Exogenous Generosity Shock
Argentina has another novelty solution to inflation, and it's as dumb as the other ones
Last week, the monthly inflation rate for Argentina came out: 3.9%, with an even more worrying 5% monthly price increase in food. Besides the foibles of the CPI and whatnot, this was not good news. The government decided it needed to get really serious on inflation, which is why it announced a policy that everyone agrees will totally 100% succeed at bringing down food prices: a state-owned national food company that sells cheaper food directly to consumers. Let’s ignore the fact that the company, like all Argentinian state owned companies, will end up being a clownish black hole of patronage and corruption. Exactly how is that supposed to work?
Well, recently I went over the Peronist theory of inflation: corporate greed, market concentration, and international commodity prices all cause inflation. The first two, as I (and Joey Politano) have been over in the past, are simply a bizarre fallacy (or plain brazen dishonesty), confusing the price level for price growth. More market power and/or higher mark-ups would result in more expensive products (a higher price level), but not in prices that grow consistently at higher rates (higher inflation). International commodity prices might have played a role in inflation when the country exported basic food products (meat, dairy, wheat) but A) that is no longer the case (Argentina exports as much gold bullion as it does beef) and B) people are spending less and less on both food and in goods in general.
So a National Food Company wouldn't solve inflation because the problems it intends to solve are non-existent. But it’s even worse than that: it can't solve any problems in principle, and in all likelihood will make them worse. Let’s assume that the Peronist theory of inflation is actually correct, for shit's and giggles. How would the NFC actually solvd anything?
Well, the government's plan is to buy food from producers (small and medium ones, for some weird fetishistic reason) and resell it at lower prices directly to consumers. The rationale here is that this company would sell at lower profit margins than supermarkets, and ergo would lower the prices consumers pay. At the same time, because this company would have market power, it would be able to reduce the margins other companies enjoy in order to compete. There are innumerable objections just to this alone. Firstly, unless food production has constant or decreasing returns to scale, ir’s possible that any benefits the consumer would get from lower profit margins at the retail level would be eaten up by buying and selling from less efficient producers, plus transportation costs (which would certainly be higher), plus overhead. And the profit margins supermarkets enjoy aren’t that high, since most estimates have them at 3% of the price - in fact the vast majority of the difference between producer and consumer prices is made up of taxes, and then the cost of transportation.
The market power claim is especially shaky: you can’t just assume you will have market power, or enough of it to force everyone else to lower prices. This is particularly true because the government seems to be buying and selling from small producers only - meaning that consumers who prefer big brands, or who want to buy things that are only produced by them, won’t actually shop anywhere new at all. Let’s also not forget that, knowing profit are razor-thin already, “forcing private companies to operate at a loss” can’t be a good strategy for a government that also wants to maximize growth - if they wanted to start a recession they could have just raised interest rates to high positive levels. Lastly, it’s extraordinarily clear that the new company won’t have enough market power to sway international commodity prices, so the “international inflation” theory just gets quietly abandoned here.
Argentina’s government actually has had experiences with both “the government creates a new company to compete with the private sector” and “the government buys and sells food at subsidized prices”. None of them worked out.
The first example is the infamous, much mocked “Correo Compras”, an e-commerce site designed to rival the privately owned Mercado Libre (the country’s biggest company by market cap). Correo Compras became an immediate punchline due to the ridiculously low variety of products, the fact that those products were bizarre in general, and the fact that the company offered to sell and ship anything for free in up to 36 inrerest-free installments - which resulted in a social media trend of ordering a 30 peso chocolate bar or 9 peso juice box and paying for it over the course of three years. Looking at Google trends data, the game was rigged from the start.
The other case was the infamous IAPI - the Argentine Institute for the Promotion of Trade. Created during Juan Domingo Perón's first term in office, the IAPI monopolized international trade and offered different prices to domestic and international clients. Given that this was a traditional Peronist policies, it did not end well: at first the government bought crops at a lower price and funded whatever the hell it wanted with the profits, but it quickly found itself lacking anything to buy, since domestic farmers simply reduced their output of wheat and turned to meat instead (which was also subject to less stringent domestic price controls). As a result, during the early 50s, the IAPI had to operate at a loss, costing billions to the government and contributing to the fiscal deficit.
In conclusion, I have made abundantly clear before, the fiscal deficit and its monetary financing is the core reason that Argentina has inflation at all, and that it has the level of inflation it does (55% core annual in 2021). If you have reasonable fiscal and monetary policies, novelty solutions like price controls or a National Food Company aren’t necessary - and if you son’t have reasonable policies, you aren’t going to end inflation.