Streetwise Professor

I vacillate between calling Germans the world’s dumbest smart people or the world’s smartest dumb people. Whichever way you look at it, however, it is abundantly clear that a people that has produced amazing scientists, engineers, philosophers, and writers has a penchant for self-destructive stupidity, e.g., starting world wars that they have no hope of winning that result in national destruction.

Germany’s recent idiocies fortunately have been more contained in their effects, and have been especially concentrated in energy policy that has wreaked havoc in Germany itself. Energiewende. An obsession with renewables in a climate where the wind often stops blowing and sunshine is extremely limited for months at a time. Closing nuclear power plants. Carbon neutrality. Dependence on Russian gas.

The result of these combined acts of self-harm has been very high energy prices. These high prices have exacted a heavy toll on German manufacturing. Which is kind of a bad thing when manufacturing is your comparative advantage.

The resulting economic malaise has spurred the government into action. Prices to high? No problem! Impose price controls!

Because price controls always work, right? Right?

To illustrate just how dumb smart people can be, I give you this:

In this case, high prices are the result of insufficient supply (capacity). Indeed, high prices are a signal of scarce capacity, and provide the incentive to invest in capacity.

Capping prices distorts the signal, and eliminates the incentive to add capacity. Capping prices ensures that new capacity will never materialize, let alone materialize quickly. Meaning that the policy will inevitably have the exact opposite of its intended effect.

The caps might lead to increased industrial production, and thus increased consumption of electricity by manufacturers. But since prices are high because of inadequate capacity, where is the electricity output supposed to come from? It will have to be diverted from other consumers. Who will have to pay a higher price either directly in the form of higher prices, or in the form of reduced quality (e.g., lower reliability), or indirectly via taxes, and through lower consumption.

I’m sure they’ll be pleased. But that assumes that they realize the connection, because the government has every incentive to hide the higher cost. But a higher cost there will be.

Alas, the Germans are not unique in seizing on price controls to combat high prices. (Yeah, Mamdani–I’m looking at you). This despite the fact that at least since the time of Diocletian, the results have been the same–bad. Very bad.

In many cases–and I believe this to be so with Germany today–it is because the high prices complained of are the result of government policies, and rather than admit failure/error and undo the destructive policies, governments seize on a known nostrum that will inevitably fail. But in the meantime the government will have kicked the can down the road and claimed to have done something. The lag between doing something and the reckoning with what has been done gives it time to come up with new excuses, and new bad policies.

So enjoy, Germans. You are like the Delta guys in Animal House, intent on futile and stupid gestures. Except without the charm.