THROUGHOUT recorded human history, many people have believed that 1) they are underpaid or not paid enough for the services they perform; and 2) they are overcharged for the services/commodities they need to buy. Corollary to this still widely popular notion is the equally unshakeable assumption that government can and should set prices that are “fair” and not imposed by “greedy” businesspeople.
Price controls have existed since ancient times — as in 4,000 years ago — and they have never worked, but the intent behind them is crystal clear compared to the counterintuitive economic principles that explain why arbitrarily setting prices, even if backed by brutal force, is a fruitless endeavor. Price controls are essentially like cutting open the goose that lays the golden eggs: instead of getting more, you end up with none.
In the CNMI, the prices of gas and commodities — especially on Tinian and Rota — and, more recently, inter-island airfare, are the primary causes of consumer anguish. (During the TT days, the district legislature considered passing a price-control law.)
And yet it seems that not many of us want to understand why this state of affairs exists. Not many of us are interested in the underlying economic, which includes geographic, reasons for the “high” prices in these small, remote, typhoon-prone islands with a tiny (and shrinking) population.
Consider, for example, that in the mid-1990s, when the regular gas price on Saipan was around $1.60 a gallon (about $3.30 today), a lawmaker went on a crusade against “high” gas prices and urged the government to investigate “greedy” oil companies.
In the summer of 2008, the price of regular gas on Saipan was $5.05 a gallon — a dollar more than the CNMI’s hourly minimum wage rate at the time, and worth about $7.30 today. But as I write this, the price of regular gas per gallon on Saipan is $5.16. Did oil companies, finally, become less greedy?
CUC, for its part, hasn’t raised the much despised Fuel Adjustment Charge for several months now. Recently, CUC announced another FAC rollback. Did CUC suddenly become “more efficient” or “more compassionate”? Or is it because global oil prices have been down lately due to events in faraway places over which the CNMI has no control? FAC, as CUC has tirelessly and repeatedly explained, is based on the global price of fuel. FAC pays for the fuel that runs CUC’s power plants. No FAC, no fuel, no power. If we don’t want to pay FAC then someone else should because political speeches or campaign promises — even if they emit methane — won’t generate electricity.
Back in the 1990s, incidentally, there were not a lot of complaints about inter-island airfare. But that was because the CNMI still had a much larger population, and plenty of tourists. There were many flights available, and most were scheduled at reasonable hours.
In any case, prices rise and fall all the time. We — including, and especially, politicians — must be curious about why this is the case.
And this is why we must try to learn more about history and economics. History shows us that most of society’s problems cannot escape economic reality, which is governed by market forces, to quote Germinal Van, a biographer of economist Thomas Sowell. “And yet,” Van says, “the policies implemented by the political class to address these problems ignore, sometimes deliberately, the fundamental economic laws, and end up producing sub-optimal outcomes that affect the very people they intended to help.” See minimum-wage laws. See rent-control. See tariffs. See industrial policy. See Cabotage.
Which brings us back to a question that consumers all over the world and throughout history have asked: Why are prices “high”? The classic answer from any economist would be, “Supply and demand.”
As Matthew Hennessey of The Wall Street Journal would put it, “A high price doesn’t indicate greed any more than a low price indicates generosity. Absent force or fraud, price reflects the point at which buyer and seller both agree that the transaction makes each of them better off. The beauty of it is that economic exchange in a free market is entirely voluntary.” (My italics.) You can raise your prices, but you can’t force me to buy from you. If the wage rate you offer to me, as your prospective employee, is low, I’ll seek a better-paying job elsewhere. If you demand a salary that I, as your prospective employer, consider too high, I’ll hire someone else.
Regarding inter-island airfare, simply comparing the rates here with those in other jurisdictions is neither helpful nor illuminating. The cost of doing business there may differ from the cost here. And then there’s demand and the size of the market. The cost of operating flights, logistical challenges, economies of scale, the regulatory environment, government-imposed taxes and/or fees, the lack of competition, the cost of entering a small aviation market to compete over a small (and dwindling) number of passengers. These and other factors should be considered when comparing the CNMI’s current inter-island airfare with other jurisdictions.
Accusations of “corporate greed” and “price gouging” may draw applause, but they do little to address the economic realities that drive prices in remote, typhoon-prone islands with small and shrinking populations.
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