History never repeats itself but, economically, it’s sometimes possible to detect common strands. Take, for example, the following developments: rising inflationary pressures; big increases in energy prices; a war on foreign soil; even bigger increases in energy prices; and a fast-developing cost of living crisis. Sounds familiar? Well, that’s what happened in 1973.
Inflationary pressures had been building for quite some time. Already, a wage-price spiral was emerging. The Yom Kippur War triggered the OPEC oil embargo, designed to punish economically those Western nations seen to be supporting Israel. The oil price quadrupled within a matter of weeks. My parents were issued with petrol ration books (even if, in the event, the coupons were never required). Households were told to stop using “non-essential” appliances, including electric toothbrushes. Frequent power cuts meant that homework was often completed in candlelight. Edward Heath, the then-prime minister, introduced the Three Day Week, possibly the death knell for his time in office.
Policymakers really didn’t know what to do. For some, the increase in oil prices risked rising unemployment and, thus, it was important for policy to shore up demand, most obviously by cutting taxes to reduce the burden of higher energy prices on households and businesses. Others, however, feared that, with inflationary pressures building long before the oil embargo, policy stimulus would pour fuel on an inflationary fire. In truth, the oil shock contributed to both higher unemployment and higher inflation. What later became known as stagflation was, according to the conventional economic theories of the day, simply not possible. Yet the increase in oil prices had left the UK a lot worse off. Policymakers and others often pretended otherwise but there was ultimately no escaping the fact that higher oil prices were a mechanism that redistributed wealth from oil consuming nations to the oil producers.
Of course, not everyone in oil consuming nations saw things that way. Unions were able to strike in order to demand inflation-busting wage increases for their members. Companies were often able to pass on cost increases in the form of higher prices. Others, however, were left behind, including many pensioners, non-unionised workers and those dependent on social benefits.
Today, we are faced with similar dangers. We cannot know how far energy prices will rise but a quick look at a map of gas pipelines from Russia through to Europe provides a visual clue of the risks facing European energy supplies. Inflationary psychology is already more developed than at any other point in the past three decades, suggesting that further increases in energy prices could trigger a much more forceful wage-price spiral. Policymakers are, again, divided as to whether the threat facing our economies is inflationary or recessionary. It may, unfortunately, be both.
There is also, however, a bigger question. The Russian invasion of Ukraine may mark the return of Cold War themes supposedly left behind with the fall of the Berlin Wall in 1989 and the Soviet Union’s collapse two years later. In the early 1990s, there was much talk of a “peace dividend”. Defence budgets would collapse. Companies would head eastwards in search of new workers and new consumers. Outsourcing of production would lower prices. We could all, in effect, live happily ever after.
Well, maybe that profitable peace is drawing to a close. Just this weekend, BP announced it would be exiting from its almost 20 per cent shareholding in Russian energy company Rosneft. Sanctions will doubtless impose huge costs on Russia. Europe’s dependency on Russian gas, however, suggests that the costs of economic disengagement will be felt on both sides. True, with fewer oligarchs able to buy up London property, there may be opportunities for ludicrously rich investors from elsewhere to pick up a bargain or two. For the rest of us, however, the property “crumbs” may be rather more limited.
Indeed, it may be time for a bit of honesty. When it comes to freedom and democracy, there’s no such thing as a free lunch. Sometimes, rightly, there is a price to pay. For many of us, that means higher energy prices, more inflation, higher interest rates and, most importantly, adjusting to a world which no longer seems as safe as it once was.
