badly, with all sorts of unexpected and unintended consequences. If that’s not bad enough, the exit arrangements for these schemes are extremely tricky to construct and navigate.
By rights, Treasury strongly should have advised the government against imposing price caps based on the clear theoretical and empirical knowledge that this type of intervention is ultimately ineffective at meeting the policy objective of reducing prices while carrying high costs.
Of course, price caps are a seemingly seductive solution to rising prices. There are plenty of examples where governments have been tempted.
In August 1971, US president Richard Nixon ordered a 90-day freeze on all prices and wages. Initially the move was popular politically, with The New York Times declaring “we unhesitatingly applaud the boldness with which the president has moved”.
In combination with marked volatility in the value of the US dollar – Nixon had abandoned the gold standard at the same time – the freeze resulted in the onset of stagflation (inflation and rising unemployment).
Having said this, price caps never go totally out of fashion, with the city of St Paul, Minnesota recently deciding to impose rent controls to improve housing affordability. Rent increases were capped at 3 per cent a year. (The Greens are in favour of this policy here.) The effect on supply was immediate, with building applications for rental developments falling by more than 85 per cent in a year. Unsurprisingly, building activity soared in the twin city of Minneapolis with no rent controls. As The Wall Street Journal summed it up, “rent control is destructive because it reduces the supply of housing, especially for low-income households”.
Let us return to the policy dilemma faced by the federal government in relation to the sharp rises in the price of electricity and gas forecast in the October budget. Initially this news wasn’t accompanied by much concern, let alone policy relief. But as it dawned on the government leadership team that soaring energy costs would be politically unpopular as well as economically damaging, a view emerged that “something had to be done”.
In addition to encouraging more supply, the most straightforward way to deal with the problem was to provide targeted support for low-income households and affected businesses. To be sure, there is some automatic assistance for these households given the indexation of welfare payments. Moreover, several state governments have implemented schemes to provide electricity price relief for consumers.
The problems faced by Jim Chalmers were twofold: first, where was the money coming from to pay the compensation; and, second, compensation could be potentially inflationary in the context of a close-to-full capacity economy.
My assessment is that these problems were not insurmountable because, by the time the compensation was being rolled out, economic conditions would likely have weakened. Sure, fiscal affordability may have been an issue, but the government’s final policy position will involve substantial additional spending in any case.
With only a weak understanding of how the east coast electricity market operates – and bear in mind that it is complicated and varies from state to state – the federal government took the unexpected decision to impose a short-term price cap on gas of $12 a gigajoule, after which a “reasonable pricing provision” would apply, as well as a price cap on thermal coal of $125 per tonne.
Why a coal price cap was determined as necessary is anyone’s guess. While coal continues to supply most of the electricity on the east coast, it is rarely the price setter. It’s also unclear how many plants were paying more than the cap, with many plants having their own coalmines and with that coal not available for export.
What seems to have driven the policy is the small number of contracts signed by coal plants that referenced international coal prices and the owners of these plants being keen to break these contracts. Given the imprimatur of government legislation and compensation paid to the providers of coal making up the difference between the price cap and the international price, a deal was sealed. There is little doubt that this aspect of the policy will turn out to be very bad deal indeed.
The only rational explanation for a coal price cap was the avoidance of a marked shift to the use of gas to generate electricity. The worry may have been that a gas price cap without a coal price cap would have disproportionately swung the economics to gas production. This could prove problematic in the context of the relative shortage of gas on the east coast plus constraints on its movement.
Of course, this illustrates what a dense thicket is quickly created once a decision is taken to impose price caps. And there are just so many complications that the bureaucrats in Canberra have no knowledge of, including different types of coal, different contractual arrangements of the various plants, transport considerations – the list goes on.
When it comes to the gas price cap, most of the producers could probably have lived with the $12 figure for 12 months or slightly longer. Mind you, there is no compensation for these producers along the lines given to the coalmines. The real kicker in the legislation is the reasonable pricing provisions, which inevitably will have a chilling effect on supply. Indeed, we are already seeing the cancellation of some projects.
Moreover, the wholesale gas market has effectively collapsed as industrial gas users refuse to enter into contracts with the gas producers on the basis that a better deal is around the corner given the government’s intervention.
Without understanding the real reasons behind surging electricity and gas prices – the war in the Ukraine is only part of the story, with the turmoil in global energy markets apparent before then – the government has stumbled into a complicated, expensive and likely ineffective policy approach.
But given the inflammatory language used by federal Industry and Science Minister Ed Husic to demonise the gas industry, it’s hard to see a negotiated solution that could moderate prices while guaranteeing future supply options.
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Immunity from previous infection protects from new Covid strain
Only one in five people who reported an infection in December were known to have had COVID-19 previously, according to the ACT government.
While data is unavailable for most of the country, the numbers from the ACT suggest that past exposure to the disease provides some protection against the prevailing strains.
This contrasts with widely publicised fears that newer COVID-19 subvariants are highly effective at evading the body's immune defences.
The ACT is one of few jurisdictions that reports its reinfection rate, though its outbreaks largely mirrored those in New South Wales and Victoria last year.
About 46 per cent of Australians had already had COVID-19 by June last year, according to an analysis of antibodies in blood samples.
That proportion is almost certainly far higher today. This, combined with the ACT data, suggests a previous infection is strongly associated with avoiding infection during this latest surge.
Infectious diseases specialist Sanjaya Senanayake, an associate professor at the Australian National University, said the ACT data reflected what was happening overseas.
Singapore, for example, was also reporting that about 20 per cent of known new cases were reinfections.
Dr Senanayake said this relatively small number of reinfections showed that immunity — whether from vaccines or past exposure — was working for most people.
"It's hard to differentiate, in a place like Australia, between purely vaccine-induced immunity and infection-induced immunity, because many of us have both been COVID-19-infected and have had [several] vaccines," he said.
"This is hybrid immunity we're seeing.
"And what it tells us is that, even though in laboratory settings … these new subvariants have the potential to evade the immune system, this hybrid immunity is providing good protection."
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Darwin CBD retailer Paul Arnold installs panic room in his store as others report being punched, grabbed by drunken itinerants
"Itinerant" is NT code for "Aboriginal"
Darwin's retailers are warning violent behaviour has increased to the point where their staff are no longer safe and it is driving customers away from the city centre.
In Darwin's central Smith Street shopping mall, food retailers and other business owners have claimed they are losing money hand over fist because drunk itinerants regularly brawl and aggressively demand money from their customers.
"People are scared, they are demanding food and money from my customers, which is very much [affecting] the business, and we don't know where to get help with this problem," one of the mall's food shop owners said.
Ashvin Gill — who manages another business in the mall — said she regularly has to lock her front door after violent, drunk itinerants try to force their way in.
"As the front face of this business, apart from doing my job, I also have to be aware and alert at all times of my own safety as well as my clients, so it can be pretty overwhelming and exhausting" she said.
Ms Gill said when her business had been attacked or she felt under threat, the police have come to assist, but sometimes it took a long time for them to arrive.
"Almost daily, I see police officers but, at the same time, it takes time to call these people. So, it's not an immediate effect of protection," she said.
Retailers report being grabbed, punched
A worker from another shop said she was attacked recently while walking to her car in a car park off the mall after work. "I was actually grabbed. He was drunk, and I just said: 'Let me go! let me go!'
She said she didn't tell police about the attack because being confronted by drunk itinerants on the street and in the shop has become such a regular occurrence.
Nigel manages another store in the mall.
"Two Friday nights ago, I got punched in the mouth because I didn't want someone sitting in my doorway and he objected," he said.
"Two weeks before that I had a drunk guy come in and completely trash the shop. "I've had rocks thrown at my window, rocks thrown at me."
Nigel said the violence was severely damaging the business. "It's scaring the living daylight out of the tourists, they come in and hide in my shop," he said.
Nigel said he felt the problem had escalated well beyond anti-social behaviour to a serious crime situation.
"As retailers, we've seen what's happened in Tennant Creek and Katherine. We've just lost Alice Springs, I fear that's where we're heading if we don't get this under control."
Photographer and Darwin city councillor Paul Arnold has a gallery in the mall. "This is the worst Christmas I've had in the CBD and I've got 15 years I've been in the CBD, people are voting with their feet and not coming into the city," he explained. "The cost to small business is getting out of control."
He said he had installed a lockable panic room in the back of his gallery for staff. "If the shop gets trashed, the shop gets trashed, and they can watch on CCTV and call police."
Calls for more police resources in the CBD
Mr Arnold said that, despite many meetings between retailers, government staff and police, the problem was getting worse.
"We've had public meetings and we hear there is short staffing," he said. "But the answer is that the police need to be keeping our retailers and business owners in the CBD, and patrons, they need to be keeping them safe, and I'm sorry, they're not."
For a few years, the Northern Territory government and Darwin City Council have been paying a private security almost $1 million a year to employ a few staff to patrol the CBD in golf buggies.
Nigel said the security guards were limited in what they could do, as they could not touch nor arrest people.
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Problems in the Queensland government
This will come to be remembered as the year the Queensland Labor Party blew it. It was the year the Palaszczuk government poisoned the political ecosystem and caused pain to innocent bystanders.
When the Premier wasn’t gallivanting on the red carpet, she was frantically covering up one scandal after another.
The year ended on a tragic note with the alleged stabbing murder of Emma Lovell by teenage home invaders, one of whom was out on bail. Palaszczuk was forced to defend her government’s softening of juvenile justice laws.
Labor was especially shamed by failures in Queensland Health.
An enduring memory for me will be a story in the Gold Coast Bulletin about an 89-year-old great-grandmother who waited 7½ hours for an ambulance after falling in her kitchen and breaking her hip and leg.
Shirley Prestipino had to lie on the floor like a wounded animal, her daughter Tina Barber told the paper.
Inept Health Minister Yvette D’Ath was caviller and unconvincing in pretending long waits for emergency care was the new normal.
In a “bombshell” parliamentary hearing, the Opposition successfully pressed bureaucrats into admitting that Queenslanders were waiting up to 15 hours in overcrowded emergency departments.
The LNP also calculated that Queensland’s ambulance crisis was the worst in the country, with more than one in three ambulances routinely ramped outside hospitals.
Ministerial documents D’Ath kept hidden showed ramping was getting worse despite record federal hospital funding. A Right to Information search by the LNP revealed patients were waiting longer in the back of ambulances stuck outside hospitals, despite there being thousands fewer call-outs than the previous year.
D’Ath’s veracity was also under question. The RTI showed the Labor government did not once meet its Code 1A response time target in a three-month period, despite the Health Minister saying these targets were being met. Between June and September, paramedics and patients were ramped for close to 40,000 hours. The worst hospitals for ramping were Logan, Ipswich, PA and QEII.
A patient suffering severe abdominal pain and vomiting died after waiting 9hr 19min for an ambulance. An aged care resident who fell died after an ambulance took more than three hours to arrive, while a woman threatening self-harm took her own life after an ambulance delay of more than two hours.
The year ends with Queensland’s forensic laboratory in a terrible mess. Botched DNA testing saw murderers and rapists go free. An inquiry by Walter Sofronoff KC found the Queensland Health lab was run by a prolific liar who mishandled evidence and compromised thousands of cases.
The failures in the DNA tests have serious ramifications for the criminal justice system. Sofronoff, a retired Supreme Court judge, was “astounded” by what was uncovered and said the failings were “as big as it gets”.
He found several scientists employed at the lab had been clamouring for years about a dangerous lack of scientific integrity. As usual when bad news comes to the surface, the government was slow to act.
A low point in Labor’s political year came with revelations in parliament of interference in the independent watchdog groups. Ousted state archivist Mike Summerell said the government was “toxic”, with parliament misled and reports falsified to hide “bad news”.
Former integrity commissioner Nikola Stepanov had her staff slashed to one person with no legal training while she investigated alleged illegal lobbying. Her computer system was so old it lacked the capacity to update files relating to lobbying. Stepanov’s laptop was seized and the contents “deleted without my knowledge or consent”. In other evidence, she told the House she was referred to as “bitch on a witch hunt”.
Former legal services commissioner Bob Brittan called for a far-reaching inquiry, saying he was bewildered that ethical issues he raised were ignored. Auditor-General Brendan Worrall advocated law changes to bolster his independence amid concerns the state government holds too much power over his office.
There is much unfinished business. Parliament heard Logan city councillors had been involved in a “travesty of justice”. The councillors were forced out of office and unable to run again after charges were made against them that were later found to be unsubstantiated. They are suing. Also charged and thereby ineligible for re-election was Moreton Bay mayor Allan Sutherland. Charges against him were dropped.
Jonathan Horton (then) QC told the parliamentary inquiry that CCC chairman Alan MacSporran had not ensured the CCC acted impartially, independently, and fairly at all times in the Logan case. MacSporran’s appointment was terminated.
We also learned this year that Annastacia Palaszczuk has a tin ear, embarking on a jolly social life at taxpayer expense while middle-aged mortgage men and women were at home tightening the belt.
At the hands of her government, few were spared extra taxes and charges. Learner drivers are forced to pay $186.55 for their licence – seven times more than southern states.
And now resource companies are abandoning Queensland as a direct result of a controversial new royalties scheme introduced by Treasurer Cameron Dick. With Dick at the helm, service has never been worse while debt has never been higher.
Meanwhile, some are still not willing to forgive Palaszczuk for milking Covid-19 for political gain, extending lockdowns at great harm to families and small business.
Peter Beattie was chastised for saying so, but he was right when he said Palaszczuk should be grooming a successor. While she is happy to take the spotlight for good news announcements, she quickly retreats to the shadows when bad news arrives.
I’m convinced she will not survive another year.
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Also see my other blogs. Main ones below:
http://dissectleft.blogspot.com (DISSECTING LEFTISM -- daily)
http://antigreen.blogspot.com (GREENIE WATCH)
http://pcwatch.blogspot.com (POLITICAL CORRECTNESS WATCH)
http://edwatch.blogspot.com (EDUCATION WATCH)
http://snorphty.blogspot.com/ (TONGUE-TIED)
http://jonjayray.com/blogall.html More blogs
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