Thursday, March 16, 2006

Price controls

There is a lot of talk around here about price controls. One of the candidates for mayor of Kiev has made it a central plank of his election campaign. Others have mentioned it too and it came up in the press conference day before yesterday with Yekhanurov.

The gist of the argument for it is that prices are rising rapidly here. I have mentioned something about this already. The price rises are steep and that hurts people here no doubt about it. The problem though is that the people with the thing subject to the price control don't have to sell. You can set a price but the people don't have to sell at that price. Or they can sell to some other country. Ukraine is not the closed system it once was. (And there is an argument that it never was. The Soviet Union was probably propped up by sales of natural resources to the west.)

And if people can refuse to sell or sell somewhere else, that means shortages. We already went through this with Tymoshenko's price setting. The price of gas was set and there were shortages. The response was to blame the gouging middlemen, middlemen who created jobs much as they do in any country in the West, and to make plans for the government to step into the market itself to create production at the price it wanted. The whole thing sounded and still sounds all kinds of retrograde. How would government pay for it all especially if foreign investment passed over Ukraine much as it has done? I guess you could always impress workers to build what you want. That has been a good source of cheap labor before, so at least there is a history behind that. It's a disreputable history but it is a history.

But if you don't do something of that sort, how are you going to pay for it? The people who argue for price controls say nothing about this. They are either ignorant about the effects, which isn't a good sign, or they are pandering to the public, which also isn't a good sign.

That people are hard hit is true. How you deal with that without making things worse is the problem. And price controls will simply make things worse.

1 comment:

Anonymous said...

I am not so dogmatic on price controls, I think it depends on how they are done and whether they are flexible or not.

They are a limited tool, that's to be sure, but are they a completely useless tool?