Price Controls. Burdensome regulations just do not work!

First Published: 2005-01-29

The Christmas strike by LP gas dealers not only threatened our turkey dinners, it re-opened an argument that has raged ever since the government slapped price controls on a range of goods and services more than 30 years ago.

The Prices Commission sets the selling price of 25 food items and 11 over-the-counter drugs, while limited markups are allowed on automobiles, parts and accessories. Fixed margins on gasoline and diesel are re-calibrated whenever new shipments arrive. And propane margins are adjusted periodically.

Why do we still have these archaic, burdensome regulations, when any Economics primer will tell you that – though tried since biblical times – they just don't work?

Well, if you ask Chief Price Inspector Sidney McKenzie of the Ministry of Trade & Industry's Consumer Division, he will dutifully tell you that Controls ensure that "essential items are sold at a price which would be affordable to all, despite economic capability."

But the real reason has little to do with economics. Three decades ago, then Prime Minister Lynden Pindling was playing the same kind of political games here that President Richard Nixon was in the United States.

Both Nixon and Pindling were facing general elections in 1972, and they both imposed price controls in 1971 to improve their electoral chances by checking runaway inflation caused by massive US military and social spending.

Back then, inflation and unemployment were rising, productivity was dropping and the stock market fell 36 per cent between 1968 and 1970. This period of low growth and inflation ended the postwar economic boom. And in 1973 the Arab oil embargo capped it off by triggering a global recession.

Economists view the Great Inflation of the 1970s as the most dramatic policy failure since the Great Depression of the 1930s. Nixon's wage and price freeze went into effect in August 1971, and was mostly revoked by 1974. Our price control act was passed in July 1971, and remains in force today.

Nixon's controls on oil and natural gas prices remained in place until 1981, when they were abolished by President Ronald Reagan. Analysts say their continuation was due to concerns about monopolies in the energy sector, but they led to shortages and lower investment in oil exploration.

When the Progressive Liberal Party came to power here in 1967 it was deeply suspicious of the white merchant class which, until then, had controlled every aspect of life in the country. As inflation grew, a few middle class black intellectuals led by Pauline Allen formed the Consumer Protection Agency to promote "militant price control."

She was later replaced by Dr Earl cash, who condemned merchants for having no social conscience. With a knack for the obvious, Dr cash complained that "whenever price ceilings are raised on breadbasket items, those items will very quickly be sold near those ceilings.

"It seems that every time the grocery shelf is restocked, the markers place a higher price on the item…Eastern Airlines has increased its fare to Florida. The Shirley Street Theatre and the Sunshine Twin have upped admissions…The Prices Commission needs to hold the line on these disgraceful increases."

However unrealistic this commentary was, it reflected the views of many thoughtful Bahamians. In 1990, for instance, former Prices Commission Chairman Anthony Kikivarakis said removing controls on gasoline would be like handing our economy over to foreign companies.

"Our mandate is to ensure that there are sufficient essential goods and services available to all members of the public at reasonable prices," he declared. "The theory that competition will effectively cure all ills is just that – theory."

His argument was that as there are so few major players in our economy, competition is a sham: "There is one large bakery in Nassau," he explained. "A classic example of the need for price control to keep an essential item like bread available at a reasonable cost."

A few years later former Prime Minister Hubert Ingraham called price control a discredited policy that no sensible government would rely on: "Only fools and demagogues argue for it…It serves no useful purpose." But he made no move to dismantle the system, not wanting to create a political storm in a teacup we suppose.

More recently, Troi Ferguson of the Bahamas Agricultural & industrial Corporation said that if price controls were lifted, poor Bahamians would be unable to afford basic items and we would be faced with a social disaster.

Pauline Allen Dean (now retired from a 40-year banking career) still says price controls should be vigorously enforced, although she allowed that competition was enough to keep the banks in line. She objected, in particular, to the practice of raising prices on shelf items in anticipation of future price hikes.

This is standard procedure in industries where market prices fluctuate from purchase to purchase: "You have to sell at tomorrow's price, which is your buying price, otherwise you won't make a profit," one large food wholesaler told Tough Call. "And by the same token if prices go down and you don't adjust yours accordingly, you will be stuck with inventory that you will have to write off. That's competition."

Years ago, local auto dealers said they would stop importing parts because the allowed markup didn't take account of the true cost of storage, obsolescence and shrinkage (read theft). They had to hire one of the big three accounting firms (at great cost) to support their arguments, and eventually the markup on parts was raised.

But year after year we have to go through these pointless exercises between the government and the private sector…furious little battles that take up a lot of time, energy and newspaper space and inconvenience consumers no end. But in the final analysis prices go up…as we have just seen in the recent propane crisis.

The futility of applying price controls to imported goods should be clear from these examples. While they may restrict the local markup on a few items, any uneconomic pricing levels will quickly be made up by higher prices on uncontrolled items, or cost cuts in other areas. And the bureaucratic paperwork involved puts an unnecessary burden on wholesalers and retailers.

"We have to submit forms to the Prices Commission breaking out costs every time goods are landed at a different rate," one wholesaler explained. "But there is only one civil servant who can process these applications, so we can have inventory tied up for a month or more. Dated products are a big concern in this regard, and storing freezer items makes the process even more expensive.

"On breadbasket items like rice, flour, sugar, and grits (which are all duty-free), we are allowed a 13 per cent markup," he added. "These are only a handful of items but they are all high volume products. And you just can't operate profitably on a markup like that."

A pharmaceutical wholesaler agreed: "Our operating costs run at 18 per cent and we are one of the more efficient companies in the business. That's why we try to avoid price controlled items. Or if we do carry them, we consider it a kind of loss leader."

And one has to ask if it is likely that corned beef and grits will suddenly become luxury items – out of reach of the poor – if price controls are lifted? Will car dealers – who already find it hard to compete with individuals buying used vehicles in Miami – rush to hike their sticker prices?

Clearly, the whole price control system is a political farce. And one that supports the tax-funded employment of at least a dozen civil servants and adds unnecessary costs and burdens to local businesses that are inevitably passed on to consumers in other ways.

If controls were ended, fuel prices may go up to reflect market conditions and the rates of return demanded by distributors and dealers. But since Bahamians use their cars the way they use phones, that may be a good thing. And since government taxes make up a third of the price per gallon of gas, there's plenty of leeway to keep a lid on prices if that is the objective.

As General Motors chief Rick Wagoner said recently: "If you want people to consume something less, the simplest thing to do is price it more dearly."

But making this Alice in Wonderland tale even more unreal is the fact that Bahamians have no problem paying outrageous prices to government utilities for lousy, yet essential, services. So why do we complain ceaslessly about fuel prices?

Trade & Industry Minister Leslie Miller was the proprietor of a tax-subsidised business called Sunburst Paints. And although this company received double-dipping tax breaks (in the form of duty-free imports of raw materials and equipment as well as protective tariffs on competing products), it was not price-controlled.

That meant Mr Miller could charge whatever he liked for his products. And when he was president of the Light Industries Development Council he wanted the government to force distributors to carry his products.

But recently Minister Miller felt justified in shutting down propane dealers who had suspended operations because the government refused to allow them to earn a sufficient return on their investment. Consumers should not be held hostage by business, Mr Miller declared grandiosely.

As one anonymous commentator on the Bahamas B2b message board asked incredulously: "I am wondering how a Cabinet Minister can threaten to take a business license from gas companies on day one, then he is going to press charges against them for hoarding on day two, and then makes a deal with them on day three. Can someone please explain this to me?"

Former cabinet minister Tennyson Wells put it more bluntly: "When you have these kinds of statutory controls, you must behave responsibly and not use them to bruise people," he told Tough Call. Mr Wells is a major shareholder of Caribbean Gas, which has about a third of the local wholesale propane market.

"It costs me about half a million dollars to bring in a tanker of gas and the new rules let me make just 13 cents a gallon, or $130 every thousand gallons. But the retailer selling a thousand gallons a day with no risk or exposure whatever makes $1,150 because of the higher markup he is allowed. That can't work. You can't run a business on a 13-cent markup."

So Mr Wells set up his own retail company and now buys propane from himself.

Shell Gas supplies about 48 per cent of the country's 14 million gallon a year propane market. About half of those sales are to bulk customers like hotels, which earn a higher margin. Meanwhile, Island Gases, owned by Alphonso Elliot, brings in container loads of propane from the US , but is still classified as a retailer with the ability to charge higher markups.

Such ludicrous inconsistencies are all that should be needed to prove that price controls must be scrapped.

Controls are usually imposed to stop a rapid rise in the cost of a good or service during a shortage, or to hold down inflation during an emergency. Often, these are the result of short sighted government policies in the first place.

Governments may also impose price controls in response to pressure from a segment of the population that is upset about the rising cost of a good or service. But selective controls usually end up harming the very constituencies the politicians say they are trying to help.

For example, long-standing rent controls destroy incentives to build and maintain low-income housing, resulting in less housing for the poor. Controls can also divert economic activity and investment into uncontrolled sectors. And they can encourage black markets and bribery.

So despite their superficial appeal, economists are generally opposed to controls, except perhaps for brief periods during wars or emergencies.

As C. Jackson Grayson, who headed Nixon's price-wage control experiment, warned Congress when it was considering capping medical costs: "Price controls will make things worse. Believe me, I've been there…Controls have not worked in 40 centuries. They will not work now."

The column 'Tough Call' by Larry Smith is published in The Tribune every Thursday and is reprinted here as a courtesy. Mr. Smith founded and successfully grew an advertising agency over 20 years. Under his direction Media Enterprises diversified into short-run commercial printing and publishing, and is now the largest non-fiction book wholesaler in the Bahamas. He has 30 years experience as a journalist and publicist and has contributed numerous articles and columns to the Bahamian press. A former reporter at the Nassau Guardian, local correspondent for Reuters and editor at the Bahamas News Bureau, he conceived and edited the Bahama Almanac (published 2000 by Media Enterprises), wrote the commentary for Mike Toogood's Portrait of an Archipelago (published 2004 by Macmillan Caribbean), and edited the Bahamas Environmental Handbook (published 2002 by the government). In 2003 he took a year's leave of absence from Media Enterprises to lead a transition management team at the Nassau Guardian after the paper was acquired by local investors. After leaving the Guardian he was contracted by the Tribune as online manager/editor and columnist. He has a degree in political science and journalism from the University of Miami. Mr. Smith can be contacted at: larry@tribunemedia.net

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