Price Controls and Subsidies

In Venezuela, there’s shortages on various staple foods, including pretty much any meat. Going to the store is a laborious process that people can only go on certain days. Everybody takes their turn. So why are there shortages?

Let’s look at history for a bit of context. During the French Revolution, price controls on bread was one of the main demands of protesters in Paris (you know, the ones who stormed the Bastille and forced Parliament to acquiesce to their demands even though Paris is but one city in a large country). So what happened? Well, there was a shortage of grain, but with the price controls, the vendors couldn’t raise their prices, so they had very little incentive to make it work.

There was no money in making bread. And given the price controls, food ran out even faster (although at least it was equitably distributed), which led to more protests for more food, but there wasn’t more food, just more protesters and more political pressure from the Parisians. The only place to buy bread was on the black market. That led to people thinking rich people were hoarding food to sell at a markup later. That was true at first, but after a while, there simply wasn’t any food. There’s only so many years before all the hidden supplies are gone. But the people didn’t accept that there really wasn’t food.

With all the social disruption, the markets weren’t working very well, so it was harder to import food. Then some of the areas of the country that produced the most grain, which were very religious areas, really started to get pissed off that the secular Parisians were hijacking the political process. Some of the more conservative areas started rebelling, which further restricted the food supply (which ended with nearly every one of them being murdered in what is the most overlooked horror of the French Revolution). In other words, things spiraled way out of control and price controls played some part in that.

A somewhat similar thing happened in Rome, except this time, the price of grain was actually subsidized by the government. When I say Rome, I don’t mean the whole thing, I mean the actual city of Rome and only the city of Rome. Well, as you might expect, this caused a massive influx of people at all times. Food was cheap.

It might not come as a surprise that Rome faced a few grain shortages. During those times, the price of grain shot up. Even if the central government could pay the exorbitant prices, that won’t make food magically appear. So what happens? People buy grain, as much as they can, and then wait until it’s worth more. Thus they make bank and further ensure there will be a shortage. With the promise of food and the lack thereof, the masses got very riled up. And guess what? The black market became the only place to buy bread.

What happens, though, when the black market simply has no more bread? What happens when food just, you know, runs out? Well, people riot because they’re starving.

My point is, overall, price controls and subsidies throw commodities out of whack. That leads to social unrest, protests, and just like in Venezuela, the entire government gets voted out (goodbye Chavistas).

So what about situations where it isn’t food? Let’s say, the price of water is subsidized. For instance, in Iran there’s a water subsidy. Guess what? Iran is fucked. Their farms are drying up. The people using outdated techniques that waste mass amounts of water continue to use those techniques.

In one field, a farmer, Ismael Alizadeh, opened an eight-inch water pipe during the middle of the day, under the burning sun, flooding a field of pistachio trees. “We have always done it like this,” he said with a shrug.

Roughly the same thing happened in California, though for different reasons. California has a peculiar system of water rights that boils down to, first come first serve, so the people with the most senior water rights get to use all the water they want. This led to wildly inefficient farming techniques that wasted tons of water, which helped massively deplete the reservoirs (and continues to do so, although as of late, the state seems to have woken up).

Now, back to the food subsidy programs. I’m not saying that all subsidy is wrong. It’s clearly a good thing to make food affordable to people that can barely afford to buy it. For the same reason as I am 100% in support of food kitchens and shelters for the homeless, I also 100% in favor of subsidizing food for the impoverished among us (in the US, that comes in the form of EBT/Snap/food stamps). This is just a basic humanitarian issue. People need to be able to eat.

Subsidies are best when there is no downside to that thing being used more. In fact, subsidies are great when you want it used more. Like, for instance, alternative energy. Subsidies are fantastic for the promotion of solar power or wind.

We just need to keep in mind that price controls don’t really work during shortages and that subsidies are really only good to promote the use of something.

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