Worst idea ever

food price controls

Supermarket shelves in Venezuela after the introduction of price controls.

The idea of introducing price controls frequently comes up – especially in times of rising prices or economic hard times.

So it’s been no surprise to hear them in Bermuda recently.

But it’s disappointing that the idea is being pushed by Terry Lister, who generally has a strong and sensible grasp of economics.

As a commenter said on The Royal Gazette website today: “In the simplest terms, price controls do not work. Period.”

In fact, food prices are not the main driver of inflation in Bermuda.  Bermuda’s inflation rate stands at 1.9 percent. Food prices are 2.5 percent higher than they were a year ago, so more than inflation, but price increases for tobacco and liquor and especially health care (6.6 percent) are higher.

Since 2006, tobacco and liquor, fuel and power and health care have all recorded greater increases.

That’s not to say that food prices have not risen. According to the CPI, they are about 33 percent higher than they were eight years ago – so they have increased by about four percent a year, or slightly less when inflation is compounded.

That’s no fun, and given that many people have seen their incomes shrink in the same time period, it’s understandable that it feels like food prices have risen – especially when you’re buying food once a week or more often.

So would price controls help?

In a word, no. First, most price increases are driven by price increases overseas. US food prices were up 2.5 percent in May, so Bermuda price increases are pretty much in line with this.

And from 2006 to 2012, US food prices rose by about 3.3 percent annually – not quite as  fast as Bermuda’s but not so far off either. Local price controls would have little or no effect on them.

Then too, supermarket owners are confronted with the same costs as most other business owners. They pay the same taxes, rents, Belco costs and labour costs as everyone else.

The only difference is, through the recession, people still buy food, even as they dispense with other more discretionary purchases. Ya gotta eat, right?

But it’s hard to see how price controls will help.

More importantly, the history of price controls is dismal. They lead, inevitably, to commodity shortages, empty shelves and queues. If a business is forced to sell a product at a loss, they will stop selling it. It’s that simple.

As economist Murray Rothbar wrote: ” Price controls, I, and countless economists before and since, pointed out, never work; they don’t check inflation, they only create shortages, rationing, declines in quality, black markets, and terrible economic distortions. Furthermore, they get worse as time goes on, as the economy adjusts out from under these pernicious controls. ”

Wikipedia gives a good history here.

Sometimes, some kind of price regulation is justified, especially where monopolies are unavoidable. Thus, Belco’s prices are regulated – if not, it could raise prices as much as it wants because there is no competition and everyone needs electricity.

But there’s plenty of competition between supermarkets. If you don’t like the prices in one store, you can do down the road. And this ensures there is healthy price and quality competition.

So please, Mr Lister, drop the idea of price con

trols. They don’t work and never have. Instead, we should look at ways to reduce overall structural costs in Bermuda and getting people back to work with better incomes. Then they can buy the food they can afford.

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2 Responses to Worst idea ever

  1. tryangle says:

    What alternatives could be explored if the aim is to lower the grocery bill for residents?

    Duty breaks on certain imported foods? (I think for some there is little to no duty already)
    Change of the supermarket paradigm? (for lack of a better term, a newer way for groceries to operate, something along the lines of a Membership Shopping business?)

    I always thought the 10% discount idea was a flawed band-aid approach, but if the ‘staples basket’ suggestion is equally flawed, how can we make things better for families who could use a relief?

    • Indy says:

      It’s a fair and tough question. Bermuda’s high structural costs make reducing prices for anything difficult. Generally speaking, reducing Customs duty elsewhere (ie on fuel) would help to reduce other costs, as would a reduction in payroll taxes. That’s what Government can do. Shipping costs to Bermuda are extreme, and putting pressure on the shipping companies would also help. We already have financial assistance for people who are in need – perhaps some form of food voucher or food stamps would be applicable (although stigma reduction would need to be applied here).
      This may sound harsh, but the best solution is to keep working on expanding the economy and jobs – that may not help people now, but it is the only long term, sustainable solution, which tinkering with prices will not achieve. As a side note, Lindo’s deserves credit for installing solar panels at its shop, but the cost benefits of that will take some time to filter through.

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