Opinion |

Price Controls Are Bad for Israel

Nehemia Shtrasler
Nehemia Shtrasler
Angel Bakery, in the central Israeli city of Lod.
Angel Bakery, in the central Israeli city of Lod.Credit: Alon Ron
Nehemia Shtrasler
Nehemia Shtrasler

This happens every year or two in a fairly regular cycle. Something happens, and bread producers demand that the Economy Ministry raise the prices of bread under government control.

This time, they say, the COVID crisis and the war in Ukraine have raised the price of wheat, fuel, raw materials and transportation costs and so they have to raise the price of bread.

I’m not so sure. The fact that bread prices have been government-controlled for decades has led to many distortions that do not allow for the “correct” price of bread.

The economic ministries also realize that there’s no apparatus of control in the world that knows how to set the right price for a product. And so they established a panel of experts that examined all aspects of the matter and recommended deregulating bread prices and letting competition do what it does.

Economy and Industry Minister Orna Barbivai quickly opposed the recommendation. She likes regulation. She doesn’t want to remove it, she even wants to expand it to whole-grain bread. That’s what happens when you worship the god of populism.

Barbivai’s refusal to deregulate is part of a neo-socialist worldview which holds that the government knows better than the market on how to set prices. That’s also what they believed in the Soviet Union until it collapsed.

In fact, Israel suffers from government over-involvement, high tariffs, many monopolies, sole importers, and bureaucratic obstacles - all of which lead to food prices that are too high, bread included.

Israel is also the only country in the West that regulates basic food prices like milk, cheese, sour cream, low-fat yogurt, eggs, bread and challah. That’s the awful legacy from the early years of austerity under Dov Yosef.

Let’s also remember that until 1990 those basic products (in addition to cooking oil and chicken) were heavily subsidized. Subsidies and price controls meant Israeli bread was ridiculously cheap, and it was exported to the West Bank and from there to Jordan, and even reached the Gulf states. And here in Israel we used bread for animal feed because it was cheaper than seeds and fodder.

In 1990, subsidies were cancelled and wastage stopped. The state budget also breathed a sigh of relief over billions in savings. The problem was that the politicians weren’t courageous enough to complete the work and deregulate the prices of those products. And that’s how we got here, to a periodic debate about bread.

Price controls are popular, but in real life they're good for manufacturers and bad for the consumer. In real life, manufacturers take advantage of every opportunity, genuine or falsified, to persuade the government that costs have gone up and the product needs its price raised.

The manufacturers come to the Economy Ministry with an army of economists and lawyers armed with endless statistics, and all they have to do is persuade a few officials in the ministry, and that’s not hard. The result is that prices for price-controlled products go up more than necessary.

In 2011, after the “cottage cheese protest,” the Trade and Industry Ministry decided to place the price of cottage cheese under supervision, and recommended a price of 6.30 shekels ($1.89). But before that happened, dairy giant Tnuva lowered the price itself to 5.9 shekels and made a laughingstock of price controls.

In 2010, due to the high profits that price-regulated bread was bringing to bread producers, they started giving discounts of up to 20 percent to supermarket chains. Everyone wanted to sell as much of this profitable product as possible, that’s how overblown the price was. One day the bread producers reached an illegal deal, which stopped all the discounts and raised the price of bread to its highest regulated price. Here again, price controls are good for the manufacturers and bad for consumers.

And so the time has come to deregulate. The moment price controls are lifted, bread manufacturers will go into a price war and so will the supermarket chains, which will advertise special low prices for basic dark bread and challah. Competition will also force the manufacturers to raise the quality of basic bread, put it in a bag and stop throwing it at the doorways of stores in dirty cartons.

But for that to happen, we need a different economy minister. Not one whose middle name is populism.

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