The fatal lure of price control

The best way to contain corporate excess profits and increase consumer benefits is to promote
competition.

Lee Sang-ryeolThe author is an editorial writer of the JoongAng Ilbo. An election is powerful indeed. The government has completely shifted direction toward the “people-centric” economy in full-speed mode after the last by-election in Seoul delivered a humiliating defeat for the governing People Power Party.

The primary target of the ruling front is to tame prices of groceries and greedy banks. The cause is clear. Prices of food and beverages have risen steeply. They jumped 5.1 percent on average from January to October against a year-ago period. High food prices harden the working class, already struggling with tight budgets amid the economic slump. While almost all industries are struggling, banks expect a historic-high interest income of 60 trillion won ($46 billion) this year, all thanks to higher interest rates.

But the government’s approach to taming the two challenges raises concerns, as it has turned to intervention on prices and profits — two key values of the market economy.

The government has started to keep watch on prices by items. The vice ministers of economy-related ministries become the supervisors of the items that fall under their responsibility. Specific officials were designated to watch each of the nine processed food items closely. They became “bread” or “milk” officials for the time being. Deputy Prime Minister for Economic Affairs Choo Kyung-ho, who also serves as finance minister, claimed that the strategy is to “draw cooperation from the industry to stabilize prices.” But “cooperation” translated into the “demand” on the relevant industry to stop raising prices. Since they are closely monitored by their bosses and the public, the young officials will do their best to meet the political goal. With their names on the line, they have no other choice.

Such forcible price control always caused a backlash. Companies would be discomforted and apprehensive by the government pressure. Since they cannot raise the end prices, they would reduce the quantity of the content or change ingredients to cheaper materials to lower cost. They would wait until the diversion in government attention and raise prices all at once. The government under the Lee Myung-bak presidency resorted to price control for the first time since the military regime. When prices shot up from a spike in international oil prices, his administration listed 52 living necessities to keep a close watch on. However, the prices of these items rose 1.6 times above the average gain in the consumer price index under Lee’s five-year term. The strategy was an utter failure.

Banks enjoying record income owe partly to the lax government supervision. Bank profits are bound to increase in the high-interest environment. Financial Supervisory Service Governor Lee Bok-hyun in February warned against the “exploitive” business practices of banks. But their income growth did not stop. The government either turned a blind eye to commercial banks’ massive profits or neglected their profiteering by charging too high interest.

The government does not deny that it is mulling to seize some of the “excess profits” from banks. The opposition Democratic Party is pushing for a “windfall tax” on banks. Whether their profits are returned to the state coffers through tax or self-will, it cannot be right in a free market, as it means a government intervention in determining how much of a profit is optimal for the private sector. Korean banks, already overly complacent, would settle for an “adequate” income level in the future. The intervention leaves a bad precedent for the market economy. Companies certainly would fret they could be the next. Their motive to maximize profit through innovation would also be dampened as they must watch the government for every move.

The best way to contain corporate excess profits and increase consumer benefits is to promote competition. The Lee Myung-bak government introduced budget gas stations. Public utility companies bought petroleum products from refiners and provided them to these gas stations at cheaper prices. Pump stations nearby had to follow and lower their prices, too. According to the Korea Energy Economics Institute, the consumer return effect from the 10-year operation of the budget gas stations reached 2.1 trillion won. The mobile value network operator (MVNO) offering budget-friendly phone and rate plans also contributed to breaking up the oligopoly of three major wireless service providers and lowering the mobile phone rates. Subscribers to the MVNO phone scheme amounted to 14.7 million as of July. Online banking pure players like KakaoBank and Toss Bank also helped shake traditional banks out of complacency to provide greater choices for consumers in products and rates.

All conservative governments championed the market economy. But their behaviors changed when their approval rating sank. They gave into the temptation of price and market control under the pretext of being “people-friendly.” However, past lessons show that the best way to help public livelihoods is to break up the oligopoly and promote competition in the market system.