Institutions and laws often outlive the problems they were created to solve — even when they were bad in the first place.
Thomas Hobbes, the 17th-century English philosopher, famously described the politicized Renaissance papacy as “the ghost of the deceased Roman empire, sitting crowned upon the grave thereof.” In a similar vein, the laws in Minnesota and several other states that prohibit selling goods too cheaply are ghosts of the deceased New Deal. It is time to get these misguided statutes off the books.
The issue arises because Wal-Mart and Target have limited the number of drugs they sell at $4 in states with minimum pricing laws. That flat fee supposedly is below cost for 55 of the generic drugs in Wal-Mart’s program. Laws in Minnesota, Wisconsin and at least seven other states ban selling merchandise for “less than its true cost.” Wal-Mart will sell these 55 drugs for $9 instead. Target follows a similar policy on a smaller set of drugs.
Laws that limit retailer discounting generally were passed in the 1930s and reflect a widespread preoccupation of that era. Competition was dangerous. Low prices could threaten an economy. Government should act to regulate commerce and limit price declines.
Government-fostered price fixing was a key element of Franklin Roosevelt’s New Deal. It was especially important in the National Industrial Recovery Act passed in June 1933. The act established a National Recovery Administration that imposed pricing and production standards for all sorts of goods. It arm-twisted industries into adopting “codes” that included floors below which no company could lower its prices.
The New Deal was not communist. It wasn’t fascist either, but both Mussolini’s fascism and Hitler’s National Socialism had similar elements. Unrestrained competition was bad. Government needed to act as a moderator of the competing interests of different groups and to limit the activities of capitalist companies. Catholic social thought of the era emphasized similar themes. The 1930s impulse toward government economic control was a broad one, not limited to Marxists.
Moreover, efforts to maintain prices in the 1930s were understandable even if misguided. The Federal Reserve had failed the nation, letting the money supply collapse by a third between 1929 and 1933. Price and wage levels had to fall and they did. In the face of such tragic incompetence, people were desperate for solutions, even ones that treated symptoms rather than causes.
Moreover, then as now, people worried that large national retailers would drive small local stores out of business. Anything said about Wal-Mart today was said of the A&P food chain 75 years ago. People argued chains would drive out independent businesses and then reap monopoly prices. Many thought that state-level limits on price discounting would protect small-town businesses.
Seven decades of experience with these laws produces few positive effects. Our nation eventually grew out of the Depression despite — not because of — the NRA and similar measures.
The economic forces behind long-term growth of national chain retailers were far greater than the issue of predatory pricing. National chains did supplant most small independent retailers in rural as well as urban areas. But the feared ensuing price increases never materialized. The barriers to entry in retailing are not that great.
Wal-Mart and Target could challenge Kmart just as that company could challenge Sears and Wards. Wal-Mart and Target get sniped at on one side by specialized big-box retailers like Best Buy and Home Depot and on the other by drug chains like CVS and Walgreens that sell a broad range of consumer items. Minimum pricing laws are irrelevant to the whole process.
Gov. Tim Pawlenty thinks the law should not apply to $4 prescriptions but that we need to keep the law. Outgoing Attorney General Mike Hatch thinks the laws do not even apply but agrees they should be kept on the books.
Milton Friedman would have cut through all this muddled thinking. If laws that prohibit businesses from lowering prices have any effect at all, it is to restrict competition and make consumers pay higher prices. There is no reason to dither. These are bad laws that simply should be repealed.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.