Hello, and welcome to another episode of the Odd Lots podcast.
I'm Joe Wisntal and I'm Tracy Alloway. Tracy, we've talked a lot, obviously about the big energy crunch in Europe this year, in Germany in particular, but we haven't really talked so much about, you know, what governments are trying to do to ameliorate some of the pain, the specific policy options, right, and you know, I think there seems to be an acceptance or widespread view that at least not everyone can be directly exposed to sort of the
market rate of energy. It's just too much, it's too damaging to a lot of households, particularly lower income households. But even like some of the surges, and just like costs of heating for this year, I mean extraordinary increasing costs expected absolutely all the oh. I was talking to my mother recently and she's over in Austria and she says, because the weather has been warmer, she hasn't had to
turn up the heat just yet. So the weather is bailing some people out so far, but that's not going to be the case all winter. And as you mentioned, for a lot of low income households, this is just an extraordinary burden to be buried. The weather really doesn't matter a lot. It's interesting, you know. Actually I think there's the Dutch spot rates briefly when negative last month,
but it doesn't necessarily mean the crisis is over. It's just a function of like how much supply or how much storage capacity there is right now and some warmer weather. And you can have these situations, and you particularly get them with gas or other forms of energy that can't be stored indefinitely. One day you could have negative prices but still be facing a very big potential shortfall and
higher costs for everyone exactly. And one of the policy options that is on the table and looks like it's currently making its way through various corners of the moment, it might even be decided by the time that we actually release this episode. We're recording this on November one. It is a price cap on gas, or in German a gas price bruns, which I believe translates to my German is terrible, especially for someone who's half Austrian. But I think it's like gas price breaks or gas price stopic.
This is the great thing about German policy. Every time there's a new decision, you get a new word to play around with. It's also a new word that is kind of almost English sounding, and then something else, and so you can like sort of figure it out anyway, a little bit of a sidetrack. But yes, there is this proposal in Germany to subsidize a significant chunk of
gas consumption for households and businesses. But obviously that raises all sorts of questions, and you know, in particular, if there's a fundamental shortage of the underlying commodity, if there's a fundamental scarcity of the molecules. You know, it's one thing to say, Okay, we're going to subsidize the price, but that does necessarily solve the problem of yes, but do we have adequate gas? Right, And of course, this was one of the big criticisms of the Biden administration's
decision to release oil from these strategic petroleum reserve. It was that you are in effect subsidizing the price and you're not actually bringing down demand at a time when the commodity is more scarce. So this is an interesting
alternative policy here. So the other aspect of this, which is really interesting is that economists as a class seem to really hate price controls when it comes to inflation, when it comes to high prices, you know, expand supply side capacity, you know, let the market do its thing. Let let high prices be the cure for high prices, or let the central bank try to reduce demand to
bring things into balance. When the subject of price controls comes up, economists get like extremely the majority of them get extremely anxious. And yet there is this political reality that on some level, it appears governments in Europe and I guess in the US have some role to lay
in ameliorating severe acute price shocks. People have strong opinions when it comes to price controls, but as you mentioned, there is a history of politicians actually using them even here in the US, which is something that came up
very briefly on that previous episode with Josh Younger. All Right, so we're going to be diving more into a potential plan in Germany, specifically to deal with the high price of gas this winter, and we're gonna be speaking with someone, actually, we're going to be speaking to a past guest and someone who knows a lot about this topic and is directly involved in this. We're gonna be speaking to Isabella Vabor.
She's a professor of economics at UMS, a fellow at the Burgruin Institute, and she has been a member of the Independent Commission for Natural Gas and Heating in Germany working on this proposal. So, Isabella, thank you so much for coming back on the podcast. Thanks so much for having me. You've written about I'm gonna just jump into
this right away. I remember you wrote a column that I think I thought it was pretty inoffensive last year in The Guardian about well, maybe we should talk more about price controls as a solution to inflation, and like the economics, you know, the sort of like the very serious economist commentators, they just totally flipped out that's right.
I guess that's not a question. And I don't know, I'm like jumping right into like when you know, I get really messy online, but I'm just I'm setting that up. I'm just getting it right out. There's an empathetic observation. Was an empathetic observation, Thank you very much. Empathy in this regard is much wack up. But why do I mean,
what is it about price controls that causes people? Causes sort of like the mainstream economic commentary to really flip out, And why do you think, like fundamentally like people should be more open to them as a tool to address inflation.
What are they all getting wrong? Yeah, maybe it's a good idea to kind of take a step back and try to summarize what I right to say in that back in December, Basically, the way I saw the inflation debate going was that there was a confrontation between team Transitory, who was kind of hoping for inflation to be gone sooner or later and therefore there was not much urgency to act, and kind of the team let's raise interest
rates as fast as possible. And I was basically asking suggesting that there was a third possibility, which is, instead of like kind of risking to push down the whole economy by raising rates or sitting there invading and for hoping that inflation would go away, that there is a history of surgical interventions trying to kind of stabilize the
prices that drive inflation in the first paid place. So I was trying to kind of invoke this history to bring back this this perspective of saying, well, if there are specific prices that are shooting up in extreme ways, maybe there's something that we can do about these specific prices without trying to recommend some sort of wartime full that at, a price control policy or any anything like it.
Do your question why it triggers economists so much. I think it's basically the case that in most economic models, if your prices aren't moving freely anymore, your model no longer works. So in some sense, the free movement of prices is really at the core of most of economic modeling and thinking, and therefore it kind of is is is a total trigger point for economists who I used to that as the main mechanism of coordinating an economy. Many ways, economists think about the market as the movement
of prices. If you think of the Machellian cross, then what matters there is the price adjustment, right, So the market in some sense is the price adjustment. You don't even know like how big the firms are on the Machellian cross, or how how small or how many and so on, but you do know how the price is moving. So can you talk to us a little bit more about specific situations where price controls might make some sense?
Because you brought up the sort of wartime analogy, And I think when a lot of people hear price control maybe not a lot of people, but some people when they hear price controls will think back to, for instance, World War two and the price controls that were implemented there as part of America's wartime effort. And that was
for a very specific situation. But how would that apply to our current economic environment or what is it that you're seeing in the current economic environment where these would make some sense. So the historical analogy that I used in this piece was in fact the transition from a war economy to a post war economy, which was a process that I had studied for my book How China Escapes Struck Therapy, because the analogy of a transition from a planned war economy to a market post war economy
was very important in the China these context. Now in late one, as you might remember, the Council of Economic Advice is actually invoked the same transition as kind of the closest analogy for understanding the inflation that occurred in the context of the transition to a post shutdown economy.
So what happens in such a moment of transition is that you have a very rapid structural shift where you want firms to very quickly change their production behavior, which creates short run scarcities and which creates a price shock.
So in the context of the transition from a war to a post war economy, you can think of factories that first produce tanks and now as opposed to produce cars, and then there's an interim period in which basically this adjustment is happening, and if demand is sufficiently strong, then this kind of bottleneck resides in an increase in prices in ways in which these prices would not root up
if you didn't have this in elasticity of supply. At the time, in the transition from a war to a postwar economy, America's most established and most famous, even some of the most conservative economies were arguing that would be useful to maintain selective price controls in the places where supply was very in elastic and demand relatively strong in order to prevent these prices from shooting up, which would then reset in a situation where all the purchasing power
would be absorbed by these price hikes, which would then in the next round result in possibly a very sharp downturn. So you would have a short inflationary boom followed by a sharp deflationary downtown turn, which had in fact happened
after the First World War. So therefore this kind of stood as a warning at this post war moment in actual history, the controls were pulled pretty much overnight, and there was a very sharp increase in inflation that coincided with a very sharp increase in profits, and then a short downturn which was however, by far not as bad as after the First World War. And there are different reasons that we can discuss. One of them might be
the war in Korea. But so this is the argument that basically, if you have bottomnecks and you have prices shooting up because supply can simply not adjust in the in this immediate run to demand because of these physical challenges of of changing production structures, then a price civilization could be useful not only to prevent inflation, but also
to prevent such sharp boom bust cycles. When you sort of kicked off this whole breujaha at the end of last year, you know, war was kind of an analogy or for thinking about historical patterns, And then not long afterwards, there's the start of an actual war in Europe, and we've seen, of course it's come down a bit, but we saw this massive price shock for energy over the
summer in Europe and including in Germany. Before we get to your work on this commission, how would you just sort of summarize the challenge or the crisis in Germany, Like if someone was asking you what happened, why did gas prices surge so much? Or what are the current economic conditions of Europe, how do you sort of diagnose
the problem? I mean, first of all, we have to see that already in late one gas prices in Europe were very high, right in Germany in particular, they were so high that, as a matter of fact, the policy proposal that I wrote with a colleagues sebas Anderlin came out still before the war because already that and we were estimating that given the enormous increase in wholesale gas prices, that would translate into around two percent increase in inflation
if it was handed down into retail gas prices. So even before the war, there was a gas price crisis, if you want so, But of course it has become much much more severe now. To answer your question, I think that basically, gas is a good that is so essential that all consumers that happen to be heating with gas cannot do without gas. And at the same time, firms that have technologies that rely on gas have to some degree the possibility to do fewer switch, but that
is relatively limited or at least not complete. So that again, also in the case of firms, you have a really great dependence on this specific source of energy. So if the price shoots up, you basically have a pretty inelastic demand response, not completely in elastic, but relatively inelastic up
to a point. So this kind of creates a very dramatic situation where on the household side, as the representatives of landlords we're pointing out as a matter of fact, we have a situation where they are warning of like kind of nass private insolvency because people can simply not pay their gas bits if the government wasn't going to step in. And on the part of firms and industries, Germany is of course an economy that is hugely reliant
on industrial production. For a rich country, it's around twenty three percent of of GDP that comes from from industry and manufacturing, so that is that is pretty big, like given given that it's a rich that is a rich economy, So this um the whole industrial part of the economy under enormous stress if there is both a looming danger
of actual physical gas strategies and a price shock. So, since you mentioned corporate profit taking, which is a hot topic in many places around the world, you know in Europe and in the US as well, can you walk us through the practical differences between a price cap on something versus something like a windfall tax on profits, Like what are the different effects that those would have on
the economy. Maybe, if I may, I would like to first briefly comment on why I think profits can go up in unusual ways in in in the kind of situations that we are talking about. So if there is a bottomneck that typically affects a whole sector or at least the whole line of production, which means that other competitors in the market, where that all other competitors have the same kind of issues and keeping their supply chain running.
So if you are Honda and I'm Toyota, we both know that we have a computer chip shortage and that this means that we can only produce whatever at whatever level we can produce. So in this kind of situation, if I was to increase my prices, you could not easily take away my market share in the ways in which you could um in normal times. Right in normal times, if I was to increase my prices, then you would say, oh, wonderful. Um, now they are going to lose part of their market
here because their stuff is getting more expensive. So let's expand our production. But that kind of easy expansion of production is not possible because of the bottom neck that affects all players in the market equally. So in that kind of situation, then both companies that are direct competitors can increase prices in base that would be very harmful
to their position in the market in normal times. So this means that prices suddenly can be hiked in ways where they are no longer controlled by competition, in the ways in which we would expect them to be now. The difference between a price cap and a windfall profit taxes. I think that the price cap basically says that a firm can no longer charge a price that goes above a certain level or that represents an increase by X
over a certain historical date. Whereas for the windfall profit, you would need to look at what are the profits that the firm actually made, and then you would want to kind of tax that back. Right, So, um, in the first case, you kind of don't let the windfall profit to emerge on the market, and in the second case, you would like first have the windfall profits happen and
then you want to tax them away. And then you of course hope that firms, being aware of wind for profit taxes, would kind of anticipate it these been for profit taxes, and therefore would not hike prices quite in the way as they would without it in for profit tax But I'm actually thinking of these two policies as
being complementary along the value chain. So I mean, clearly, we are not gonna impose price caps um in in very many areas of the economy, if simply because we don't even have the bureaucratic capacity to do that in a reasonable way. But in Europe, and as by now also fellow economists like Paul Brookman and Jose stick Let's have been arguing the energy crisis is so severe that
various forms of price caps in the energy sector. Of course on the table now if you do some form of price cap, and we can talk about the details of the German case later. I suppose if you do some form of price cap on let's say gas, ideally you want that this reduction and cost for firms is somehow translated into a reduction or at least stabilization of the prices or the things that these firms are producing.
Right So here then there could be a situation where an energy price cap could be complementary with e wind for profit tax in the sense that which wouldn't even really be a tax, because the price caps that we are talking about in Europe tend to be fiscal price caps in the sense that the government is actually paying
to bring down the price. And you could add a conditionality of saying, if the firm that God subsidized price, that God like a subsidy that enabled it to have access to add at a lower price, should not in the next round really win for profits. If it does, it would have to pay back part of the subsidy
or the whole subsidy that it received. So in that kind of scenario you would have actually complementarity between a price gap on energy as an extremely important input and a conditionality on for the access to that subsidized gas that would follow event fall tax kind of logic. So let's get to the German situation specifically. What don't you just tell us though, what was or what I guess it just wrapped up? What was the Independent Commission for
Natural Gas and Heating? What was it tasked to do? Who tested? How did you? How did you become a member of this group? Why do you just sort of before we get even into the details too much, why don't you just sort of talk about your experience how it came about. So basically, I have been arguing that we have to think about a form of nonlinear pricing
for natural gas since earlier this year. Um so I've been kind of in conversation with economists in Germany on this issue for a while, and the government had been trying out all sorts of policies in the last months, including transfers and so I mean like transfers of money and thereious other forms of policies in the current crisis.
But eventually they realized that the gap, the pressure that comes from the gas price shock is so intense that they had to do something that directly tackled this price shock.
So they set up a commission in late September that has been called upon by the Chances Office in the Ministry of Economic Affairs, and we received the mandate to develop a policy that would basically be this gas price break, which which is this funny German word that you already mentioned earlier, So basically literal German is sometimes I really do put the brakes on gas prices. Makes sense. There's also this strange fashion around using break for so many
things like that that break and so on. But anyways,
that's that's a different topic. So um, so they set up this commission there were six other economists, myself and various representatives from industry, from utility companies, unions, environmental groups like a charity organization and so on, to kind of be an independent commission to try to come up with a policy package that could kind of square the circle of having at the same time a crisis of actual physical gas shotage and a crisis of inflation and skyrocketing
energy prices on top of what looks more and more like a recession. So one of the criticisms of the proposal has been that maybe this will keep even more pressure on utility suppliers who are already pretty strained. I think Uniper, for instance, I think it's on course to be nationalized by the end of the year. Or but would you say to that criticism, like what is the actual impact that price caps would have on energy suppliers
or gas suppliers. Yeah, interesting questions. So we had four representatives of utility companies on the Commission and one of the elements of the policy package is actually to provide more liquidity to these companies. And the way that the gas price breaks an impossible word in English, um we work is that basically, the utility providers they get funds from the government which will allow them to give a
rebate on gas. It's four households and firms, and it's it's a non linear pricing scheme with the savings bonus. And I'm happy to explain the technically details. Feel free to our Our listeners love technical details, so feel free to dive into that. Yeah. So, the the basic philosophy is to say, there's one part of gas demand that is pretty in elastic, and there's another part of gas
ement that is considerably more elastic. So therefore there's a quota that everybody gets with a price that is lower than the market price, and that quota for the household sector and all the firms that kind of have a gas account like you and I, is such that this quota is based on eighty percent of your estimated use and for these you will pay twelve cents, and if you use more than these eight percent, then you will have to pay whatever your retail price is on your
gas contract. Now, if you managed to use less than eighty percent, there's actually this additional feature of this policy, which is that you will still have your rebate. So this means that if you use less your the price will actually fall because your rebate may be larger proportional
um to your usage. So this is to say that there's a savings bonus if you if you use less than So that's the policy on the kind of what we call the SLP customers, so those with like a non industrial gas account, and on the side of industry, it's kind of a similar scheme, but the price would be seventh cents because it's like taxes and so on are not accounted for on the industry side, and the
quota would be seventy instead of eight. And then there has been like a lot of debate whether industry firms can or cannot trade the gas that they get at
this discounted price in the market. And this has probably been one of the most hotly debated issues and still is one of the most hotly debated issues because from a pure like let's have price signals rain all the way through a perspective, I will be desirable to have firms trade gas in the market from the perspective of kind of price stability and also not encouraging firms to kind of switch from producing whatever they are producing too getting cheap gas and selling it on the market and
kind of using this as their business model perspective, There's like trading of subsidized gas on the market is not a very desirable feature. The way that the Commission report stands as of now is that it actually does allow for industrial firms to sell the subsidized gas on the market.
I'm I'm a bit skeptical about this as a kind of general rule, I can see a use for having a reverse auction or or a model where basically the state sets up a marketplace to buy back some part of this gas in a defined volume, but as a kind of a general policy see for all industrial firms in Germany to have this like basically a minimum margin that is defined by whatever a firm can make by
selling the subsidized gas on the market. I think this sets somewhat problematic incentives because it seems likely that this will be um in particular attractive for firms that are at the beginning of the value chain and that are very gas intensive and have relatively low margins, which could then create all sorts of cascading effects like if let's say, producers of of of basic methods or basic chemical components decided to buy and sell gas instead, then this will
of course create or not necessarily create, but make it shortage more severe, which could then have all sorts of ripple effects along the supply chain. So on my mind, it would be more desirable to have a policy that kind of spreads the burden of saving gas more really right, So in the theory, the fear of allowing sort of like almost like a cap and trade system, but for
the gas. Subsidized gas is an industry that's low margin, rather than producing their price, rather than producing the goods that other players on the value chain might need, might just sell at a substantial markup there discounted gas. Can you just talk a little bit more? I mean, look, obviously the issue with something like dealing with high gas prices is yes, the price is high, but there's also you know, the whole issue is there's a scarcity of
the commodity itself. Talk to a little bit more about the rationing effect of this plan, like how does it sort of create an incentive to perhaps curtail use or discourage use in less economic ways, and then talk a little bit more about the redistributive effects, because you know, in terms of subsidizing households, etcetera, it seems sort of clear that, Okay, you want to sort of make sure that somehow hold don't freeze, that the poorest households in
particular can afford to keep the heat on over the winter. But at the same time, if you subsidize everyone, you still run into the same capacity shortfall. Yeah. Absolutely, First of all, there is still a strong savings incentive bid into this scheme. Right above, you have the extremely high market prices. Twelve cents is still almost twice as much as people would have been paying in twenty one, and price one we're already very high so to have cents
should still have a lot of savings incentives. But on top of it, we have this savings bonus scheme which ensures that from a like price incentive perspective, there's still a lot of incentive to save gas. Then we have like kind of come up with a number of complementary measures like information campaigns, like advisory services and how households
can actually save gas and so on. But there is a big question of distribution here because of course, I mean you use the word ration, So what we are doing here in sometimes it's rationing price capped gas, right, because everybody gets a quota of price capped gas, which is obviously desirable because it's cheaper. So it's not a physical ration, but it's a kind of a ration for
an entitlement to price capped gas. Now, the rule that we are using is based on the consumption estimate that every household or firm would have based on their utility providers estimates. This, of course has the big difficulty from the perspective of what are the distribution outcomes of this policy.
That if you used very little gas, you would get a small quota, and if you used a lot you would get a big quota, right, because obviously eight percent of a small estimate is much less than eighty percent of a big gess that and your estimate would be somehow based on your past consumption and what kind of house you're living in and so on. Now, this is an issue especially for the households that are using like huge amounts of energy, which can be very rich, households
that have facilities like pools and so on. So one of the demands that the actually are debating right now is whether there could be kind of an upperbound to this eight percent rule, so that you get but not more than let's say twenty th kid what hours or or something like that. This then goes into the whole question of data availability on the part of utility providers, which I'm happy to go into detail if this is
of interest. But basically, the situation is in Germany that a utility provider does not know whether behind any utility bill is like one huge villa or an apartment building with one fifty flats, or a business. So therefore, in order to have such an upper bound, we would need a better data base, which I think would be desirable in any case, because if we are talking about blooming
gas shortages. It would be good to know whether there's one hundred households or five households behind any one gas account. But yeah, so there is this whole big question of what are the distributional implications. I think one way of chatifying what we are doing is to say this policy is taking off the like extreme spikes in gas prices, So it's not like trying to do social policy or transfers or whatever, but it's like taking off the spikes in the price of gas, which is the result of
the war in Ukraine. So therefore it doesn't really make sense that whoever happens to have a gas account is the one who is paying for the cost of war, compared to someone who happens to have an oil heating system or or whatever else they might have. So this is I think, one way of kind of chastifying this approach,
But of course there are still issues of distribution. We are also recommending for the kind of implicit subsidy that comes from having access to this price kept gas to be taxed, so that part of this distributional issue is kind of elevated by then the taxing whatever the rebate is in the next round. We have also set up kind of or we have recommended to set up a fund for households in need where they could get additional
support with their heating bits. So one question I had is if you impose price controls, what what is the trigger or the necessary conditions for the price controls to revert or be taken off for gas price um gas pedals to come into effect. I don't know, like when
you hit the gas on gas prices again. Yeah, maybe I should say that there is a controversy amongst the economists whether we should be calling this a price control a price cap, and kind of this whole language of gas price break is a way of circumventing that discussion because at the end of the day, that this policy is not a traditional price control. The utility providers are not being simply ordered to charge lower prices, but there asked to charge lower prices and are being paid in
return rates. So it's kind of a fiscally funded price cap if this makes sense. And then there are all these other features that I've talked about. But back to
your question. So, the way that we have set the prices in the gas price break is such that if you look at the average price that would emerge from this at twelve cents and twenty percent at an average of around twenty cents retail price, you get a price of around fourteen cents, which is the price that, based on the best gases that we had in the room, would be the kind of new normal once this gas crisis is no longer a severe as it is right now.
So the idea is that we are not kind of stabilizing prices back to a pre crisis level, but we are stabilizing prices on a level that is consistent with what we expect the market prices to be in about two years time. This means that, at least in theory, if these guesses aren't completely off, which is of course totally possible, firms that would be taking decisions based on these prices that they have now should also be viable in the future because similar kind of market prices should
emerge in the future. Households should not experience another price shock when the gas price break stops. Stepping on the brake on gas prices. We're laboring this analogy a bit too much. Aren't the break of the break? You know? I just want to I guess the devil's advocate for a second. But when we talk about price cabs, or we talk about our ceilings or breaks or windfall profit taxes, you know, for ten years, the energy business was not a particularly good business to be in, and a lot
of firms did not have much pricing power. The stocks did not do too well, poor profits. There are a lot of gas companies that went out of business, or exploration companies and so forth. And then, of course in the middle of COVID and then in this period the fortunes turned around. But part of me wonder as well, it's like, okay, the shareholders of these companies suffered for you know, underperformed for years and years, and then finally there's a surge, and then the surge happens in prices.
The windfall profit comes after like ten years or longer, and suddenly politicians say we're gonna tax it away. And so I kind of feel when I look at this, it's like, well, there's, yes, this year or maybe over the last two years, there's been these extraordinary profits, but it's not taking into account the entire long cycle, which saw many years of underperformance. Why shouldn't the shareholders are the investors in these industries be compensated for the sort
of other part of the goal, so to speak. Why do they only get the profits clipped and not the downside clip? I mean, in the German case, there's none of that happening, right because all the I mean the price cap is financed by public money. So therefore, basically it wouldn't affect profits on the part of utility providers
and name anyway. But of course we also don't have a lot of local sources of possive fuels, right, So therefore this whole debate that's happening in other countries of like, basically taxing the fossil fuel industry to then finance fiscal price caps is not really an option here. But to go back to your question, I kind of have a suspicion which I would be interested, in fact, to hear what you think about if this is a possibility. But um,
let's let me put it differently. I mean, one way of thinking about the price hikes that we have seen in the fossil fuel industry is to say that a lot of oil production capacity went off the grid during the pandemic, where you kind of had, of course, this collapse in demand which allowed companies to downsize their production in ways in which they would not downsize their production
if there wasn't such a gigantic demand shock right. And then after the pandemic, yes, some production has returned to the grid, but poss a few companies, based on their earning scores, have been quite explicit that they are taking a discipline approach to investment, and what they saw happening is basically that prices skyrocketed and costs were down because
they had shut down the most costly production facilities. Obviously, if you have to choose which production line to shut down, you would shut down the one that is most costly and such at least profitable. Right. This then means that you have a situation where this constraint supply actually suddenly
becomes extraordinarily profitable. And this is of course a problem because I mean, we would expect, based on echon one oh one, that if prices go up, supply would go up, right, But now we have a situation where actually prices go up and supply doesn't really go up by as much.
Because firms see that prices go up, profits go up, and that's actually great because they are making record profits that are in some cases higher than they have ever been in the long history of these companies, right, So why would anyone choose to produce more to bring the prices down into earn less. So that is kind of the conundrum that we find ourselves, and I think, yeah, that definitely sounds like an accurate characterization of the existing conundrum.
Isabelle of Favor, It's so fascinating to talk to you because it's so it's such a treat to talk to someone who's such a deep background in theory, but then also in the position of working on putting these things, making the policy. Yeah, and so hearing you talk about the sort of like practical realities of how do you ameliorate the pain while you know, having some rationing effect and so forth, really fascinating. Really appreciate you coming back on the show. Thanks so much for having me. This
is a lot of fun. There's a lot of fun. I really appreciate you taking the time, and I'm looking forward to having this one coming out. Thanks Isabella. That was great, Tracy, I really liked that episode. I mean, I guess sort of for the reason we're just talking about, because it is rare for something that's like this sort of theoretical theoretical topic. Economists often, you know, they're often do theory and not too much practice, and then it's like, okay,
let's put it into practice. Let's that's what we can do. Yeah. I was also kind of just thinking about how quickly things have changed between the time that Isabella published that op ed and now it seems like things that were one unthinkable are certainly being thought through and maybe even implemented. There's so many funny little details that she talked about. You know. The the idea of like making a market in the subsidized gas is very funny to me because
you know, it's like a, right, here's the idea. We wanted to just sort of put this ceiling of some sort on gas. But of course, economists, you know, I think there's a certain type of economistry. His first thought is like, great, let's have an auction mechanism for the subsidized gas. It immediately goes back to the market mechanism for you know, somewhere somewhere is like proposing a Dutch auction. Yeah, exactly. It's immediately it's like, well, should should firms be forced
to actually use the subsidized gas. What if they can sell up more profitably to another firm that needs more subsidized gas because their margins are higher. It's so funny, how like it always like sort of like well like seep into these debates. Yeah. The other thing I thought was interesting was just the discussion of historical price controls and also why you can see prices spike during a
supply constrained environment. And I know, you know, intuitively it seems kind of obvious, but this idea that suddenly everyone has pricing power at the same time because of scarcity and the thing that they're producing. Like again, I guess it's obvious, but it kind of crystallizes that point for me. Yeah, absolutely, you know. And also look, and I was really interested to hear about how there's still has to be some
rationing mechanism otherwise what are we doing here? Because the issue is there is a fundamental as you said, there's a fundamental scarcity of the the natural gas molecules themselves.
So how do you get that balance where yes, you're humiliorating some of the pain, particularly for smaller households, etcetera, but also trying to sort of like recreate some sort of scarcity mechanism, and it was interesting even that she was talking about a utility level data, which is people get really anxious about that, and it's come up in some of our conversations with Jigger Shaw, for example, about well,
what if we just had more data about use? But then people get really anxious about privacy, so they're just sort of all things kind of crazy when you think about it, that we're trying to solve these problems without necessarily having a lot of granular data or as much granular data as we could, right, because if we had the data, you think, Okay, well, yeah, like we're not. We're not going to give the subsidy to people with pools,
right because pools aren't as essential. Heating a pool isn't as essential as cooking, or heating a pool isn't as essential as keeping a house warm. But you know, we don't have that data. Shall we leave it there? Let's leave it there. Okay. This has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Wisn't Though. You can follow me on Twitter at the Stalwart. Follow
our guest Isabella Vabor. She's at Isabella M. Vabor. Follow our producers Dash Bennett at dashbot and Kermen Rodriguez at Carmen Arman, and follow all of our podcasts at Bloomberg under the handle at podcasts. And for more odd Lots content, check out Bloomberg dot com slash odd louds. Tracy and I keep a blog there where we talk a lot about these same issues. We post our transcripts, and once a week we post a newsletter where we discussed more of this stuff. You can sign up for that at
Bloomberg dot com slash odd Lots. Thanks for listening