Another Victory for Capitalism

Israel recorded a milestone in its socioeconomic policy history yesterday: Price controls on the five most common breads were removed. For years, price controls on these products (whole and sliced white and dark breads and ordinary challah) had been the symbol of social justice, because bread is a basic necessity of life. Their removal thus appears to represent a further collapse of the idea of protecting society's weaker members, another victory for capitalism and free markets.

Even with controls, the price of these breads had risen gradually over the years, to ensure that bakeries at least earned enough to cover their production costs, albeit little profit. Everything went smoothly until Eli Yishai (Shas), who sees himself as the representative of the weaker classes, took over the Industry, Trade and Employment Ministry. He initially refused to raise bread prices even when soaring production costs necessitated it, unless the poor were compensated. But he lost that battle: In June 2007, prices were raised with no compensation to the poor.

Yishai did not intend to fall into that trap again. Meanwhile, the Prime Minister's Office had been pressing to end price controls altogether, both as part of its general policy of reducing government involvement in the economy and out of the realization that price controls also benefit the well-off, who can afford to pay full price. Thus when the bakeries began demanding another increase in bread prices, agreeing to end price controls in exchange for compensation to the poor gave Yishai a way to escape a repeat of July's fiasco.

As always, the Finance Ministry pushed to minimize the compensation, while Yishai strove both to increase the immediate payment and to create a permanent mechanism for compensating the poor for price increases. The final deal stated that price controls will end (causing bread prices to rise), the poor will be given one-time compensation, and a long-term mechanism will be developed to compensate the poor for price increases in any basic product - a sort of consumer price index based solely on the consumption habits of the poor.

The rise in bread prices will be immediate, while the one-time compensation will be paid in another three weeks. Both of these developments seem certain. In contrast, it is not clear when the new index will be finalized or what it will look like.

Bread prices will also certainly continue rising in the near future, as bakeries start setting prices based on economic considerations and grocery stores add their own markups to give themselves a slice of the profits. Bakeries termed the newly deregulated market an "earthquake." They will now have to get used to pricing their products, while consumers will have to start shopping around to find the stores with the lowest prices.

It is an ironic twist of fate that Yishai, the minister of the weaker classes, is the one who signed the order creating a free market in bread. Now, he will have to ensure that the second half of his reform also works - that the index for compensating the poor on a regular basis is indeed developed and applied. Otherwise, instead of being remembered as the man who created a new mechanism for helping the needy, he will be remembered as the one who ended the price controls on bread from which they had long benefited.