Liz Truss’ Hail Mary

September 12, 2022

“I will end the U.K.’s short-termist approach to energy supply once and for all,” Liz Truss said last week.

The plan, upon analysis, is the opposite of long-term thinking.

This “solution” baffles me as a conservative. If you were truly a conservative, you would let free market forces fix this problem – short-term pain for long-term healing. However, given the amount of government involvement in the private sector today, that would be political suicide. She chose a plan that Labour would’ve much more likely implemented – throw money at the problem, create more entitlements, more government involvement, thereby kicking the proverbial can down the road (i.e. extreme debt, higher taxes), all in the name of helping the most vulnerable. I mean, £180 billion in new debt, with rising interest rates!

It seems to me Liz Truss understands her precarious position. She comes into power unpopular, not democratically elected, with her party already in hot water for both Boris Johnson’s conduct and their perceived lack of competency in dealing with this record inflation. She’s trying to throw a Hail Mary in order to stay in her position. Saying that, I tend to lean towards being a realist here, rather than blaming the right or left – much of this inflation is out of their control. Sure, the Bank of England and ECB are way behind in raising rates, leading to a large currency devaluing against the dollar, but this inflation is more supply driven (Russian aggression, China lockdowns, supply chain backlogs) than demand driven.

The solution, ironically, lies in a more long-term approach. I’m not saying the government should do nothing, but the scale of intervention in this case is very unwise. Artificial financial engineering and intervention will only create more problems. Saying that, the government can help cushion some potential blows from this, and steer the energy sector towards a sustainable future:

1. To save political face, the government could propose a price cap for the lowest income bracket. Inflation harms them the most, but the rest of the U.K. (which is a wealthy nation) can cope for just one winter. A blanket cap is not a good solution.

2. Truss deserves credit for this - Restarting fossil fuel/nuclear power plants. The government shot themselves in the foot by decommissioning domestic power plants, increasing reliance on energy imports. Saying this, they should also increase incentives for renewable solutions – a two-pronged approach that will help with the transition to a carbon-neutral society.

3. Back in 2009, during America’s own cost of living crisis (caused by different reasons), the government intervened in a brilliant way. In the “Cash for Clunkers” program, the federal government paid automobile dealers between $3,500 and $4,500 each time a customer traded in an older, less fuel-efficient vehicle and purchased a newer, more fuel-efficient vehicle. The rebates were passed on to customers as a purchase incentive[1]. This program targeted low-mid class families, saving them money both immediately and long-term, both in terms of fewer car repairs and a lower gas bill due to a newer, more fuel-efficient car. Conservatives could implement a similar solution by incentivizing the public to:

• Upgrade their boilers. The central gov. can pay for up to 75% of a new, energy-efficient boiler, lowering prices both now and long-term.

• Install floor heating, double-panned windows, thermal blinds – in a similar way, the gov. incentivizes households upgrade these parts. It is a less energy consuming way to heat a home. This will take longer to implement, but the long-term benefits would be great.

• Go on an information offensive: This would be a multi-pronged approach, from giving households useful tips on how to keep their homes warm, to placing the blame on factors outside their control (hostile public sentiment towards Russia is high, could be politically savvy), encourage the public to do their best to conserve energy themselves in a variety of ways.

The markets sure haven’t reacted in a kind way, nor many in her own party. Let’s hope this winter is milder and windier than expected, otherwise the future bill will be too large.

[1] https://www.nber.org/digest/feb11/cash-clunkers-had-modest-and-short-lived-effects#:~:text=Under%20the%20%242.85%20billion%20%22Cash,customers%20as%20a%20purchase%20incentive.