Earlier this month, Finance Minister Yair Lapid unveiled his old-new weapon in the war against the high cost of living: price controls. Lapid pledged that more products would be controlled; that’s his response to the so-called Milky protest, in which Israelis complained about higher prices in Israel compared to Berlin.
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But while Lapid is waving the banner of price controls as a solution to the high cost of living, the relevant officials are admitting that this method is an old-fashioned tool that will only help marginally.
“After 15 years of working in price controls, I don’t believe that controls are efficient. I believe that creating competitive market conditions is much more efficient than price controls,” said Zvia Dori, who from 1995 to 2011 was in charge of food-price controls at what is now called the Economy Ministry. “That’s my position in principle, and that’s true for bread as well,” said Dori, who was testifying in court.
The price of standard bread reflects the problem. In court, Dori conceded that she knew that bakeries were selling bread to supermarket chains at prices much lower than the price-controlled level. The bakeries did not hide this; they demanded compensation for doing so, which in many cases they received.
The significance is simple. Officials in charge of price controls knew that bakeries were giving discounts on price-controlled bread. But instead of concluding that the controlled price was too high and should be lowered, the situation was viewed as a reason to raise prices. Dori also conceded that price controls were the main tool used by bakeries of standard bread to raise prices, because if there were no price controls, the price of standard bread would drop.
If that’s what the official in charge of price controls for 15 years thinks, Lapid should take the message to heart: Price controls are a limited response to the high cost of living. The right response is just the opposite: increasing competition, opening the market to competitive imports, encouraging small and midsize manufacturers, and fighting economic concentration, especially among the big food manufacturers.
Price controls should be left to isolated cases — when market failures prevent competition. Even in those cases, controls must be improved so that they stop serving the interests of the manufacturers and begin serving consumers.