Is rationing the solution to the cost of living crisis?

The cost of living crisis will get worse and threatens to push millions of people into poverty; rationing may be the answer.

Supply and demand. Economics is about supply and demand. When demand rises and supply falls, prices go up.

But economics also has this concept called equilibrium and a lot of maths.

Supply always equals demand

In a fully operating capitalist economy, supply always equals demand—price changes to balance the two sides of the equation. Only when social pressures get in the way does this change. For example, during the early days of Covid, toilet paper shortages were caused because social pressure stopped prices from rising to create a balance between supply and demand. In a way, we had a strange form of rationing. Not rationing enforced by government policy but instead enforced by the rules of society. Any company that hiked up the price of toilet paper would have been pilloried in the court of public perception.

True inflation is a persistent rise in prices

Price rises and inflation are not the same things; at least they weren’t when I studied economics. Instead, I was told that inflation was a persistent rise in prices.

Inflation isn’t caused by a sudden shortage, but it can be caused when a sudden shortage leads to higher prices, which leads to higher wages, which leads to higher prices, etcetera.

Demand equals supply. If supply falls, but demand stays the same, the price goes up. If demand is unaffected despite this price rise, the price increases again.

The inflation danger right now is not shortages caused by supply chain issues; it is the risk that monetary policy has so loaded the economic system that there is too much slack and wages rise, leading to an increase in demand, creating an upwards circle.

It is also about maths

Remember, too; inflation is a relative measure. It compares prices with prices a year ago. If prices double one year and stay the same the next year, there is no inflation in year two.

The oil price has trebled in two years. This is leading to higher prices.

But for the oil price to continue to exert upwards pressure at a similar pace, it would need the treble again over the next two years. I don’t think this is very likely.

We need higher wages, but that will be disastrous

Many people question the logic of increasing interest rates, which decreases disposable income, at a time when our disposable income is under pressure anyway.

But the point about higher interest rates is to try and suck money out of the economy and stop higher wages.

The result will surely be a recession.

Why rationing has to be considered

But the above circumstances will be disastrous for people who were already struggling to make ends meet even before the crisis.

Take, for example, a paid carer. This is an essential job — without carers, society may be torn apart. But this is typically a minimum or, at best, near-minimum wage job. Moreover, higher fuel, energy and rent costs may push carers into extreme poverty.

If wages go up, this will lead to a second-round inflation effect.

For some, the only possible way to avoid absolute poverty is for those who are not in danger of falling into poverty to bear more of the burden of higher costs.

The answer is to ration energy and food. That way, demand growth can be kept in check without creating poverty

Temporary

I am not advocating this as s long-term solution.

Providing we avoid an upwards spiral inflation cycle with higher wages leading to higher costs leading to higher wages, there are extremely good reasons to think prices will fall back in time.

As we shift to renewables and electric vehicles, oil demand will crash, and in any case, energy bills will fall.

Supply chain issues will be solved; food shortages will not persist (providing climate change doesn’t change the equation).

And later this decade, autonomous cars will have a massive deflation effect.

But for the next 18 months, rationing might be the only answer.

And I will leave you to consider whether this should be rationing within a country or globally because it is clear that later this year and in 2023, we will tragically see starvation rear its ugly head across the world’s poorest countries.