The Return Of Rationing

The Difficult Decisions Needed In An Age Of Austerity

Jun 23rd 2011
Courtesy Of "The Economist"

POLICYMAKERS must juggle three priorities when offering a public service: coverage, cost and choice. They almost always have to sacrifice at least one of the three. As austerity bites, this equation is going to lead to very tricky decisions.

Health is an area where the trilemma clearly applies. Britain’s National Health Service offers universal coverage but as a result has to limit patient choice in order to control the costs. The American health system historically gave a high priority to patient choice at the price of ballooning costs and the exclusion of the uninsured from the system. Having increased coverage, the Obama reforms will have to restrict choice if they are to control costs.

Over the past 40 years cost has been less of a constraint in all areas of public policy than it might have been. At times of crisis governments without exchange-rate targets have been able to let their currency, rather than the real economy, take the strain. Steady growth has allowed governments to expand the services they offer. Once granted, a service or benefit is hard to remove because recipients campaign for its retention.

Pensions are a case in point. Governments have promised generous future benefits without recognising the full cost upfront. The demographic bulge caused by the baby-boomers helped at first: when the promises were made, the ratio of workers to retirees was high.

Now that the boomers themselves are retiring, the cost is becoming clear. On the issue of coverage, governments can hardly remove pension rights altogether. So they are having to ration the benefits. Rather than retiring earlier than private-sector employees and having their pensions linked to their final salaries, British public-sector workers are being asked to retire later, have their pensions based on a career average and enjoy less generous inflation-linking. This has provoked unions to call strikes for June 30th.

Britain is still in the relatively fortunate position of having an independent monetary policy and the ability to borrow from the markets in its own currency at relatively low rates. But countries in the euro zone are facing more painful options. In a world where cost is the priority, either coverage or choice has to be restricted.

One option is to ration cash itself. As Argentina battled to avoid default in 2001, citizens were restricted in the amount of cash they could withdraw from their bank accounts. The corralito, as this measure was known, stayed in place even after default. Iceland introduced capital controls in the wake of its financial crisis, imposing a limit on foreign-exchange transactions of 350,000 kronur (about $3,000) for residents planning to travel abroad. A chaotic Greek default would require capital controls to prevent the assets of the banking system disappearing overnight.

An alternative to rationing cash is to ration goods. Decades of prosperity have accustomed consumers to a wide range of choice. Baskin-Robbins once advertised 31 ice-cream flavours, one for every day of the month; now it offers 1,000. Restaurant menus are no longer a set list of choices but the starting point for negotiations between diner and waiter.

It is hard to imagine this abundance disappearing. But it can. Countries can create their own currencies but this alone does not help buy goods from abroad. If they cannot balance their trade or borrow money at a reasonable rate, they will be unable to afford all the goods their citizens want. (America, with its reserve currency, is privileged in this respect.)

Britain found itself short of dollars after the end of the second world war, once President Harry Truman cancelled the lend-lease programme that provided the country with credit. British politicians decided that the only way to guarantee a minimum standard of living for all citizens was to restrict consumer choice.

The wartime rationing regime was tightened so that the country could pursue an export drive. Consumption of meat, sugar and even clothes was restricted, and the rules were not relaxed until the 1950s. This columnist’s father recalled the options as “jam or butter on your bread, but not both”.

The critical resource in a modern economy is not food, but power. When power is restricted for whatever reason, governments have to decide which users have priority: factories, hospitals, shops or consumers. China has power rationing now, as does Venezuela (a sign of incredible incompetence in an energy-rich country). Developed economies have not experienced this sort of thing on a regular basis since the 1970s. But that could be the outcome if they are forced into default.