Matthew Lau: Parliament’s economic blockheads weigh in on food prices
Three cheers for the corporate and industry executives who defend their businesses and industry from senseless political attacks
At the Standing Committee on Agriculture and Agri-Food’s meeting last week, MPs interrogated corporate and industry executives, including from Loblaw (which owns the grocery chain Loblaws) and Empire Company (which owns Sobeys and other brands), about their companies’ supposed role in food price inflation. To summarize the proceedings: the MPs generally behaved like unaccountable economic illiterates; the executives ably swatted away the preposterous attacks on their businesses and industry.
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That the committee even held such a meeting underlines politicians’ fundamental misunderstanding of corporate purpose and basic economics. The social responsibility of Loblaw and other businesses is to increase their profits. No business has a social responsibility to reduce inflation. Nor can government — whether by interrogating corporate executives about profit margins and corporate strategy, undertaking regulatory initiatives or special taxation or otherwise browbeating industry — centrally plan the economy towards consumer welfare improvement. Free and competitive markets create consumer surplus; government planners, invariably guided by ignorance and perverse incentives, destroy it.
Liberal MP Ryan Turnbull said during the inquisition that it “struck” him that Loblaw’s net earnings were “quite sizable.” His question, therefore, to Loblaw Senior Vice President Jodat Hussain (whose company includes not only the food stores, but also a bank and pharmacy): “If you’re able to drive profits in some of your verticals in your business” (such as the beauty segment), “couldn’t you afford then to distribute some of those to hand down cost savings to the average Canadian citizen who are your patrons at your stores every day?” The implication is that Loblaw has some kind of social obligation to offset higher profits in some business segments by reducing its already slim profit margins on food.
This is, of course, absurd. Next we might see Mr. Turnbull arguing that if a pharmaceutical company increases its profits by bringing to market a new life-saving drug, it acquires a social obligation to distribute those increased profits to consumers by selling its other products below cost. Or, perhaps, that a bank that through efficacious management increases the profitability of its credit card business must be a better corporate citizen by offering cheaper automobile loans to risky borrowers. Or that a hotel whose restaurant becomes more profitable through menu improvements has a social obligation to return the profits to tourists by reducing room rates. The reality, of course, is that business profits are not public property. They belong to the owners who invested in the business.
Loblaw’s Mr. Hussain answered, quite sensibly, that his company’s job is to offer consumers prices that are as low as possible. If customers find grocery stores that serve them better than Loblaws does, its business will be destroyed. Mr. Turnbull replied by complaining that Loblaws’ grocery prices were nevertheless too high. But if he really believes Loblaws is not properly serving customers, he should attract some investors, start his own grocery store chain and then charge whatever he wants. If Canadians really prefer his way of running grocery stores to Loblaws’, he can make himself fabulously wealthy while massively increasing consumer welfare.
The nonsense went on for about two hours, with contributions by politicians of all stripes. Alistair MacGregor of the NDP complained that Loblaw did not increase its workers’ pay quickly enough in the past few years, as if by incurring higher labour costs Loblaw could supply food more cheaply. In a follow-up question, Liberal MP Leah Taylor Roy unaccountably chastised Loblaw for a supposed corporate policy in which store managers are denied bonuses for not cutting employee wages enough — a policy whose existence Loblaw’s Mr. Hussain denied. Later, Bloc Québécois MP Yves Perron questioned Empire Company’s chief operating officer, Pierre St-Laurent, about why grocery stores have raised prices faster than restaurants, evidently unaware they are two very different types of business.
A uniting theme of the grocery store inquisition, of which the Conservatives were also a part, was the profit margins on Loblaw’s and Empire Company’s food segments. The answer, for the record, is that margins in the grocery store business are approximately flat over time and in the low single digits — as might be expected in a highly competitive industry. Unfortunately, as Karl Littler of the Retail Council of Canada told the parliamentary committee, “there are some folks for whom any level of profit is suspect ideologically, and I don’t suppose I’m going to dissuade them.” But, as Littler explained, reasonable people should “reject as absurd the notion that profits in the two to five per cent range are in any way out of the ordinary.”
Well said! Three cheers for the corporate and industry executives who defend their businesses and industry from senseless political attacks — and who have the patience to try to explain economics to the blockheads in Parliament.
