Signature natural gas cost proposal revitalizes price stabilization to meet 21st century challenges, reflects Berggruen Institute’s advocacy for innovative policies that shape markets toward better outcomes
A “gas price brake,” a proposal initially introduced by USC Berggruen Fellow Isabella Weber, is being adopted by the German government. The scheme follows a non-linear pricing approach that stabilizes the price for parts of consumption, and preserves market prices on the margins. This measure culminates years of Weber’s research and represents a shift in how Western governments respond to inflation and oversee political economy.
“Rising gas prices are inflation’s primary fuel, projecting price-raising pressure throughout the broader economy,” said Weber. “By using smart tools to prevent price spikes for resources that underlie all business activity, Germany can make it through this winter, and the winters to come.”
Under Weber’s plan, the German government will determine a “base rate of consumption” of natural gas for each household and business. Consumers will be allowed to purchase natural gas up to their base level at a low price, while paying the high market rate when their use exceeds that level. This takes financial pressure off households and firms but maintains incentives to save gas in the context of the looming gas crisis.
To bring down prices, the government will make up the difference, paying producers the spread between the capped price and the market rate at the time of sale. These payments will come from a €200 billion emergency fund that has been set aside for the gas price brake and a similar scheme for electricity. This mechanism will have the crucial impact of preserving the same incentives for utility providers to continue their gas provisioning despite very high wholesale gas prices —an essential feature of successful price stabilization measures.
“Overlapping planetary emergencies, from COVID and climate change to the resurgence of major power conflict, can and will suddenly create major supply shocks in sectors on which entire economies depend,” said Weber. “In these circumstances, contrary to popular belief in the post-1970s economic consensus, smart price control policies can buy time for measures that absorb the supply shock and thus enhance economic resilience.”
The move presents a shift in policy following advocacy by Weber and other economists who have argued for new economic stabilization approaches in response to new geopolitical realities. Weber advised on the Emergency Price Stabilization Act, which was introduced in the US House of Representatives by Rep. Jamaal Bowman in August of 2022. Most recently, Weber testified before the US House Government Reform and Oversight Committee on September 15, 2022, where she forcefully advocated for careful monitoring of price and supply trends in strategic commodities as an imperative for good governance in a world of 21st century disruptions. Weber will expand on these ideas further in “Inflation in Times of Overlapping Emergencies: Systemically Significant Prices and Monetary Resilience,” a working paper and public event to be held at the University of Southern California on November 30, 2022.
The gas price brake and energy price caps in several other European economies along with windfall profit taxes also marks a clear break from government policy and mainstream economic orthodoxy since the 1970s. The Biden Administration’s recent move to create a petroleum price corridor using the Strategic Petroleum Reserve may signal a broader trend towards targeted price intervention policy in the US and around the world.
Weber’s work puts into practice key principles underlying the Berggruen Institute’s “predistribution” concept, according to which interventions at the origin point of economic growth and wealth creation best enable a high-functioning, inclusive economy. Beyond efforts to ensure price stability for crucial commodities, Institute initiatives in this area include a detailed policy framework for the creation of a “data dividend” to compensate the public for digital information used by platforms; a proposal from Saule Omarova for the creation of a National Investment Authority, which has been analogized to a public venture capital enterprise; and work on a potential Los Angeles municipal bank to invest in local housing and infrastructure.
“Rather than blindly trusting markets or struggling after the fact to distribute outcomes, we are pioneering ways to enable high functioning, high-growth economies that work for everyone,” said Yakov Feygin, associate director of the Future of Capitalism program at the Berggruen Institute.
About Isabella Weber:
Isabella M. Weber is an Assistant Professor of Economics at the University of Massachusetts Amherst and the Research Leader for China at the Political Economy Research Institute. She is currently an Associate in Research at the Fairbank Center of Harvard University and a fellow at the Berggruen Institute. Her first book How China Escaped Shock Therapy: The Market Reform Debate is the winner of the Joan Robinson Prize 2021 and the International Studies Association Best Interdisciplinary Book Award and has been recommended on best book of 2021 lists by the Financial Times, Foreign Policy, Project Syndicate, ProMarket and Folha de S.Paulo among others. For her work on the rise of economics in China’s recent history she has won the International Convention of Asia Scholars’ Ground-breaking Subject Matter Accolade and the Warren Samuels Prize for Interdisciplinary Research in History of Economic Thought and Methodology. She is the principal investigator of a research project on systemically significant prices, inflation and profits funded by the Groundwork Collaborative. Her writings have appeared in the Washington Post, The Guardian, Forbes and Project Syndicate. Previously she was a Lecturer at Goldsmiths, University of London, and has been the principal investigator of the ESRC- funded Rebuilding Macroeconomics project What Drives Specialization? A Century of Global Export Patterns. Isabella holds a Ph.D. in Economics from the New School for Social Research, New York, and a Ph.D. in Development Studies from the University of Cambridge and was a visiting researcher at Tsinghua University. German born, she studied at the Free University of Berlin and Peking University for her B.A.
About the Berggruen Institute:
The Berggruen Institute’s mission is to develop foundational ideas and shape political, economic, and social institutions for the 21st century. Providing critical analysis using an outwardly expansive and purposeful network, we bring together some of the best minds and most authoritative voices from across cultural and political boundaries to explore fundamental questions of our time. Our objective is enduring impact on the progress and direction of societies around the world. To date, projects inaugurated at the Berggruen Institute have helped develop a youth jobs plan for Europe, fostered a more open and constructive dialogue between Chinese leadership and the West, strengthened the ballot initiative process in California, and launched Noema, a new publication that brings thought leaders from around the world together to share ideas. In addition, the Berggruen Prize, a $1 million award, is conferred annually by an independent jury to a thinker whose ideas are shaping human self-understanding to advance humankind.