The price of bread

The largely stalled trend toward privatization and financial sector reform should continue.

Bread 224.88 (photo credit: Ariel Jerozolimski [file])
Bread 224.88
(photo credit: Ariel Jerozolimski [file])
The government's response to spiraling bread-production costs has been to scrap all price controls. This has unleashed predictable populist scorn. Instead of tightening supervision, it has been asserted, the government has callously allowed bakers to charge what they wish. Far from being a reckless or a heartless move, however, this is exactly what should have been done long ago. Price controls for what are known as "standard loaves" were historic vestiges, based more on sentiment than on economic necessity or logic. No Western democracy retains anything akin to this country's now-scrapped "standard bread" price-limits. These were products of a folkloristic correlation between bread and the very sustenance of life. Decades ago, this linkage moved then-premier Menachem Begin to forbid the scrapping of bread subsidies. His ill-advised emotional call has now finally, and very belatedly, been reversed. Begin's sincere premise was that the standard loaf is the staple component of the diets of the lowest socioeconomic strata. This it doubtlessly was in bygone days. Yet Central Bureau of Statistics surveys on the consumption habits of low-income families have long since debunked any such assumptions. According to the CBS's most recent findings, the country's poor spend no more than 1.3 percent of available income on breads of any variety. Of this, nearly half buys pitas - which were not included in the price-control framework and are proportionately more expensive than the standard loaf. Indeed, less than a fifth of what low-income families spend on assorted breads was going to that price-controlled loaf. By way of stark contrast, those Israelis defined statistically as poor spend over three times more on cellphone bills than on bread. The humble standard loaf, it can thus be said with certainty, long ago fell out of favor, to the extent that by no stretch of political manipulation can it be portrayed as a staple for any social stratum. This realization has of late even dawned on that self-styled spokesman for the underprivileged, Trade and Industry Minister Eli Yishai (Shas). Last summer he fought tooth and nail to prevent a 20-agorot price increase for the subsidized standard loaf mandated by soaring wheat costs worldwide. As a result, the bakers ceased supplying the standard loaf altogether, forcing even the most deprived of consumers to switch to pricy "specialty" breads. Eventually the bakeries won a 12.5% hike and the standard loaf reappeared, though in smaller quantities. Some bakeries in fact removed the standard loaf from their production lines altogether. The price of flour has doubled since June, rendering the hard-won raise irrelevant. By now even Yishai apparently understood that he could not force entrepreneurs in a free economy to produce a price-regulated product at a loss. Swelling subsidies would have obliged the taxpayers to prop up producers with little or no benefit accrued to the poor. They would have returned us to an era in which Israeli cattle and poultry were fed on standard loaves, literally cheaper than chicken-feed. To save face and dangle a perk before his constituency, Yishai has elicited a NIS 60 million in "one-time compensation" for the loss of the subsidized loaf, to be paid to anyone who receives regular National Insurance Institute benefits. In broad economic terms, this is a worth-while trade for the Treasury, which cuts its losses and ends the pointless wrangles over bread that are rife for political exploitation. Israel's own experience shows undeniably that price-deregulation is the speediest route to price-reduction. Subsidies were discontinued for an exhaustive variety of "basic foods" in 1990. Their cost in real terms has since decreased, while their availability has not diminished. When telephone services were monopolized they were overpriced and not readily available. Competition radically changed the picture in no time. Indeed, we hope the government finds other areas where regulation can be reduced and competition increased. The largely stalled trend toward privatization and financial sector reform should continue. Properly done, such an economic reform process can accelerate the reduction in unemployment that healthy growth rates have produced. The greatest antidote to poverty is increasing employment, which can only be achieved by increasing opportunities for small businesses and promoting economic growth. Reforms, not controls, are the key to putting bread on the Israeli table.