No, Yolanda, price control has never worked and it won’t now

When Yolanda Diaz, the vice president and minister of Labor, speak, raise the bread. And this time she has done it to try just the opposite: prevent the shopping basket from continuing to climb spurred by this inflation that seems to have no end.

Diaz has suggested set price limits to a series of foods that make up a “basic” shopping basket, about 20 or 30, and do so in a way that does not hinder free competition in the market. Does anyone know how that can be done?

That is, the vice president proposes to intervene in the market but at the same time wants to respect the rules of the game of free competition. A complex puzzle at a time when prices are soaring and companies have tried to contain them until the costs have forced them to pass them on to the customer.

Díaz has not indicated what foods would be the ones that would make up that basic basket, but he has dropped on Twitter that bread, milk, eggs… Precisely, the foods that are becoming more expensive and the most necessary. And we all agree that this is a very big effort for families (many cannot afford it).

But, is price control going to do any good in this context?

A wicked domino effect

Price control is something that is very commonly used in communist regimes so that, in theory, the whole of society can access products in a more equal way. But we have very adverse examples of this practice throughout the world.

we have seen it in Venezuelawhere the government fixes prices that local inflation later throws to the ground and cause shortages. Because a price control often causes fewer product units to be produced, since companies have no margin to do so due to higher costs and lower profits.

And not only that, It can also cause the closure of many businesses. If they have increasingly higher costs to produce but earn less when selling, the chain becomes unsustainable, generating layoffs and closures. Things that the Executive in turn also wants to avoid.

Furthermore, if the price of a series of foods is controlled, the price of others will rise, because somehow these losses will have to be compensated. So we are dealing with a fish that bites its tail, it will have been useless.

We have more adverse examples of this practice. For example in Sweden the rental price is intervened, something good in that everyone can access housing, but on the other hand there is so much demand that the waiting times to get a house are between 8 and 10 years old.

And if we go back in history, in the USA during World War II prices were capped and shortages were obtained. If there are no production incentives (ie profits), producers do not increase their capacity. It is truism.

And then there is the legal issue. There are already experts who warn that this agreement to be reached (it is very difficult) would contravene the Competition Law, so, would it be necessary to create an ad hoc law to carry it out? It doesn’t seem realistic.

It is more than clear that something must be done to contain prices, but that does not mean putting a cap on food. It is necessary to see how to make sure wages are not devalued, deflating personal income tax or raising the minimum wage, but nothing happens by putting a cap on prices, because the move can go really wrong.


Source: El Blog Salmón by www.elblogsalmon.com.

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