It Looks Like Putin Cannot Lose – Econlib

Assume that Russian czar Vladimir Putin has an ounce of ideology in him, that is, he is not in the job only for his own selfish interest, but he genuinely thinks that the West is decadent and evil, and that the Russian civilization can save mankind. In that case, he has a good reason to believe that he cannot really lose the war he started in Ukraine.

The reason is that even if his armies lose on the battlefield, as may very well happen, the Russian czar will have, in the meantime, pushed many Western governments to dramatically increase their own Caesarean powers. The European Commission has just put together a plan for redistributing the energy industrys excess profits to consumers and intermediate users of (natural) gasas Russian state crony Gasprom has cut nearly all its sales of that product to Europe. The plan will probably be adopted on September 30 when the Energy ministers meet. (See How the EU Intends to Collect Windfall Profits from Energy Firms, The Economist, September 15, 2022; EU Seeks to Raise $140 Billion Clawing Back Energy Profits, Wall Street Journal, September 14, 2022; and EU Targets 140bn from Windfall Taxes on Energy Companies, Financial Times, September 14, 2022.)

As the plan now stands, the government would seize part of the profits whose pursuit normally lead energy companies to risk investment losses in the hope of making excess profits in the future. It is as if the government capped the excess prices paid to producers, disincentivizing them from producing more. On the other hand, by using the confiscated profits to cap the consumers energy expenditures at what they now spend, it will encourages them to consume more than they would otherwise do. What is needed given the increased scarcity is exactly the contrary: more production now and in the future, and less consumption now. Furthermore, price caps on gas and electricity are already in force in some countries and may be tightened. A real planning mess! (Even the United Kingdom government, which some hoped had left the EU to pursue free-market policies, announced price controls on energy.)

The economic consequences will probably prove disastrous. Governments (the EU government and the national governments) will need correcting interventions in cascades, becoming more dirigiste as they try to solve problems they themselves created. The phenomenon is well known: as central planning fails, arguments are made that more central planning is needed. Energy czars, clean or dirty, will gain power in the bowels of Western Leviathans. Energy markets will be blamed as ripe with market failures.

All these are temporary emergency measures, the EU governments will say. But as usual, once the emergency is over, state power is very unlikely to retreat to its pre-emergency level. It will continue to grow, one emergency after another. (See Robert Higgs, Crisis and Leviathan [Oxford University Press, 1987].)

It is an error to think that the rule of law, individual rights, and political rights can long survive the demise of economic freedom. Milton Friedmans classic Capitalism and Freedom (University of Chicago Press, 1962), published 60 years ago, remains required reading on this issue. In order to protect their subjects from excess prices, politicians and bureaucrats will accumulate excess power over them. The West will go farther down the road to serfdom. It would be surprising if the US government did not follow. The West will be really decadent and evil. Whether by then the old Russian tyrant is still alive or not does not matter from our viewpoint.

I am not arguing that nothing should be done. I am arguing against central planning. The least bad solution in the circumstances (thus, the best one) would be to subsidize those households whose misery is deemed unacceptable or would break the European publics resistance to Putins imperial tyranny; and to let prices and profits play their signaling role of coordination without coercion, like in a free society. (See my recent EconLog post Efficient and Inefficient Rationing.)

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It Looks Like Putin Cannot Lose - Econlib